Life Insurance (Chapter 1)
Know This!
"Level" in level term insurance refers to the death benefit, which does NOT change.
A policy states it will pay a specified face amount if the insured dies during the 20-year premium-paying period and nothing if death occurs after the 20 year period. What type of policy is this?
20-year level term.
Agent/Producer
A legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer.
A Straight Life policy has what type of premium?
A level annual premium for the life of the insured and provide a level, guaranteed death benefit.
What type of premium is charged on a straight life policy?
A level premium for the life of the insured.
Who is insured under a juvenile life policy?
A minor.
Does the death benefit of an Adjustable Life policy automatically increase with inflation?
Adjustments to the death benefit can be made by the policyowner, and not automatically, and would usually require evidence of insurability.
The policyholder of a whole life insurance policy is also the insured. What age must the insured attain in order to receive the policy's face amount?
Age 100.
The LEAST expensive first-year premium is found in which of the following policies?
Annually Renewable Term.
The death protection component of a universal life policy is expressed as what type of coverage?
Annually renewable term.
Group life insurance policies are written as what type of insurance?
Annually renewable terms.
Which of the following is INCORRECT regarding a $100,000 20-year level term policy?
At the end of 20 years, the policy's cash value will equal $100,000. // Term policies do not develop cash values.
Graded-Premium Whole Life policy premiums are typically lower initially, but gradually increase for a period of 5-10 years. After the period of increase the premiums will
Be level thereafter.
Nonforfeiture Values
Benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses.
In variable universal life insurance, to what policy component does the term variable refer?
Cash value and death benefit.
What happens to the cash value when a whole life insurance policy matures?
Cash value is paid to the policyowner.
The type of policy that can be changed from one that does not accumulate cash value to the one that does is a ?
Convertible Term Policy. // A convertible term policy has a provision that allows the policyowner to convert to permanent insurance.
Which component increases in the increasing term insurance?
Death benefit.
In increasing and decreasing term policies, which policy component fluctuates during the policy term?
Death benefit. // There are three basic types of term policies: level, increasing and decreasing. Regardless of the type of term insurance purchased, the premium is often level throughout the policy. Only the amount of the death benefit may change.
What type of life insurance is best suited to cover a mortgage?
Decreasing term.
What does level refer to in level term insurance?
Face amount.
What policy component decreases in decreasing term insurance?
Face amount.
What does "level" refer to in level term insurance?
Face amount. // Level term policies maintain level death benefit (or face amount) throughout the term of the policy. In level term insurance, the premium also remains consistent over the years, unlike the premiums of many policies, which increase as the policy ages.
Which of the following is NOT a characteristic of universal life insurance?
Fixed premium. // Universal life policies allow the policyowner to increase the amount of premium going into the policy and to later decrease it again. They may even skip a premium payment.
A Universal Life insurance policy has two types of interest rates that are called
Guaranteed and current. // The insurer credits the cash value in the policy with a current (non-guaranteed) interest rate and backs the cash value with a contract (lower guaranteed) rate of interest.
Annually renewable term policies provide a level death benefit for a premium that what?
Increases annually. // With the age of the insured.
During partial withdrawal from a universal life policy, which portion will be taxed?
Interest. // During the withdrawal, the interest earned on the withdrawn cash value may be subject to taxation.
Which of the following would be considered an advantage of owning term insurance?
It provides the highest amount of coverage for a temporary period of time.
An insured buys a 5-year level premium term policy with a face amount of $10,000. The policy also contains renewability and convertibility options. When the insured renews the policy in 5 years, what will happen to the premium?
It will increase because the insured will be 5 years older than when the policy was originally purchased. // The premium will remain level during the entire level premium term policy period. If the policy renews at the end of the term, the premium will be based on the insured's attained age at the time of renewal.
Twin brothers are starting a new business. They know it will take several years to build the business to a point that they can pay off the debt incurred in starting the business. What type of insurance would be the most affordable and still provide a death benefit should one of them die?
Joint Life. // A Joint Life policy covering two lives would be the least expensive because the premiums are based on an average age, and it would pay a death benefit only at the first death.
Who is the insured under a Juvenile Life policy?
Juvenile life insurance is, as the name implies, any life insurance written on the life of a minor.
Variable Whole Life insurance is based on what type of premium?
Level fixed. // It is a level fixed premium investment-based product.
An insured has a life insurance policy that requires him to only pay premiums for a specified number of years until the policy is paid up.
Limited-pay Life. // In limited-pay policies, the premiums for coverage will be completely paid-up well before age 100, usually after a specified number of years.
B just bought a new car, which he anticipates will be paid for in 4 years from now. He also wants to buy a life insurance policy, but is financially limited until the car is paid off. Which of the following would be best for B?
Modified Life. // A Modified Life policy would be best. It charges a lower premium for the first few policy years and then a higher level premium for the remainder of the life of the policy. These policies were developed to make the purchase of whole life insurance more attractive for individuals who have limited financial resources but will be able to afford higher premiums in the near future.
Which Universal Life option has a gradually increasing cash value and a level death benefit?
Option A. // Under Option A, the death benefit remains level while the cash value gradually increases. The death benefit will increase at a later date in order to maintain a gap between the cash value and the death benefit before the policy matures.
To sell variable life insurance policies, an agent must receive all of the following EXCEPT
SEC registration. // Agents selling variable life products must be registered with FINRA, have a securities license, and must be licensed within the state to sell life insurance. SEC registration is for securities, not agents.
What type of whole life insurance policies only requires a payment of premium at its inception, and in addition to providing insurance protection for the life of the insured, endows at the insured's age of 100?
Single premium whole life.
Which of the following is called a "second-to-die" policy?
Survivorship life. // Survivorship life (also referred to as "second-to-die" or "last survivor" policy) is much the same as joint life in that it insures two or more lives for a premium that is based on joint age.
Know This!
Term Life = Temporary (Type of Protection), Level (Premium), Level-Increasing-Decreasing (Death Benefit), and there is NO Living Benefits. Whole Life = Permanent until age 100 (Type of Protection), Level (Premium), Level (Death Benefit), and offers Cash Values, Policy Loans, and Nonforfeiture Values as Living Benefits.
A 27-year-old has limited income and can only budget $15 per month for life insurance. Which policy would provide the largest face amount for that amount of premium?
Term insurance. // Because a term policy is not accumulating cash value, the cost is lower than those policies that do.
What type of life insurance policy offers pure death protection?
Term.
What elements of an adjustable life policy can be changed by the policyowners?
The amount and payment period of the premium, the face amount, and the period for protection.
What increases during the term period for increasing term insurance?
The death benefit.
Attained Age
The insured's age at the time the policy is issued or renewed.
Who bears the investment risk on whole life?
The insurer (insurance company).
All of the following are true regarding a decreasing term policy EXCEPT
The payable premium amount steadily declines throughout the duration of the contract.
Who bears the investment risk on variable life?
The policyowner (assets in a separate account).
All of the following are true about variable products EXCEPT
The premiums are invested in the insurer's general account. // Insurers selling variable products invest their customer's monies in a separate account, which is very similar to a mutual fund. Since there is no guaranteed rate of return, customers must bear the investment risk.
Which of the following is NOT a characteristic of variable annuities?
They offer guaranteed stock performance. // Unlike fixed annuities, which offer guaranteed minimum benefits, variable annuity benefits are based off the performance of a stock portfolio. The performance of the portfolio is not guaranteed.
Which of the following policies would have an IRS required corridor or gap between the cash value and the death benefit?
Universal Life - Option A. // Universal Life Option A (Level Death Benefit option) policy must maintain a specified "corridor" or gap between the cash value and the death benefit, as required by the IRS. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes, and consequently loses most of the tax advantages that have been associated with life insurance.
What type of life insurance policy has an Option A and Option B?
Universal Life.
Which type of life insurance policy allows the policyowner to pay more or less than the planned premium?
Universal Life. // The policyowner has the flexibility to increase the amount of premium going into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to compensate for the nonpayment of premium.
Which of the following types of polices allows for flexible premiums and a variable investment component?
Variable universal life insurance. // It combines a flexible premium with an investment component that allows for potentially great returns.
Applicant or Proposed Insured
A person applying for insurance.
Beneficiary
A person who receives the benefits of an insurance policy.
Whole life policies provide protection until the insured reaches what age?
Age 100.
An individual has just borrowed $10,000 on a 5-year note from his bank. The note is due in installments. What type of life insurance policy would be best suited to this situation?
Decreasing term.
What is the main advantage of converting from group life insurance to individual coverage?
Evidence of insurability is not required.
What type of policy issues certificates of insurance to the insured?
Group policy.
A whole life policy that requires that the policyowner only pays premiums for a specified number of years is known as what kind of policy?
Limited-pay whole life.
What type of life insurance policy is Life Paid-up at age 65?
Limited-pay whole life.
What are the living benefits of whole life insurance?
Loan values.
What are the death benefit options in universal life policies?
Option A - level death benefit, and Option B - increasing death benefit.
Lapse
Policy termination due to nonpayment of premium.
Between adjustable life and universal life policies, which one provides more flexibility to the policyowner?
Universal life.
What type of policy is typically issued without proof of insurability from the insured?
Group policy.
Policy Maturity
In life policies, the time when the face value is paid out.
Which authorities regulate Variable Life policies?
Variable life insurance products are dually regulated by the State and Federal Government: The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the State Department of Insurance.
What policy component must decrease in decreasing term insurance?
Face amount.
In a joint life policy, when is the death benefit paid?
Upon the first death.
If an employee wants to join group life insurance coverage outside of the open enrollment period, what would the employee have to provide?
Evidence of insurability.
When the amount of insurance is increased in an adjustable life policy, what will the insurer require from the insured?
Evidence of insurability.
A young father would like a life insurance policy to provide coverage for all five family members at the lowest cost. Which type of policy would he most likely buy?
Family Protection Policy. // Family protection insurance combines protection for all members of a family into one policy. It usually provides a permanent plan of insurance on the base insured, and term riders on other members of the family. Because they are all covered under a single policy, there is only one policy fee.
Securities
Financial instruments that may trade for value (ex: stocks, bonds, options).
What type of premium do both Universal Life and Variable Universal Life policies have?
Flexible. // Variable universal life, like universal life itself, has a flexible premium that can be increased or decreased as the policyowner chooses, as long as there is enough value in the policy to fund the death benefit.
Under a 20-pay whole life policy, in order for the policy to pay the death benefit to a beneficiary, the premiums must paid for what time period?
For 20 years or until the insured's death, whichever occurs first.
What are the characteristics of the group that underwriters will consider before issuing a group life policy?
Group's purpose, size, financial strength and turnover.
Universal life policies have two types of interest rates. What are they?
Guaranteed and current.
Know This!
If an insured skips a premium payment on a universal life policy, the missing premium may be deducted from the policy's cash value. The policy will NOT lapse.
Know This!
In variable contracts, the policyowner bears the investment risk (assets in a separate account).
Adverse Selection
Insuring of risks that are more prone to losses than the average risk.
Which of the following best describes annually renewable term insurance?
It is a level term insurance. // Annually renewable term is a form of level term insurance that offers the most insurance at the lowest cost.
If a policy offers pure death protection, what does this mean? What does this reveal about the cash value of the policy?
It means there is no cash value.
A married couple owns a permanent policy which covers both of their lives and pays the death benefit only upon the death of the first insured. Which policy is that?
Joint Life Policy. // Joint life policies cover the lives of two insureds; rates are blended. Upon the death of the first insured, the policy ends.
What are the death benefit options in Universal Life policies?
Option A is the level death benefit option, and Option B is the increasing death benefit option.
What universal life option has a gradually increasing cash value and a level death benefit?
Option A.
Insured
Person covered by the insurance policy; may or may not be the policyowner.
What is the major difference between the most common types of whole life policies: Straight Life, Limited Payment and Single Premium?
Premium payment mode.
Know This!
Premium rates on a joint life policy are determined by averaging the ages of both insureds. Joint life = first to die; survivorship life = second to die (last survivor).
What type of whole life insurance policy generates immediate cash value?
Single premium whole life. // Like other types of whole life policies, Single Premium Whole Life (SPWL) endows for the face amount of the policy if the insured lives until the age of 100. The distinguishing feature of a SPWL is the fact that it generates immediate cash value, due to the lump-sum payment made to the insurer.
Which of the following policies would be classified as a traditional level premium contract?
Straight Life. // Straight whole life policies have a level guaranteed face amount and a level premium for the life of the insured.
What would help prevent a universal life policy from lapsing?
Target premium.
Regarding taxation, how does the cash value of a universal life policy accumulate?
Tax deferred.
Know This!
Term insurance has no cash value.
Know This!
Term insurance provides the greatest amount of coverage for the lowest premium.
Face Amount
The amount of benefit stated in a life insurance policy.
Death Benefit
The amount paid upon the death of the insured in a life insurance policy.
Insurer (Principal)
The company that issues an insurance policy.
An Adjustable Life policyowner can change which of the following policy features?
The coverage period.
Under Option B in a universal life policy, what happens to the death benefit?
The death benefit increases each year by the amount of the cash value increases.
Who owns a group life insurance contract?
The employer (also known as the sponsor of the group).
Whole life insurance policies mature when the insured reaches the age of 100. If the owner of a whole life policy (the insured) dies at age 80, and there are no outstanding loans on the policy, what portion of the death benefit will be paid to the beneficiary?
The full death benefit.
A father owns a life insurance policy on his 15-year-old daughter. The policy contains the optional Payor Benefit rider. If the father becomes disabled, what will happen to the life insurance premiums?
The insured's premiums will be waived until she is 21. // If the payor (usually the parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21.
In annually renewable term policies, what is the annual premium based upon?
The insureds attained age.
Premium
The money paid to the insurance company for the insurance policy.
All of the following are true regarding a decreasing term policy EXCEPT?
The payable premium amount steadily declines throughout the duration of the contract. // Premiums remain level with a decreasing term policy; only the face amount decreases.
Policyowner
The person entitled to exercise the rights and privileges in the policy.
Who is entitled to the cash values in a life insurance policy?
The policyowner.
How does the premium for Joint Life compare to the premium on two policies covering the same two individuals for the same death benefit?
The premium for joint life would be less than the same type and amount of coverage on the same individuals; it is based on a joint average age that is between the ages of the insureds.
As time progresses, what happens to a premium in a Graded Premium Whole Life Policy?
The premium gradually increases each year for the first few years (5-10) of the policy and then remains level thereafter.
With annually renewable term insurance, what happens to the premium as one's age increases?
The premium increases each year with the age of the insured.
What happens to the premium in an annually renewable term life policy?
The premium increases with each renewal.
How is the premium determined in a joint life insurance policy?
The premium is based on the average age of the insureds.
In term policies, what happens to the premium throughout the term of the policy?
The premium remains level.
Level Premium
The premium that does not change throughout the life of a policy.
How does continuous premium straight life differ from 20-year limited pay life?
The premiums for straight life will be spread over the insured's lifetime, thus enabling the insurance company to charge a lower annual premium. When the premium-paying period is condensed to a 20-year duration, a higher annual premium is required.
Why are policy loans not available on term insurance?
There is no cash value to borrow against.
Endow
To have the cash value of a whole life policy reach the contractual face amount.
What is the purpose of establishing the target premium for a universal life policy?
To prevent the policy from lapsing.
An insured owns a life insurance policy. To be able to pay some of her medical bills, she withdraws a portion of the policy's cash value. There is a limit for a withdrawal and the insurer charges a fee. What type of policy does the insured most likely have?
Universal life.
In what type of life insurance policies can the policyowner skip premium payments without the policy lapsing?
Universal life.
What kind of policy allows withdrawals or partial surrenders?
Universal life.
An insured receives his monthly summary for his life insurance policy. He notices that the cash value of the policy is significantly lower this month than it was last month. What type of policy does the insured have?
Variable.
When would a 20-pay whole life policy endow?
When the insured reaches age 100.
When does an adjustable life policy accumulate cash value?
When the premiums paid are more than the cost of the policy.
Know This!
Whole life insurance provides lifetime (permanent) protection and accumulates cash value.
If an insured terminates membership in group life insurance, to what type of insurance can the insured covert the coverage?
Whole life.
What type of life insurance policy provides permanent protection?
Whole life.
Many policies are both renewable and convertible. What are the similarities between these two provisions?
With both a renewable policy and convertible policy, the premium for the renewed or converted policy will be based on the insured's current age at the time of the renewal or conversion. Also, evidence of insurability is not required for each provision.
Deferred
Withheld or postponed until a specified time or event in the future.