Quiz: Flexible Permanent Life Insurance

Which of the following most correctly describes death benefit Option 1 of a universal life insurance policy? A. It has a fluctuating death benefit, equal to the cash value and a net amount at risk that may rise or fall. B. It has a level death benefit, equal to the cash value and a net amount at risk that decreases at the same rate that the cash value increases. C. It has a rising death benefit, equal to the cash value and a level net amount at risk. D. It has a decreasing death benefit, equal to the cash value and a net amount at risk that decreases more than the cash value increases.

B. It has a level death benefit, equal to the cash value and a net amount at risk that decreases at the same rate that the cash value increases. UL death benefit Option 1 resembles a traditional whole life policy in that the net amount at risk decreases while the cash value increases to produce a level death benefit.

To meet the federal definition of life insurance and thus qualify for life insurance's favorable tax treatment, all permanent life insurance policies must have: A. a cash value that never equals the death benefit B. a cash value that eventually exceeds the policy's death benefit C. a corridor of pure insurance protection between the cash value and death benefit, the amount of which depends on the insured's age D. a cash value that grows to equal the death benefit no later than the insured's life expectancy

C. a corridor of pure insurance protection between the cash value and death benefit, the amount of which depends on the insured's age According to the legal definition of life insurance, a life insurance product cannot consist fully of cash value. The death benefit must be greater than the policy's cash value by a specified percentage. For universal life insurance, the policy must contain a corridor of insurance protection through age 95.

All the following statements regarding adjustable life insurance are correct EXCEPT: A. Changing the premium will change the policy's future cash value growth. B. The policy death benefit may be increased by increasing the premium. C. Policy premiums can be changed up or down whenever the policyowner wants to do so. D. Adjustable life is a good choice for someone who wants the ability to change the policy value as insurance needs change.

C. Policy premiums can be changed up or down whenever the policyowner wants to do so. Most adjustable life insurers require advance notice of premium change requests and limit changes to once per year.

Henry owns a variable universal life insurance policy. He has put half of his premiums in the fixed account, 25 percent in a growth stock fund subaccount, and 25 percent in a bond fund subaccount. With respect to this policy, all the following statements are correct, EXCEPT: A. Only the funds in the fixed account are guaranteed as to principal and interest. B. The premiums in the fixed account earn interest at the insurer's current rate. C. The insurance company bears the investment risk for the amounts invested in the variable subaccounts. D. Henry can transfer funds among variable subaccounts with no income tax consequences.

C. The insurance company bears the investment risk for the amounts invested in the variable subaccounts. The premiums placed in the variable subaccounts are not guaranteed. Subaccount values move up or down depending on the investment performance of the subaccount portfolio. Henry, not the insurer, bears the investment risk for the amounts in the variable subaccounts.

Andrea owns a variable universal life insurance policy and would like to stop making premium payments for several years while her son attends college and resume them when he graduates. Regarding her policy, which of the following statements is most correct? A. Andrea can stop making premium payments while her son is in college as long as she makes up the missed payments later. B. Andrea can increase or decrease premium payments under her policy but cannot stop making payments altogether. C. Andrea's policy will lapse. D. As long as the policy's cash value covers the monthly deductions for the cost of insurance and expenses, Andrea's policy will remain in force.

D. As long as the policy's cash value covers the monthly deductions for the cost of insurance and expenses, Andrea's policy will remain in force. Andrea can stop making premium payments while her son is in college and is not required to make up the missed payments later.

In a front-end loaded universal life contract, when does the insurer deduct a charge to cover the costs of administering the policy? A. once, when the first premium is paid B. from the cash value after the premium has been deposited to it C. at the start of each policy year D. from the premium payment before it is credited to the policy's cash value

D. from the premium payment before it is credited to the policy's cash value In a front-end loaded contract, the premium charge is not a one-time expense.

An insurer may recoup acquisition fees associated with the sale and administration of universal life insurance by assessing a cash value withdrawal fee called a(n): A. index charge B. mortality charge C. premium charge D. surrender charge

D. surrender charge Insurers may assess a surrender charge on full or partial surrenders to recoup acquisition and administration costs.

If a variable universal life policyowner chooses death benefit Option 3, what will the guaranteed minimum benefit equal? A. the policy's net amount at risk plus its cash value minus the sum of premiums paid B. the policy's net amount at risk plus its cash value C. the policy's net amount at risk plus its cash value plus the sum of premiums paid D. the policy's net amount at risk plus the greater of total premiums paid or the policy's cash value

D. the policy's net amount at risk plus the greater of total premiums paid or the policy's cash value Death benefit Option 3 assures the policyowner that the death benefit will reflect the higher of the actual cash value or the sum of premiums paid.