Chapter 1: Types of Individual Life Insurance
Straight Life
lowest annual premium remains level, cash value increases
Single Premium Whole Life
provides level death benefit to insured for one-time lump-sum payment generating immediate cash value
What is a "minimum premium" in a Universal Life policy?
the amount needed to keep the policy in force for the current year allowing it to be annually renewable
What are the death benefit options in a Universal Life policy? (A & B)
A. level death benefit B. increasing death benefit
An individual has just borrowed $10,000 from his bank on a 5-year installment loan requiring monthly payments. What type of insurance policy would be best suited to this situation? A) Decreasing Term B) Variable Life C) Universal Life D) Whole Life
A) Decreasing Term (a decreasing term policy's face amount decreases as the amount of debt is reduced)
Annually Renewable Term
level death benefit and may be guaranteed renewable without proof of insurability ; premium increases annually according to obtained age
Does the death benefit of an Adjustable Life policy automatically increase with inflation?
No, adjustment care made by policy owner NOT automatically and usually requires proof of insurability
If a policy offers pure death protection, what does that mean?
There is no $ value
Which of the following is TRUE regarding an indeterminate premium whole life policy? A) the premium can be raised up to a guaranteed maximum rate B) the premium is lower in the first year of the policy; then it is gradually raised every year C) the premium is level throughout the life of the policy D) the premium is usually higher in the first few years of the policy
A) the premium can be raised up to a guaranteed maximum rate
When would a 20-pay whole life policy endow? A) at the insured's age 65 B) after 20 payments C) in 20 years D) when the insured reaches age 100
D) when the insured reaches age 100
Universal Life
UNBUNDLED policy; flexible premium (minimum and target), may skip payments if there's sufficient cash value
Who is insured under a Juvenile Life policy?
a minor
Renewable provision
allows policy owner to renew policy without proof of insurability but premium is based on insured's current age
How does continuous premium straight life differ from 20-year limited pay life?
- straight life: premium is lower because it's paid over time - 20-year: higher premium
What is Option A and Option B in Universal Life policies?
A: level term B: increasing term
What type of insurance provides pure death protection?
term insurance
All of the following are TRUE regarding the convertibility option under a term life insurance policy EXCEPT A) upon conversion, the premium for the permanent policy will be based upon attained age B) upon conversion, the DB of the permanent policy will be reduced by 50% C) evidence of insurability is not required D) most term policies contain a convertibility option
B) upon conversion, the DB of the permanent policy will be reduced by 50%
What kind of policy allows withdrawals or partial surrenders? A) 20-pay life B) Term policy C) Variable whole life D) Universal life
D) Universal Life
A man decided to purchase a $100,000 Annually Renewable Term Life policy to provide additional protection until his children finished college. He discovered that his policy A) Decreased death benefit at each renewal B) Required a premium increase each renewal C) Built cash values D) Required proof of insurability every year
B) Required a premium increase each renewal (premiums are adjusted each year to the insured's attained age; policy must be guaranteed renewable. DB remains level, no cash values)
Equity Indexed Whole Life
cash value is dependent upon performance of the equity index such as the S&P 500; always a guaranteed interest rate; face amount increases annually to keep up with inflation
What are the two components of Universal Life insurance? (not options)
insurance component and cash account
Joint Life
single policy insuring 2+ lives; can be term or permanent; death benefit paid upon first death ONLY (spouses, business partners)
Which type of insurance policy generates immediate cash value? A) single premium B) level term C) decreasing term D) continuous premium
A) single premium
Limited-Pay Whole Life
shorter premium paying period than straight life, cash value accumulates quicker (20-year pay life, life paid-up at 65)
Which option for the Universal life allows the beneficiary to collect both the death benefit and cash value upon the death of the insured? A) Option B B) corridor option C) variable option D) Option A
A) Option B
A 27-year-old professional has limited income and can only budget $15 per month for life insurance. Which of the following life insurance policies would provide the largest face amount for that amount of premium? A) Term insurance B) Universal life C) Ordinary whole life D) 30-pay life insurance
A) Term insurance (bc term is not accumulating cash values, the cost is lower than policies that do)
A variable policy's death benefit and cash value is based on a distinct pool of investments. These are held in separate accounts that act like A) Keogh plans B) mutual funds C) traditional whole life insurance D) nonvariable insurance
B) mutual funds
Which of the following policies would have an IRS required corridor gap between the cash value and death benefit? A) Universal Life - Option B B) Equity Indexed Universal Life C) Variable Universal Life D) Universal Life- Option A (level death benefit)
D) Universal Life- Option A (level death benefit)
An insured receives a 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? A) term B) securities C) stock D) variable
D) Variable
Decreasing Term
level premium with an annually decreasing death benefit; primarily used when amount of needed protection decreases over time ex: loan, mortgage or other debts
Level Term Insurance
most common type of term insurance with a level death benefit
Term Insurance
offers the greatest amount of temporary coverage for the lowest premium with *no cash value* (also known as pure life insurance)
With annually renewable term insurance, what happens to premium as one's age increases?
premium increases with age
Graded Premium Whole Life
premium starts out low and then gradually increases for 5-10 years then levels out
Convertible provision
provides policy owner with the right to convert the policy to permanent insurance without proof of insurability and premium is based on attained age
3 Forms of Whole Life Insurance
straight life limited pay whole life single premium whole life
Modified Life
type of whole life policy that charges a lower premium for the first 3-5 years that then increases and levels out (typically purchased by individuals just starting out and have limited financial resources)
Juvenile Life
written on life of minor; commonly known as "jumping juvenile" because the face amount increases at predetermined age (often 21) - face amount jumps but premium remains level
Whole Life Insurance
- lifetime protection includes saving element (cash value) - endows at age 100 - premium remains level - death benefit remains level - policy owner can borrow against cash value or receive cash value upon surrender (doesn't accumulate until 3rd year)
Concerning Juvenile Life Insurance, which of the following statements is incorrect? A) juvenile life is classified as any life insurance purchased by a minor B) usually a parent or guardian is the applicant for insurance on the life of a minor C) it can be a limited premium payment policy D) it is classified as any life insurance written on the life of a minor
A) juvenile life is classified as any life insurance purchased by a minor (does not need to be purchased by a minor)
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. What kind of policy is it? A) Graded premium life B) Limited-pay life C) Variable life D) Adjustable life
B) Limited-pay life (coverage paid-up well before age 100, usually after specified # of years)
The premium of a survivorship policy compared with that of a joint life policy would be A) half the amount B) lower C) higher D) as high
B) lower
An individual purchased a $100,000 Joint Life policy on himself and his wife. Eight years later, he dies in a car crash. How much will his wife receive from the policy? A) nothing B) $50,000 C) $100,000 D) $200,000
C) $100,000 (In joint life policies, the death benefit is paid upon the first death only)
Which of the following policies is characterized by a provision where the premiums are lower in the early years of the policy and increase over time to a point where they become level for the remainder of the policy? A) enhanced whole life B) minimum deposit whole life C) graded premium whole life D) indeterminate premium whole life
C) Graded premium whole life
To sell variable life insurance policies, an agent must receive all of the following EXCEPT A) FINRA registration B) a securities license C) a life insurance license D) SEC registration
C) SEC registration (SEC registration is for securities not agents))
What do Modified Life and Straight Life policies have in common? A) Same amount of premium B) Graded premium C) Temporary protection D) Accumulation of cash value
D) Accumulation of cash value
Under a 20-year whole life policy, in order for the policy to pay the death benefit to a beneficiary, the premiums must be paid: A) until the policy owner reaches age 65 B) for 20 years C) until the policy owners age 100, when the policy matures D) for 20 years or until death, whichever occurs first
D) for 20 years or until death, whichever occurs first
What are the 2 components of a Universal policy? A) insurance and investments B) mortality cost and interest C) separate accounts and policy loans D) insurance and cash account
D) insurance and cash account (insurance always annually renewable)
Multiple Protection Policies (Double or Triple Indemnity Policies)
combine permanent insurance with level term insurance for multiple protection period; pay 2 or 3 times the face amount if insured dies during specific period of time
Family Policy
combines whole life with term insurance into single policy to cover multiple people; whole life typically on breadwinner and convertible term insurance on others - spouse: convert to permanent coverage until age 65 - children covered beginning 30 or 31 days after birth and can convert to permanent at age 21
Increasing Term
level premium with a death benefit that increases each year (often used with return of premium riders)
Adjustable Life
policy owner has the power to - adjust premium rates - adjust premium paying period - adjust face amount - change period of protection cash value is generated when premiums paid is greater than the cost of the policy
Payor Benefit
rider primarily used with juvenile policies that states if the payor (often parent) becomes disabled for at least 6 months or dies insurer will waive the premium until minor reaches a certain age (21)
What (2) regulates the sales of variable life insurance?
securities exchange commission (SEC) and Financial Industry and Regulatory Authority (FINRA)
Which authorities (4) regulate Variable Life policies?
- state and federal government - Securities and Exchange Commission (SEC) - Financial Industry Regulatory Authority (FINRA) - State Department of Insurance
If an agent wishes to sell variable life policies, what license must the agent obtain? A) Surplus Lines B) Personal Lines C) Securities D) Adjuster
C) Securities
Which of the following best defines target premium in a universal life policy? A) the corridor of insurance B) the recommended amount to keep the policy in force throughout its lifetime C) the max amount the policy owner must pay on a policy D) the minimum amount to make sure the policy is annually renewable
B) the recommended amount to keep the policy in force throughout its lifetime
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 five years, what will happen to the premium? A) it will remain the same for the new 5-year term B) it will decrease for the new 5-year term since the insured is now a lesser risk to the company C) it will increase each yer during the next 5 years as the face amount increases each year D) it will increase because the insured will be 5 years older than when the policy was originally purchased
D) it will increase because the insured will be 5 years older than when the policy was originally purchased
Twin brothers are starting a new business. They know it will take several years to build the business to the 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? A) Whole life B) Ordinary life C) Joint life D) Decreasing term
C) Joint life
What is Pure Death Protection?
if the insured dies during term, the policy pays the death benefit to the beneficiary; if the policy is cancelled or expires prior to the insured's death, nothing is payable at the end of the term and their is no cash value or living benefit
Return of Premium
increasing term insurance that pays additional death benefit to beneficiary equal to amount of premiums paid - which is paid if death occurs within a specific period of time or if insured outlives policy term
As time progresses, what happens to the premium in a Graded Premium Whole Life policy?
it gradually increases each year for the first few years (5-10) then levels off
Survivorship Life
single policy insuring 2+ lives; death benefit paid upon LAST death
What is a "target premium" in a Universal Life policy?
the recommended amount that should be paid on a policy in order to cover the cost of insurance protection and keep the policy in place for a lifetime
The death protection component of Universal Life insurance is always A) adjustable life B) increasing term C) annually renewable term D) whole life
C) annually renewable term
In Modified Life policies, what happens to the premium? A) it is higher during the first policy years B) it varies at the beginning, but levels out by the end of the third year C) it is level at the beginning and increases after the first few years D) it always remains level
C) it is level at the beginning and increases after the first few years (lower premium first 3-5 years then higher during remainder of insured's life)
A father owns a life insurance policy on his 15 y/o daughter. The policy contains the optional Payor benefit rider. If the father becomes disabled, what will happen to the life insurance premiums? A) the premiums will become tax deductible until the insured's 18th bday B) since it is the policyowner and not the insured who's disable. the life insurance policy will not be affected C) the insured will have to pay premiums for 6 months. If at the end of this period the father is still disabled, the insured will be refunded the premiums D) the insured's premiums will be waived until she is 21
D) the insured's premiums will be waived until she is 21
Variable Life Insurance
a permanent life insurance policy with an investment component; the policy has a cash-value account, which is invested in a number of sub-accounts available in the policy; policy loans can be borrowed against cash value; premium is fixed if whole life and flexible is universal life
How does the premium for Joint Life compare to the premium on 2 policies covering the same 2 individuals for the same death benefit?
the premium for Joint Life would be less the premium for 2 individual policies on the same individuals
Many policies are both renewable and convertible. What are the similarities?
- premium for both is based on insured's current age - evidence for insurability is not required
