Life insurance

Current assumption whole life is:

Based on current assumptive interest rates --- Current assumption life is interest-sensitive. It was one of several interest-sensitive whole life policies developed in the 1970's. Current Assumption Life is a policy in which the policy owner may choose to add additional premium, when the rate of return on the cash value increases.

What is NOT true of a universal life policy?

Credited interest is never guaranteed --- Universal Life: * is referred to as unbundled life insurance as expenses are paid from the CV and disclosed to the insured. * guarantees a minimum interest rate on the cash value. * contains flexible premiums. * provides an annual report to owners showing C.V., F.V., expenses, etc. * has an option A that provides a level face value. * has an option B that provides an increasing value.

The two death options on universal life are:

Increasing and level --- Universal Life Option A offers a level death benefit. The face value will only vary (increase) if the cash value accumulation exceeds the levels allowed by the IRS. This increase in face value is called the corridor of protection. Universal Life Option B offers increasing coverage. The total death benefit will be the sum of the universal life face value and the accumulated cash value. Since the insurer will continue to withdraw money from the cash value to pay for the original face value, less money will be left behind to accumulate interest. With option B the policy owner sacrificies cash value for a higher face value. At an age specified in the policy, the insurer will discontinue the increasing coverage.

In a whole life policy, who bears the risk that the investment returns will be lower than the guaranteed cash value?

The insurance company --- Whole life insurance policy writers (insurers) bear the risk that investment returns will be lower than the guaranteed cash value. Example: The insurance company guarantees 4% interest return. Current interest rates are at 1.5%. The insurance company must pay the 4%. They will suffer a loss of 2.5%.

Which one of the following policies requires the insurer to maintain a separate account?

Variable insurance products --- Separate Accounts: Variable life insurance policyholders may be able to place the cash value in a separate account which conforms to their investment objectives. Whole life, Interest sensitive life, adjustable life, and universal life insurance policy holders are unable to choose among differing investment portfolios. Term insurance has NO cash value.

Policy holders have the risk that investment returns will be lower than initially anticipated in:

Variable life --- Variable life insurance policyholders bear the risk that investment returns will be lower than initially anticipated. There is no guarantee to the cash value in a variable life product. There is a minimum guarantee to the face value.

What type of policy is a combination of life insurance with equity investments, designed to keep pace with inflation?

Variable universal life --- Variable Life is considered high risk due to the equity investment. It is subject to Security and Exchange Commission (SEC) regulations. Variable Life offers PORTFOLIO INVESTMENT CHOICES for the owner of the policy. This allows the owner to direct the cash value into certain securities. Variable universal life offers the above plus flexible premiums.

All of the following are objectives in purchasing variable life, EXCEPT:

It gives a solid guarantee of cash value that is earning a good interest. --- Policyholder objectives in purchasing variable life insurance are threefold: 1. Variable life offers the potential of greater death benefits and higher cash value, compared to whole life policies. 2. Variable life offers the ability to switch to a portfolio which is more compatible with the investor's objectives. 3. Tax-deferment. The investment gains in the separate account are not subject to current income tax.

Which one of the following generally require premium payments in fixed amounts at fixed dates?

Whole life --- Premium payments: Variable and whole life insurance premiums are generally paid in fixed amounts at fixed dates. Universal life insurance premium payments are flexible in timing and amount. Variable universal life has flexible premiums.

All of the following statements are true of a universal life policy, EXCEPT

The face amount must remain fixed (level). --- The face value of universal life may vary. Evidence of insurability for the increased coverage might be required. A corridor (set by the IRS) between the face value and cash value must be maintained at all times. In other words, the F.V. must always be greater than the C.V. by a specific amount determined by the IRS. The cash value is kept in the general investment account of the insurance company which invests typically in bonds and mortgage products. (The separate account is reserved for variable products.)

Which of the following is true of the cash value of Universal life insurance?

Guarantees a minimum interest on the cash value --- Cash Value: Variable life insurance does not guarantee a rate of return on the cash value. Universal life insurance guarantees some minimum level of interest for the cash value. Whole life insurance guarantees cash value.

Ralph and Kaye own four grocery stores. When doing their estate planning, they determine that there is insufficient liquid assets to pay estate taxes. Their children would be forced to sell one or more of the stores to pay these taxes. What policy might they purchase to provide liquid assets to their children?

Last-to-die policy --- Last-to-die or Survivor life will best suit Ralph and Kaye's needs. When the first one dies the policy will not pay benefits. When the last one dies the policy will pay a benefit that can be used by the children to pay estate taxes and preserve the family business. Joint life pays when the first of 2 insureds dies. This is used when both insureds require a death benefit if the other insured dies.

All of the following statements are true of a universal life policy, EXCEPT:

The face amount must remain fixed. --- The face value of the policy may vary. Evidence of insurability for the increased coverage might be required. A minimum corridor between the face value and cash value must be maintained at all times.

Which of the following provides coverage for 2 individuals but only pays a benefit when the first individual dies?

First-to-die --- Joint life or first-to-die policies provide coverage on two people. When the first person dies the policy pays benefits to the surviving insured. This is cheaper than buying individual policies on each of the two people.

Variable life insurance:

Has level premiums ---Does not guarantee a rate of return on the cash value --- Variable life insurance does not guarantee a rate of return on the cash value. The cash value may be placed in a separate account. The investor has investment choices in the separate account. Some of the investments available are high risk equity investments.