Life Only, Chapter 1 - C. Interest-Sensitive, Market-Sensitive and Adjustable Life Products

(Adjustable Life): As the insured's needs change, the policyowner can make adjustments in his or her policy. Typically, the policyowner has the following options:

(1) Increase or decrease the premium or the premium paying period (2) Increase or decrease the face amount or (3) Change the period of protection

Universal life offers one of two death benefit options:

(1) Option A (level death benefit) (2) Option B (increasing death benefit)

Since the premium in universal life insurance can be adjusted, the insurance companies give the policyowner a choice to pay either of the two types of premiums:

(1) minimum premium (2) Target premium

Minimum premium:

- amount needed to keep the policy in force for the current year - makes the policy perform as an annually renewable term product

Agents selling variable life insurance products must:

- be registered with FINRA - have a securities license - be licensed by the state to sell life insurance

Indexed Whole Life (equity index whole life)

- cash value is dependent upon the performance of the equity index - guaranteed minimum interest rate - policy's face amount increases annually to keep pace with inflation without requiring evidence of insurability - classified depending on whether the policyowner or the insurer assumes inflation risk

Describe Increasing Death Benefit option (Option B) in a universal life policy:

- death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases - total death benefit will always = the face amount of the policy + the current amount of cash value - pure insurance with the insurer remains level for life - expenses are higher than option A - the cash value is lower in the older years

Describe level death benefit option of universal life policies:

- death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in the later years - pure insurance is actually decreasing as time passes, lowering expenses, and allowing for greater cash value in older years - increase in death benefit at a later point in time

Variable Universal Life has the following features and characteristics:

- flexible premium that can be increased, decreased or skipped as long as there is enough value in policy to fund the death benefit - Increasing and decreasing the amount of insurance - Cash withdrawals or policy loans

In a Universal Life policy, what happens during a partial withdrawal?

- interest earned on withdrawn cash value may be subject to taxation - death benefit will be reduced by the amount of any partial surrender

Describe statutory definition of life insurance:

- must be specified gap maintained between cash value and death benefit in a life insurance policy - % that apply to the corridor are established in a table that vary the age of the insured and the amount of coverage - if corridor is not maintained the policy is no longer defined as life insurance and loses most of the tax advantages associated with life insurance

Interest-Sensitive Whole Life (Current assumption life)

- whole life policy that provides guaranteed death benefit to age 100 - Insurer sets the initial premium based on current assumptions about risk, interest and expense - If actual values change, the company will lower/raise the premium at designated intervals - Credit the cash value with the current interest rate that is usually comparable to money market rates - minimum guaranteed minimum rate of interest

Why does the policyowner bear investment risk in variable life contracts?

Cash value is not guaranteed, since it fluctuates with the portfolio the premiums have been invested in by the insurer

The added benefit of current interest rates in interest-sensitive whole life may allow for__________

Greater cash value accumulation or a short premium-paying period

Universal Life Insurance (Flexible Premium Adjustable Life)

Policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again

In adjustable life, increases in the death benefit or changing to a lower premium type policy will usually require______________________

Proof of insurability

Variable contracts are regulated by................

SEC, FINRA, & Insurance Department

Why does the death benefit in a level death benefit option (option A) universal life policy increase at a later point in time?

So that the policy will comply with the "statutory definition of life insurance" that was made by the IRS and applies to all life insurance contracts after December 31, 1984

The insurance component of a universal life policy is always _______________________ insurance

annually renewable term

The ____________ of an adjustable life policy only develops when the premiums paid are more than the cost of the policy

cash value

In an adjustable life policy, the insured typically determines how much ______________ is needed and the affordable amount of _______________. The insurer will then determine the appropriate type of insurance to meet the insured's needs

coverage; premium

The cash value of a variable whole life policy is not _________________ and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer.

guaranteed

If the policyowner in an indexed life policy assumes the inflation risk, the policy premiums ___________

increase with the increases in the face amount

What are the two components of a universal life policy?

insurance component and a cash account

Variable Universal Life Insurance combines................

many features of the whole life with the flexible premium of universal life and the investment component of variable life

Universal life policies allow the ___________ of the policy cash value

partial withdrawl (partial surrender)

In a universal life policy, the policyowner may skip paying a _______________ and the policy will not lapse as long as there is sufficient _______________ at the time to cover the monthly deductions for cost of insurance. If the cash value is too small, the policy will expire

premium; cash value

Variable Whole Life insurance is a level, fixed _______________, _________________ based product with a guaranteed minimum death benefit

premium; investment

Target premium:

recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime

If the insurer assumes the inflation risk in an indexed life policy, the premium________________

remains level

Unlike universal life, most of the investment vehicles in variable universal life policies do not guarantee _________________

return

Due to the element of investment risk, the federal government has declared that variable contracts are __________

securities

Since the insurance company does not bear the investment risk of the contract, these assets must be invested in a _____________

separate account which invests stocks, bonds and other securities

Adjustable Life Insurance can assume the form of either ______________ insurance or ______________ insurance

term insurance; permanent insurance

In adjustable life, the policyowner has the option of converting from ___________ to ___________ or vice versa

term life; whole life

In adjustable life, the insurer may adjust the death benefit when converting from a ________ to a ___________

whole life policy, term policy