Chapter 3: Types of Policies and Riders

Question 1

What questions should be asked when determining which policy should be purchased?

Answer 1

1. Is protection needed on a short-term or long-term basis?
2. How much coverage is needed?
3. How much premium can the policy owner afford to pay?
4. Does the policy owner have a need to access cash from the policy?
5. What other types of benefits can be added to the basic coverage to meet all the policy owner’s needs?

Question 2

What are the two basic types of life insurance policies?

Answer 2

1. temporary (term)
2. Permanent (whole life)

Question 3

What is the face amount?

Answer 3

the death benefit payable on the policy if the insured dies before the policy ends

Question 4

What may the death benefit also be referred to?

Answer 4

the limit of liability or the policy proceeds

Question 5

In what situations might a temporary (term) policy be the best?

Answer 5

If protection is needed to meet short-term goals, such as to provide benefits to pay for education in case the insured dies before his/her teenagers finish college

Question 6

In what case might long-term (permanent) insurance might be needed?

Answer 6

If the insured wants to provide benefits to a surviving spouse

Question 7

What is cash value?

Answer 7

Cash accumulation in the policy that can be accessed through a policy loan or cancellation (surrender) of the policy.

Cash value is considered a living benefit in a permanent policy causing the premiums to be higher than term insurance.

Question 8

When does a policy mature/endow?

Answer 8

when the cash value in the policy equals the face amount of the policy (and the insured is still living)

Question 9

What is a rider?

Answer 9

an added benefit attached to the policy that supplements existing coverage

Question 10

Why might a rider be added?

Answer 10

It is usually added at the time the policy is purchased and may result in a small increase in premium. The cost of the rider is usually insignificant compared to the cost of buying a separate policy for the same benefits

Question 11

The face amount of insurance is also referred to as the:

a. cash value
b. policy proceeds
c. surrender value
d. loan value

Answer 11

b. policy proceeds

the face amount of insurance is the stated death benefit, or policy proceeds

Question 12

What is pure insurance?

Answer 12

term insurance

Question 13

What does pure insurance provide?

Answer 13

pure death benefit

Question 14

Does term insurance provide any cash value or living benefits?

Answer 14

no

Question 15

Why are term insurance policies less expensive in the early years as compared to permanent forms of insurance?

Answer 15

because premiums paid for these types of policies purchase strictly death benefit and do not offer any cash value or living benefits

Question 16

How long does term insurance provide protection?

Answer 16

1. It offers temporary life insurance protection for a specified period of time.
2. This period could be as short as 1 year, or provide coverage for a specific number of years such as 5, 10, or 20 years.
3. It could also be purchased for coverage up to a specific age like 65.

Question 17

When can the face amount be paid out to the named beneficiary?

Answer 17

Only if the insured dies during the specified term of the policy

Question 18

What are the 5 types of policies?

Answer 18

1. level
2. decreasing
3. increasing
4. annually renewable term
5. return of premium term

Question 19

What is a level policy?

Answer 19

the death benefit remains level ad the premiums remain level during the policy term

Question 20

What is a decreasing policy?

Answer 20

The death benefit decreases, but premiums remain level for the policy term. Often such policies are sold as mortgage protection with the amount of insurance decreasing as the balance of the mortgage decreases.

2. premiums paid for decreasing term are lower than the premiums payable for level term since the benefit decreases throughout the term of the policy

Question 21

What is an increasing policy?

Answer 21

The death benefit increases over the life of the policy while the premiums remain level. This type of term is normally written as a rider to provide cost of living or return of premium benefits

Question 22

What is an annually renewable term?

Answer 22

The simplest form of term life insurance is for one year. The death benefit remains level and the premiums increase yearly as the policy renews up to a specified age.

Question 23

What is a return of premium term?

Answer 23

1. This policy is written as increasing term insurance and provides for an additional death benefit that equals a full refund of premiums if the insured is still living at the end of the term.
2. These policies are very low-risk with respect to paying benefits and therefore charge a much higher premium than level term insurance

Question 24

What are the 2 special features of life insurance policies?

Answer 24

1. Renewable
2. Convertible

Question 25

What is the renewable special feature?

Answer 25

1. A benefit that will renew the contract on the renewal date without evidence of insurability
2. The renewal premium is based upon attained age
3. Renewability is important because the risk is that the insured’s health may deteriorate and the insured may be unable to obtain a policy at the same rates or even at all, leaving the insured without coverage
4. Level term policies may offer the option of being renewable for an additional premium

Question 26

What is the convertible special feature?

Answer 26

1. the right to convert the existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract
2. The premium can be based upon either attained age or original (issue) age.
3. the premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond.
4. If the conversion is based on the issue or original age, back premiums plus interest will be required to be paid at the time of conversion

Question 27

Which of the following is NOT a feature of term life insurance?

a. cash value
b. lower initial cost
c. limited duration
d. pure protection

Answer 27

a. cash value

Term life insurance has no cash value and is often referred to as providing pure protection. Compared to the same face amount of whole life insurance, term will cost less.

Question 28

The net amount at risk to the insurance company at the endowment date is what?

Answer 28

ZERO

Question 29

A “level term” policy means that the _____ remains the same throughout the entire policy period.

a. cash value
b. loan value
c. beneficiary
d. face amount

Answer 29

d. face amount

The death benefit or face amount of insurance remains level throughout the term of the policy. Term policies do not have cash value or loan value

Question 30

What is whole life insurance?

Answer 30

Permanent protection that matures, or endows, at the insured’s age of 100 when the cash value is scheduled to equal the face amount of the policy.

Question 31

What will happen with the face amount if the insured is still living at age 100 and they have a whole life policy?

Answer 31

The insurer will pay the face amount to the owner

Question 32

What is the net amount in a traditional whole life policy?

Answer 32

the net amount at risk= face value- cash value

As cash value increases over time, the net amount at risk decreases. This does not affect the face amount of the policy as that remains level. Since the cash value equals the face amount at maturity, as the cash value grows, the amount of risk to the insurance company decreases

Question 33

Can a whole life policy be convertible or renewable?

Answer 33

No

Question 34

What are the 3 ways premium payments may be structured?

Answer 34

1. straight life or continuous premium
2. limited payment
3. single premium

Question 35

What is a straight life or Continuous Premium?

Answer 35

1. the premium is level and payable to age 100 or death of the insured, whichever comes first
2. the face amount remains level throughout the life of the policy
3. This policy has the highest total premium outlay
4. Cash value will accumulate slower

Question 36

What is a limited payment?

Answer 36

1. Premium payments are for a specified time or to a specified age
2. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100
3. While the annual premium is higher than Straight Life, it is paid for a shorter period of time and will have a lower total premium outlay
4. Cash value will accumulate faster

Question 37

What is a Single Premium?

Answer 37

1. the entire premium is paid in a lump sum at the time of purchase and creates immediate cash value
2. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100
3. The policy has the lowest total premium outlay for the life of the policy

Question 38

What would have a higher premium, a limited 10-pay life policy, or a limited 40-pay life policy?

Answer 38

A 10-pay life policy because the shorter the premium paying period is, the higher the premium

Question 39

A producer is explaining the concept of limited-pay life insurance to a 40-year-old client. When comparing a straight life policy with a 10-pay life policy, which of the statements is correct?

a. A 10-pay life policy will have a lower annual premium than a straight life
b. A straight life policy has immediate cash value
c. a policy fully paid up in 10 years will endow at the client’s age of 50
d. The cash value in a straight life policy will accumulate at a slower rate than the cash value in a 10-pay life

Answer 39

D. The cash value in a straight life policy will accumulate at a slower rate than the cash value in a 10-pay life

The actual amount of premium per year in a 10-pay life policy will be higher than straight life since the number of payments is reduced. Because of this, the cash value will accumulate faster in a 10-pay life and slower in a straight life policy. Both policies will endow at age 100. Neither a straight life or 10-pay life policy has immediate cash value