Chapter 4 Flashcards
What is the cash surrender value of a whole life policy?
The cash surrender value arises from the policyholder’s right to quit the contract and reclaim a share of the reserve fund attributable to the policy. By cashing in a policy, the policyowner gives up the death benefit
Do life insurance policies with cash surrender values usually have loan provisions?
Yes - (called policy loans) - can borrow up to the cash surrender value of the policy - the cash surrender and its death benefit remain in force when cash is loaned and interest must be paid on the borrowed amount
If a policy loan has not been paid back when the insured dies, how is the amount (plus interest) obtained?
It is deducted from the policy’s death benefit
When is a whole life death benefit payable?
At the death of the insured
The death benefit of a whole life policy has two components - what are they?
- The cash value, sometimes referred to as the savings element
- An insurance protection element that must be paid in addition to the cash value so that the death benefit equals the policy’s face amount (known as the “net amount of risk” to the insurance company - which represents the net amount of risk at any time that the insurance company is exposed to)
Whole life policies mature or endow - what does that mean?
They usually mature or endow at age 100 or 120. If the insured is still alive when maturity occurs, the cash value of the policy will equal the face amount and the policy will mature-at endowment, the policyowner will pay taxes on any gains
Will a policy holder pay taxes on gains of a whole life policy when it matures/endows?
Yes
What is straight life or ordinary life (other names for continuous premium whole life)?
Premiums are the same each year for the duration of the contract. If the policyowner discontinues making premium payments, they will receive cash value of the policy
What is a limited payment whole life policy?
One that allows for a lifetime of premiums to be paid in a shorter period of time.
What are the two common types of limited pay whole life?
- 10-pay or 20-pay whole life, the premiums are payable in 10 or 20 level annual installments
- life-paid-up at at 65, premiums are payable in level annual installments from the date of purchase to the year the insured turns 65
Will annual premiums for limited pay whole life be higher than those for continuous premium whole life (straight life or ordinary)
Yes - because trying to fit them into a tighter period of time
Is coverage for a limited payment whole life policy for the entire life of the insured?
Yes - just like continuous pay (straight/ordinary life) in this regard
What is a single premium whole life policy?
one payment at the time of purchase - initial payment + interest earnings will cover all future costs of maintaining the policy - create immediate cash value
What is a modified premium whole life policy?
Sometimes call “modified whole life” - lower premiums during the first 3 to 5 years (approximately same as term), then steps up to a higher for the remainder of the policy - making the cost higher than continuous premium whole life
What is a graded premium whole life policy?
Even lower initial premium than modified whole life policies - graded premium starts out lower than the other types of whole life policies, then increases every year for 5 to 10 years, before leveling off for as long as the policy remains in force
What is an indeterminate premium whole life policy?
Similar to nonparticipating whole life, except it provides for adjustable premiums - The company will charge a current premium based on its current estimate of investment earnings, mortality, and expense costs. If these estimates change in later years, the company will adjust the premium accordingly, but never above the maximum guaranteed premium stated in the policy
What is interest sensitive whole life?
AKA current assumption whole life, is a type of whole life insurance where the cash value can increase beyond the stated guarantee if economic conditions warrant. The interest sensitive policy has:
- A fixed, level death benefit
- A premium schedule fixed in regard to the timing of payments
with interest sensitive whole life, the insurer will make investments with a percentage of each premium payment. Excess or current interest from those investments may be credited to the policy to make the cash value rise - the interest rate is not fixed for the life of the policy and can fluctuate depending on current market conditions
Policyowner is protected from drops below a minimum
With interest sensitive whole life, not only can the cash value increase more quickly, but what can also grow?
The death benefit
What are the advantages of whole life?
- Permanent coverage
- guaranteed level premiums
- Does not expire after term
- Cash Values accumulate Tax deferred
- Policies offer certain options in the event of lapse after premiums have been paid in
What are the disadvantage of whole life?
- Higher premium than term
- Premiums can’t be decreased and are inflexible
- Death benefit cannot be increased
- Policyowner has no control over where cash value is invested
What are flexible policies?
Policies which can be adjusted in terms of premiums, face amounts, and investment objectives (length of coverage) - can be adjusted to meet changing needs
A flexible policy basically allows a combination and adjustment of the policy between whole life and term life - depending on the premium relationship to the death benefit and length of coverage
Note
What is universal life?
Flexible policy - designed for people who want flexible premiums and flexible coverage over the course of their lifetime
WIth a universal life policy, the policyowner may increase or decrease the death benefit, subject to insurability requirements. In addition, the policyowner has the flexibility to choose one of two policy death benefit options - what are those?
- Option A - Provides for a level death benefit equal to the policy’s face value. As a result of this choice, more of the premium is placed in the cash account, making the cash value rise more quickly
- Option B - Provides for an increasing death benefit equal to the face value plus the cash account. Cash value does not increase as quickly because more of the premium is applied to the higher cost of the increasing death benefit over the life of the policy
With universal life, may withdrawals and loans be made against the cash value?
Yes
With universal life, can the policyowner also “cash in” the universal life contract for its current cash value whenever he or she wishes?
Yes
WHat is the “corridor” in a universal life policy?
An automatic increase in the death benefit amount of insurance protection required under the tax law when policies accumulate a high propotion of cash value compared to the death benefit
Both whole life and universal life allow for policy loans (which need to be paid back) from the cash value - however, only universal life allows for what?
Partial surrenders (withdrawals) from the cash value
How much do cash withdrawals in Universal life adjust the cash value and death benefit?
By the amount of the cash withdrawal
Withdrawals from a universal life policy are what with respect to taxability?
THey are tax free up to the cost basis - (the value of the premiums paid)
How are withdrawals above the cost basis taxed?
As ordinary income
Do withdrawals require repayment (like policy loans)
No
What is equity indexed universal life?
Permanent life insurance policy that allows policyholders to tie accumulation value to a stock market index such as the S&P500. Indexed universal life generally contains a minimum guaranteed interest rate component along with the indexed account option
Do equity indexed universal life policies generally give a minimum guaranteed rate along with the indexed account option?
Yes
Do equity indexed universal life policies guarantee that the interest credited to the cash value will never be below zero?
Yes
Adjustable life combines the guarantees of whole life insurance with the affordable premiums of term insurance in one policy
Note - allowed to adjust mix of whole life and term life based on his desire for affordable premiums and cash value growth
What are the advantages of Adjustable life?
- Mix of term and whole - allows for adjustment between two
- Can skip premiums without losing coverage as long as enough to cover policy’s monthly expenses
- Flexible death benefit is advantageous
- WIthdrawals allow access without requirement to pay back
- Equity indexed provide upside potential of index with downside guarantee that interest crediting rate to cash value will never be below zero
What are the disadvantages of adjustable life?
- More complex than whole life or term
- Important that client understands that premium payment amounts, interest rates, withdrawals, and death benefit can significantly impact the policy’s long-term benefits
What are variable policies?
Permanent insurance policies designed to provide lifetime coverage for the insured and have cash value and a death benefit.
What is the major advantage of variable policies?
They allow the policyowner to participate in various types of options without being taxed on the earnings
What is a “separate account” held by life insurance companies?
Held by life insurance companies and maintained separately from the insurer’s general assets. This account is established to hold premiums used to purchase funds/investments that the company offers. This account is distinct from the general account established to hold insurer assets and premiums for their fixed insurance products
The number and type of investment choices available to the policyowner varies from company to company, and from policy to policy. Most companies have suggested model portfolios to simplify the policyowner’s selection for the variable policy
Note
Do variable policies have a guaranteed rate of return or risk of loss?
Separate account investment options usually include a mix of stocks, bonds, mutual funds, money market instruments, and even commodities, although investment performance is not guaranteed, it can provide higher rates of return than the guaranteed or current rates paid on other traditional insurance policies
Variable insurance is an insurance product that contains an investment element. For this reason, both the securities industry and state insurance commissioners regulate these policies -
Note -
What licenses do agents needs to sell variable?
- agents selling variable must have a life insurance license (and an additional variable specific license is required in some states
- Agents must register with the SEC and FINRA. Exams are required to obtain those licenses
Does variable universal life have a guaranteed cash value?
No - it has a separate account instead
What is variable universal life also called?
Variable whole life, or fixed-premium variable life
Variable universal life policies have two death benefits - t/f?
True
With respect to variable universal life, Death benefit option A (or Option 1) remains level regardless of increases or decreases in cash value, while benefit option B (or option two) varies with the fluctuating cash values
Note - you can choose option A or B
With variable universal life, can the death benefit fall below the original face amount?
No - it will increase with positive investment results, however, in the event of negative performance, it cannot decrease below the original face amount
The amount below which the death benefit to a variable universal life policy cannot fall below is known as what?
The guaranteed minimum death benefit
Variable life is whole life with a separate account - variable universal life is universal life with a separate account
Note
Variable universal life is also called flexible premium variable life
Note
What are the characteristics of the death benefit for the following:
- Level Term
- Whole Life
- Current Assumption whole life
- Universal Life
- Variable Life
- Variable Universal Life
- Level Term: Expires at the end of the term
- Whole Life: Fixed and Level
- Current Assumption Whole Life: Fixed and Level
- Universal Life: Adjustable level, or increasing level
- Variable Life: Varies with investment performance; original face amount is guaranteed
- Variable Universal Life: Adjustable level or increasing options
What are the characteristics of the premiums for the following:
- Level Term
- Whole Life
- Current Assumption whole life
- Universal Life
- Variable Life
- Variable Universal Life
- Level Term: Fixed schedule, increases at renewal
- Whole Life: Fixed schedule, level amount
- Current Assumption whole life: Fixed schedule, may increase or decrease, but may not go above guaranteed amount
- Universal Life: Flexible schedule, flexible amount
- Variable Life: Fixed schedule, level amount
- Variable Universal Life: Flexible schedule, flexible amount
What are the characteristics of the cash amounts for the following:
- Level Term
- Whole Life
- Current Assumption whole life
- Universal Life
- Variable Life
- Variable Universal Life
- None
- Fixed and guaranteed
- Current interest with guaranteed minimum
- Current interest with guaranteed minimum rate
- Varies with investment performance, no guaranteed minimum and at risk for loss
- Varies with investment performance, no guaranteed minimum and at risk for loss
Do variable universal life policies generally offer a guaranteed minimum death benefit?
No
Is it true that most variable life policies offer a guarantee of a minimum return
Yes
What is a joint life policy?
Usually covers two or more lives, with the death benefit being paid out when the first insured dies
What are joint-life policies also known as?
First to die policies
With joint life policies, once the death benefit is paid out, what happens to the policy?
It ends
What is an advantage of a joint life policy vs. two individual policies?
Right product for married people who want a surviving spouse to be able to maintain a certain lifestyle, but they want to pay less than the cost of two individual policies
What is a survivorship life policy?
insures two individuals and will pay the death benefit when the last individual dies
What are survivorship life policies often called?
Second-to-die or last-to-die policies
What is the advantage of a survivorship policy?
It costs less than two individual policies - the policy can provide money to pay estate settlement costs and related expenses upon the death of a second spouse
What is juvenile life insurance?
Coverage written on the life of a child or a minor
What are some characterstics of juvenile life insurance and some advantages?
Most often permanent life insurance - in addition to the death benefit, juvenile life insurance provides the benefit of locking in the low premium for the child’s entire life, and guarantees the child has life insurance in case their health changes in the future
Does a juvenile life insurance policy generally come in the form of permanent life insurance locking in low premiums?
Yes
What are “jumping juvenile” policies?
Death benefit of a juvenile policy may seem too small when the child is grown up. To address this, the face amount of some juvenile policies automatically increases when the child reaches age 18 or 21 - with no corresponding increase in premium - this is known as a jumping juvenile policy
What are the 3 types of “specialized policies” discussed?
- Joint Life (first to die, second to die is not joint life - but survivorship)
- Juvenile
- Jumping Juvenile (typically increases face amount at 18 yrs old)
