Chapter 4: Special and Flexible Use Policies Flashcards
An ______ policy will pay the face amount under one of two situations: If the insured is alive at the contract maturity date, or
If the insured dies during the policy period.
Endowment
TF: premiums for endowment policies tend to be higher to build cash value more quickly for an earlier policy maturation date
True
TF: Cash value in an endowment must accrue very quickly, demanding a higher premium.
True
TF: Endowment contracts are based on time periods, either 20 years from the date of purchase, or when the insured reaches age 65, for examples.
True
A _____ _____ _____ is an over-funded life insurance policy in which proceeds are subject to taxation.
Modified Endowment Contract (MEC)
What is used to determine whether a life insurance policy is an MEC?
The seven-pay test
TF: The seven-pay test means, To pass the test, the premiums paid during the first seven years of the policy may not exceed the total amount of level annual premiums that would pay-up the policy in seven years. If it fails, it is considered an MEC.
True
TF: the earliest a life insurance policy can endow is 95. New CSO tables increase that age to 120
True
_____ _____ whole life, also known as ______ _____ whole life, provides varying premiums based on a changing current interest rate.
Interest Sensitive
Current Assumption
TF: For Interest Sensitive whole life, Higher interest rates allow the insurer to reduce the premium, and lower interest rates require the insurer to raise the premium.
True
_____ _____ whole life policies have face amounts that increase with respect to inflation without requiring the insured to undergo a medical exam or provide proof of insurability
Index Linked
TF: CPI is used to determine inflation for index linked policies
True
TF: For Index Linked whole life policies, insurers can increase premiums annually, OR offer a level premium (which is higher to estimate and account for expected index changes)
true
_____ _____ insurances policies insure the lives of two or more people, and the premiums are less expensive than if they were insured separately.
Joint Life
A ___ ___ ____ joint life policy pays the face amount upon the first person’s death. Coverage for the other person ceases. (good for business continuation)
first to die
With a ____ ____ ____ joint life, or ______ life policy, the policy only pays out up the death of the second insured (used for estate planning)
Second to die
Survivorship
____ ____ insurance is intended to cover the life of a debtor in the event the debtor dies prior to paying off a debt. The Creditor owns the policy and is the beneficiary.
Credit Life - typically decreasing term life.
TF: For Credit Life; at any give time, the face amount of the policy cannot exceed the amount of debt, and are typically issued for 10 years or less
True
TF: For Credit Life, Once the debt is paid off, the debtor’s coverage terminates. Credit life policies do not have conversion rights. Credit life policies may be issued individually or through a group policy. In individual policies, the creditor is the policyowner and beneficiary. In group credit policies, the creditor owns the master policy and certificates are provided to debtors.
True
With fixed premiums and guaranteed death benefits, an _____-_______ _____ _____ policy is a type of contract tied to an equity index
Equity Indexed Whole Life
TF: For an Equity Indexed Whole Life Policy, there is a guaranteed minimum amount of cash value, but no ceiling on growth
True
Charlotte takes out a $14,000 loan. How much credit life insurance can the creditor take out on Charlotte?
Select one:
a. $767,011
b. $14,000 plus interest
c. $7,000
d. $28,000
B
All of the following are true regarding credit life insurance, EXCEPT:
Select one:
a. At any time, the face amount of the policy cannot be greater than the amount of the debt.
b. Straight life or economatic life insurance may be used to cover a debt.
c. Credit life policies are typically issued for a period of 10 years or less.
d. Credit life insurance is only sold through a group policy.
D
Which policy pays a death benefit only upon the death of the last person insured?
Select one:
a. Joint life
b. First-to-die
c. Survivorship life policy
d. Juvenile policy
C
Which of the following is not a way that an endowment policy can mature?
Select one:
a. Surrender of cash value
b. When the cash value equals the face amount, at the end of the policy period
c. When the policy period ends, even if the insured is alive
d. Upon the death of the insured
A
A policy known as interest-sensitive whole life is:
Select one:
a. Modified whole life
b. Economatic whole life
c. Current assumption whole life
d. Graded premium whole life
C
Who is the beneficiary of a credit life policy?
Select one:
a. Insurer
b. Insured
c. Creditor
d. Debtor
C
What policy is usually used for credit life insurance?
Select one:
a. Whole life
b. Straight life
c. Increasing term
d. Decreasing term
D
Which policy will pay benefits on the death of the second insured?
Select one:
a. Survivorship life policy
b. First-to-die
c. Modified whole life
d. Current assumption whole life
A
A policy with flexible premiums based on a changing current interest rate is:
Select one:
a. Modified endowment contract
b. Straight whole life
c. Current assumption whole life
d. Joint life
C
Which of the following life insurance policies is not an example of third party ownership?
Select one:
a. Split-dollar plan
b. Key employee life insurance
c. Group life
d. Economatic
D
______ ____ ______ (also called non-traditional life insurance policies_, offer flexible cash values, flexible face amounts, flexible paying periods, and flexible periods of protection.
Flexible Premium Policies
TF: Adjustable Life consists of a term base with a whole life rider.
False - Whole life base with term rider is correct
For ______ ______ policies, the policyowner chooses the amount of coverage needed and how much premium they can pay, then the insurer determines what mix of term and whole life is most appropriate.
Adjustable Life
What are the 4 changes a policyowner can make as their needs change to an adjustable life policy?
Raise or lower premium
Raise or lower face amount
Change coverage period
Change premium paying period
TF: In addition, converting a term policy into a whole life policy with the same face value would result in an increase of premiums.
True
TF: cash value in an adjustable life policy only accrues when the amount of the premium paid is greater than the cost of coverage.
True
_________ life, sometimes called ______ _______ _____ life, is similar to adjustable life, BUT the policyowner can skip premium payments as long as there is enough cash value in the policy to cover the death protection.
Universal
Flexible Premium Adjustable
(this policy allows both the premium and face amount to be increased or decreased)
For universal life, two premiums are quoted:
______ premium will build cash value, resembling whole life
______ premium will keep the policy in force, resembling term life
Target
Minimum
______ life policies are simply annual renewable term policies with a cash value account.
Universal
To increase a death benefit on a universal life policy, ______ ______ _______ will be required
Proof of Insurability
______ Life = Buy Term and Invest the Difference
Universal
For universal life, if certain minimum premium payments are made for a given period, the policy will remain in force for the guarantee period even if the cash value drops to zero. What is this called?
No Lapse Guarantee Riders
TF: Universal life policies offer higher yields than ordinary whole life insurance. Universal life interest rates range from 8% – 12%. Ordinary whole life may earn 3% – 6%.
True
TF: Universal life policies have a guaranteed minimum rate, typically around 5%, that the policy is guaranteed to earn
True
In universal life, cash value is assessed ______.
Monthly
TF: Currently, universal life policies use back-end loading, meaning that the sales and administrative charges are not deducted until the policy owner takes out cash value from the policy or surrenders the policy for its cash value.
True
TF: Often, back-end loading decreases over a period of years:
In the first or second years, the charge may by 10%;
In the 10th or 11th year, the charge may be zero.
True
TF: On the other hand, partial withdrawals or cash value surrenders are not subject to interest, but the insurer charges a small service fee.
True
Two death benefit options for universal life policy owners?
Option A (Option 1) pays a deisgnated amount specified by the policyowner
Option B (Option 2) pays an increasing death benefit
The is an additional amount of pure life insurance in the form of decreasing term, which is used to increase the policy’s death benefit, so the policy does not exceed a certain maximum ratio of cash value to death benefit set by the IRS.
Corridor
TF: In a universal life policy, the corridor kicks in, which allows for an increasing death benefit, so the policy does not fail the seven-pay test, turning into a MEC.
True
TF: Per compliance with TAMRA, policy cash value must not be excessively larger than the level term insurance protection in order to keep the policy’s classification as life insurance.
True
____ _____ ______ life works the same way as unibersal life, but the interest rate is tied to the stock market index, allowing greater potential for larger cash value growth.
Equity Indexed Universal Life (have a fixed guaranteed minimum interest rate, but a nonguaranteed indexed rate which can reach yields of 15-20% or more)
Whole life and universal life policies have some similarities and differences. Which of the following is NOT a characteristic of a universal life policy?
Select one:
a. Policy owner may increase or decrease the death benefit
b. Cash value is fixed and guaranteed
c. Interest earned by the cash account cannot vary
d. Flexible premiums schedule is available
C
Which of the following best describes a circumstance in which the insurer would increase the death benefit of a universal life insurance policy?
Select one:
a. To lower premiums
b. To decrease the death benefit
c. To prevent the cash value from growing too quickly
d. To decrease the policy loan interest rate
C
Which of the following best describes option B/option 2 under a universal life policy?
Select one:
a. The death benefit is the policy face amount or policy cash value, but not both.
b. The death benefit is the policy face amount and the cash value.
c. The death benefit is only the face amount.
d. The death benefit is only the cash value.
B
Which of the following changes may the policyowner of an adjustable life policy NOT make?
Select one:
a. Lengthen the coverage period
b. Decrease the premium
c. Increase the premium
d. Invest premiums in the insurer’s separate account
D
All of the following statements are false regarding universal life insurance, EXCEPT:
Select one:
a. Proof of insurability is required to increase the policy face amount.
b. Premium payments cannot be skipped.
c. The face amount is level.
d. Premiums are fixed.
A
All of the following are true regarding adjustable life policies, EXCEPT:
Select one:
a. An adjustable life policy can be entirely whole or term, or a mix of both.
b. If the policyowner decreases the premium, the policy could be adjusted to have more term coverage.
c. When the premium is decreased, the insured is not required to provide evidence of insurability.
d. When the face amount is increased, the insured is required to provide evidence of insurability.
C
TF: When the premium is decreased or the face amount increased, the insured is typically required to provide evidence of insurability.
True
A person who has a universal life policy and needs cash from the policy, but does not want to have an outstanding policy loan should:
Select one:
a. Take a partial surrender of the policy’s cash value
b. Take a full surrender of the policy’s cash value
c. Get a loan from the bank
d. Take out a policy loan
A
What happens when a universal life policyholder pays the minimum premium?
Select one:
a. The face amount will automatically increase.
b. The face amount will automatically decrease.
c. The policy will resemble term life insurance.
d. The policy will resemble whole life insurance.
C
If Sandra chooses an adjustable life policy, all of the following are flexible, EXCEPT:
Select one:
a. Face amount of the policy
b. Type of protection
c. No requirement for proof of insurability
d. Length of protection
C
The primary difference between universal life and adjustable life is:
Select one:
a. Premium payments are flexible.
b. Premium payments can be skipped.
c. Face amount can be increased or decreased.
d. None of the above
B
