Life Insurance Policies

Question 1

One of the major financial decisions to be made by a family is the amount and type of life insurance to purchase. The form of insurance that offers flexible premiums without a fixed cash value is?

Answer 1

universal life

A unique feature of universal life is that the premiums are flexible. That is, if the client wishes to pay more or less than the target premium, that may be done. However, the nature of the universal life product is such that cash values can fluctuate. Cash values can fluctuate in variable life, but unless the policy is UVL (universal variable life), premiums are scheduled (fixed). Typically there are no cash values with term insurance and the premiums are fixed and whole life has both fixed premiums and guaranteed cash values.

Question 2

Which of the following is indicative of the primary difference between variable life insurance and straight whole life insurance?

Answer 2

The way in which the cash values are invested

Variable life insurance allows the policyowner to decide how the cash value is invested through a number of subaccounts. Death benefits from life insurance policies are always free of income tax regardless of the type of policy.

Question 3

Which type of life insurance has premiums that increase each time the policy is renewed, and no cash value buildup?

Answer 3

Term

A term policy provides life insurance only with no savings element. Upon renewal, the rates are higher as you age.

Question 4

On a scheduled premium variable life insurance policy, the insured is guaranteed?

Answer 4

at least 100% of the stated death benefit.

Scheduled, or fixed, premium variable life insurance has a minimum guaranteed death benefit equal to 100% of the original face amount. There are no guarantees to the cash value and, as a fixed premium policy, no changes are made as a result of performance of the separate account.

Question 5

If a client wishes to purchase a life insurance policy that doesn’t invest in the market, but allows the holder to pay additional premium if desired, the recommendation is?

Answer 5

universal life

Universal life (not universal variable life) does not invest in the market through a separate account. That is only true of life insurance policies using the word “variable.” These policies are frequently overfunded (premium over the required amount is paid-in by the policyowner). Term life cannot be overfunded and annuities of any type are not life insurance policies.

Question 6

universal life insurance

Answer 6

1) Universal life has flexible premiums.
2) Cash values can fluctuate and may even fall to zero.

Universal life features flexible premiums that add to the cash value account, although there are no guarantees and the cash value can disappear if insufficient premiums are paid. There is no guaranteed minimum death benefit as there is with fixed (scheduled) premium variable life. The assumption that level annual premiums are to be paid throughout the insured’s life is associated only with ordinary whole life and scheduled premium variable life policies.

Question 7

One way in which universal life and variable life are similar is that both?

Answer 7

permit loans against the cash value

As long as the policy has cash value, loans are permitted. Neither of these has a fixed minimum cash value, and only universal life has flexible premiums. Only variable life is considered a security.

Question 8

Marianne has a fixed-premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease to?

Answer 8

the original face value

The face value in an insurance policy is the death benefit. In a variable life policy, the face value will fluctuate with the separate account’s performance, but it will never decrease below the original minimum face value.

Question 9

You have a 37-year-old client whose wife has just given birth to triplets. Because of the added responsibilities, he wants to maximize the amount of life insurance he can acquire. Which of the following types of insurance will give him the greatest amount of coverage for the lowest initial premium?

Answer 9

Annual renewable term

At any given age, term insurance always carries the lowest premium and, of the term policies available, annual renewable term always has the lowest initial premium. Of course, because the premium tends to increase each year the policy is renewed, at older ages it can become unaffordable. But, remember, this question is only asking about initial cost.

Question 10

Features are common to both variable annuities and scheduled premium variable life insurance?

Answer 10

1) Income earned in the separate account is tax deferred.
2) Contract owners have voting rights.

All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive 1 vote for each $100 of cash value. With variable life insurance, AIR applies only to the death benefit of a variable life policy, not to cash value. Variable annuities earning more or less than the AIR affects the value of the accumulation unit. Scheduled premium variable life has premiums that are fixed, but no such requirement exists with variable annuities.

Question 11

A 35-year-old client purchased a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is?

Answer 11

9% of premium per year, computed over a 20-year period.

A variable life insurance plan may include a maximum sales charge of 9% over a period not to exceed 20 years. It may be loaded as much as 50% of the first year’s premium but must average no more than 9% over the first 20 years.

Question 12

Among the special characteristics of a universal life insurance policy is

Answer 12

the policy may be overfunded

This question is looking for a feature found in universal life that is not generally found in other forms of life insurance, i.e, something special. In the case of universal life, the policyowner is permitted to pay in an amount in excess of the stated premiums (one of the reasons universal life is known as flexible premium life). The IRS puts limits on the amount of the overfunding before certain tax advantages are lost, but that is beyond the scope of the exam. Not only universal life, but variable life as well, has the possibility of increased death benefits. In fact, some whole life policies allow policy dividends to be used to increase the death benefit. Permanent forms of insurance policies, including whole life, universal life, and variable life, permit loans against the cash value. Therefore, being able to borrow against the cash value is nothing special. Many forms of life insurance have surrender charges for early termination.

Question 13

difference between a universal life insurance policy and a scheduled premium variable life insurance policy?

Answer 13

Premiums on a scheduled premium variable life policy are fixed, while those on a universal life policy are flexible.

A major difference between these two insurance programs is the payment of premiums. Scheduled premium is just another way of saying fixed premium. In a universal life policy, including universal variable life, the premiums are flexible. There is no choice of separate account subaccounts for universal life. Universal life is designed to benefit from periods of high interest rates, not falling ones. Finally, universal life policies have a minimum guaranteed interest rate; no such guarantee applies to variable life.

Question 14

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be correct to state that

Answer 14

by surrendering the policy, its cash value may be obtained

Surrender of the contract requires the insurance company to pay out its cash value. The death benefit is calculated annually (not semiannually) with the cash value being figured monthly. There is no time requirement to remedy a cash value deficiency. Scheduled premium means fixed premium, one that does not change. It is the cash value and the death benefit that will be affected by the performance of the separate account.

Question 15

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of

Answer 15

Although state law may allow for periods longer than 24 months, federal law requires a 2-year conversion privilege.

Question 16

A registered representative presenting a variable life insurance policy proposal to a prospect must disclose what about the insured’s rights of exchange of the VLI policy?

Answer 16

Federal law requires the insurance company to allow the insured to exchange the VLI policy for a form of permanent life insurance issued by the same company for 2 years with no additional evidence of insurability.

(Federal law requires that issuers of variable life insurance policies allow exchange of these policies for a form of permanent life insurance, (usually whole life), issued by the same company for a period of no less than 2 years. The exchange must be made without additional evidence of insurability.)

Question 17

In a scheduled premium variable life insurance policy, what is guaranteed?

Answer 17

1) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years

2) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months

3) a minimum death benefit

(In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the 3rd year of coverage.)

Question 18

Flexible premium payments are a feature of

Answer 18

Only universal and universal variable life policies** have flexible premium payments.

Question 19

Variable Life Separate account valuation?

Answer 19

Unit values are computed each day. Policy cash values are a monthly computation. The death benefit is computed annually.

Question 20

Universal Life Insurance

Answer 20

1) it may include a minimum guaranteed interest rate.

2) it offers the policyowner exceptional flexibility in adjusting the premiums, cash value, and death benefit.

3) it offers two death benefit options.

The single most distinguishing characteristic of universal life is the fact that premiums are flexible and not fixed.

Question 21

In a scheduled premium variable life insurance policy, what is guaranteed?

Answer 21

In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance, but no physical is required. The 75% cash value loan is a minimum, not a maximum, and applies after the 3rd year of coverage.

Question 22

A client needs funds for an unexpected medical emergency. If the client takes out a loan against the cash value of his life insurance policy and does not pay it back, the insurance company can do which of the following?

Answer 22

Reduce the death benefit when the client dies

(Unpaid cash value loans reduce the death benefit.)

Question 23

An individual purchasing a flexible premium variable life contract should know?

Answer 23

1) Timing and amount of premiums generally are discretionary

2) The performance of the separate account directly affects the policy’s cash value.

A flexible premium policy allows the insured to determine the amount and timing of premium payments, provided minimums are met. Depending on the policy, the face amount (death benefit) is recalculated each year. It is intended that the death benefit receive some inflation protection, but this cannot be guaranteed. If separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses unless the requisite amount is received within 31 days

Question 24

A terminally ill client wishing to access a portion of the cash value in his whole life insurance policy while still providing a death benefit for his beneficiaries could do so by?

Answer 24

taking out a policy loan

One of the benefits of whole life insurance is the ability to borrow against the guaranteed cash value in the policy. At death, the amount of the loan is paid off from the death benefit, but the remainder is then paid to the beneficiaries of the policy. Surrendering the policy cancels the death benefit, and the purchaser of the viatical is now the one who determines the beneficiaries. You can’t convert permanent insurance to term (and the exam will not consider the situation of leaving the cash value to purchase extended term insurance, which wouldn’t work here anyway)

Question 25

An individual purchased a variable life insurance policy 10 years ago. The policy has a $500,000 face amount which has grown to $525,000 due to the performance of the selected separate account subaccounts. Three years ago, the insured borrowed $50,000 against the policy which has never been repaid. The effect of this is that the total death benefit today is?

Answer 25

$475,000

The death benefit of a variable life insurance policy is the current face amount ($525,000) or the guaranteed minimum, whichever is greater, less any outstanding loans ($50,000).

Question 26

Life insurance is generally purchased to replace the lost income of the insured. A client wishing to purchase a policy with a level death benefit and level premium for as long as the premiums are paid would choose?

Answer 26

Whole life insurance is permanent insurance with a level premium and a level death benefit. The renewable term policy may have a level death benefit, but every 5 years, the premium will increase. Universal life has flexible premiums and, depending on the option chosen, the death benefit can increase. Decreasing term insurance, which is often called mortgage life insurance, reduces the death benefit over the life of the policy, as the name implies.

Question 27

A customer in his 20s, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. An investment adviser representative might consider recommending?

Answer 27

scheduled premium variable life insurance.

Variable life insurance has the advantage of offering possible inflation protection for the death benefit. The insured assumes investment risk for this benefit and pays a fixed scheduled premium for the life of his contract. Term life insurance is usually a fixed amount, and the premium increases as the insured ages. This would not meet the customer’s need for an increasing death benefit. Buying a whole life policy with a rider permitting the purchase of additional insurance means a higher premium now for the policy for the rider and then, as the insured is older, higher premiums for the new insurance. That could work, but the advantage to the variable life policy is that there is the opportunity for the death benefit to grow while the premiums remain level. Some would recommend the aggressive portfolio strategy, but the question tells us the customer is looking for life insurance.

Question 28

The death benefit of a variable life policy must be calculated at least?

Answer 28

The death benefit must be calculated annually and the cash value, monthly.

Question 29

One of your customers has a scheduled premium variable life insurance policy purchased 10 years ago. The initial face value was $1 million and the annual premium is $1,200. A few years ago, with the cash value of the policy at $30,000, the customer borrowed $20,000 for a home improvement project. Of that, $10,000 has been repaid, and the current cash value is $45,000. With the current death benefit showing as $1.1 million, the customer’s death would provide the beneficiary with?

Answer 29

$1,090,000

The death benefit is the current amount ($1.1 million) less any indebtedness. The balance remaining from the $20,000 loan is $10,000, and that will be paid from the proceeds of the policy. That leaves the beneficiary (or beneficiaries) with the remainder of $1,090,000.

Question 30

A life insurance policy that allows the policyholder to “overfund” the premium payments is called?

Answer 30

Universal life, also known as flexible premium or unscheduled premium life, allows the policyholder to make payments in excess of the stated premium in an effort to generate greater cash value growth.

Question 31

The main benefit that scheduled premium variable life insurance has over whole life insurance is?

Answer 31

potential for a higher cash value and death benefit

Premiums of variable life insurance policyholders are invested in the insurer’s separate account. This allows the policyholder the opportunity (though there are no guarantees) to enjoy significant returns and substantially higher cash values than are obtainable through a whole life policy. Scheduled premium is just another way of saying fixed premium, a characteristic of whole life as well. Policy loans against the cash value are permitted in both policies with the cash value in the whole life being guaranteed. There is a maximum allowable sales charge on variable life policies (9% of total premiums paid over a 20-year period). The term sales charge is not used with whole life.

Question 32

One of your customers would like to buy a life insurance policy that has no participation in the stock market, has no cash value, and provides coverage for 20 years. You should recommend?

Answer 32

A 20-year term life policy

Term life insurance generally offers no cash value and is not tied to the stock market. Coverage terminates at the sooner of death or the stated term, which in this case is 20 years. Whole life, as the name implies, provides coverage for your entire life and does generate cash values. A 20-pay life policy offers lifetime coverage with the feature of premium payments for only 20 years (at a much higher rate than whole life). A variable annuity death benefit is not considered a life insurance policy. It simply pays back the greater of the annuity value or the total paid into the annuity when the policyholder dies.

Question 33

An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose?

Answer 33

the scheduled premium policy because the contract is issued with a minimum guaranteed face amount

A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.

Question 34

What is guaranteed by a variable life policy?

Answer 34

A variable life policy has a minimum guaranteed death benefit, but there is no minimum guaranteed cash value. There is no performance guarantee on separate accounts, and policy loans are required after the policy has been in effect for at least 3 years (36 months).

Question 35

A 35 year-old client indicates that he needs $500,000 of life insurance coverage for the next 20 years. The lowest out-of-pocket cost would be if he purchased?

Answer 35

a 20-year level term policy

In almost all circumstances, certainly for short-to-immediate time periods, term life will be the least expensive form of insurance. A 20-pay life is a permanent policy where the premiums are paid in a 20-year period rather than until death. Variable annuities are not life insurance policies, even though they are issued by life insurance companies.

Question 36

A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is?

Answer 36

renewable level term

Level term insurance offers a fixed face amount over the life of the policy. If the policy is renewable, the owner has the ability to renew it for that same face amount and the new term, but at new, higher premiums as the insured’s age increases.