types of life insurance

Question 1

Term insurance

Answer 1

temporary protection because it only provides coverage for a specific period of time.

Question 2

three basic types of term coverage

Answer 2

Level,
Increasing, and
Decreasing.

Question 3

Level term insurance

Answer 3

most common type of temporary protection purchased. The word level refers to the death benefit that does not change throughout the life of the policy.

Question 4

Level premium term

Answer 4

the name implies, provides a level death benefit and a level premium during the policy term.

Question 5

Annually renewable term (ART)

Answer 5

the purest form of term insurance. The death benefit remains level (in that sense, it’s a level term policy), and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as the probability of death increases.

Question 6

Decreasing term

Answer 6

a level premium and a death benefit that decreases each year over the duration of the policy term. Decreasing term is primarily used when the amount of needed protection is time sensitive, or decreases over time. Decreasing term coverage is commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. The amount of coverage thereby decreases as the outstanding loan balance decreases each year. A decreasing term policy is usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term.

Question 7

Return of premium (ROP) life insurance

Answer 7

an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid. The return of premium is paid if the death occurs within a specified period of time or if the insured outlives the policy term.

Question 8

Special feature in term insurance: renewable provision

Answer 8

allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability. The premium for the new term policy will be based on the insured’s current age.

Question 9

Special feature in term insurance: convertible provision

Answer 9

provides the policyowner with the right to convert the policy to a permanent insurance policy without evidence of insurability. The premium will be based on the insured’s attained age at the time of conversion.

Question 10

Whole life insurance

Answer 10

provides lifetime protection, and includes a savings element (or cash value). Whole life policies endow at the insured’s age 100, which means the cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100. The policy premium is calculated assuming that the policyowner will be paying the premium until that age. Premiums for whole life policies usually are higher than for term insurance.

Question 11

key characteristics of whole life insurance.

Answer 11

Level premium — the premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy.
Death benefit — the death benefit is guaranteed and also remains level for life.
Cash value — the cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policyowner. (Remember: the insured and the policyowner do not have to be the same person.) Cash values are credited to the policy on a regular basis and have a guaranteed interest rate.
Living benefits — the policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash value, also called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred.

Question 12

The three basic forms of whole life insurance

Answer 12

straight whole life, limited-pay whole life and single premium whole life

Question 13

Straight life

Answer 13

the basic whole life policy. The policyowner pays the premium from the time the policy is issued until the insured’s death or age 100 (whichever occurs first). Of the common whole life policies, straight life will have the lowest annual premium.

Question 14

limited-pay whole life

Answer 14

designed so that the premiums for coverage will be completely paid-up well before age 100. Some of the more common versions of limited-pay life are 20-pay life whereby coverage is completely paid for in 20 years, and life paid-up at 65 (LP-65) whereby the coverage is completely paid up for by the insured’s age 65. All other factors being equal, this type of policy has a shorter premium-paying period than straight life insurance, so the annual premium will be higher. Cash value builds up faster for the limited-pay policies.

Question 15

Single premium whole life

Answer 15

designed to provide a level death benefit to the insured’s age 100 for a one-time, lump-sum payment. The policy is completely paid-up after one premium and generates immediate cash.

Question 16

Adjustable life

Answer 16

developed in an effort to provide the policyowner with the best of both worlds (term and permanent coverage). An adjustable life policy can assume the form of either term insurance or permanent insurance. The insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insured’s needs. As the insured’s needs change, the policyowner can make adjustments in his or her policy. Typically, the policyowner has the following options:

Increase or decrease the premium or the premium-paying period;
Increase or decrease the face amount; or
Change the period of protection.

Question 17

Universal life insurance

Answer 17

implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance. If the cash value is too small, the policy will expire. ALLOW PARTIAL WITHDRAWL

Question 18

Variable life insurance

Answer 18

a level, fixed premium, investment-based product. Like traditional forms of life insurance, these policies have fixed premiums and a guaranteed minimum death benefit. The cash value of the policy, however, is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer. The policyowner bears the investment risk in variable contracts.

Question 19

Variable universal life insurance

Answer 19

a type of insurance that combines many features of the whole life with the flexible premium of universal life and the investment component of variable life, making it a securities version of the universal life insurance.

Variable universal life insurance, like universal life itself, has the following features and characteristics:

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

Question 20

Interest-sensitive whole life,

Answer 20

a whole life policy that provides a guaranteed death benefit to age 100. The insurer sets the initial premium based on current assumptions about risk, interest and expense. If the actual values change, the company will lower or raise the premium at designated intervals. In addition, interest-sensitive whole life policies credit the cash value with the current interest rate that is usually comparable to money market rates, and can be higher than the guaranteed levels. The policy also provides for a minimum guaranteed rate of interest.

Question 21

indexed whole life (or equity index whole life) insurance

Answer 21

the cash value is dependent upon the performance of the equity index, such as S&P 500 although there is a guaranteed minimum interest rate. The policy’s face amount increases annually to keep pace with inflation (as the Consumer Price Index increases) without requiring evidence of insurability. Indexed whole life policies are classified depending on whether the policyowner or the insurer assumes the inflation risk. If the policyowner assumes the risk, the policy premiums increase with the increases in the face amount. If the insurer assumes the risk, the premium remains level.

Question 22

Joint life

Answer 22

a single policy that is designed to insure two or more lives. Joint life policies can be in the form of term insurance or permanent insurance. The premium for joint life would be less than for the same type and amount of coverage on the same individuals. It is more commonly found as joint whole life, which functions similarly to an individual whole life policy with two major exceptions:

The premium is based on a joint average age that is between the ages of the insureds; and
The death benefit is paid upon the first death only.

Question 23

Survivorship life

Answer 23

“last survivor” policy) is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life, which pays upon the first death. This type of policy is often used to offset the liability of the estate tax upon the death of the last insured.