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LIFE INSURANCE (OFFICIAL LLQP) > Universal Life Insurance (Chapter 4) > Flashcards

Universal Life Insurance (Chapter 4) Flashcards

1
Q

REVIEW

What’s the difference between Term & Whole Life?

A

Term provides insurance coverage for a
specified period or term, while Whole Life provides insurance coverage for life.

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2
Q

Life Insurance Terminology

Adjusted Cost Basis (ACB)

A

The amount of money invested.

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3
Q

REVIEW

What are the differences in premiums between Term & Whole Life?

A
  • With Term, premiums increase with the age of the life insured.
  • With Whole Life, premiums remain constant regardless of the age of the life insured.
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4
Q

Life Insurance Terminology

Cash Surrender Value (CSV)

A

Money that the life insurance policyholder receives for canceling their policy before it matures or they pass away.

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5
Q

REVIEW

Name some differences in benefits for Term & Whole Life

A
  • Term does not provide non-forfeiture benefits.
  • Death Benefit in term cannot be increased without proof of insurability and additional premiums.
  • Whole Life may provide non-forfeiture
    benefits.
  • Death benefit in Whole Life can be increased, without providing proof of insurability.
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6
Q

Life Insurance Terminology

The difference between Adjusted Cost BASE
& Adjusted Cost BASIS

A

Adjusted Cost BASE
- Deemed Disposition of capital property.

Adjusted Cost BASIS
- Amount of money invested in an insurance policy, & the calculation of the policy gain.

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7
Q

Chapter 4

What is a Universal Life (UL) Policy

A

UL insurance combines permanent insurance with tax-advantaged investing, within limits.

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8
Q

TRUE OR FALSE

Premium Taxes on a UL Policy ranges from 2% to 4%, and it is charged on the entire premium.

A

TRUE

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9
Q

FILL IN THE BLANK

After the premium taxes are applied, the remainder of the premium goes into the policy’s _____________.

a) Investment account(s)
b) Adjusted Cost Basis
c) Dividend Account(s)
d) Exempted Account

A

After the premium taxes are applied, the remainder of the premium goes into the policy’s Investment account(s)

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10
Q

TRUE OR FALSE

If the policyholder were to invest money outside of a policy (ex. mutual funds or GIC), the amount invested would not be subject to premium tax.

A

TRUE

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11
Q

TRUE OR FALSE?

The insurance company adds the mortality costs to the policy’s investment account.

A

FALSE

The insurance company DEDUCTS mortality costs FROM the policy’s investment account.

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12
Q

What are the expenses within a policy premium? (6)

A
  1. Cost of selling the policy (Marketing, salaries & commission to agents)
  2. Underwriting
  3. Administration
  4. Investigating Claims
  5. Paying death benefits.
  6. Profits sought by shareholders
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13
Q

The flexibility of a UL policy results in…

A
  • Timing & amounts of premium
  • Face Amount
  • Life / lives insured
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14
Q

TRUE OR FALSE

Within limits, and amounts of premiums, the insurance company restricts the policyholder from paying maximum premiums due to tax implications that could occur.

A

FALSE

Within limits, and amounts of premiums, the Policyholder can decide how much to pay in premiums.

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15
Q

TRUE OR FALSE

The policyholder can deposit lump-sum premiums at any time.

A

TRUE

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16
Q

Name some key factors that could result in an insufficient account value

A
  • The policy was always minimally funded
  • Policyholder made withdrawals from the policy
  • Policyholder decreased or stopped premium payments
  • The investment returns were negative or lower than anticipated.
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17
Q

How is the Modal Factor Calculated in UL Policies?

A

(1 ÷ number of payments per year).

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18
Q

TRUE OR FALSE?

If the policyholder needs additional coverage in the future, he can add that additional coverage to the existing policy on an attained age basis without a Guaranteed Insurability Benefit (GIB) due to the flexibility of the UL policy.

A

FALSE

Any increase in the face amount of a UL policy will require the insured person to provide evidence of insurability unless the policy includes a rider for a guaranteed insurability benefit.

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19
Q

TRUE OR FALSE?

UL policies may allow the policyholder to add or substitute a new life insured under the policy, as long as the new person can provide evidence of insurability.

A

TRUE

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20
Q

FILL IN THE BLANK

The mortality deductions of UL policies are based on______________ .

a) Cash Surrender Value (CSV)
b) Probability of Death
c) Life Expectancy
d) Net Amount at Risk (NAAR)

A

The mortality deductions are based on the net amount at risk.

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21
Q

How do you calculate the Net Amount at Risk ?

A
  • Death Benefit – Investment Account Value

(ex. Pratik owns a UL policy with a death benefit of $500,000 and an account value of $128,000. The current NAAR of his policy is $372,000, calculated as ($500,000 – $128,000).

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22
Q

Simplify Yearly Renewable Term (YRT)

A
  • The Cost of Insurance (COI) expressed as a dollar amount per $1,000 of risk.

(Ex. Pratik’s policy has a COI of $18.57. NAAR is $372,000. The insurance company would make a mortality deduction of $6,908 from his account, calculated as ($18.57 × $372,000 ÷ $1,000).

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23
Q

TRUE OR FALSE?

Yearly renewable term (YRT) is one-year term insurance that renews at the end of every policy year.

A

TRUE

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24
Q

TRUE OR FALSE?

The annual YRT premium for a specific year is based on the life insured’s risk of death for that year.

A

TRUE

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25
Q

TRUE OR FALSE?

The cost per $1,000 at risk generally decreases each year because the risk of death tends to increase with age (with the exception of the first few years of life).

A

FALSE

The cost per $1,000 at risk generally INCREASES each year because the risk of death tends to increase with age (with the exception of the first few years of life).

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26
Q

REVIEW

How do you calculate the mortality cost for term insurance?

A

Death benefit multiplied by the probability of death.

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27
Q

What are the two mortality costing option for Universal Life Policy?

A
  1. Yearly Renewable Term (YRT)
  2. Level Cost of Insurance (LCOI)
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28
Q

TRUE OR FALSE?

For a UL policy based on LCOI, the cost per $1,000 at risk generally remains constant over the duration of the policy.

A

TRUE

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29
Q

TRUE OR FALSE?

Some policies allow the policyholder to switch from YRT costing to LCOI costing after the policy is issued.

A

TRUE

30
Q

TRUE OR FALSE?

The policyholder is permitted to switch from LCOI to YRT costing after the policy is issued.

A

FALSE

The policyholder is NOT permitted to switch from LCOI to YRT costing after the policy is issued.

31
Q

What are the 4 Death benefit options in a UL Policy?

A
  1. Level Death Benefit
  2. Level Death Benefit + Account Value
  3. Level Death Benefit + Cumulative Premiums
  4. Indexed Death Benefit
32
Q

Name some Key Points in Level Death Benefit

A
  • Remain constant at the original face amount.
  • Beneficiary can receive the policy’s account value once it exceeds the original face amount.
  • Premiums greater than the minimum will grow the policy’s investment account.
  • least expensive of the death benefit options.
  • Suitable for clients who do not have an increasing insurance need.
33
Q

What are some Key Points for Level Death Benefit + Account Value?

A
  • Net Amount at risk (NAAR) remains level over time.
  • Mortality deductions are greater than Level Death Benefit.
  • Investment account grows more slowly.
  • Beneficiary receives original amount of insurance, plus the full account value, as a tax-free death benefit.
  • Suitable for those who deposit large premiums in excess of the
    amount required.
34
Q

Name some Key Points in the Level Death Benefit + Cumulative Premiums

A
  • Most expensive death benefit option
  • Beneficiary receives the original face amount plus the gross amount of each premium.
  • Provides a full refund of premiums
    when the life insured dies.
  • Suitable for policyholders who intend to maximize their premiums.
35
Q

What are some Key Points for Indexed death benefit?

A
  • Death benefit equal to the original face amount and indexed for some measure of inflation.
  • Some policies index the death benefit to the Consumer Price Index (CPI).
  • Some policies allow the policyholder to choose an indexation rate.
  • The NAAR for a UL policy with an indexed death benefit will not be level.
  • Suitable to cover an end-of-life risk that is expected to increase over time (Ex. tax liability on assets that appreciate in value.)
36
Q

Name 3 investment components within the UL Policy?

A
  • Net Premiums
  • Tax Deferral
  • Investment Choices
  • Impact of investment return
37
Q

Simplify Net Premiums

A

Net premiums are the policy’s investment funds which equals to Gross Premiums — Premium tax — Mortality — Admin expenses

38
Q

TRUE OR FALSE?

The insurance company may limit the policyholder’s net premiums to ensure that the policy remains tax-exempt.

A

TRUE

39
Q

TRUE OR FALSE?

Investment income earned within the policy’s tax-exempt investment account are fully taxable as long as it remains in the plan.

A

FALSE

Investment income earned within the policy’s tax-exempt investment account is NOT taxable at the time it is earned, much like income earned within a registered retirement savings plan (RRSP) (Tax differed) is not taxable as long as it remains in the plan.

40
Q

TRUE OR FALSE?

UL policies offer a wide range of fixed income and equity investment choices, giving the policyholder the ability to actively manage the investment mix.

A

TRUE

41
Q

TRUE OR FALSE?

The policyholder is limited to a single investment choice; he cannot have his net premiums divided or spread out to a number of different investment choices due to the Net Amount at Risk.

A

FALSE

The policyholder is not limited to a single investment choice; he can have his net premiums divided or spread out to a number of different investment choices.

42
Q

FILL IN THE BLANK

Daily interest accounts (DIA) usually offer ______________ based on the yield of a specified benchmark, such a percentage of the yield on a 30-day Government of Canada treasury bill.

a) a minimum interest rate
b) an ETF (Exchange Traded-Fund)
c) Advanced Accounts
d) Limited Pay T-100

A
  • Daily interest accounts (DIA) usually offer a minimum interest rate based on the yield of a specified benchmark, such a percentage of the yield on a 30-day Government of Canada treasury bill.
  • The absolute minimum return is set at 0%, so the principal is guaranteed.
43
Q

Index options are usually diversified by?

A

Index options may be diversified by location, asset mix (Ex. equity, bond, balanced), market capitalization (Ex. large cap, small cap) or income objective (Ex. Capital growth vs. income).

44
Q

TRUE OR FALSE?

UL policyholders can choose to receive interest income based on the performance of a selection of mutual funds.

A

TRUE

45
Q

TRUE OR FALSE?

If investment returns are lower than expected in a UL policy, then the mortality deductions will erode the account value more quickly.

A

TRUE

46
Q

TRUE OR FALSE?

Projections and illustrations of investment returns in a UL policy are intended to demonstrate how the policy works, and are a prediction of guaranteed or expected performance.

A

FALSE

Projections and illustrations of investment returns are only intended to demonstrate how the policy works, and are not a prediction of guaranteed or expected performance.

47
Q

Non-Forfeiture options in a UL policy is commonly known as?

A

Accumulating fund.

48
Q

What are the Non-forfeiture options in a UL policy?

A
  1. Surrendering the policy
  2. Policy withdrawals (partial surrender)
  3. Premium offsets
  4. Policy loans
  5. Collateral for third-party loans
  6. Leveraging
  7. Distribution upon death
49
Q

FILL IN THE BLANK

Surrender charges are normally charged if the policy is surrendered during __________ of coverage.

a) Before the 3rd year
b) During the accumulation phase
c) After 10 years
d) First 5-10 years

A

Surrender charges are normally charged if the policy is surrendered during the first 5 to 10 years of coverage.

50
Q

TRUE OR FALSE?

The surrender charge in a UL policy can exceed the value of the investment account especially when funds are withdrawn in the early years.

A

FALSE

  • The surrender charge would never
    exceed the value of the investment account.
  • The policyholder doesn’t have to pay a surrender charge if the policy does not have a cash value.
51
Q

TRUE OR FALSE?

Surrendering a UL policy will result in a taxable policy gain.

A

TRUE

52
Q

FILL IN THE BLANK

A withdrawal in a UL Policy is considered to be_____________.

a) Full Surrender
b) a Paid-Up policy
c) Partial Surrender
b) Cancellable policy

A

A withdrawal in a UL policy is considered to be a partial surrender.

53
Q

TRUE OR FALSE?

Withdrawals in a UL policy doesn’t affect the growth of the investment account because they are tax-deferred and held in a reserve.

A

FALSE

Withdrawals in a UL policy will impede the growth of the investment account, and may affect the long-term viability of the policy.

54
Q

TRUE OR FALSE?

Participating whole life policies provide the policyholder with the choice of using policy dividends to offset their premiums.

A

TRUE

55
Q

TRUE OR FALSE

In regards to premium offsets in a UL policy, the investment account can grow to such a size that it can be used to fund future mortality and expense deductions indefinitely.

A

TRUE

56
Q

What’s the term that’s used when the UL policyholder obtains a loan from the insurance company against the cash surrender value of the policy?

A

Policy Loan

57
Q

TRUE OR FALSE?

The policyholder is required to pay back the loan in UL, because the loan balance plus any accumulated interest affects the insurance companies administrative expenses.

A

FALSE

The policyholder is not required to pay back the loan, but the loan balance plus any accumulated interest will reduce the death benefit payable under the policy.

58
Q

TRUE OR FALSE?

A policy loan is also considered to be a taxable disposition.

A

TRUE

59
Q

TRUE OR FALSE?

UL policyholders may be able to use the
cash surrender value of the policy as collateral for a loan from a third party.

A

TRUE

60
Q

What’s the difference between Collateral Loan & Leveraging Loan in UL policy?

A

They are both the same however with leveraging, you can obtain series of loans rather than a single loan.

[Ref. 4.6.6]

61
Q

Name some ADVANTAGES in a UL Policy

A
  • Offers flexibility to the policyholder.
  • Policyholder can increase, decrease or
    suspend premiums. (as long as the policy’s account value can support the mortality and expense.)
  • Policyholder has a choice of investment products.
  • Offers the opportunity for tax-sheltered investing, within limits.
62
Q

What are some DISADVANTAGES in a UL policy?

A
  • Complex and may be difficult
    for the policyholder to understand.
  • Policyholder needs to actively monitor
    the performance of the investment
    account.
  • Policy performance is sensitive to changes in investment performance.
63
Q

What are the differences in Policy dividend with UL policy and Whole Life?

A

Policy pays dividends in Whole Life, but doesn’t pay dividends in Universal Life.

64
Q

What are the differences in mortality deductions and expenses with UL policy and Whole Life?

A
  • Mortality deductions and expenses
    are deducted from investment account in UL. Mortality deductions may be based on YRT or LCOI costing.
  • Mortality deductions and expenses
    are taken from policy reserves in Whole Life.
65
Q

What are the differences in death benefits with UL policy and Whole Life?

A
  • UL Policyholders have options with respect to the death benefit (Ex. death
    benefit plus account value, death
    benefit plus cumulative premiums).
  • In Whole Life, Death benefit is not affected by the value of the
    investment account
66
Q

What are the differences in modal factors with UL policy and Whole Life?

A
  • Modal factors generally are not
    used in UL.
  • Modal factors are applied in Whole Life if premiums are paid other than annually.
67
Q

What are the differences in investments with UL policy and Whole Life?

A
  • Policyholder can choose how the
    investment account is invested in UL.
  • Insurance company chooses how
    the policy reserves are invested in Whole Life.
68
Q

Who can benefit from Universal Life Policy?

A

Investment-savvy policyholders who have long-term insurance needs and who are also looking for tax-advantaged investment opportunities.

69
Q

TRUE OR FALSE?

Leveraging a UL policy can provide a tax-free source of retirement income.

A

TRUE

70
Q

Abebe has a universal life (UL) policy with a face amount of $400,000.

When Abebe purchased the policy, his life insurance agent recommended that his policy have level cost of insurance (LCOI).

The cost of insurance (COI) of the policy has been set at $23.25.

Last year the value of the investment account was $98,000 and this year it has grown to $107,000.

Which statement accurately describes the mortality deduction from Abebe’s account?

a) The mortality deduction last year was $7,022
b) The mortality deduction this year is $6,832
c) The mortality deduction is the same because it is level
d) The mortality deduction in the later years is greater

A

Step 1 is to calculate the NAAR for both years:

NAAR = death benefit − investment account value
Year 1 = $400,000 − $98,000 = $302,000
Year 2 = $400,000 − $107,000 = $293,000

Step 2 is to calculate the mortality deduction

Mortality deduction = (COI × NAAR) ÷ 1000
Year 1 = ($23.25 × $302,000) ÷ 1000 = $7,021.5
Year 2 = ($23.25 × $293,000) ÷ 1000 = $6,812.25

[Ref: 4.3.3]

LIFE INSURANCE (OFFICIAL LLQP) (18 decks)

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