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
*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).
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).
26
*REVIEW* How do you calculate the mortality cost for term insurance?
Death benefit multiplied by the probability of death.
27
What are the **two** *mortality costing option* for Universal Life Policy?
1. Yearly Renewable Term (YRT) 2. Level Cost of Insurance (LCOI)
28
*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.
TRUE
29
*TRUE OR FALSE?* Some policies allow the policyholder to switch **from YRT costing to LCOI** costing after the policy is issued.
TRUE
30
*TRUE OR FALSE?* The policyholder is **permitted** to switch **from LCOI to YRT** costing after the policy is issued.
FALSE The policyholder is NOT permitted to switch from LCOI to YRT costing after the policy is issued.
31
What are the **4 Death benefit options** in a UL Policy?
1. Level Death Benefit 2. Level Death Benefit + Account Value 3. Level Death Benefit + Cumulative Premiums 4. Indexed Death Benefit
32
Name some **Key Points** in Level Death Benefit
- 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
What are some **Key Points** for *Level Death Benefit + Account Value?*
- 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
Name some **Key Points** in the *Level Death Benefit + Cumulative Premiums*
- 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
What are some **Key Points** for *Indexed death benefit?*
- 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
Name **3 investment components** within the UL Policy?
- Net Premiums - Tax Deferral - Investment Choices - Impact of investment return
37
**Simplify** Net Premiums
Net premiums are the policy’s investment funds which equals to Gross Premiums — Premium tax — Mortality — Admin expenses
38
*TRUE OR FALSE?* The insurance company may **limit** the policyholder’s net premiums to ensure that the policy remains tax-exempt.
TRUE
39
*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.
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
*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.
TRUE
41
*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.
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
*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
- 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
Index options are usually diversified by?
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
*TRUE OR FALSE?* UL policyholders can choose to receive interest income based on the performance of a selection of mutual funds.
TRUE
45
*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.
TRUE
46
*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.
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
Non-Forfeiture options in a UL policy is commonly known as?
Accumulating fund.
48
What are the **Non-forfeiture options** in a UL policy?
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
*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
Surrender charges are normally charged if the policy is surrendered during the **first 5 to 10 years** of coverage.
50
*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.
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
*TRUE OR FALSE?* Surrendering a UL policy **will** result in a taxable policy gain.
TRUE
52
*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 withdrawal in a UL policy is considered to be a **partial surrender**.
53
*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.
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
*TRUE OR FALSE?* Participating whole life policies provide the policyholder with the choice of using policy dividends to offset their premiums.
TRUE
55
*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.
TRUE
56
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?
Policy Loan
57
*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.
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
*TRUE OR FALSE?* A policy loan is also considered to be a *taxable disposition.*
TRUE
59
*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.
TRUE
60
What's the difference between Collateral Loan & Leveraging Loan in UL policy?
They are both the same however with leveraging, you can obtain series of loans rather than a single loan. | [Ref. 4.6.6]
61
Name **some** ADVANTAGES in a UL Policy
- 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
What are **some** DISADVANTAGES in a UL policy?
- 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
What are the *differences* in **Policy dividend** with UL policy and Whole Life?
Policy pays dividends in Whole Life, but doesn't pay dividends in Universal Life.
64
What are the *differences* in **mortality deductions and expenses** with UL policy and Whole Life?
- 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
What are the *differences* in **death benefits** with UL policy and Whole Life?
- 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
What are the *differences* in **modal factors** with UL policy and Whole Life?
- Modal factors generally are not used in UL. - Modal factors are applied in Whole Life if premiums are paid other than annually.
67
What are the *differences* in **investments** with UL policy and Whole Life?
- **Policyholder** can choose how the investment account is invested in UL. - **Insurance company** chooses how the policy reserves are invested in Whole Life.
68
Who can benefit from Universal Life Policy?
Investment-savvy policyholders who have long-term insurance needs and who are also looking for tax-advantaged investment opportunities.
69
*TRUE OR FALSE?* Leveraging a UL policy can provide a tax-free source of retirement income.
TRUE
70
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
***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]