CHAPTER FIVE - VARIABLE INSURANCE POLICIES
When the topic of “modern” life insurance policies arises, thoughts turn immediately to variable insurance policies and interest-sensitive insurance policies. There are those in the industry that firmly believe that some day agents and brokers will sell only Variable contracts and the traditional life insurance policies with fixed premiums and guaranteed values will no longer be available. However, there will always be a demand for the traditional life insurance policies with its guaranteed policy values.
Statistically, the industry reports that in 1993 (for example) there were more than 31 million traditional policies sold, but only 700,000 Variable life and Variable annuity were sold. Further, there are life insurers that are not in the Variable insurance field, sticking to their fixed products, and so far, they have not lost much (if anything) in market share as fixed products continue to dominate the life insurance market.
Various consulting and industry organizations that keep track of such matters, report that from 1989—when Variable life insurance started “taking hold”—to 1993, sales of Variable life insurance as measured by premium income, have doubled. From 1993 through 1994, sales of Variable annuities increased almost 50%—when informed of this rapid growth, one should look at the interest rates on all investments that year—and not surprisingly, Variable Universal Life insurance grew by 64% that same year.
What was happening during this period of time? No surprise, during the decade of 1980-1990, sales of traditional life insurance decreased by a little over 4 million policies. Following this same trend, according to the American Council of Life Insurance, 1991-1992 Variable life insurance sales increased 30 percent while the traditional whole life policy sales decreased by 2%. The ACLI also reported that from 1984, when there were less than 500,000 Variable Universal Life policies in force, to 1993, the number increased to 1.2 million.
What is happening? One should remember that if a company sold one widget in 1994 and then sold 200 widgets in 2004, the increase would be a 200% increase!—point being that Variable policies are relatively new products, so every additional sale is expected—otherwise they would have been pulled from the market. The concern for some insurers is the reduction in traditional whole life sales and in-force numbers, while Variable products are increasing. So what really is happening is:
F The market, i.e. consumers, wants the same investment opportunities with their life insurance and annuities that they have with their personal savings.
DEFINTION OF VARIABLE CONTRACTS
NOTE: during this discussion, the terms “variable contracts”, or “variable policies”, are used, sometimes interchangeably, but in most cases, since variable contracts include both Variable life insurance products and Variable annuities, the descriptive “Variable contracts” can be either. This text relates to life insurance products; however, in some situations discussions of both are appropriate, such as market interest, taxation and regulation.
“Variable” in the context of life insurance and annuity contracts, simply refers to the investment performance of the contract. “A Variable life insurance policy is an investment-oriented whole life insurance policy that provides a return linked to an underlying portfolio of securities…Variable life insurance offers fixed premiums and a minimum death benefit. The better the total return on the investment portfolio, the higher the death benefit or surrender value of the Variable life policy.” Dictionary of Insurance Terms, 3rd Edition.
The big difference is that the guaranteed rate of return may fluctuate—sometimes even monthly—and at any point in time, the policyowner knows what they are realizing as a return on their policy. This is not the case with a variable contract as the investment return varies according to the value of the underlying securities. If the market rises, this is advantageous to the policyowner, if the market declines, this is a disadvantage.
Recent statistics indicate that since about 1925, inflation has averaged 3.2 percent annually, and during this period, common stocks have had an average return of 10.5 percent, government bonds have had an average annual return of 4.9 percent. Conclusion: no investment vehicles have matched stock-based investments.
Low investment rates have had a positive effect on equity based financial products, in particular mutual funds and variable contracts. The lower the investment rate, the more popular mutual fund-type investments become as low interest rates push savers from fixed interest accounts—CDs in particular—into mutual funds. Conversely, if interest rates increase, those savers will jump back into fixed interest products. (Note: will this be the case for traditional and variable contracts—will higher interest rates create more of a demand for traditional plans?)
Life insurance companies, incidentally, are not sitting on their hands and, as a matter of fact, most variable contracts now include a fixed interest option among the various investment choices offered, plus many contracts now offer not only a fixed interest account, but also a money-market account. This allows those policyowners who are concerned when the interest rate rises, to transfer assets out of equity accounts and into fixed interest accounts where they will remain until the policyowner decides to move them back into equities.
Interestingly, during the 1980s, when interest rates declined to very low levels, many expected that when rates started to climb, mutual funds investors did not “bail out” of mutual funds as expected. When the interest rates started to rise in the mid-1990s, many investors decided to say with equities and the sale of CDs was nowhere as high as was expected.
THE MARKET FOR VARIABLE CONTRACTS
Perhaps the most telling reason for the interest in variable contract today is that many consumers are well educated and they fully understand the relationship between investment risk and reward, and most of them either are in the mutual fund market or understand it well. These are the people that will understand and appreciate the investment opportunities in variable contracts.
Because these persons are, as a general rule, well educated, the insurance producer must be able to educate others in regards to life insurance protection and mutual fund investing.
THE ROLE OF MUTUAL FUNDS
Mutual funds and variable contracts are explicably intertwined and as explained in detail later, mutual funds are the primary investment vehicle for variable contracts. Mutual funds have been around for more than 50 years, as evidenced by the fact that in 1940 the Investment Company Act was written to regulated “open-end investment companies,”—mutual funds. They became popular in the early 1980s because of the successful marketing of mutual fund managers who convinced many consumers that they were, indeed, “user friendly.” The result was gratifying for mutual funds as many persons who were just “savers” poured their savings into mutual funds in order to take advantage of the higher interest rates.
When the interest rates declines in the later 1980s, those who had invested in fixed-interest financial instruments (read “life insurance”) chose to move their assets to mutual funds, with the end result that mutual funds grew rapidly, to where there are now over 4,000 different mutual funds, up from about 200 only 10 years ago. What is particularly interesting is that since the Variable annuity (who preceded Variable life) was first “invented,” around 1976, since the late 1980s, they have become much more popular. This was, of course, not coincidental.
During this same period of time (late 1980s) life insurers were taking a beating on sales of their traditional insurance products. Those that were in the Variable product lines increased their products; many of those that were not in that market, entered of established agreements with companies that had those products.
With additional competition, insurers wanted to make better products, so they expanded the account options, to the point that today, variable contracts can offer ten or more separate accounts within one contract. To make them even more attractive, the flexibility was increased by allowing contract owners to transfer their assets between the various funds—at little or no extra cost.
Recognizing that not everyone is familiar with investment terminology and practices, the variable contract providers/insurers provide customer support. Programs such as “asset allocation,” “dollar cost averaging” and “diversification programs” help consumers make investment choices available with variable products.
PRODUCER’S INTEREST IN VARIABLE PRODUCTS
An agent who markets variable products must not only be licensed by the state Department of Insurance, but must also hold a Series 6 or 7 registration with the SEC. LIMRA has reported that the numbers of those agents who hold the SEC registration have decreased and that there are some that are “dually-licensed” that do not market variable products. In the same vein, Securities firms that have added variable products to their portfolios have noticed reluctance to market variable products by their representatives.
The reason for the lack of interest on both insurance and securities representatives is attributed to the lack of understanding of each other’s products. This is entirely understandable; as life insurance agents often have difficulty is working with the investment risk and the seemingly-multitude of regulatory and compliance issues. Conversely, the securities dealers who are familiar with the investment part of variable contracts have a difficult time in understanding the risk protection part of the product.
The sales-reluctance should not create any kind of impediment to either the insurance agent or the security dealer. This is really human nature—one will market successfully those products that are familiar to him. As collateral, think of the millions of dollars spent by the life insurance industry attempting to get property and casualty agents to sell life insurance, with minimum success, or health insurance agents selling life insurance, and vice-versa.
Nevertheless, this should be good news for the life insurance agent as minimum interest by security dealers means more opportunity to those who are willing to market “modern life insurance”.
CONTRACTUAL AND CURRENT GUARANTEED RATES
In respect to traditional whole life insurance plans, the guarantee that an insurer will offer on these policies must be safely guaranteed regardless of the economic situations of the country, and as mentioned earlier, this has been in the range of 3-5%. One thing to keep in mind is that these guaranteed rates are guaranteed within the contract (hence, “contractually guaranteed). These rates are the base for crediting the policy’s cash value. In today’s market, however, particularly with interest-sensitive products, (defined as a newer generation of life insurance policies that are credited with interest currently being earned by the insurance company on these policies) the cash value is credited with the higher of the contractually guaranteed rate, or a “current” guaranteed rate. The current rate is adjusted to reflect the changing economic conditions, i.e. the prevalent interest rates. If the current rate falls below the contractually guaranteed rate, then the contractually guaranteed rate will be applied to the policyowner’s contract.
Contracts that function this way also guarantee a death benefit that is equal to higher of the contractual death benefit or a current benefit.
In today’s market, policies that are not interest-sensitive are usually participating policies, where excess earnings are distributed to policyowners as dividends. Using the paid-up additions dividend option can also increase the policy’s face amount.
With the traditional whole life policy, the death benefit consists of the net amount at risk the first year, decreasing to age 100, and the difference between the decreasing net amount at risk and the face amount, is the cash value. With interest-sensitive whole life, the net amount at risk is only part of the death benefit at issue date, but the cash value grows according to the growth of the underlying assets (hence, unevenly) until age 100, when the cash value equals the death benefit. The death benefit of the interest-sensitive plan is not level in the early years, so if the insured dies during the early years of the plan, the death benefit would be based on the contractually guaranteed interest rate or a current benefit, which is based on the high current rate.
UNIVERSAL LIFE INSURANCE
UNIVERSAL LIFE
Historically, Universal Life (UL) was first mentioned as a concept in 1946 and then later in 1964 in actuarial articles in industry publications. Regardless of its actuarial origin, the first published concept of the modern UL was presented at a conference in 1975. The following year, a small company in Atlanta offered the first UL policy, but because of adverse tax problems, it discontinued sales. In 1979, E.F. Hutton Life (then Life of California) offered UL, and while it was welcomed with open arms by many, others loudly and continually voiced opinions that it was (1) bad for the companies because it made them into nothing but “banks,” (2) it was not good for the consumers as it was too difficult to understand, plus a multitude of other reasons, and (3) it was not good for the agent as the commissions were going to be lower and they were going to have to be under dual regulation (insurance and SEC).
It is often said, “Timing is everything.” During the early 1980’s interest rates on newly invested funds were higher, much higher in many cases than those earned on established investment portfolios. This gave UL a head start on the traditional cash-value products with their interest rates of 3 –3 ½ %. However, what goes up, must come down, and when interest rates declined, so did the popularity of UL.
Universal Life policies offer flexibility: flexible premium payments and adjustable death benefits. After the first (minimum) payment, the policyowner can pay whatever they wish into the policy, and at whatever time they wish, and in some cases, the policyowner can skip paying altogether if the cash value can cover the premium charges. Moreover, to top it all off, the policyowner can adjust the death benefit with very little difficulty (with one caveat: if the death benefit increases, the insurer may ask for evidence of insurability).
As happens so frequently, companies geared up for the expected bonanza of increased sales and premium income. However, again typically, many companies believed that since this product “sold itself” and there was so much administrative cost (many projections and other required consumer information) that the agents should be able to live with lower commissions, especially since they would be selling so many policies.
The agents did not share the production hysteria of so many companies at that time and commissions were not dropped as much as the companies expected. And to make matters worse, administrative expenses were higher than anticipated by many companies.
As mentioned earlier in this text, UL policies are “transparent” since the policyowner can see exactly how the funds are distributed. They are furnished with many illustrations and examples of the fund distribution and expected returns, and while the policyowner cannot evaluate the adequacy of many of the assumptions, they certainly can see where the money goes.
F The principal difference between the CAWL and UL is that UL polices have neither fixed premiums nor fixed death benefits.
The movement of funds in UL follows the following schedule (Note that the term “policy period” is used, instead of typical mode of payments, such as monthly, quarter, annual, etc. The reason is that this is a flexible contract and the premium-paying period does not have to be a predetermined time period):
- The policyowner pays a minimum premium to the company.
- The company subtracts expense charges for the first policy period. (This is called “front-end loading” and some UL policies do not have this charge at this time.)
- The company then subtracts the mortality charge on the insured’s age and the policy’s net amount at risk. Premiums for any supplemental benefits (Accidental Death, etc.) are also subtracted.
- The remaining amount is the initial cash value of the policy.
- The cash value is credited with interest that then becomes the end-of-period cash value.
- UL policies generally have high surrender charges. The cash value less the charge is the cash surrender value.
- The second policy period (usually this is a month) starts with the previous cash value. The policyowner may (or may not) add additional premium at this time. If the previous period’s cash value is sufficient to cover the mortality and expenses charges (current) then no premium is necessary. However, if it is not sufficient, the policy lapses unless additional premiums are paid.
- For the second policy period, the cash value at the end of the first period is increased by any premium payment, and then reduced by the expense and mortality charge, increased again by interest at the current rate.
This process continues until the policy lapses or surrenders.
DEATH BENEFITS
When traditional types of life insurance are written with a certain death benefit (such as $100,000)-that face amount of the policy remains in effect as long as the policyowner pays the premium, but if no premium is paid, the insurance can terminate. One important feature of Universal Life policies is that the death benefit is adjustable-it could be $100,000 at the beginning of the policy period, but it might drop down to $50,000 at some point and later rise to $175,000. Within certain limitations, the policyowner controls these adjustments.
With this adjustment feature, no new policy is needed to reflect the different amount of insurance; the adjustments are made to the existing policy. When the policyowner increases the death benefit, some insurers require proof that the insured person is still insurable—in good enough health to meet the insurer's standards.
At the onset of a Universal Life policy, the policyowner chooses one of two death benefit options:
OPTION A
The first choice, Option A, provides a level death benefit similar to traditional life insurance policies. This level benefit is stated in the policy, but the insured still has the option to increase it or decrease it during the policy period.
When the death benefit is selected, the premium is determined, with part of it destined to pay for the insurance coverage (the death benefit) and part to be deposited into the cash value account to earn interest. The policyowner pays this same premium regardless of whether the death benefit is increased or decreased during the policy period. (An exception is when the policyowner exercises the premium-paying flexibility of Universal Life, discussed later.) Thus, the policy provides a level death benefit and a cash value account that accumulates interest.
It is important to differentiate between the death benefit-the insurance protection-and the cash value. For a Universal Life policy to receive the special Internal Revenue Code (IRC) tax considerations that apply to insurance policies, there must always be an amount at risk until the insured reaches age 95. (To reiterate, the amount at risk refers to the amount for which the insurer is at risk, and is the difference between the face amount [death benefit] of the policy and its cash value. If a policy with a $100,000 death benefit had cash values of $20,000, the amount at risk would be $80,000.)
As the policyowner continues to pay premiums, the cash value increases while the amount at risk for the insurer decreases. In times when earnings are high, it would be possible for the cash value and the amount at risk to be nearly the same.
If the cash value begins to approach the amount of insurance, the death benefit must be raised. The Internal Revenue Code dictates a certain minimum amount at risk that must be maintained in order for the policy to continue to be treated as life insurance and not as an "investment.” This minimum amount is often referred to as the tax corridor or the risk corridor.
(Face amount illustration only, policyowner may raise of lower death benefit)
OPTION B
The second death benefit choice, Option B, provides for an ever-increasing death benefit that is made up not only of the amount of insurance, but also the amount of the cash value account. For example, if the original death benefit (at the onset of the policy) is $100,000 and the cash value is $45,000; when the insured dies, the beneficiary of the policy will receive a $145,000 death benefit.
The insured's death at any point results in a death benefit equal to the $100,000 insurance (on this example policy) plus whatever the cash value is at the time of death.
Because it is known from the beginning that the death benefit will increase, the premiums for Option B would be greater than for Option A so as to pay for the increasing amount of insurance protection. An individual could choose to pay the same premium for an Option B type of policy as for an Option A type policy, but the cash values would grow at a reduced rate, resulting in values more like those shown in the following illustration.
THE CASH VALUE ACCOUNT
CHARGES TO THE ACCOUNT
The Insurance Premium: Of each premium paid, a portion pays for the life insurance protection. This amount, based upon mortality rates for the particular individual, is typically taken as an adjustment to the cash value account once a month. Then, as previously discussed, another portion goes to the cash value account to draw interest.
Loading: Not all of the remaining payment draws interest, however, because sales and administrative expenses must be paid. This charge is called a “load” or “loading.”
Expenses may be deducted as front-end loads or back-end loads. In a front-end loaded policy, the insurer deducts a certain percentage from each premium payment before crediting it to the cash value account as discussed above. If the load is 6%, and the premium payment is $1,000, $60 would be deducted, leaving $940 for the cash value account.
Recent Universal Life policies are more often back-end loaded, which means the entire premium payment is deposited into the cash value account. The back-end loading comes into play if and when the policyowner performs certain transactions in the cash value account, such as surrendering the policy for its cash value. The advantage of back-end loaded policies is that the cash value account has more money to earn interest in the early years. The disadvantage is that some back-end loads are quite high.
Some insurers offer the equivalent of a no-load arrangement, whereby the insurance company takes a percentage of current earnings, similar to no-load mutual funds.
Other Charges: Insurers may also charge a flat fee to cover the cost of maintaining and servicing the policy. This may be an annual fee or a monthly fee. Some insurers have first year charges that apply in addition to all other policy charges. After the first year the policy is in force, these charges no longer apply. As examples, first year charges may be:
- Up to one dollar per thousand dollars of insurance coverage.
- No excess interest paid on the first $1,000 cash value, which in effect is a charge because that interest is lost to the policyowner.
- A flat monthly fee paid in addition to any other policy charges.
Insurers provide the Universal Life policyowner with an annual statement that shows exactly what transactions occurred and what charges were assessed during the year.
SINGLE PREMIUM UNIVERSAL LIFE
Like whole life policies, Universal Life insurance may be purchased with a single premium paid at the policy's inception. The benefits of paying a single large premium are the same as those for whole life and could be magnified as the result of the current interest rate paid on Universal Life cash values. Of course, all of the cautions about maintaining the risk corridor in a Universal Life policy must be observed.
THE ADJUSTABLE PREMIUM
Most Universal Life policies are purchased not with a single premium, but with periodic payments spread over a number of years. At the risk of being repetitive, it is important to remember that whereas traditional life insurance policies have a fixed level premium; payable on a regular schedule, Universal Life offers an adjustable or flexible premium. This feature permits the policyowner to raise, lower and even skip premiums. However, lowering or skipping premiums is possible only if enough cash value has accumulated to pay for the pure insurance costs and any administrative charges. If the cash value is not adequate, a payment must be made to keep the insurance in force.
THE IMPORTANCE OF PREMIUM FLEXIBILITY
When a Universal Life policy goes into effect, a minimum level premium payment is established. For the policy to have any cash value, obviously, some premiums must be paid. As stated earlier, once the cash value grows adequately, this amount can be used to keep the insurance protection in force whether or not the policyowner pays additional premiums.
As an illustration of the importance of flexible premiums, assume an individual purchased a Universal Life policy with a death benefit of $200,000 with an annual premium of $1,000 and several years later, the cash value grew to $15,000. At this point, the policyowner's first child enters college and the policyowner wants to skip the annual premium on the policy. The policyowner can do so because there is adequate cash value to pay for the insurance protection. (See the illustration on the next page.)
The policyowner could continue to skip payments for several years while the cash value account takes care of the insurance protection, or the policyowner could make reduced premium payments. Of course, at some point, the cash value used to pay for the insurance protection could dwindle to the point that no additional funds would be available for insurance protection. At that point, the policyowner must make a payment or the insurance lapses—there is no further coverage. In addition, since the cash, value account was reduced during the years, and since no premium payments were made; the policyowner cannot rely upon those funds to be available for other purposes.
INCREASING THE PREMIUM PAYMENT
If the insured’s financial condition, in the above example, improves, and the policyowner may wish to rebuild the cash value account. Although the original insurance (minimum) premium was $1,000, the policyowner elects to pay $1,500annually. By increasing the premium payments, the policyowner benefitsbecause the cost of insurance protection remains the same, as the additional paid premium goes to the cash value account to earn interest (assuming they have not increased the death benefit). However, remember, the so-called risk corridor—the IRS-dictated minimum of insurance protection to cash value—must be maintained in order for the cash value account to continue receiving favorable tax treatment. At any time, the policyowner can revert to the original premium payment amount or stop paying premiums entirely.
An Illustration of Adjustable Premium and Death Benefit illustrates one of many ways a Universal Life policyowner could adjust the premium and the death benefit over many years. Notice each adjustment can be made independent of the other; that is; the premium can be changed without affecting a death benefit and vice versa, as long as the cash value account is adequate to make the desired adjustment. A summary of the transactions follows the illustration.
At age 30, the insured purchases a Universal Life death benefit of $100,000 for a $500 annual premium. This coincides with the birth of a child. At $500per year, the cash value grows moderately. When the insured is age 33, the policyowner receives a $1,000 windfall, which is deposited into the cash value account with the usual premium. At age 36, the policyowner withdraws $500, but continues to make level $500payments and the death benefit remains at $100,000.
At age 40, the insured increases the death benefit to $150,000and begins making $900 premium payments. At age 42, the insured skips one premium payment, then resumes paying at age 43. At age 44, the policyowner increases the premium payment to $1,500 per year, retaining the $150,000 death benefit.
At the insured's age 48, the child enters college. The insured withdraws $4,000 that year and the next year, while continuing premium payments. At ages 50 and 51, the policyowner withdraws $4,500 each year. At 52, after the child graduates from college the insured continues paying premiums and keeps the $150,000 death benefit, making no further withdrawals. At age 55, the insured lowers the premium payment in anticipation of retirement and drops the death benefit to $100,000. At age 60, the insured makes no more premium payments, and lowers the death benefit to $50,000. At that time, the cash value is sufficient so that no further premiums are required.
USES FOR THE CASH VALUE ACCOUNT
Withdrawals: Universal life policyowners are permitted to make withdrawals from the cash value account. Withdrawals of only a portion of the cash value (rather than all of it) are sometimes called partial surrenders because the policyowner is surrendering or giving up part of the policy. The withdrawal is made from the cash value account, so that portion of the cash value is surrendered. Most Universal Life policies also reduce the death benefit by the amount of the withdrawal.
Withdrawal Charges: While this illustration shows the cash value account reduced to $3,000, in reality it would be reduced even more because of fees charged for the withdrawal. When a policy is back-end loaded, this is one of the situations where the expense loading applies. Front-end loaded and no-load policies are also likely to assess a charge for withdrawals.
Taxation on Withdrawals: Policyowners who make partial withdrawals from cash value accounts may or may not have to pay taxes on the withdrawal, depending upon the circumstances. For policies at least 15 years old, the portion withdrawn is not taxed unless it is greater than the amount the policyowner has put into the policy. For example, if premiums paid total $20,000 and the policyowner takes out $20,000, there is no tax due since $20,000 represents a return of capital on which the policyowner has already paid taxes. If the same policyowner withdraws $21,000, however, taxes are due on the $1,000, which is considered interest.
Policies that have not yet been in force 15 years when a partial withdrawal is made, are subject to more complex rules dealing with the specific age of the policy, how much has been paid into the policy and the amount of the withdrawal.
Paying and Receiving Interest: Because a withdrawal is not the same as a loan, the amount withdrawn does not have to be repaid, nor is any interest charged the policyowner for using the withdrawn sum. From the insurance company's viewpoint, withdrawal is simply a return of the policyowner's money. Since the money is no longer in the policy's cash value account, no interest is earned on the amount withdrawn.
Repaying Partial Withdrawals: The policyowner is permitted to return the amount withdrawn to the Universal Life cash value, but repayment does not restore the death benefit to its original level. The insurance company might permit the policyowner to restore the original death benefit, but usually will require proof that the insured is still in good health and insurable.
In addition, whether or not the death benefit is restored, repayment of the withdrawal is considered to be a premium payment and is subject to whatever fees the insurer normally charges.
Costs of Withdrawing and Repaying
At first glance, partial withdrawals from a Universal Life policy might seem immensely preferable to borrowing money—whether from an outside lending institution or from the policy itself—since no interest is charged and the policyowner can return the money to the policy later. However, careful consideration should be given to the actual costs of a withdrawal that will be repaid to the cash value account:
• Fee paid to the insurer at withdrawal.
• Reduction of the death benefit (cost to the survivors).
• Loss of interest on the money while withdrawn.
• Charges assessed by the insurer when the amount is returned to the cash value account.
Even apart from the reduction in the death benefit, the other costs can be considerably higher in the long run than a loan.
In many cases, it will, indeed, be worthwhile from the policyowner's point of view to make partial withdrawals. However, policyowners need to be well informed about the cost of this decision.
Total Withdrawals
Universal life policyowners also may withdraw all of the cash value. However, as stated earlier, payment for the insurance protection is periodically taken from the cash value account. If the entire amount is withdrawn, no money is available to continue the insurance coverage. Therefore, the policyowner must make another premium payment to keep the insurance in force. Insurers are required to notify policyowners if the insurance protection becomes endangered.
Some insurers charge a penalty if the policyowner removes all of the cash values in the early years of the policy. This typically involves taking back all or part of the excess interest earned during the previous 12 months.
Note: Withdrawals are discussed in more detail in Chapter 8.
STUDY QUESTIONS
1. Variable life insurance is gaining in popularity because
A. it is much cheaper.
B. the commissions are higher so agents work harder to sell them.
C. they are much more profitable for life insurance companies.
D. consumers want the same investment opportunities with their life insurance that they have with their personal savings.
2. With Variable life insurance, the better the total return on the investment portfolio,
A. the higher the death benefit or surrender value of the Variable life policy.
B. the higher the commission paid to the agent.
C. the higher the general account of the insurer must be.
D. the lower the death benefit of the policy.
3. The primary investment vehicle for variable contracts is
A. the stock market.
B. corporate bond funds.
C. mutual funds.
D. certificates of deposit.
4. A life insurance agent that markets variable products
A. must only have a life insurance license.
B. must only have a series 6 or 7 SEC registration.
C. is not allowed to market health or annuities.
D. must have both an insurance license and series 6 or 7 SEC registration.
5. With ordinary life insurance, the base for crediting the cash value is (are)
A. the higher of the guaranteed rate or a current rate.
B. the contractually guaranteed rates.
C. the current rates.
D. the types of investments in the cash value account.
6. Universal Life offers
A. flexible death benefits only.
B. flexible premium payments and adjustable death benefits.
C. guaranteed level premiums and adjustable death benefits.
D. contractually guaranteed rates.
7. Universal Life policies are considered “transparent” because
A. they must be accompanied by a prospectus after the sale.
B. the policyowner can see how the funds are distributed.
C. they really are nothing but whole life with a mutual fund, and that is readily transparent.
D. the investment portion of the cash value is guaranteed.
8. Universal Life Option A
A. provides a level death benefit.
B. provides a fluctuating, adjustable death benefit.
C. provides for an ever-increasing death benefit.
D. has guaranteed level death benefit and contractual cash values that grow at a guaranteed rate of 5% per year.
9. Universal Life Option B
A. provides a level death benefit.
B. provides an ever-increasing death benefit.
C. provides a fluctuating and adjustable death benefit.
D. provides for no death benefit as all premium goes into the cash value fund.
10. A Universal Life policyowner wants to get all of his money out of the policy,
A. he can withdraw all of the cash value but then no money is available for death benefits.
B. he may withdraw all the cash value and if the policy has been in force for more than 5 years, all of his premium will be returned.
C. he cannot get any of the cash value out, but at his death, full death benefits will be paid.
D. he can withdraw all of the cash value and the death benefits will then increase by the amount of the withdrawal.
ANSWERS TO STUDY QUESTIONS
1D 2A 3C 4D 5B 6B 7B 8A 9B 10A