Whole Life and TERM-100

Chapter Quizzes

Emmanuel is a 35-year-old university professor and is in the process of purchasing a $250,000 whole life insurance policy. He plans on retiring at 65, after which he does not want to make premium payments. but still wants to be covered right up to his death. He wants to know exactly when the premiums will end. His generous salary will allow him to pay higher premiums while he is still working.
 
Identify the type of policy you would recommend from the list provided:
a) Universal life 

b) Adjustable whole life

c) Guaranteed whole life

d) Limited payment whole life

d) Limited payment whole life

Rationale: Limited payment life is a whole life insurance policy that provides lifelong insurance coverage, while only requiring premiums for a specified guaranteed period. The premiums for a limited payment life policy will be higher than for a whole life policy where premiums are payable for life. 
This makes up for the fact that the coverage continues after payments cease. Even though the payment method is different, Emmanuel is still covered for his whole life and when he dies the death benefit will be paid. No other premium payments are required.

Although the premiums for a limited payment life policy are higher than premiums for a lifetime
payment policy, there are several benefits for the policyholder:
• Knowing exactly when the premiums will end. Often the pay period is chosen to coincide with retirement, particularly if the policyholder expects to have a lower level of disposable income in retirement;
• Elimination of the longevity risk, which is the risk of living longer than anticipated or longer than average. For a regular whole life policy, premiums are payable for life, even if that extends to age 100 or even longer;
• The insurance company applies the time-value-of-money principle, which reduces the cost to the client over the long term because the insurer has the use of his money earlier than a normal lifetime payment policy.
 
Ref: 3.6

Neelam is looking for whole life coverage that grows over time, but is worried about her family’s history of diabetes. She is in good health at present but does not want coverage premiums to go up if she is diagnosed in the future. Neelam is mindful that she might need more coverage if that is the case. What type of coverage would be the best option for Neelam?
a) Paid-up addition

b) Premium reduction

c) Term insurance 

d) Premium accumulation

a) Paid-up addition

Rationale: Under the paid-up additions (PUA) option, the annual policy dividend is used as a single premium to buy additional whole life coverage that is paid-up. This additional insurance takes the same form as the base policy and will have its own death benefit and cash surrender value (CSV). New medical evidence of insurability is not required to take advantage of the PUA option, because the insurance company takes the potential increase in coverage via PUAs into account when underwriting the base policy.
 
Neelam’s best option would be to choose PUAs because they provide a great way to increase the amount of coverage on the life insured, even if her health has deteriorated to the point where she would not normally qualify for new coverage. For this reason, PUAs are the most popular dividend payment option, with over 90% of whole life policies sold using the PUA option.

Ref: 3.4.4

Aculina is meeting with her insurance agent, Lev, to purchase a life insurance and critical illness policy. She is a 30-year-old pharmacist and knows that it is time for her to start planning for her financial future. After preparing her needs analysis, Lev suggests that Aculina purchase a $250,000 term-100 policy and a $50,000 critical illness policy to age 75. Aculina would like to know what happens with her T-100 policy if she lives to 100 years old. 

Identify the correct statement that Lev should share with Aculina from the list provided:
a) Premiums for her policy will continue when she reaches 100, even if the death benefit has not yet been paid out.

b) Premiums for her policy will stop when she reaches 100, even if the death benefit has not yet been paid out.

c) Premiums for her policy will stop when she reaches 100 and the policy will be made void.

d) Premiums for her policy will stop when she reaches 100 and she will have to surrender the policy for the CSV.

b) Premiums for her policy will stop when she reaches 100, even if the death benefit has not yet been paid out.

Rationale: A term-100 policy is a permanent insurance policy. T-100 provides coverage for life. Some T-100 policies mature at age 100, meaning the death benefit is paid when the life insured reaches age 100 (but is taxable) or dies, whichever comes first.

Premiums for a T-100 policy cease when the life insured reaches age 100, even if the death benefit has not yet been paid out. The policyholder continues to be eligible under the terms of the policy for the death benefit to be paid out, despite the fact that they are no longer required to pay premiums.

Ref: 3.11.2

Marjorie recently lost her mother after a long battle with breast cancer. She was overwhelmed by the support her mother received from the local hospice center and would like to leave a donation to the hospice when she herself passes away. She is considering how a life insurance policy would help her reach that goal. Marjorie has a specific amount in mind that will not change over time. She is certain she will not want to surrender the policy for other personal needs. She has no need for the investment opportunity provided by some life insurance policies but is mindful that she should take this step now while she is young and healthy and the premiums are affordable.

Identify the policy from the choices provided that best suits Marjorie’s life insurance need:
a) A Term-100 policy

b) A Universal life policy

c) A Whole life insurance policy

d) A Premium offset policy

a) A Term-100 policy

Rationale: Term-100 insurance may be appropriate when the following conditions apply:
▪ The policyholder requires a fixed amount of insurance to cover a need that is not expected to
increase prior to death, regardless of when that death might occur;
▪ The policyholder is certain that they will never want to surrender the policy;
▪ The policyholder has no need of the investment opportunities provided by universal life (UL) insurance.

Ref: 3.11.6

Aadim is a successful freelance photographer, a job with a widely fluctuating monthly income and no employer to deduct taxes from his pay. As his insurance agent, you have established that a permanent life insurance policy is best for Aadim. You note that he would benefit from flexible premiums, a savings component, and the ability to shelter money tax-free. Aadim is 30 years old and is in excellent health. He is mindful that accessing cash value of a policy could be a need if his business ever took a turn for the worse.
 
Based on what you know, which of the following policy types would you recommend?
a) Universal life insurance

b) 10-year term insurance 

c) Term-100 insurance

d) Adjustable whole life insurance

a) Universal life insurance

Rationale: Universal life (UL) insurance provides coverage for the entire lifetime of the life insured, and does not have a fixed premium. A minimum premium is required but more than the minimum can be paid. That excess provides a savings component to the policy. Within certain limits, the policyholder can use a UL policy to accumulate savings that are completely sheltered from tax if they form part of the death benefit, or tax-deferred if they are withdrawn prior to death. UL insurance policies are noted for the flexibility they provide the policyholder. 
 
T-100 policies typically do not have a cash surrender value (CSV).
 
While an adjustable whole life policy would have lower premiums, it would expose Aadim to more risk, which is not preferable given his fluctuating income.

Ref: 3.1.2.3

Sal is a 63-year-old retired teacher. He owns a $100,000 whole life insurance policy and has made all of his payments, which have typically been the same every month. Sal decides he is no longer concerned with leaving behind a financial legacy and would rather buy a boat and sail the world. He figures he needs at least $58,000 to do so. What kind of expectations can Sal have regarding his policy?
a) He may be entitled to receive a payment of the policy’s CSV, less any surrender charges.

b) This type of policy does not typically include a CSV.

c) With a whole life policy there are no surrender fees or taxes.

d) The savings he has can most likely be tax-deferred if withdrawn prior to death.

a) He may be entitled to receive a payment of the policy’s CSV, less any surrender charges.

Rationale: A whole life policy builds up a cash surrender value (CSV) over time. If Sal surrenders the policy prior to his death, he may be entitled to receive payment of that CSV, but this would be less any surrender charges, if applicable. 
T-100 policies typically do not have a CSV. 
Universal life (UL) insurance policyholders can use a UL policy to accumulate savings that are completely sheltered from tax if they form part of the death benefit, or tax-deferred if they are withdrawn prior to death.

Ref: 3.1.2.1

Which of the following is a benefit of purchasing a whole life insurance policy?
a) It does not expire.

b) It offers flexible payment options.

c) It matures at age 100.

d) It involves an easy renewal process.

a) It does not expire.

Rationale: Whole life insurance provides coverage over the entire or whole life of the life insured. Unlike term life insurance, a whole life policy does not expire, builds cash surrender value (CSV), does not require renewal. Universal life insurance offers flexible payment options. Term-100 insurance matures when the policyholder reaches 100 years of age.

Ref: 3.2.1

Yashar is meeting with his client, Assa, to present her with life insurance options. This is their third meeting and, after listening to Assa’s concerns, Yashar prepares a plan for her. He suggests that Assa should purchase a $50,000 whole life insurance policy payable over 20 years. The yearly premiums are $2,456, but Assa would like to pay the premiums quarterly.
 
What will be Assa’s quarterly premium?

a) $712.80

b) $818.67

c) $638.56

d) $614.11

c) $638.56

Rationale: Life insurance premiums are normally quoted on an annual basis, and premiums are payable in advance. However, Assa wants to pay her premiums quarterly. The insurance company calculates the premium payment by applying a modal factor that reflects the insurance company’s loss of investment income, compared to the income it could have earned on an up-front annual premium. The quarterly modal factor is 0.26 × $2456 (the annual premium) = $638.56

Ref: 3.2.3.4

Richard, 40 years old, believes in the importance of life insurance and understands how health problems could make it harder to obtain life insurance. That is why he is looking to buy life insurance on his 5-year-old son’s life. What is important to Richard is that his son, Oliver, is covered for life, but he does not want Oliver to be burdened by the payment of premiums once the policy is assigned to him as a young adult. He would also like the amount of coverage to increase over time because he realizes that the value of a dollar today will be lower many years from now. Which of the following policies would meet Richard’s objectives?

a) Limited pay T­100 insurance

b) Participating whole life payable with premium reduction option

c) 20-year pay participating whole life with paid-up addition option

d) 20-year pay non-participating whole life

c) 20-year pay participating whole life with paid-up addition option

Rationale: Richard’s first objective regarding the insurance for his son, Oliver, is that once the policy is assigned to Oliver as a young adult, he does not have to pay premiums anymore. A 20-year pay whole life meets that objective. 

The limited payment T-100 policy would allow for the premiums to be paid up so that Oliver does not have to pay the premiums, but it does not allow for increasing coverage.

The second objective for Richard is for the insurance coverage to increase over time. A participating policy with the PUA option meets this goal as the dividend option purchases additional coverage and increases the death benefit. 

A 20-year non-participating whole life policy will allow for the premiums to be paid up by Richard so that Oliver does not have to pay the premiums; however, it does not offer increasing coverage.

Ref: 3.10, 3.5, 3.6

Lucia owns a participating whole life insurance policy. She would like her dividend payment option to increase both the death benefit and CSV. Identify the dividend payment option that is most likely to achieve Lucia’s objective.
a) Term Insurance

b) Premium reduction

c) Accumulation

d) Paid-up additions

d) Paid-up additions

Rationale: Lucia’s objective to increase both the CSV and death benefit with her dividend payment option is best accomplished with paid-up additions.

Depending on the payment option that the policyholder chooses, participating policy dividends may affect the death benefit and CSV of the policy (including any additions). The paid-up additions (PUA) option will increase both the CSV and death benefit. The accumulation option will increase the death benefit if the policyholder does not withdraw all of the funds in the accumulation account. The term insurance option will temporarily increase the death benefit (for the duration of the one-year term only). Premium reduction does not impact the CSV or death benefit. 

Ref: 3.3.3

Which of the following individuals would most likely be interested in a limited payment whole life policy payable to age 65?
a) Grace who needs life insurance to cover her debts which she will finish paying at age 65.

b) Charles who wants insurance to cover his tax bill upon his death and does not currently have much disposable income.

c) Jenny who wants insurance to leave a legacy after she dies and anticipates her retirement income starting at 65 will be lower than her current income.

d) Mario who wants to cover his kids’ post-secondary education should he die before age 65.

c) Jenny who wants insurance to leave a legacy after she dies and anticipates her retirement income starting at 65 will be lower than her current income.

Rationale: Whole life insurance, even if it is limited pay, is used to cover insurance needs that occur no matter what age the life insured dies, such as covering the final taxes or leaving a legacy. Debt repayment and paying for kids’ education are temporary needs better covered by term insurance. Since limited payment life insurance will have a higher annual premium, it is not a good fit for people who do not currently have much disposable income like Charles. It is a good fit for people who can afford it now but will see their income drop after the payment period, such as Jenny.

STUDY REFERENCE:
3.6 Limited payment whole life

Identify the type of insurance that is defined as having:

• Coverage for the entire lifetime of the life insured

• A savings component that is created through the deposit of excess premiums

• The option to accumulate savings that are completely sheltered from tax if they form part of the death benefit, or tax-deferred if they are withdrawn prior to death

• Being noted for the flexibility it provides the policyholder

a) Universal life

b) Term-100

c) Guaranteed whole life

d) Adjustable whole life

a) Universal life

Rationale: Universal life (UL) insurance provides coverage for the entire lifetime of the life insured, and does not have a fixed premium. A minimum premium is required but more than the minimum can be paid. That excess provides a savings component to the policy. Within certain limits, the policyholder can use a UL policy to accumulate savings that are completely sheltered from tax if they form part of the death benefit, or tax-deferred if they are withdrawn prior to death. UL insurance policies are noted for the flexibility they provide the policyholder. 

Ref: 3.1.2.3

Angelo is meeting with his life insurance agent, Marcus, to purchase a life insurance policy. They both agree that a participating whole life insurance policy best meets Angelo’s needs. While discussing dividend payment options, Angelo asks if he would be able to get additional coverage that could accumulate a cash value that he could surrender as needed without affecting the main policy.

Identify the policy option that Marcus should present from this list:

a) Cash

b) Investment options

c) Premium reduction

d) Paid-up additions

d) Paid-up additions

Rationale: Under the paid-up additions (PUA) option, the annual policy dividend is used as a single premium to buy additional whole life coverage that is paid up. This additional insurance takes the same form as the base policy and will have its own death benefit and cash surrender value (CSV). The policyholder can usually surrender a PUA separately from the main policy, and receive its CSV without affecting the main policy.

Ref: 3.4.4

Alex is the policyholder and life insured of a $1,000,000 whole life insurance policy with a CSV of $265,000. He takes a policy loan for $200,000. The policy loan accumulates an interest of $10,000 every year. Three years later, Alex dies without ever having made a payment on the loan. Alex’s CSV at the time of his death is $300,000. How much will his beneficiary receive from the policy?
a) $770,000 

b) $800,000

c) $300,000

d) $1,000,000

a) $770,000

Rationale: The policy loan and accrued interest must be repaid following Alex’s death. The death benefit will be reduced by the amount of the loan ($200,000) and the amount of the accrued interest over three years ($30,000). Therefore, the beneficiary will receive $770,000 ($1,000,000 – $200,000 – $30,000).

Ref: 3.5.1.2

Fabio owns a $250,000 non-participating whole life insurance policy. He purchased the policy 12 years ago when he was 33 years old. When he looks at his contract, it was written that in the twelfth year, his cash surrender value should be at $55,000. Fabio’s other investments have recently lost a lot of money. He would like to surrender this policy for the cash value, but he does not know how much he will receive.  
 
Help Fabio better understand how to set a realistic expectation of what he might receive by selecting an option from the list:

a) $250,000, with no applicable taxes.

b) $250,000, minus applicable taxes.

c) $55,000, with no applicable taxes

d) $55,000, minus applicable taxes.

d) $55,000, minus applicable taxes.

Rationale: Fabio can expect to receive somewhere around the $55,000 identified as the CSV as his policy for the current year, minus applicable taxes.

Fabio will be cancelling or surrendering his policy. He will not be entitled to the death benefit value of $250,000.

The cash surrender value (CSV) of a life insurance policy is the amount that the insurance company will pay to the policyholder if the policyholder surrenders the contract. The CSV is not the same as the total value of the policy that would be paid upon death.

The CSV comes from the value accumulated when the premiums exceed the insurance company’s actual costs for the policy, and some or the entire surplus is used to help create a policy reserve.

The CSV represents the fair or equitable portion of the policy reserve and any paid-up additions (PUA) that the insurance company will return to the policyholder if he surrenders the policy.

A portion of the CSV will be taxable when received by the policyholder.

Ref: 3.5.1