Ch. 4 - Life Policy Types

What are the two broad categories of life insurance?

TERM (temporary protection, no cash value) and PERMANENT (lifetime protection with a cash value/savings component).

Define TERM life insurance.

Pure death protection for a specified period. Pays ONLY if the insured dies during the term. No cash value, no living benefits, and it expires with nothing paid if the insured survives the term.

Why is term insurance the least expensive per dollar of coverage?

It provides pure death protection with no cash accumulation, and most policies expire without paying a claim — so the insurer's cost per dollar of face amount is lowest.

LEVEL TERM — describe.

Both the death benefit AND the premium remain LEVEL for the entire term. The most common form of term insurance.

DECREASING TERM — describe and give a typical use.

The DEATH BENEFIT decreases over the term while the PREMIUM stays LEVEL. Commonly used as mortgage protection or credit life, matching a declining debt balance.

INCREASING TERM — describe and give a typical use.

The DEATH BENEFIT increases over time, usually with premium increasing as well. Often used to fund a return-of-premium rider or to keep pace with inflation.

ANNUALLY RENEWABLE TERM (ART) — describe.

One-year term that renews each year WITHOUT evidence of insurability, but at an INCREASING premium based on attained age. The purest form of term insurance.

What does the RENEWABLE feature guarantee?

The right to renew the policy at the end of the term WITHOUT proving insurability. The premium increases based on ATTAINED AGE at renewal.

What does the CONVERTIBLE feature guarantee?

The right to convert the term policy to a PERMANENT policy WITHOUT evidence of insurability. Highly tested.

Conversion of term to permanent: what are the two premium-setting options?

ATTAINED AGE — premium based on the insured's age at conversion (lower immediate cost). • ORIGINAL AGE — premium based on age when the term policy was issued (lower ongoing premium, but requires paying the difference in premiums plus interest as a lump sum).

Why is renewable AND convertible term valuable to an insured whose health has declined?

Both features operate WITHOUT evidence of insurability, so an insured who has become uninsurable can still maintain or upgrade coverage.

What is RETURN OF PREMIUM (ROP) term?

Term insurance that refunds premiums paid if the insured survives the term. Structured using increasing term. Premiums are significantly higher than standard level term.

Define PERMANENT (whole) life insurance.

Coverage that protects for the insured's ENTIRE LIFE (typically to age 100 or 121) and builds CASH VALUE. Premiums are generally level.

What is cash value, and who can access it?

The savings/living-benefit component of a permanent policy that accumulates tax-deferred. The POLICYOWNER may access it via policy loans, partial surrenders, or full surrender.

At what age does a traditional whole life policy 'endow'?

Age 100 (older contracts) or 121 (newer contracts) — the cash value equals the face amount and the policy pays out to the living insured.

STRAIGHT (ordinary/continuous premium) WHOLE LIFE — describe.

Level premiums payable for the insured's ENTIRE LIFE, until death or endowment. Lowest annual premium of the whole life family and slowest cash value growth.

LIMITED PAY WHOLE LIFE — describe.

Premiums are paid over a SHORTER, specified period (e.g., 20-Pay Life, Paid-Up at 65), but coverage continues for life. HIGHER premiums during the pay period; cash value grows faster.

SINGLE PREMIUM WHOLE LIFE — describe.

One large lump-sum premium purchases a fully PAID-UP policy for life. Immediate substantial cash value. Almost always classified as a MEC.

MODIFIED WHOLE LIFE — describe.

LOWER premium in the early years (typically first 3-5 years), then a HIGHER level premium for the remainder. Designed for buyers who expect income to rise.

GRADED PREMIUM WHOLE LIFE — describe.

Premium starts low and increases gradually each year over a period (often 5-10 years) before leveling off. Lower initial outlay than modified, with more gradual steps.

How does limited-pay whole life differ from term in premium/coverage?

Limited pay: HIGH premium for a SHORT period, coverage for LIFE. • Term: LOW premium for a SHORT period, coverage ONLY for that period.

What is INTEREST-SENSITIVE (current assumption) WHOLE LIFE?

Whole life whose cash value growth is credited at current interest rates (subject to a guaranteed minimum), with periodic premium redeterminations. The insurer bears investment risk.

What is INDETERMINATE PREMIUM whole life?

The insurer charges a lower current premium but reserves the right to raise it up to a stated GUARANTEED MAXIMUM based on actual mortality, expense, and investment experience.

UNIVERSAL LIFE — name its three defining features.

1) FLEXIBLE premiums (amount and timing) • 2) ADJUSTABLE death benefit • 3) UNBUNDLED — mortality charges, expenses, and interest credits are separately identified and reported

How does universal life actually function internally?

Premium goes into a cash value account. The insurer deducts a monthly MORTALITY charge (cost of insurance) and EXPENSE charges, then credits interest to the balance. It is essentially ANNUALLY RENEWABLE TERM plus a cash accumulation account.

UNIVERSAL LIFE OPTION A — describe.

LEVEL death benefit. The face amount stays constant; the cash value grows within it, so the pure insurance (corridor) amount DECREASES over time. Lower cost of insurance.

UNIVERSAL LIFE OPTION B — describe.

INCREASING death benefit. The beneficiary receives the face amount PLUS the accumulated cash value, so the total death benefit grows. Higher cost of insurance because the pure insurance amount stays level.

Memory trick: UL Option A vs Option B.

Option A = A level benefit ('A' for stAys the same). • Option B = Bigger benefit (face + cash value).

What is the CORRIDOR in a universal life policy, and why does it exist?

The required gap between cash value and death benefit needed to preserve the policy's status as life insurance under IRS rules. Without it, the contract would be taxed as an investment, not insurance.

What are the two premium levels in universal life?

TARGET (planned) premium — the amount recommended to keep the policy in force for life. • MINIMUM premium — the smallest amount that keeps the policy in force for the current period, essentially covering pure term costs.

What happens if a UL policyowner pays only the minimum premium long-term?

The cash value may be insufficient to cover rising mortality charges, and the policy can LAPSE. This is a primary UL risk and a common suitability disclosure point.

What is the UL grace period behavior when cash value runs low?

If the cash value cannot cover monthly deductions, the insurer notifies the owner and provides a grace period (typically 61 days in California) to pay enough premium to keep the policy in force.

VARIABLE LIFE — describe.

Permanent insurance with a FIXED, level premium where cash value is invested in SEPARATE ACCOUNT subaccounts chosen by the owner. Death benefit varies with investment performance but has a GUARANTEED MINIMUM face amount.

VARIABLE UNIVERSAL LIFE (VUL) — describe.

Combines UL's FLEXIBLE premium and adjustable death benefit with VL's separate-account investment choice. Typically has NO guaranteed minimum cash value and often no guaranteed minimum death benefit.

Who bears the investment risk in variable products, and what licensing follows from that?

The POLICYOWNER bears the investment risk. Because the product is a SECURITY, the producer needs a FINRA securities registration (Series 6 or 7) IN ADDITION to a state life insurance license.

Variable Life vs. Variable Universal Life — the key difference.

Variable Life: FIXED, scheduled premium and a guaranteed minimum death benefit. • VUL: FLEXIBLE premium, adjustable death benefit, generally no minimum guarantees.

What regulates variable life products?

Dual regulation: the STATE insurance department AND federal securities regulators (SEC/FINRA). A prospectus must be delivered to the prospect.

INDEXED UNIVERSAL LIFE (IUL) — describe.

UL whose interest crediting is tied to an external market index (e.g., S&P 500) rather than a declared rate. Includes a FLOOR (often 0%) protecting against index losses and a CAP or participation rate limiting gains. Funds remain in the general account — not a security.

Why is IUL generally NOT a security while VUL is?

IUL credits interest based on index PERFORMANCE but the money stays in the insurer's GENERAL account with a guaranteed floor — the insurer bears the downside risk. VUL invests in separate accounts where the owner bears the risk.

ADJUSTABLE LIFE — describe.

A policy that allows the owner to change the premium, face amount, and protection period, converting between term-like and whole-life-like coverage. Increases in face amount require evidence of insurability.

JOINT LIFE (first-to-die) — describe.

Covers two or more lives and pays the death benefit upon the FIRST death; coverage then generally ends. Premium is based on a joint average age. Common use: business partners, or income replacement for a two-income household.

SURVIVORSHIP LIFE (second-to-die) — describe and give its primary use.

Covers two lives and pays only after BOTH have died. Lower premium than two individual policies. Primary use: funding ESTATE TAXES, which are typically due after the second spouse's death (due to the unlimited marital deduction).

Joint life vs. Survivorship life — memory anchor.

JOINT = first to die (pays early, protects the survivor). • SURVIVORSHIP = second to die (pays late, funds estate taxes).

ENDOWMENT policy — describe.

Pays the face amount if the insured dies during the term OR if the insured SURVIVES to the endowment date. Because of rapid funding, modern endowments generally fail IRS definitions of life insurance and lose favorable tax treatment.

JUVENILE life insurance — describe.

A policy written on the life of a minor. The applicant/owner is typically a parent or guardian. Often includes a payor benefit rider.

What is the PAYOR BENEFIT rider on a juvenile policy?

If the premium-paying adult dies or becomes totally disabled, premiums are WAIVED until the child reaches a specified age (typically 21 or 25).

What is a JUMPING JUVENILE policy?

A juvenile policy whose face amount automatically INCREASES (often five-fold) when the child reaches a specified age (typically 21), with NO increase in premium and NO evidence of insurability.

FAMILY POLICY (family plan) — describe.

A combination policy: WHOLE LIFE on the primary wage earner plus TERM riders covering the spouse and children. Children are usually covered under a single convertible term rider regardless of number.

FAMILY INCOME policy vs. FAMILY MAINTENANCE policy.

Family INCOME: whole life plus DECREASING term, providing income from the date of death to the end of a set period from POLICY ISSUE. • Family MAINTENANCE: whole life plus LEVEL term, providing income for a set period beginning at the DATE OF DEATH.

INDUSTRIAL (home service / debit) life insurance — describe.

Small face amounts (typically under $2,000), premiums collected weekly or monthly at the home by an agent. Historically used for burial expenses. Largely obsolete.

CREDIT LIFE insurance — describe.

DECREASING TERM insurance covering a borrower, with the CREDITOR as beneficiary for the amount of the outstanding debt. May be individual or group. The benefit cannot exceed the debt owed.

Can a lender require the borrower to buy credit life from that lender?

No. Requiring the purchase of insurance from a specific source as a condition of a loan is illegal TYING/coercion. The borrower must be free to choose the provider.

FINAL EXPENSE / burial insurance — describe.

Small-face permanent (usually whole life) coverage designed to pay funeral and final medical costs. Often simplified-issue or guaranteed-issue with graded death benefits in the first 2-3 years.

What is a GRADED DEATH BENEFIT policy?

A policy (usually guaranteed-issue final expense) that pays only a return of premium plus interest if death occurs in the first 2-3 years, with the full face amount payable only after that period. Accidental death is typically paid in full immediately.

What is a MODIFIED ENDOWMENT CONTRACT (MEC)?

A life policy that fails the IRS SEVEN-PAY TEST — funded faster than allowed. The DEATH BENEFIT remains income tax-free, but living distributions (loans and withdrawals) are taxed LIFO — gains first — and may carry a 10% penalty before age 59½.

Once a policy is a MEC, can it be reversed?

No. MEC status is permanent for that contract and follows it even if later exchanged.

Which policy type is almost automatically a MEC?

Single premium whole life — the entire premium is paid at once, far exceeding seven-pay limits.

Term vs. Permanent — how should a producer frame the choice?

Term suits TEMPORARY needs with a limited budget (income replacement during working years, mortgage protection). Permanent suits PERMANENT needs (final expenses, estate liquidity, lifetime dependent) and adds cash value. Suitability depends on need duration, budget, and objectives.

Which policy provides the highest immediate death benefit per premium dollar?

Term life insurance — it has no cash value component, so nearly all premium goes toward pure death protection.