Individual Life Insurance Flashcards

A modified premium whole life policy charges lower premiums in the early years and higher premiums later. How does its cash value accumulation compare to a standard whole life policy?

Answer: Cash value accumulation is slower in the early years but catches up over time

Because early premiums are lower in modified whole life, less money funds the reserve initially, causing slower early cash value growth, though it typically converges with standard whole life values in later years.

What distinguishes variable universal life (VUL) from traditional universal life insurance?

Answer: VUL invests cash value in separate account subaccounts with market risk borne by the policyowner

VUL directs cash value into separate account subaccounts (stocks, bonds, money market) where investment gains are not guaranteed and the policyowner assumes all market risk.

Under the IRC Section 7702 corridor test, what happens if a life insurance policy's cash value exceeds the limit relative to the death benefit?

Answer: The insurer must increase the death benefit to maintain corridor compliance

To comply with IRC 7702's corridor requirement, if cash value grows too large relative to the death benefit, the insurer must increase the death benefit proportionally to keep the policy classified as life insurance.

Which of the following best describes a modified endowment contract (MEC)?

Answer: A policy that fails the 7-pay test and loses favorable tax treatment on withdrawals and loans

A MEC is a life insurance contract that fails the 7-pay test under IRC 7702A; loans and withdrawals are taxed as income first (LIFO) and subject to a 10% penalty before age 59½.

An insured dies during the grace period before paying the overdue premium. How does the insurer typically handle the claim?

Answer: The full death benefit is paid, and the overdue premium is deducted from the proceeds

If death occurs during the grace period, the insurer pays the full death benefit minus the unpaid premium, because coverage remains in force during the grace period.

Which life insurance concept describes the present value of future premiums expected to be paid, subtracted from the present value of future benefits?

Answer: Policy reserve

The policy reserve (legal reserve) equals the present value of future benefits minus the present value of future net premiums, representing the insurer's liability for each in-force policy.

A policyowner designates the estate as beneficiary of a life insurance policy. What is the primary disadvantage of this designation?

Answer: Proceeds must pass through probate and may be delayed or reduced by creditor claims

Naming the estate as beneficiary causes life insurance proceeds to flow through probate, exposing them to estate administration costs, delays, and claims by the decedent's creditors.