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Policy Types

Term, whole life, universal, variable, and specialty policies. Know how premiums, death benefits, and cash values behave in each one.

Study questions and answers

Try each question first, then tap to check your answer.

1. Which type of term insurance has a death benefit that declines over time and is commonly used to cover a mortgage?

  1. Level term
  2. Decreasing term
  3. Increasing term
  4. Renewable term
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B. Decreasing term
Decreasing term keeps a level premium while the death benefit shrinks, matching a declining loan balance.

2. A convertible term policy allows the policyowner to:

  1. Renew at the original premium
  2. Exchange the policy for permanent coverage without evidence of insurability
  3. Borrow against the policy's cash value
  4. Increase the face amount at any time
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B. Exchange the policy for permanent coverage without evidence of insurability
Conversion lets the owner switch to permanent insurance without proving insurability. The new premium is usually based on attained age.

3. When a renewable term policy is renewed, the new premium is based on the insured's:

  1. Age when the policy was first issued
  2. Health at the time of renewal
  3. Attained age at renewal
  4. Average age over the term
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C. Attained age at renewal
Renewal does not require evidence of insurability, but the premium increases to reflect the insured's attained age.

4. Which policy has level premiums payable for life, a guaranteed cash value, and coverage to the maturity age?

  1. Whole life (straight life)
  2. Universal life
  3. Variable life
  4. Term to age 65
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A. Whole life (straight life)
Straight whole life has a level premium payable for life, guaranteed cash values, and coverage until the policy matures.

5. Which statement best describes limited-pay whole life?

  1. Coverage ends when the premiums stop
  2. Premiums are paid for a set period while coverage continues to the maturity age
  3. Premiums increase each year
  4. The policy builds no cash value
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B. Premiums are paid for a set period while coverage continues to the maturity age
Limited-pay policies (such as 20-pay life) compress premiums into a shorter period, so cash value builds faster than in straight life.

6. Which statement best describes universal life insurance?

  1. Fixed premium and fixed death benefit
  2. Premiums are invested in a separate account chosen by the owner
  3. The policy has no cash value
  4. Flexible premiums and an adjustable death benefit
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D. Flexible premiums and an adjustable death benefit
Universal life separates the protection, cash value, and expense components, which allows flexible premiums and an adjustable death benefit.

7. Under universal life death benefit Option B (Option 2), the death benefit equals:

  1. The face amount only
  2. The cash value only
  3. The face amount plus the cash value
  4. Total premiums paid plus interest
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C. The face amount plus the cash value
Option B provides an increasing death benefit equal to the face amount plus the cash value. Option A provides a level death benefit.

8. To sell variable life insurance, an agent must hold:

  1. A life license only
  2. A securities registration only
  3. A life and health license
  4. Both a life license and a securities registration
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D. Both a life license and a securities registration
Variable life is both an insurance product and a security, because its cash value is invested in a separate account.

9. A survivorship (second-to-die) life policy pays the death benefit:

  1. Upon the death of the last surviving insured
  2. Upon the first death
  3. When either insured becomes disabled
  4. In equal parts at each death
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A. Upon the death of the last surviving insured
Survivorship life covers two insureds and pays at the second death. It is often used to provide cash for estate taxes.

10. Which statement about credit life insurance is correct?

  1. It is level term that may exceed the loan balance
  2. It is whole life owned by the borrower
  3. It is usually decreasing term, the creditor is the beneficiary, and the face amount cannot exceed the debt
  4. It is a form of group health coverage
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C. It is usually decreasing term, the creditor is the beneficiary, and the face amount cannot exceed the debt
Credit life pays off a debt if the borrower dies. Coverage cannot exceed the amount owed, and the creditor is the beneficiary.

11. Which policy pays the face amount if the insured is alive on a specified maturity date, or pays the death benefit if the insured dies before then?

  1. Universal life
  2. Decreasing term
  3. Endowment
  4. Joint life
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C. Endowment
An endowment matures at a specified date or age, earlier than the maturity of whole life.

12. A joint life (first-to-die) policy pays the death benefit:

  1. At the first death among the insureds
  2. In equal shares at each death
  3. Only if both insureds die at the same time
  4. At the last death among the insureds
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A. At the first death among the insureds
After the first death, the policy ends, and the survivor must buy new coverage if needed.

13. A family policy typically provides:

  1. Group coverage for a family business
  2. Separate whole life policies for each family member
  3. Whole life on the primary insured with term coverage on the spouse and children
  4. Term coverage on all family members
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C. Whole life on the primary insured with term coverage on the spouse and children
A family policy covers the whole family under one contract, usually with whole life on the main wage earner.

14. Modified whole life is best described as a policy with:

  1. No cash value
  2. Lower premiums for the first few years, followed by a higher level premium
  3. A death benefit that decreases each year
  4. Premiums that increase every year for life
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B. Lower premiums for the first few years, followed by a higher level premium
Modified whole life suits buyers who expect their income to grow.

15. Industrial (home service) life insurance is characterized by:

  1. Small face amounts with premiums collected weekly or monthly by an agent
  2. Coverage only for occupational injuries
  3. Large face amounts for business owners
  4. Group coverage for factory workers
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A. Small face amounts with premiums collected weekly or monthly by an agent
Industrial policies have small face amounts and frequent premium collection.

16. A return of premium term policy pays back the premiums if:

  1. The insured dies during the term
  2. The insured becomes disabled
  3. The policy is canceled in the first year
  4. The insured outlives the term
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D. The insured outlives the term
It combines level term with increasing coverage equal to premiums paid, so it costs more than regular term.

17. Indexed universal life credits interest to the cash value based on:

  1. Subaccounts chosen by the policyowner
  2. The performance of a market index, subject to a cap and a floor
  3. The insurer's dividend scale
  4. A fixed rate guaranteed for life
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B. The performance of a market index, subject to a cap and a floor
The floor protects against losses, while the cap limits gains.

18. Variable universal life combines:

  1. Term coverage with a fixed annuity
  2. Whole life with decreasing term
  3. Group life with individual conversion
  4. The flexible premiums of universal life with the separate account investments of variable life
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D. The flexible premiums of universal life with the separate account investments of variable life
VUL is a security, so agents need both a life license and securities registration to sell it.

19. Annually renewable term insurance has premiums that:

  1. Increase each year as the insured ages
  2. Stay level for the life of the policy
  3. Are paid in a single lump sum
  4. Decrease each year
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A. Increase each year as the insured ages
ART (yearly renewable term) offers the lowest initial premium, but the cost increases at every renewal.

20. A single premium whole life policy:

  1. Requires premiums to age 100
  2. Converts to term after 10 years
  3. Builds immediate cash value from one lump-sum payment
  4. Has no cash value
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C. Builds immediate cash value from one lump-sum payment
Single premium whole life is usually a modified endowment contract because it is funded so quickly.

21. Group life insurance is most commonly issued as:

  1. Annually renewable term
  2. Endowment
  3. Variable universal life
  4. Whole life
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A. Annually renewable term
Group life is usually yearly renewable term, with premiums based on the group as a whole.
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