Life Insurance Product Types (Term, Whole Life, Universal Life, Annuities)
Domain 2: Life Insurance Product Types
This domain tests product mechanics: term, whole life, universal life, variable life, and annuities. Questions ask you to match a client need with a product, identify guarantees, and explain how premiums, cash value, death benefits, and taxation work.
Core rules
- Term insurance provides pure death protection for a stated period. Level term has a level face amount; decreasing term falls over time; annual renewable term increases in cost as the insured ages. Renewable term guarantees the right to renew without proof of insurability, not the premium. Convertible term allows conversion to permanent coverage, often without evidence of insurability.
- Whole life is permanent, with guaranteed premiums, guaranteed cash value, and a guaranteed death benefit. Participating policies may pay dividends, but dividends are not guaranteed. Limited-pay and single-premium versions compress premiums into fewer years.
- Universal life separates mortality charges, expense charges, and interest credits. Premiums are flexible, but if the account value cannot pay cost of insurance, the policy may lapse unless a no-lapse guarantee applies. Option A gives a level death benefit; Option B adds the account value to the death benefit.
- Variable life and variable universal life invest in separate accounts; they are securities and require a securities license and prospectus. Cash value fluctuates with subaccount performance.
- Annuities liquidate a sum into income. Deferred annuities accumulate; immediate annuities begin payouts. Fixed annuities guarantee a rate; indexed annuities credit interest by formula; variable annuities use separate accounts. Annuity earnings grow tax-deferred; withdrawals before age 59½ may incur a 10% federal penalty, and the exclusion ratio determines taxable income from annuitized payments.
Worked example
A 35-year-old needs $750,000 of coverage for 20 years while children are dependent but has limited cash flow. A 20-year level term policy matches the temporary need at the lowest cost. If the client also wants lifelong coverage and guaranteed cash value, whole life could be appropriate, but the premium is much higher. Universal life offers flexibility, but it is not a substitute for a guarantee unless the contract includes a no-lapse provision.
Traps that cost marks
Do not say renewable term guarantees a level premium. Do not present whole life dividends as guaranteed. Do not call a universal life policy guaranteed when it is underfunded. Do not sell a variable product without the securities license. Do not treat an annuity as life insurance; annuity death benefits and taxation follow annuity rules.