Life Insurance Products
Domain 2: Life Insurance Products
This domain tests product mechanics and cost structure well enough to compare products for a client: term, whole life, universal life, variable life, and annuities.
Product families
- Term. Death benefit only, no cash value; level, decreasing, or increasing; renewable and convertible. Lowest cost per dollar of face at young ages, but renewal premiums rise steeply.
- Whole life. Guaranteed premium and death benefit plus cash value; participating policies may pay dividends, which are not guaranteed; limited-pay and single-premium versions compress premiums.
- Universal life. Unbundled: premium, expense charges, cost of insurance (COI), and interest crediting. Option A (level) death benefit means the net amount at risk falls as cash value grows; Option B keeps the net amount at risk level. No-lapse guarantees usually require a minimum premium.
- Variable life and VUL. Cash value in separate-account subaccounts; the policyowner bears investment risk; sold as a security with a prospectus and a registered representative.
- Annuities. Immediate vs deferred; fixed vs variable; accumulation and payout phases; life, period-certain, and joint-and-survivor payout options.
Worked example
Age-45 UL, $100,000 Option A, $2,000 premium. Expense load 8% = $160. COI rate is $2.50 per $1,000 of net amount at risk. With an $8,000 cash value, net amount at risk = $92,000, so COI = $230. Net to cash value = $2,000 - $160 - $230 = $1,610. Credited at 4% annual for one month = about $5.37. New cash value = $8,000 + $1,610 + $5.37 = $9,615. As cash value rises, net amount at risk falls, so Option A COI charges decline.
Traps
- Treating a UL credited rate as guaranteed.
- Forgetting Option B COI is charged on a level net amount at risk.
- Assuming variable products are not securities.
- Comparing annuity account values with life insurance death benefits.