Life insurance fundamentals
Domain 2 tests life insurance mechanics: how mortality, interest, and expenses set premiums, and how term and permanent products fit different needs.
Core rules
- Mortality tables estimate death rates; morbidity is for health. Premiums use mortality, interest, and expense assumptions; reserves support future obligations.
- Term insurance is temporary, usually has no cash value, and renewable/convertible features matter.
- Whole life is permanent, level premium, guaranteed cash value, and may pay dividends (non-guaranteed).
- Universal life separates mortality and expense charges from cash value; credited interest may be fixed or indexed, with guarantees.
- Variable life cash value is invested in subaccounts and fluctuates; it is a security, requiring a securities license.
- Death benefits are generally income-tax-free to beneficiaries; cash value grows tax-deferred. Policy loans are not income unless the policy lapses or is surrendered with gain.
Worked example
A 35-year-old needs coverage until a 20-year mortgage is paid and children finish school. A 20-year level term policy matches that temporary need at low cost. If the same person also needs permanent estate liquidity, a smaller whole life policy can supplement term. Buying only permanent coverage may overfund a temporary need; buying only term may leave the permanent need uncovered.
Traps
Term does not build cash value. Whole life premiums are not age-increased. Variable life is not guaranteed. An unpaid loan reduces the death benefit and can cause lapse.