Life Insurance
What the exam tests
Life Insurance tests policy structures, underwriting, beneficiary designations, cash-value mechanics, taxation, and needs analysis. Expect term versus permanent comparisons, maturity and death-benefit treatment, and policy-owner control.
Core rules
- Term is pure protection. Whole life has guaranteed cash value and level premium. Universal life separates mortality and interest; variable life uses separate accounts and shifts investment risk to the owner.
- Death benefits are generally income-tax-free under IRC §101(a), but included in the insured’s estate if the insured holds incidents of ownership.
- A modified endowment contract fails the 7-pay test. Loans and withdrawals are taxed LIFO, and a 10% penalty generally applies before age 59½.
- Typical provisions: incontestability and suicide clauses (often two years), grace period, reinstatement, and automatic premium loan.
- Beneficiary designations control over a will. Per stirpes divides a deceased beneficiary’s share among descendants; per capita divides only among survivors.
Worked example
DIME needs analysis: debt $200,000 + income replacement $60,000 × 10 = $600,000 + mortgage $250,000 + education $150,000 = $1,200,000. Existing group term is $300,000 and savings are $100,000, so the gap is $800,000. The recommendation should state assumptions, not treat the result as exact.
Traps that cost marks
Naming the estate as beneficiary can create probate and creditor exposure. Do not call a MEC illegal-it is tax-inefficient. Do not assume term builds cash value. Transfers for value can lose the income-tax-free death benefit.