Key Takeaways
- Term life provides death benefit only - NO cash value accumulation.
- Whole life has guaranteed cash value growth and level premiums for life.
- Universal life offers flexible premiums and adjustable death benefits.
- Variable life invests cash value in separate accounts (subaccounts) - IS a security.
- Variable Universal Life (VUL) combines variable investment with flexible premiums.
- Death benefits are generally INCOME TAX-FREE to beneficiaries.
- Variable products require BOTH insurance AND securities licenses to sell.
- Separate account investments expose policyholders to investment risk.
Life Insurance Products
Life insurance products may serve as investment vehicles in addition to providing death benefit protection. Understanding the different types is essential for proper client recommendations.
Types of Life Insurance
| Type | Cash Value | Premiums | Death Benefit | Securities License |
|---|---|---|---|---|
| Term | None | Lowest, increases at renewal | Level or decreasing | No |
| Whole Life | Guaranteed | Level for life | Guaranteed | No |
| Universal Life | Interest-based | Flexible | Adjustable | No |
| Variable Life | Securities-based | Fixed | Variable (minimum guaranteed) | Yes |
| Variable Universal Life | Securities-based | Flexible | Variable | Yes |
Term Life Insurance
Term life provides pure death benefit protection with NO cash value.
Characteristics
| Feature | Description |
|---|---|
| Coverage Period | Specific term (10, 20, 30 years) |
| Cash Value | None |
| Premiums | Lowest initially; increase at renewal |
| Death Benefit | Level or decreasing |
| Renewability | May renew at higher rates |
| Convertibility | May convert to permanent without medical exam |
Types of Term Insurance
| Type | Death Benefit Pattern |
|---|---|
| Level Term | Death benefit stays constant |
| Decreasing Term | Death benefit decreases over time |
| Annual Renewable Term (ART) | Renews annually at higher premium |
Best Suited For
- Maximum coverage at lowest cost
- Temporary insurance needs (mortgage, children's education)
- Clients who will invest the premium savings elsewhere
Permanent Life Insurance
Permanent insurance provides lifelong coverage with cash value accumulation.
Whole Life Insurance
| Feature | Description |
|---|---|
| Coverage | Lifetime (to age 100-121) |
| Premiums | Level for life |
| Cash Value | Guaranteed growth at fixed rate |
| Death Benefit | Guaranteed face amount |
| Dividends | May pay dividends (participating policies) |
| Loans | Can borrow against cash value |
Dividend Options (Participating Policies)
| Option | Description |
|---|---|
| Cash | Receive dividend in cash |
| Reduce Premiums | Apply to premium payments |
| Accumulate | Leave with insurer at interest |
| Paid-Up Additions | Buy additional insurance |
| One-Year Term | Buy additional term coverage |
Universal Life Insurance
| Feature | Description |
|---|---|
| Premiums | Flexible (within limits) |
| Death Benefit | Adjustable |
| Cash Value | Earns current interest rate |
| Transparency | Itemized charges disclosed |
| Flexibility | Can skip or increase premiums |
Death Benefit Options
| Option | Death Benefit Paid |
|---|---|
| Option A (Level) | Face amount only |
| Option B (Increasing) | Face amount PLUS cash value |
Exam Tip: Universal life offers FLEXIBILITY in premiums and death benefits, unlike whole life which has fixed premiums.
Variable Products (SECURITIES)
Variable life products invest cash value in separate accounts tied to market performance. They are securities and require both insurance and securities licenses.
Variable Life Insurance
| Feature | Description |
|---|---|
| Premiums | Fixed, level |
| Cash Value | Invested in separate account (subaccounts) |
| Investment Risk | Borne by policyholder |
| Death Benefit | Variable, but minimum guaranteed |
| Regulatory Status | IS a security |
Variable Universal Life (VUL)
Combines features of both variable life and universal life:
| Feature | Description |
|---|---|
| Premiums | Flexible |
| Cash Value | Invested in separate account |
| Death Benefit | Adjustable |
| Investment Options | Multiple subaccount choices |
| Risk | Full investment risk on policyholder |
Separate Account vs. General Account
| Account Type | Variable Products | Fixed Products |
|---|---|---|
| Separate Account | Cash value here | Not used |
| General Account | Not used | Cash value here |
| Investment Risk | Policyholder | Insurance company |
| Guaranteed Returns | No | Yes |
| SIPC Protection | No | N/A |
Subaccount Options
Variable products offer various investment options similar to mutual funds:
| Subaccount Type | Objective |
|---|---|
| Money Market | Safety, liquidity |
| Bond/Income | Income generation |
| Balanced | Growth and income |
| Growth | Capital appreciation |
| Aggressive Growth | Maximum growth |
| International | Global diversification |
Regulatory Requirements
Licensing Requirements
| Product Type | Insurance License | Securities License |
|---|---|---|
| Term Life | Yes | No |
| Whole Life | Yes | No |
| Universal Life | Yes | No |
| Variable Life | Yes | Yes (Series 6 or 7) |
| Variable Universal Life | Yes | Yes (Series 6 or 7) |
Why Variable Products Are Securities
Variable products are securities because:
- Cash value is invested in a separate account
- Policyholder bears investment risk
- Returns depend on market performance
- Similar to mutual fund investments
Registration Requirements
| Document | Purpose |
|---|---|
| Prospectus | Required disclosure document |
| Application | Policy application |
| SEC Registration | Separate account registered |
Exam Tip: Variable products are SECURITIES because the cash value is in a SEPARATE ACCOUNT tied to market performance. Selling them requires BOTH insurance AND securities licenses.
Tax Treatment of Life Insurance
| Tax Aspect | Treatment |
|---|---|
| Death Benefit | Generally INCOME TAX-FREE to beneficiaries |
| Cash Value Growth | Tax-deferred while inside policy |
| Policy Loans | Not taxable (if policy stays in force) |
| Surrenders | Taxable gain = Cash value - premiums paid |
| Dividends | Generally tax-free return of premium |
Modified Endowment Contract (MEC)
If too much premium is paid into a policy, it becomes a MEC:
- Withdrawals and loans are LIFO (taxable earnings first)
- 10% penalty on withdrawals before age 59½
- Death benefit still tax-free
Exam Tip: Life insurance death benefits are generally INCOME TAX-FREE. However, they may be included in the estate for ESTATE TAX purposes.
Which life insurance product requires a securities license to sell?
What distinguishes a separate account from a general account?
Which life insurance product offers flexible premiums and guaranteed cash value growth?
How are life insurance death benefits generally taxed to the beneficiary?
5.2 Annuities
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