Life & Health Insurance License Exam

Whole life insurance provides permanent protection for the insured's entire lifetime. It combines a death benefit with a cash value savings component. Premiums are typically level for the life of the policy. The policy matures at age 100 or 121, at which point the cash value equals the face amount.

Premiums are higher than term insurance because they fund both the death benefit and cash value accumulation. In early years, premiums exceed the cost of insurance, and the excess builds cash value. The cash value grows tax-deferred. Upon death, beneficiaries receive the death benefit (not the death benefit plus cash value).

Premiums paid throughout the insured's lifetime

Level premiums from issue to death or age 100/121

Cash value accumulates over time

Most common form of whole life

Premiums paid for a limited period, but coverage lasts a lifetime

Common forms: 10-pay, 20-pay, paid-up at 65

Higher premiums than ordinary whole life

Policy is "paid up" after the premium-paying period

Faster cash value accumulation

Entire premium paid in one lump sum at issue

Immediate cash value

Classified as a Modified Endowment Contract (MEC) with different tax treatment

Immediate paid-up status

Premiums start low and increase over time

Eventually level off after a specified period

Allows younger buyers to afford permanent coverage

Lower initial cash value growth

Lower premiums in the first 3-5 years

Higher level premiums thereafter

Compromise between term and whole life costs

Premium can be adjusted by the insurer based on experience

Has a guaranteed maximum premium

Current premium may be lower than the maximum

Insurer reviews and adjusts premiums periodically

Cash value growth tied to current interest rates

Guaranteed minimum interest rate applies

Premiums may vary based on investment performance

Blends traditional whole life with universal life features

Uses dividends to purchase additional term insurance

Lower premium than traditional whole life

Provides more death benefit per premium dollar

Available only with participating policies

Policy owner can borrow against the cash value

Interest charged on loans

Outstanding loan balance reduces death benefit

No credit check or approval required

Loans not taxable unless policy lapses

Policy owner can surrender the policy for its cash surrender value

Cash surrender value equals cash value minus any surrender charges and outstanding loans

Surrendering terminates all coverage

May result in taxable gain if surrender value exceeds premiums paid

Protect the policy owner's cash value if premiums are not paid

Required by state law

Options include cash surrender, reduced paid-up insurance, and extended term insurance

Participating (par) whole life policies may pay dividends. Dividends represent a return of excess premium and are not guaranteed. Dividend options include:

Cash payment

Premium reduction

Accumulate at interest

Purchase paid-up additions

Purchase one-year term insurance (fifth dividend option)

Permanent lifetime protection

Level premiums

Cash value accumulation (forced savings)

Tax-deferred growth

Loan availability

Guaranteed death benefit

Higher premiums than term

Lower rate of return on cash value compared to other investments

Limited flexibility

Slow initial cash value growth