Unit 2

Front 1

What is guaranteed in a variable life insurance policy?

Back 1

In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. All important information concerning the insurance policy must be addressed in the prospectus. This would, of course, include all sales charges. Money invested in a variable life policy may be invested selectively by the policyholder and may be invested in a wide variety of securities depending on the investor's objectives.

Front 2

Marianne has a variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, the investments and the face value begin to decline in value. If this continues, the face value could decrease:

A) to 50% of the original face value.
B) to the original face value.
C) to 25% of the original face value.
D) to 0.

Back 2

The face value in an insurance contract is the death benefit. In a variable life policy, the face value will fluctuate with the cash value, but it will never decrease below the original minimum face value.

Front 3

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that:

A) if a policy loan exceeds the policy cash value, the deficiency must be remedied within ten business days to keep the policy from lapsing.
B) premiums will vary based upon performance of the separate account.
C) by surrendering the policy its cash value may be obtained.
D) you will receive a statement of your death benefit no less frequently than semiannually.

Back 3

Surrender of the contract requires the insurance company to pay out its cash value. Death benefit is adjusted annually.

Front 4

As a new securities product, variable life insurance must be registered under:

A) the Securities Exchange Act of 1934.
B) the Trust Indenture Act of 1939.
C) the Securities Act of 1933.
D) the Investment Advisers Act of 1940.

Back 4

Because of the separate account, these contracts must be sold with a prospectus, and therefore be registered under the Securities Act of 1933.

Front 5

Fees such as mortality and risk expenses are deducted from the:

I premium payment for flexible premium policies.

II. premium payment for scheduled premium policies.
III. separate account cash value for flexible premium policies.
IV. separate account cash value for scheduled premium policies.


I.

Back 5

III and IV.

Expenses are deducted from the separate account cash value for both scheduled and flexible premium VLI contracts.

Front 6

Which of the following statements is TRUE concerning variable life separate account valuation?

A) Unit values are computed monthly and cash values are computed daily.
B) Unit values are computed daily and cash values are computed monthly.
C) Unit values are computed monthly and cash values are computed weekly.
D) Unit values are computed weekly and cash values are computed monthly.

Back 6

Unit values are computed daily and cash values are computed monthly.

Unit values are computed each day. Policy cash values are a monthly computation.

Front 7

A customer has a variable life policy and has made two annual premium payments. From the first year's premium, $600 was deducted in sales charges. From the second year's premium $400 was deducted. If the customer terminates the policy before the end of the second year, which of the following statements are TRUE?

A) The customer is not entitled to a policy refund but may exchange the policy for a traditional whole life policy.
B) The customer is refunded any cash value and a portion of the sales charges.
C) The customer receives the policy cash value only.
D) The customer is refunded all premiums paid.

Back 7

The customer is refunded any cash value and a portion of the sales charges.

The variable life refund provision returns cash value plus a portion of the sales charges deducted if it is made within the first two policy years.

Front 8

The basic characteristic of common stocks that makes them a suitable form of investment for variable annuities is:

A) their yields, which are always higher than mortgage yields.
B) their yields, which are always higher than bond yields.
C) they do not fluctuate in value during periods of adverse economic conditions.
D) the changes in their price tend to be more related to changes in the cost and standard of living than to changes in bond prices.

Back 8

The correct answer was: the changes in their price tend to be more related to changes in the cost and standard of living than to changes in bond prices.

Investments in common stocks have generally produced a rate of total return that exceeds the rate of inflation over the same period. This tendency cannot, however, be guaranteed to a customer.

Front 9

Which of the following are advantages of a periodic payment deferred annuity over a lump-sum deferred annuity?

Smaller individual payments spread out over time are easier to meet than a single large payment.
Tax deferral of growth and accumulation is available only if periodic payments are made.
Insurance companies must impose a higher sales charge if payment is made in a lump sum.
With periodic payments, the investor's commitment is spread out over years and is easier to reverse if necessary than is payment of a lump sum.

A) I and III.
B) I and IV.
C) II and III.
D) II and IV.

Back 9

The correct answer was: I and IV.

Tax deferral is available for annuities whether they are bought with a lump sum or by periodic payments. Insurance companies are not required to impose a higher or lower sales charge according to the purchase method.

Front 10

A client is in the annuitization stage of a variable annuity. If the separate account earned 8% during the current month, which of the following statements is correct?

The next check will increase if the AIR is 5%.
The next check will increase if the AIR is 10%.
The number of annuity units owned will increase.
The number of annuity units owned will remain the same.

A) I and IV.
B) II and IV.
C) I and III.
D) II and III.

Back 10

The correct answer was: I and IV.

During a period in which the separate account's performance exceeds the AIR, the next check will increase. Regardless of performance, once the contract is annuitized the number of annuity units remains unchanged. It is the value of the units that changes.

Front 11

All of the following statements regarding variable annuities are true EXCEPT:

A) although investors bear the investment risk, the insurance company provides receive a minimum return guarantee.
B) the separate account may be invested in mutual fund shares.
C) upon annuitization, the investor selects the settlement options.
D) all account earnings must be reinvested.

Back 11

The correct answer was: although investors bear the investment risk, the insurance company provides receive a minimum return guarantee.

Investors do not receive a return guarantee; in a variable annuity, the investor assumes investment risk.

Front 12

The AIR on a variable annuity is 5%. In March, the separate account earned 5%, which resulted in an April payment of $300. In April, the separate account earned 9%, resulting in a May payment of $325. What must the separate account earn in May to generate a $325 June payment?

A) Between 5% and 9%.
B) 3.25%.
C) 9%.
D) 5%.
Your answer, Between 5% and 9%., was incorrect. The correct answer was: 5%.

The annuitant will receive a payment equal to the previous payment if the separate account return for the period equals the AIR.

Back 12

The correct answer was: 5%.

The annuitant will receive a payment equal to the previous payment if the separate account return for the period equals the AIR.

Front 13

When comparing bonus or enhancement annuities to other annuities, which of the following statements are TRUE?

I. Bonus variable annuities tend to have lower annual fees.
II. Bonus variable annuities tend to have higher annual fees.
III. Bonus variable annuities generally have longer surrender charge periods.
IV. Bonus variable annuities generally have shorter or no surrender charge periods.

A) II and III.
B) I and IV.
C) II and IV.
D) I and III.

Back 13

The correct answer was: II and III.

Bonus variable annuities add a percentage of each premium payment to the account. They tend to have higher annual fees to help offset the cost of the bonus or enhancement and are generally associated with longer surrender charge periods.

Front 14

Which of the following is a major advantage of a nonqualified variable annuity compared to a mutual fund?

A) Voting for the board of directors.
B) Receiving dividends.
C) Tax deferral.
D) Diversification.

Back 14

The correct answer was: Tax deferral.

A nonqualified variable annuity has the advantage of tax deferral over investing in a mutual fund; the other choices are common to both investments.