Chapter 13 Part 2 Flashcards Preview

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Flashcards in Chapter 13 Part 2 Deck (20):
1

In a variable life insurance policy, the policy owner

not the insurance company, decides how the premium payments will be invested. however, an important feature of this type of insurance is that the death benefit generally may not decrease belom a certain guaranteed minmum. Variable life insurance is not for everyone. The client must be sophisticated and knowledgeable enough to understand the available investment options. he must be able to tolerate the fact that the policy's cash value may fluctuate greatly.

2

In a variable life insurance policy, the policyholder makes premium payments to the insurance company that issued the policy. The company first deducts various charges and expenses, including sales charges and the cost of the insurance. The company then deposits the remainder (the net premium payments) in

a separate account

3

The separate account is the

investment account in which the net premium payments made by the owners of variable life insurance and variable annuities are deposited. As the name suggests, the assets of the separate account arc strictly segregated from the company's general account. The earnings in the separate account (capital gains, interest, and dividends) are reinvested in the separate account. By the same token, if the investments in tile separate account lose money, the losses are charged against the separate account, not the company's general account. If the
insurance company goes bankrupt, its creditors may not make claims against the separate account

4

The separate account generally consists of a series of

subaccounts. Each subaccount corresponds to a different investment portfolio, which may contain money-market funds, bonds, stocks, small-cap stocks, etc. Most companies also give policyholders the option of investing their net premium payments in a fixed account. The individual subaccounts must also be registered with the SEC

5

Since each of the subaccounts contains dilferent types of securities and different investment objectives, the policyholder can select the

subaccounts that best suit his needs. For example, an investor in his twenties who wants to sec his death benefit and cash value grow as much as possible over the long term may choose to invest all of his net premiums in a subaccount that contains growth stocks. Policyholders may diversify by investing in different subaccounts. Also, policyholders may transfer money from one subaccount to another as their investment objectives change without tax ramifications

6

The premium payments for variable life insurance policies are generally

fixed and level

7

The cash value of a variable life insurance policy is determined by

the performance of the subaccounts in which the policyholder invests the net premium payments. Therefore, the cash value could theoretically decline to zero if these investments perform poorly. The cash value is normally calculated evety business day (just like the net asset value of a mutual fund)

8

The owner may borrow against the

cash value of the policy up to certain limits (usually 75% to 90% of the policy's cash value). As with traditional whole life and universal policies, the loan and any accumulated interest are deducted from the death benefit if they are still outstanding at the time the insured dies

9

The owner may withdraw some of the money from the policy's cash value without

surrendering the policy (a partial surrender) or may cancel the policy in its entirety and receive the entire cash surrender value. An mmer who takes either one of these actions may be required to pay surrender charges depending on how long the policy has been in force

10

Most variable life insurance policies are sold with a fixed

death benefit. However, the death benefit may increase depending on the performance of the subaccounts in which the policy owner invests. Generally, the death benefit may not fall below a certain minimum-the face value of the policy. the insurance company guarantees a minimum death benefit as long as the owner makes all of the required policy payments and does not take out loans against the policy

11

The policyholder, not the insurance company, shoulders all the

investment risk in a variable life insurance policy. The cash value of the policy will fluctuate depending on the subaccounts in which the owner invests. The insurance company's only obligation is to pay the minimum death benefit when the insured dies

12

A significant advantage of variable life insurance policies is the ability to

invest some of the premium payments in stocks or other assets that have historically paid high returns over the long term. These types of investments give policyholders the potential to grow their cash value and death benefits, and may help protect policyholders and their beneficiaries from the negative effects of inflation

13

Variable universal life policies combine the

flexibility of universal life policies with the investment aspect of variable life policies. Policy owners may adjust their premiums and death benefits as their circumstances warrant. they may also decide how their net premiums are invested among the subaccounts that the insurance company offers in its separate account

14

The death benefit from a life insurance policy passes

tax-free to the beneficiary. However, if the deceased owned the policy, the death benefit will be included in his estate for the purpose of calculating estate taxes. In order to avoid this problem, many tax advisers recommend that the insurance policy be placed in the name of the beneficiary or in an irrevocable life insurance trust

15

Rather than purchasing some combination of individual stocks and bonds for their portfolios, many investors find it more convenient and cost-effective to purchase these securities indirectly through

packaged products. A packaged product allows investors to share in a large, professionally managed portfolio. Many packaged products are structured as investment companies. The most popular are management companies and the most popular management company is the open-end management company, more commonly known as a mutual fund

16

The Investment Company Act of 1940 regulates

investment companies and requires them to register with the SEC. The Act's primmy purposes are to reduce abuses in the sales of investment company securities and to assure inventors of adequate and truthful information

17

The Act defines three different types of investment companies

Face-Amount Certificate Companies, Unit Investment Trusts (UiTs), and Management Companies

18

The face-amount certificate company is rare today. This type of company issues

debt certificates at a predetermined rate of interest. Investors normally purchase certificates in periodic installments but may also use a lump-sum payment. Certificate holders are entitled to redeem their certificates for a fixed amount, on a specified date. Certificates may also be redeemed prior to maturity for a specified surrender value

19

Unit investment trusts issue

only redeemable securities, each of which represents an undivided interest in a specific portfolio of securities. Unit holders receive a proportionate share of net income from the underlying investments

20

UIT portfolio generally

remains fixed for the life of the trust, so there is no need for day-to-day management of the portfolio. In a sense, a UiT is a container into which other securities are placed. The portfolio is said to be supervised, but not managed and, therefore, there is never a management fee associated with a UIT

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