Management Notes

Management Notes

Reference Notes for Management
Level premium permanent insurance accumulates a reserve that will eventually

Level premium permanent insurance accumulates a reserve that will eventually

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Level premium permanent insurance accumulates a reserve that will eventually

A) equal the face amount of the policy
B) pay a dividend to the policyowner
C) require the policyowner to make periodic withdrawals
D) become larger than the face amount

Correct Answer: A) equal the face amount of the policy

Level premium permanent insurance accumulates a reserve that will eventually

Correct Answer Explanation: A) equal the face amount of the policy

➦ Level premium permanent insurance, often referred to as whole life insurance, is a type of life insurance policy where the premium remains consistent throughout the life of the policy.

➦ These policies have a unique characteristic of accumulating a cash value or reserve over time.

➦ The primary purpose of level premium permanent insurance is to provide both a death benefit and a savings component.

➦ Over time, as premiums are paid and the policyholder’s cash value grows, the cash value will eventually equal the face amount of the policy.

Here’s a detailed explanation of why this is the correct answer:

i. Premium Structure:

➦ In a level premium permanent insurance policy, the premium paid by the policyholder remains the same for the duration of the policy.

➦ This means that the policyholder pays a higher premium in the early years of the policy, which helps to accumulate a cash value that will support the policy in later years when the cost of insurance coverage is higher due to aging.

ii. Cash Value Accumulation:

➦ Part of the premium paid goes towards the cost of insurance coverage, and the remaining portion is invested by the insurance company.

➦ This invested portion, known as the cash value, accumulates over time. The cash value grows tax-deferred, which means the policyholder doesn’t pay taxes on the gains as long as they remain within the policy.

iii. Death Benefit Payout:

➦ The face amount of the policy is the amount of money that will be paid out to the beneficiary upon the death of the insured.

➦ In a level premium permanent insurance policy, the death benefit remains constant, and it is typically the face amount of the policy.

iv. Cash Value Equals Face Amount:

➦ As the policyholder continues to pay premiums, the cash value accumulates, and over time, it can grow to equal the face amount of the policy.

➦ This means that the death benefit (face amount) is essentially supported by the cash value within the policy.

➦ Once the cash value equals the face amount, the policy effectively becomes self-sustaining, and the insurance company can pay the death benefit from the cash value without requiring additional premium payments from the policyholder.

v. Lifetime Coverage:

➦ Level premium permanent insurance provides coverage for the entire lifetime of the insured as long as premiums are paid.

➦ The goal is to ensure that the death benefit is available when needed, regardless of when the insured passes away.

➦ In summary, the correct answer is A) equal the face amount of the policy because level premium permanent insurance is designed to accumulate a cash value that will eventually equal the face amount of the policy, ensuring that the death benefit is fully funded without the need for additional premium payments.

Why the other options are not correct?

B) Pay a dividend to the policyowner:

➦ Dividends are typically associated with participating whole life insurance policies. These dividends are not guaranteed, and they are a return of excess premium and investment earnings.

➦ Level premium permanent insurance may or may not pay dividends, depending on the policy’s terms and the performance of the insurance company’s investments.

➦ However, dividends are not a primary goal of these policies, and they do not accumulate to the point where they equal the face amount of the policy.

C) Require the policyowner to make periodic withdrawals:

➦ Level premium permanent insurance does not require the policyowner to make periodic withdrawals.

➦ In fact, the goal is to allow the cash value to grow over time, and policyholders are not required to withdraw funds unless they choose to do so.

➦ Withdrawals, if made, are typically subject to taxation and can reduce the death benefit.

D) Become larger than the face amount:

➦ While the cash value in a level premium permanent insurance policy can grow significantly over time, it is not designed to become larger than the face amount of the policy.

➦ The primary purpose of the cash value is to support the death benefit, and it typically reaches a point where it equals the face amount, ensuring that the policy remains in force and can pay the full death benefit when needed.

➦ In conclusion, level premium permanent insurance is a type of life insurance policy that aims to provide a guaranteed death benefit by accumulating a cash value that eventually equals the face amount of the policy.

➦ This ensures that the policy remains in force for the insured’s lifetime without requiring additional premium payments.

➦ While dividends, withdrawals, and cash value growth can be associated with these policies, none of these options are the primary purpose or goal of level premium permanent insurance.

Level premium permanent insurance

➦ In a level-premium life insurance policy, the premium remains the same throughout the policy’s life.

➦ The premiums for this type of coverage remain the same throughout the contract.

➦ The amount of coverage provided by a permanent insurance policy like whole life increases over time.

➦ The coverage can therefore be advantageous over time: the policyholder pays the same amount but benefits from increased coverage as the policy matures.

➦ Level-premium policies are also common, but the overage amount remains the same.

➦ Most policyholders choose between 10, 15, 20, and 30 years, depending on their needs.

➦ The upfront costs of level-premium policies are generally higher than those for annual-renewable policies.

➦ It’s often more cost-effective to make level-premium payments over the long run.

➦ A policyholder typically has more medical issues during a period when higher premiums have been offset by higher coverage.

➦ When a policyholder dies during the term of the insurance, the policy pays a benefit. When death occurs outside the term period, there is no payout.

➦ Level-premium insurance is generally associated with whole life or term life policies, which guarantee the premium won’t change.

➦ As circumstances change, the premiums for other forms of insurance, such as universal life (UL) or annual term, may change.

➦ Policyholders are required to set aside a portion of their premiums in a reserve fund as they pay premiums over time.

➦ A policyholder and his or her beneficiaries will be protected from financial hardship in the event of a claim.

➦ The key benefit of level premium permanent insurance is that it covers the policyholder for the rest of their lives.

➦ There is a difference between it and term insurance, which provides coverage for only a short time.

➦ The premiums for level premium permanent insurance are typically fixed and do not increase over time, making it more affordable.

➦ It is possible for the reserve fund to reach the same amount as the face value of the policy over time, as it grows over time.

➦ As a result, if a claim is made on the policy, the insurance company can pay out the claim with funds from the reserve.

➦ Due to the accumulating reserve fund over time, it can be assured that the policyholder and their beneficiaries will receive the full amount of the policy in the event of a claim.

➦ In the event of an unexpected death, level premium permanent insurance provides financial protection to loved ones.

➦ Providing peace of mind to policyholders and their families, it is a tool for long-term financial planning.

➦ In addition to offering flexible coverage options, level premium permanent insurance also offers low rates.

➦ You can customize your coverage by adding riders to your policy and choosing the amount of coverage that suits your needs.

➦ It is also possible to obtain financial security beyond the death benefit with level premium permanent insurance.

➦ Cash value accumulation is an additional feature available in some policies, allowing policyholders to accumulate savings.

➦ You can use the cash value for emergencies or to meet other financial objectives.

➦ The level premium permanent insurance policy provides coverage throughout the policyholder’s lifetime, accumulates a reserve fund, and eventually equals the face value of the policy.

➦ Policyholders and their families benefit from flexible coverage options as well as additional features such as cash value accumulation.

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