Sample Questions
Question 1
Easy
Under which of the following conditions does a universal life policy lapse?
Solution
B is correct.
A universal life policy lapses when the account value is reduced to zero or below after charges are applied and the policyholder fails to make a sufficient premium payment within the grace period (typically 61 days) to restore a positive account value. This is the defining feature of UL's flexible premium structure: the policy persists only as long as the account value is sufficient to cover ongoing COI and expense charges.
A universal life policy lapses when the account value is reduced to zero or below after charges are applied and the policyholder fails to make a sufficient premium payment within the grace period (typically 61 days) to restore a positive account value. This is the defining feature of UL's flexible premium structure: the policy persists only as long as the account value is sufficient to cover ongoing COI and expense charges.
Question 2
Medium
Which of the following best distinguishes a Type A from a Type B universal life insurance policy in terms of the net amount at risk (NAR) as the account value grows over time?
Solution
B is correct.
Under a Type A (level death benefit) policy, the death benefit is fixed at the face amount. As the account value grows, the net amount at risk (NAR = death benefit - account value) shrinks: Under a Type B (increasing death benefit) policy, the death benefit equals face amount plus account value, so the NAR is always the face amount: This means COI charges under Type B are higher and more stable over time, while Type A COI charges decline as the account value grows.
Under a Type A (level death benefit) policy, the death benefit is fixed at the face amount. As the account value grows, the net amount at risk (NAR = death benefit - account value) shrinks: Under a Type B (increasing death benefit) policy, the death benefit equals face amount plus account value, so the NAR is always the face amount: This means COI charges under Type B are higher and more stable over time, while Type A COI charges decline as the account value grows.
Question 3
Hard
A UL policy has the following profit signature (profits per policy issued): for years 1 through 5. Using a risk discount rate of 10%, compute the discounted payback period (DPP), defined as the smallest year such that the cumulative discounted profits are non-negative.
Solution
D is correct.
Discount each year's profit at the risk discount rate of 10%.
Year 1: .
Year 2: .
Year 3: .
Year 4: .
Year 5: .
Cumulative discounted profits:
After year 1: .
After year 2: .
After year 3: .
After year 4: .
After year 5: .
The cumulative discounted profit first becomes non-negative at the end of year 5, so the discounted payback period is .
Discount each year's profit at the risk discount rate of 10%.
Year 1: .
Year 2: .
Year 3: .
Year 4: .
Year 5: .
Cumulative discounted profits:
After year 1: .
After year 2: .
After year 3: .
After year 4: .
After year 5: .
The cumulative discounted profit first becomes non-negative at the end of year 5, so the discounted payback period is .
