Problem Preview: A company offers 1.5% of final 5-year average salary per year of service. An employee retires at 65 with 35 years of service and final salaries of $92,000, $95,000, $98,000, $100,000, $105,000. You compute $51,450, but half the candidates get $41,160 because they used career average instead of final average.
HIGH-FREQUENCY: The features distinguishing term, whole, endowment, and universal life are consistently tested.
Term life insurance provides a death benefit if you die during a specified term. Survive the term, and the policy expires worthless, no cash value accumulates. For comparable standard products, term typically has the lowest premium per unit of coverage; exact premium comparisons depend on the contract and mortality basis.
KEY: Term life has NO cash value. Survive the term and nothing is paid. The cash surrender value of a term policy is always zero.
Four common variants:
- Level term: death benefit and premium stay constant throughout the term
- Decreasing term: death benefit declines over time (used to match a declining mortgage)
Common mistakes
- Saying term life has cash value. Term life is pure death protection. No savings, no cash value, no living benefits. Survive the term and nothing is paid. Trap: a question asking for the cash surrender value of a term policy, the answer is zero.
- Mixing up who bears risk in DB vs. DC. In DB, the employer bears investment and longevity risk. In DC, the employee bears both. Trap: "In a 401(k), the employer guarantees the retirement benefit", false. The employer guarantees contributions only.
- Using career average when the formula says final average. Final average uses only the last few years. Career average uses all years. The difference can be thousands of dollars. Trap: computing the wrong average and getting a plausible but incorrect benefit.
Bottom line
- Term life = pure death protection, no cash value, typically the lowest premium per unit of comparable coverage; nothing is paid if the insured survives the term.
- Whole life = permanent death protection with guaranteed cash value accumulation and level premiums for life
- Endowment = pays on death before maturity OR on survival to maturity; the payout is always certain
- Universal life = flexible-premium permanent insurance; cash value depends on variant (traditional, variable, indexed)
Exam shortcut
When a question describes a retirement product, immediately classify it as DB or DC. For DB, identify the formula type (final average, career average, flat) and compute carefully, the most common errors are using the wrong salary average or miscounting years of service. For insurance products, focus on what happens at the end of the term: term pays nothing, endowment pays the face amount, whole life continues.
The full lesson (about 2,480 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 7b
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