Free RIBO Insurance Laws and Regulations Test 2 — Questions and Answers
Question 1: Variable life insurance policy owners may make a withdrawal in terms of________.
- Number of units or fixed monetary amount through cancellation of units. (Correct answer)
- Number of units or fixed monetary amount through reduction of the life cover sum assured
- Fixed monetary amount only through reduction of the life cover sum assured
- Number of units through cancellation of units
Correct answer: Number of units or fixed monetary amount through cancellation of units.
Variable life insurance policies allow owners to make withdrawals from their cash value. These withdrawals are typically executed by canceling a specific number of units from the underlying investment funds, or by requesting a fixed monetary amount which then results in the cancellation of the corresponding units at their current value. This process reduces the policy's cash value and potentially the death benefit.
Question 2: Which of the following statements about the flexibility features of variable life policies is FALSE?
- Policy holders may request for a partial withdrawal of the policy and the withdrawal amount will be met by casting the units at bid price.
- Policy holders can take loans against their variable life policies up to the entire withdrawal value of their policies. (Correct answer)
- Policy holders have the flexibility of switching from one fund to another provided it satisfies the company’s switching of criteria.
- Policy holders have the flexibility of increasing or decreasing their premiums variable life policies.
Correct answer: Policy holders can take loans against their variable life policies up to the entire withdrawal value of their policies.
While variable life policies offer flexibility in withdrawals and fund switching, policy loans are typically limited to a percentage of the policy's cash value, not the entire withdrawal value. Allowing loans up to the full withdrawal value would expose the insurer to excessive risk, especially given the fluctuating nature of the investment-linked cash value. Therefore, the statement that policyholders can take loans up to the entire withdrawal value is false.
Question 3: The investment returns under variable life insurance policy_______. Are not guaranteed. Are Assured Are linked to the performance of the investment fund management by the life company. Fluctuate according to the risk and fall of market price
- I, II and III
- I, II and IV
- I, III and IV (Correct answer)
- II, III and IV
Correct answer: I, III and IV
The investment returns under variable life insurance policies are explicitly not guaranteed (I) because they are directly linked to the performance of the underlying investment funds (III). Consequently, these returns fluctuate according to the risk and market price changes (IV) of those investments. They are not assured (II) like some traditional policies, as the policyholder bears the investment risk.
Question 4: Which of the following statements are TRUE? The policy value of variable life policies is determined by the offer price at the time of valuation. The policy value of endowment policies is the cash value plus any accumulated dividends less any outstanding loans due at time of surrender. The life company needs to maintain a separate account for variable life policies distinct from the general account.
- I and II
- I, II and III
- I and III
- II and III (Correct answer)
Correct answer: II and III
Statement I is false because the policy value of variable life policies is determined by the *bid price* of the units, not the offer price. Statement II is true: the policy value of endowment policies includes cash value, accumulated dividends, minus any outstanding loans. Statement III is also true: life companies are legally required to maintain separate accounts for variable life policies to segregate policyholder investments from the insurer's general assets.
Question 5: Which of the following statement is FALSE?
- Rebating is to offer a prospect a special inducement to purchase a policy.
- Twisting is a specific form of misinterpretation.
- Misinterpretation is a specific form of twisting. (Correct answer)
- Switching is a facility allowing policy holders to switch to another variable life funds offered by company.
Correct answer: Misinterpretation is a specific form of twisting.
The statement 'Misinterpretation is a specific form of twisting' is false. In fact, twisting is a specific form of misrepresentation, not the other way around. Misrepresentation is a broader term for providing false or misleading information, while twisting specifically involves inducing a policyholder to lapse or surrender an existing policy to purchase a new one, often through misleading comparisons. Therefore, twisting is a *type* of misrepresentation, making the original statement incorrect.
Question 6: Which of the following statements about variable life policies are TRUE? Offer price is used to determine the number of units to be cancelled to the account. The margin between the bid and offer price is used to cover the management cost of the policy. The policy value is calculated based on the bid price of the units allocated into the policy.
- I, II and III
- I and II (Correct answer)
- I and III
- II and III
Correct answer: I and II
Statements I and II are true for variable life policies. The offer price is used to determine the number of units cancelled, and the margin between bid and offer price covers management costs. However, statement III is false because the policy value is typically calculated based on the *bid price* of the units, which represents the amount the policyholder would receive if they sold their units, not the offer price.
Question 7: What is the most suitable investment instrument for an investor who is interested in protecting his principal and receiving a steady stream of income?
- Equity
- Warrants
- Variable life policies
- Fixed Income securities (Correct answer)
Correct answer: Fixed Income securities
Fixed Income securities, such as bonds, are the most suitable investment for an investor seeking principal protection and a steady income stream. They typically offer predictable interest payments and the return of the original principal at maturity, making them less volatile than equities or warrants. Other options like equities and variable life policies carry higher market risk and do not guarantee principal or a steady income.
Question 8: What are the disadvantages of investing in common shares? Dividends are paid not more than fixed rates. Investors are exposed to market and specific risks. Shares can become worthless if company becomes insolvent.
- I, II
- I, III
- II, III (Correct answer)
- I, II and III
Correct answer: II, III
Statements II and III correctly identify disadvantages of investing in common shares. Investors are exposed to both market risk (overall market fluctuations) and specific risk (risk related to the individual company). Additionally, if a company becomes insolvent, common shares can indeed become worthless as they are last in line for repayment. Statement I is false because dividends on common shares are not fixed; they are variable and declared by the company's board, or may not be paid at all.
Question 9: Mr. Juan Dela Cruz is currently earning P30, 000/month. He is 35 years old and has a reasonable amount of savings. He has a moderate level of risk tolerance. What kind of policy would you recommend for him to buy?
- Participating Endowment
- Variable Life Policies (Correct answer)
- Participating Whole Life
- Annuities
Correct answer: Variable Life Policies
Given Mr. Dela Cruz's age, reasonable savings, good income, and moderate risk tolerance, a Variable Life Policy is the most suitable recommendation. This policy combines life insurance protection with an investment component, allowing him to participate in market growth while providing coverage. His moderate risk tolerance aligns with the potential for higher returns than traditional policies, and the investment flexibility can help him grow his wealth over time.
Question 10: Under variable life insurance policies______. There is no guaranteed minimum sum assured for the purpose of declaring dividends. There is not guaranteed minimum sum assured as a level of life insurance protection. Each of the policy owner’s premiums will be used to purchase units the number of which is dependents on the selling price of each unit. Purchase of units can only be made from the variable life fund itself, which will then create new units and add the investment monies to the value of the fund
- I and IV
- II and IV
- III and IV
- II and III
- All of the above (Correct answer)
Correct answer: All of the above
All the statements accurately describe characteristics of variable life insurance policies. There is no guaranteed minimum sum assured for dividends or as a level of life insurance protection, as both can fluctuate with investment performance. Each premium purchases units based on the selling price, and units are bought from the variable life fund itself, creating new units and adding to the fund's value.
Question 11: The benefits of investing in variable life funds include__. Policy owners have access to pooled or diversified portfolios of investment. Policy owners can easily change the level of the premium payments as the product design of variable life insurance policies have clear structures which cater separately for investment and insurance protection. Policy owners can gain access to variable life funds managed by professional investment managers with proven track records. Policy owners can buy a variable life insurance policy only with a high initial investment.
- I, II and IV
- I, III and IV
- I, II and III (Correct answer)
- I and IV
Correct answer: I, II and III
Statements I, II, and III are benefits of investing in variable life funds. Policy owners gain access to diversified portfolios managed by professionals and can often adjust premium payments due to the product's clear separation of investment and insurance components. However, statement IV is incorrect; variable life insurance policies do not necessarily require a high initial investment, making them accessible to a broader range of investors.
Free RIBO Insurance Laws and Regulations Test 2
Variable life insurance policy owners may make a withdrawal in terms of________.