There is a lot of noise surrounding the introduction of Bill 141 in Quebec which officially introduces regulations pertaining to insurance sales directly to the public without the involvement of a licensed representative. Considering all of the opposition this is generating among licensed representatives on the basis that this would put the consumer at risk because it is believed that the consumer is unable to determine his insurance needs.
Therefore we believe that a good question to ask is how competent are licensed life insurance representatives. Can they do the job where they pretend they are so indispensable? How can we answer this question?
We came up with the idea to review some of the questions on the life insurance exam that a representative must take and pass in order to become licensed.
To our complete astonishment, we found that 30% of questions and answers that we reviewed for this exam were wrong. This means that representatives must be wrong 30% of the time to pass this exam. Basically this is akin to licensing representatives who have demonstrated a serious lack of knowledge about life insurance. We are talking about a serious lack of knowledge as shown by these questions. Please note that these questions are written and produced by the AMF which is responsible for supervising the activities of these representatives. As a result this is also a serious regulation issue when the regulator is disseminating the wrong information about life insurance.
You are preparing a universal life insurance proposal for your client, Nixon. He chose to invest in GICs. He wants to finance the policy at a minimal level. He asks you the difference between the monthly payment and the annual payment of the premium. What do you answer him?
a)There is no modal factor for universal life insurance and the long-term surrender value is the same whether the payment of the premium is monthly or annual.
b)There is a modal factor for universal life insurance, and the long-term cash value will be higher if the payment of the premium is annual.
c)There is a modal factor for universal life insurance, and the long-term cash value will be higher if the payment of the premium is monthly.
d)There is no modal factor for universal life insurance, and the long-term cash value will be higher if the payment of the premium is annual.
Answer for the exam:
Answer a: Good answer. The annual premium is the same as the annualized premium in the case of a universal life insurance policy because there is no modal factor applied. Cash surrender values depend on the performance of the investment fund and not the method of payment of the premium. Answers b and c: False. There is no modal factor in universal life insurance, and the cash value does not depend on the payment method of the premium.
The right answer:
The right answer is B. Let’s start with a simple explanation. Monthly insurance costs on Universal Life are deducted on a monthly basis. If your monthly COI is $100 and the interest of the guaranteed account is 2%, if you pay an annual payment of $1200, on the first month you will earn interest of 2% of $1100 in month 1, 2% of $1000 in month 2….. If you pay $100 monthly you will earn no interest at all. As a result, if you pay the minimum payment, your long term cash value will vary depending on whether you pay the policy on a monthly or annual basis and will always be higher if a guaranteed interest account is used and can be higher or lower if an Index account is used.
Finally, all Universal Life policies apply a modal factor. There is no such a thing as an annual premium on a UL. You can select a payment frequency which is either annual or monthly. Your premium is however always monthly because your COI is deducted monthly. This monthly COI includes a modal factor and the annualized minimum payment is 12 times the monthly premium/payment which includes the modal factor.