PSI Life Exam Practice Test

The life insurance illustration rule applies to which type of insurance?

1. Term Life

2. Whole Life

3. Universal Life

4. Endowment Policies

The correct answer is: Universal Life

The life insurance illustration rule specifically applies to universal life insurance because this type of policy features flexible premiums and adjustable death benefits, which can fluctuate based on the policyholder's choices and market conditions. The rule mandates that illustrations must clearly disclose the assumptions used, projected values, and the cost of insurance over time. This is essential for universal life policies as their performance heavily depends on market interest rates and the insurer's investment performance, which can lead to significant variability in the policy's future values. Term life insurance generally has fixed premiums and benefits, making the need for detailed illustrations less critical. Whole life insurance, while it also has guaranteed components, typically offers set values that do not require the same level of disclosure as universal life. Endowment policies, while they have specific features, do not share the same flexible benefits as universal life; hence, the illustration rules do not specifically apply to them in the same way. Understanding these different requirements for illustration helps ensure that policyholders have a clear understanding of the products they are considering.