LLQP Life Insurance · Component 2.1 · 30% of the exam
Why do insurers usually apply a surrender charge to a universal life policy's account value in the early years?
- ATo penalize the client for leaving, since early surrenders disrupt the insurer's long-term investment planning
- To recover the insurer's acquisition costs if the policy is surrendered before those costs have been recouped
- CTo fund dividends for the remaining policyholders, since surrender charges are credited to the participating account
- DBecause the law requires it, so that clients are discouraged from treating life insurance as a short-term investment
Correct answer: B) To recover the insurer's acquisition costs if the policy is surrendered before those costs have been recouped
Acquisition costs are front-loaded; surrender charges, declining over a schedule, protect the insurer from losses on early terminations. The cash surrender value is the account value less the charge. The client should see the schedule.
Why the other options are wrong
- AThe charge recovers costs; it is not punitive.
- CUL policies do not pay dividends.
- DIt is a contract term, not a legal requirement.
Exam tip
Explain the surrender charge schedule up front: it is why early UL surrender values are low.
Common mistake
Quoting the account value as the surrender value.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Life Insurance module. Written against the published curriculum.
More from component 2
- A client has a need lasting about twenty years and compares a ten-year and a twenty-year term policy. The main point to explain is that:
- A client exercises the conversion privilege on his term policy. The permanent premium will be based on:
- A client notices that a small policy costs proportionately more per unit of coverage than a larger one. The explanation is that:
- A client wants to pay monthly rather than annually. The agent should explain that monthly payment:
- A client asks why dividends from her participating policy are not taxed like interest from a bank. The reason is that a dividend is:
- A universal life policyholder is choosing among the investment options inside her policy. She should understand that:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.