Alabama · Accident & Health SampleInteractive Mind Map
Classes of Life Insurance Policies
A visual breakdown of Classes of Life Insurance Policies — one of the concepts you can count on seeing on the exam.
The TESTivity Interactive Mind Mapping Graphic we picked for the Alabama Health Insurance sample is Classes of Life Insurance Policies — and this is a concept you can count on seeing on your pre-licensing exam. Get the structure straight once and those questions turn into free points.
So explore it. Click through, see how the pieces relate, and let the layout do some of the remembering for you.
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Life insurance is sorted along four either/or dividing lines — and the exam tests each one as a contrast.
Master them as pairs. First line: is the coverage written on one individual, or on a group?
👤 Individual
👥 Group
Underwriting
Case-by-case — based on the individual’s health, lifestyle, and risk.
Underwriting
On the group as a whole — no individual evidence of insurability for eligible members.
Portability
Portable — coverage stays with the person regardless of employment.
Portability
Generally not portable — though conversion rights may apply.
Cost & sponsor
Higher premium per dollar; bought by the individual.
Cost & sponsor
Lower group rates; typically employer-sponsored.
How they test thisLock the contrast: Individual = case-by-case underwriting, portable, higher premium. Group = group underwriting with no individual evidence of insurability for eligible members, employer-sponsored, generally not portable. The phrase “no evidence of insurability required” almost always points to group.
Second dividing line: does the coverage last for a set term, or is it permanent with a cash value?
This is the single most fundamental product split in life insurance.
⏱️ Term
♾️ Permanent
Coverage period
A specified period; if the insured survives the term, coverage expires with no benefit.
Coverage period
Lifelong, as long as premiums are paid.
Cash value
None — pure death protection only.
Cash value
Builds cash value over time.
Cost & examples
Least expensive for a given amount.
Cost & examples
More expensive, but builds an asset. Includes whole life, universal life, variable life.
The trap they setIf a stem says “coverage for a set period,” “no cash value,” or “the least expensive for the coverage amount,” the answer is term. If it mentions lifelong coverage or a cash value the owner can use while alive, it’s permanent. Whole, universal, and variable life are all permanent.
Third dividing line: does the policy participate in the insurer’s surplus by paying dividends?
The answer is tied to what kind of company issued it — mutual or stock.
🤝 Participating
💵 Nonparticipating
Issued by
A mutual insurer (owned by policyholders).
Issued by
A stock insurer (owned by shareholders).
Dividends
May pay dividends if the company has surplus — not guaranteed.
Dividends
Pays no dividends to policyholders.
Nature & premium
Dividends are a return of excess premium — generally not taxable. Higher initial premium; net cost may be lower if dividends are paid.
Nature & premium
Premium is set to cover expected costs and profit — no surplus is returned.
The people who write these questions love to……link the company type to the dividend. Mutual → participating → may pay dividends; stock → nonparticipating → no dividends. And know what a dividend is: a return of excess premium, generally not taxable income unless cumulative dividends exceed total premiums paid.
Fourth dividing line: who directs the investments — and who bears the investment risk?
This is the pair with a licensing twist the exam loves.
🔒 Fixed
📊 Variable
Investments
The insurer sets or guarantees the growth rate — the insurer bears the investment risk.
Investments
The policyowner directs cash value into separate-account subaccounts — the policyowner bears the risk.
Values
Predictable — premiums, death benefit, and (for whole life) cash value are stable.
Values
Cash value — and in some products the death benefit — fluctuate with performance.
Licensing
A state life insurance license is sufficient.
Licensing
Requires a FINRA securities license (Series 6 or 7)plus a life license.
⚠️
Look out for this on the exam
In variable products the policyowner bears the investment risk — not the insurer. If the separate account performs poorly, the cash value (and in variable life, possibly the death benefit) can decrease. Selling variable products requires a securities license (Series 6 or 7) in addition to a life license.
🎯
Top Exam Tips — Classes of Life Insurance
1. Four pairs: Individual vs. Group, Term vs. Permanent, Participating vs. Nonparticipating, Fixed vs. Variable. 2. Group = group underwriting, no individual evidence of insurability for eligible members, generally not portable. 3. Term = set period, no cash value, cheapest. Permanent = lifelong + cash value (whole, universal, variable). 4. Mutual → participating → dividends (return of excess premium, generally not taxable). Stock → nonparticipating → no dividends. 5. Variable = policyowner bears the investment risk; requires a securities license (Series 6/7) plus a life license. 6. Fixed = insurer bears the risk; values are predictable.
Exam vocabulary
Key Terms to Know
Individual Life Insurance
A contract covering a specific individual; underwritten case-by-case; portable coverage.
Group Life Insurance
A master contract covering members of a group; group-underwritten; typically employer-sponsored.
Term Life Insurance
Coverage for a specified period only; no cash value; pure death protection; least expensive.
Permanent Life Insurance
Lifelong coverage with a cash value component; includes whole, universal, and variable life.
Participating Policy
A policy that may pay dividends from insurer surplus; issued by a mutual insurer.
Nonparticipating Policy
A policy that pays no dividends to policyholders; issued by a stock insurer.
Policy Dividend
A return of excess premium on a participating policy; not guaranteed and generally not taxable income.
Fixed Life Insurance
Guaranteed or insurer-set death benefit and cash value growth; the insurer bears the investment risk.
Variable Life Insurance
Cash value invested in separate accounts; the policyholder bears the risk; requires a securities license to sell.
Separate Account
The investment account holding variable-policy cash value in subaccounts that function like mutual funds.
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