7.1 Flashcards
The legality of a life insurance policy is based on the concept of ______.
Insurable Interest
Insurable interest occurs between two parties that, upon the loss of one party, the remaining party will ______.
have suffered some sort of loss
In order to create a valid life insurance contract, a significant ‘interest’ must exist between two parties where one party ______.
has the potential to suffer a loss
Insurance cannot be purchased on ______.
strangers, friends, associates of no financial significance, or the like where the potential for gain, instead of loss, were to occur
In a life insurance contract, insurable interest must exist at the time of application, but is not required ______.
to still exist at the time of an insured’s death
If a married couple purchased life insurance on each other and later they divorced, they would still continue to serve as beneficiary to each other if one were to die, and would still be eligible to ______.
collect the contract’s death benefit
Initiated by individual investors and hedge fund investor groups, ______ are often advertised as ‘zero premium’ or ‘no cost’ life insurance, promoting premium-paid life insurance for two years, as well as a lump sum of cash after the two years, in exchange for future ownership in a life insurance arrangement.
STOLI schemes
Essentially, a STOLI arrangement creates a contract between an individual and a stranger who persuades the individual to purchase a life insurance policy on him or herself with the intent to ______.
sell the policy to the stranger at some point in the future
a STOLI (or IOLI) arrangement is considered to be a scam because it involves inducing an elderly individual into agreeing to purchase a life insurance contract with the intention of naming the investor as the contract’s beneficiary in exchange for ______.
‘free’ insurance and future compensation.
Under a STOLI arrangement, the investor provides money to the elderly insured to pay the policy’s premiums during the contract’s first two years, known as the policy’s ‘incontestability period.’ Once this period ends, the elderly insured ______.
transfers his or her ownership of the life insurance contract to the investor in order to be compensated
As part of a STOLI arrangement, the investor may promote paying a percentage of the policy’s death benefit once transfer of ownership occurs to the insured as ______. Once ownership is assigned to the investor or investment group, it continues to pay the policy’s premiums until the death of the insured, at which point it receives the policy’s death benefit proceeds.
compensation for the arrangement
As a way of saving money, an elderly individual might fall victim to this type of scam because it provides ‘free’ insurance for the first two years of the policy. Some STOLI scams promote the option to continue ownership after two years, as long as the insured ______.
pays back the loaned premium paid by the investor
Often unbeknownst to the insured, he or she is also responsible for ______ on the policy within the first two years, while being ineligible for other legitimate insurance during the two year period. Depending on the insured’s health, after the two years, he or she may no longer be eligible for life insurance if his or her health had deteriorated.
federal taxation
In addition to the unethical nature of the arrangement, a STOLI transaction is illegal because it ______. The intention to sell the contract to the stranger, who will ultimately collect the policy’s death benefit, voids the contract.
undermines the insurable interest requirement when purchasing a life insurance policy
Used purely as an investment opportunity for overzealous investors, STOLI schemes work against the true nature of insurance as protection of one’s beneficiaries in the event of death. Although this practice does occur, due to its fraudulent nature, state insurance regulators have ______.
prohibited and outlawed the practice of STOLI arrangements
______ provides financial protection to a policyowner’s beneficiary in the event of the policyowner’s death. Whether the beneficiary is the policyowner’s spouse, children, or someone else with insurable interest to the policyowner, a life insurance policy’s death benefit is paid out to indemnify the loss of the policyowner.
Life insurance
indemnify the loss of the policyowner
Assessing a breadwinner’s earnings, as well as the family’s size and lifestyle indicates the financial needs of the family in the event of the loss of its breadwinner and thus helps the life insurance agent ______.
recommend the correct life insurance policy to satisfy the client’s financial security
The ______ is the initial period of time when a couple begins a family. The family’s cost-of-living is at its highest during child bearing years up to the beginning of the youngest child’s adult years and is when the family is in most financial need. The surviving spouse has immediate needs of childcare and maintaining a standard of living, should the breadwinner prematurely die. During this period, life insurance is important to ensure the family’s financial security as it grows, should its breadwinner prematurely die.
Family Dependency Period
The Pre-Retirement Period begins when the youngest child ______. The family’s cost-of-living is much lower within this period, than with the previous ‘dependency’ period.
According to social security, a surviving spouse is eligible for ______ during the years he or she is dependent upon by his or her children.
is no longer dependent on support from the parents
social security survivor benefits
A period of time, known as the ______, begins and survivor benefits end after such children are no longer dependent and before the surviving spouse reaches age 60, or age 50 if he or she is disabled. Upon reaching age 60, survivor benefits resume again. Since survivor benefits are not available during the ______, it is important that life insurance provides the surviving spouse with income to adequately maintain his or her standard of living.
Blackout Period
blackout period
The Retirement Period, the final stage in the family income cycle is when social security benefits begin again at age 62 and all other sources of income typically end. As with the pre-retirement period, life insurance is important to ensure that a surviving spouse is ______.
able to maintain his or her standard of living during his or her retirement years
A ______ is an individual who receives a life insurance policy’s death benefit proceeds upon the death of the insured.
Life Insurance Beneficiary
A life insurance beneficiary is chosen by ______.
the policyowner when purchasing the life insurance contract
The amount of death benefit proceeds or distribution percentages, if multiple beneficiaries are listed, are also chosen by ______ and can or cannot be altered during the insured’s lifetime, depending on the revocable designation status that the policyowner has chosen at the time of policy issuance.
the policyowner
A life insurance beneficiary can be ______. Unlike the requirement of ______ between the policyowner and the insured individual, insurable interest is not required between the policyowner or insured and the life policy’s beneficiary; however, family members of the insured are usually named as a policy’s beneficiary.
an individual, an institution, or a charity
insurable interest
Premium payments for charitable life policies are ______.
tax deductible
Under the ______, death proceeds from an insurance policy are divided equally among the named beneficiaries. If a named beneficiary is deceased, his or her share then goes to the living descendants of that individual.
Per Stirpes Rule
Under the ______, death proceeds from an insurance policy are divided equally among only the living primary beneficiaries.
Per Capita Rule
A ______ allows the policyowner to change beneficiaries after the policy becomes in force, if he or she so chooses, without the consent of the beneficiary.
Revocable designation
An ______ cannot be changed in the future without the consent of the beneficiary. Any policy ownership rights including future policy loans or policy collateral on a loan are controlled by the policy’s beneficiary, not the policy’s owner; although, the beneficiary has the right and the choice to give these rights back to the policyowner.
Irrevocable designation
Both revocable and irrevocable beneficiary designations provide for protection of the policy’s proceeds and the long-term intent of the policyowner’s decision to purchase life insurance. While either may be chosen, a ______ is more common in the life insurance industry.
revocable designation
Beneficiary designations can be chosen in many different ways by a policyowner, and in return, insurance companies must adhere to these designations explicitly. Considering the possibility that a beneficiary may die before the insured, insurance companies advise policyowners to also designate ______.
contingent beneficiaries
A ______ is first in line to receive a policy’s death benefits upon an insured’s death. Although commonly a single individual serves as the primary beneficiary, any number of individuals can be named as the primary beneficiaries in a life insurance policy.
primary beneficiary
If needed and named in the policy, a secondary and tertiary (third) beneficiary can also be named as ‘contingent’ beneficiaries if ______.
the primary beneficiary dies before the insured.
Next in succession to the primary, the secondary beneficiary is a contingent to the primary beneficiary and will only receive a policy’s death benefits if ______.
the primary beneficiary has died before the insured
As a means of creating future wealth for one’s descendants, life insurance policies are often used to ______ , naming one’s estate as a designated beneficiary.
create a family trust
Technically, a life insurance policy is the property of the policyowner and upon his or her death, ownership of the policy (property) is transferred to the ______.
policy’s beneficiary
Viewed as property, life insurance creates an immediate estate (an established fund for the insured’s beneficiary). Even if the insured ______, the policy will pay the beneficiary the policy’s full death benefit.
prematurely dies after just one premium installment
Also viewed as property, life insurance creates ______ through which the policy’s cash value can be withdrawn as a loan from the policy or the policy’s cash value can be used as collateral to secure a loan outside of the policy.
an emergency fund
For estate conservation, income is derived only from ______. Income is indefinite and creates a legacy for next of kin or for charity.
interest gained on the principal
With capital liquidation or utilization, income is derived by ______. Funds eventually disappear and could be of concern if the surviving spouse outlives the policy’s death benefit if no additional income is derived.
both interest and principal
______ insurance policies generate a ‘cash value,’ which is a portion of the premium payment that accumulates over the life of the policy, and can be borrowed or used as collateral by the policyowner during his or her lifetime. Though a policy’s cash value can be borrowed against or used as collateral, the policyowner is responsible for paying back the loan with interest. If the policyowner dies during the loan, the policy’s death benefit would reflect any borrowed cash value and accumulated interest, and subtract it from the proceeds paid out to the policy’s beneficiary.
Whole life
Unlike a whole life policy’s living benefits that are considered to be a loan against the policy, most life insurance policies include a standard provision that allows an insured individual who becomes terminally ill or injured to receive a percentage of the policy’s face amount payable as single lump sum amount or in monthly installments. Referred to as ______, this early payment to the terminally ill or injured insured reduces the policy’s death benefit and is usually only payable for a period of one year.
Accelerated Benefits
If a policyowner is considered terminally ill, an option exists to sell the insurance policy after its contestability period has ended to a ______ who, in return, will pay anywhere from 60% to 80% of the face amount based on NAIC’s Viatical Settlement Model Regulation, though state laws and insurer policies may differ.
viatical settlement company
Regarding the Viatical Settlement, once the policy is sold, premiums are paid to the insurer by the viatical settlement company, and upon the death of the insured, the death benefit is paid to the viatical company. Essentially, it allows a ______ to relinquish a life policy in exchange for living benefits to fulfill some final comforts and expenses before death.
terminally ill policyowner
A ______ is an individual, company or legal entity that purchases ownership of a life insurance contract from a policyowner who in return receives compensation less than the policy’s death benefit, usually 60% to 80% of the policy’s proceeds. Policyowners who enter into these agreements are often terminally ill and have less than a few years to live.
viatical settlement provider
