Basics of life Insurance

Question 1

Third party ownership

Answer 1

The owner of a life insurance policy is someone other than the insured

Question 2

Insurable interest

Answer 2

The person applying for the policy must be at risk of suffering a significant loss if the insured dies

Could be emotional or economic

Only needed at time of application for life insurance

Question 3

Purpose of life insurance

Answer 3

Help relieve financial strain that a person’s death may cause for surviving family members

Question 4

Survivors

Answer 4

Can be spouse and children or other loved ones that depend on the financial support of the income earner

Question 5

Mortgage payoff

Answer 5

Mortgage life insurance policy will pay off mortgage if the insured dies and assure that their surviving family will be able to stay in their home

Question 6

Estate

Answer 6

The assets someone leaves behind after death

If a person dies in working years insurance can create an estate if they were unable to do so

Question 7

Liquidity

Answer 7

Refers to how easily an asset can be turned into cash without loss of value

Question 8

Personal uses of life insurance

Answer 8

Survivor protection
Mortgage payoff
Estate creation (if premature death)
Estate conservation 
Liquidity
Cash accumulation

Question 9

Human Life Value

Answer 9

The purpose of life insurance is to replace an individual’s economic value. This begins with a straightforward calculation.

Individuals annual income + #of years until retirement

Question 10

Needs approach

Answer 10

Used to find the amount of insurance coverage am individual should buy, but instead of looking at income it looks at the financial situation after death

Falls into 2 catagories
Cash and income needs

Question 11

Cash needs

Answer 11

Those that can be met with a lump of money

Final expenses, debt payoff, child education etc.

Question 12

Income needs

Answer 12

Created by ongoing living expenses like food clothing utilities etc.

3 distinct periods
Family dependency (children are not of working age)
Preretirement (children are working spouse hasn’t retired)
Retirement (spouse is no longer earning income)

Question 13

Blackout period

Answer 13

Social security benefits provide for surviving spouses with children under 16. And resume once spouse turn 60.

Question 14

Two types of buy sell agreements

Answer 14

Entity (purchased of deceased owner’s business interest is the business entity itself)

Cross purchase plan (surviving owner(s) purchase deceased owners interest in business)

Question 15

Key person coverage

Answer 15

Businesses can protect themselves from the death of a very important or key employee

Question 16

Executive bonus plan

Answer 16

Business pays the premium of a life insurance policy which employee owns. Employee and his named beneficiaries.

Can be used rather than a cash yearly bonus

Question 17

Deferred compensation plan

Answer 17

Employer agrees to pay employee a stated amount of income beginning at retirement rather than paying the money now. If employee dies the deferred money becomes available immediately to the employees spouse or beneficiary

Question 18

Business uses of life insurance

Answer 18

Buy sell funding 
-Cross and Entity purchase
Key Person
Executive bonus 
Deferred compensation

Question 19

Buy sell agreement, the life insurance policy is written on the

Answer 19

Business owners life

Question 20

Group life insurance

Answer 20

Single contract that covers an entire group of people

Question 21

Industrial life insurance

Answer 21

Small amounts. Are collected in person by people going door to door

Question 22

Three elements that go into calculation of insurance premiums

Answer 22

Mortality (death rate in specific population)
Interest (earnings on premium dollars between the time they are collected and the time they’re paid)
Expenses (insurer operating costs)

Question 23

Net premium

Answer 23

Premium before loading or

Mortality - Interest = Net Premium

Question 24

Gross Premium

Answer 24

Net premium + expense or

Mortality - Interest + expenses

Question 25

Premium payment mode

Answer 25

Reflect how’s frequently premiums become due

Question 26

Life insurance premiums are the lowest under which premium payment mode?

Answer 26

Annual

Question 27

Living and death benefits, level premiums, and lifetime coverage are characteristics of which class of insurance?

Answer 27

Permanent life insurance