Basics of Life Insurance

Question 1

Third party ownership

Answer 1

A situation where the owner of a life insurance policy is someone other than the insured

Question 2

To have a policy issued on someone else’s life, the applicant must have an _________ _________ in that person

Answer 2

Insurable interest

Question 3

In the personal insurance market, insurable interest exists between:

Answer 3

-Spouses or domestic partners
-parents and children
-close family members

Question 4

In the business insurance market, insurable interest exists between:

Answer 4

-business partners
-corporations and their officers and directors
-any type of business and its key employees

Question 5

With life insurance, insurable interest is only required at the time of

Answer 5

Application

Question 6

Permanent life insurance policies have a ____ _____ component that grows over time

Answer 6

Cash value

Question 7

The life insurance cash value is called the policies ______ ______

Answer 7

Living benefits

Question 8

Principle that states that the purpose of life insurance is to replace an individual’s economic value

Answer 8

Human life value

Question 9

Human life value calculation

Answer 9

The amount of the individual’s annual income x the number of years until retirement

Question 10

Used to find the amount of insurance coverage an individual should by based on the financial situation survivors will face if the individual dies

Answer 10

Needs approach

Question 11

Survivors financial needs fall into 2 categories

Answer 11

-cash needs
-income needs

Question 12

Cash needs

Answer 12

-final expenses
-debt payoff
-children’s education
-emergency fund

Question 13

Income needs

Answer 13

Created by ongoing living expenses such as food, clothing, utilities and a mortgage

Question 14

3 income need periods

Answer 14

-Family dependency
-Preretirement
-Retirement

Question 15

Family dependency income need period

Answer 15

The surviving children are too young to support themselves and depend on the surviving parent for their needs

Question 16

Preretirement income need period

Answer 16

Children have grown up and become self-supporting, but the surviving spouse has not yet reached retirement age

Question 17

Retirement income need period

Answer 17

Now the surviving spouse is no longer earning an income

Question 18

Blackout period

Answer 18

The social security administration provides benefits for surviving spouses with children under 16. When youngest child turns 16, benefits stop and do not resume until spouse turns 60

Question 19

Social security pays survivor benefits during what two income need periods

Answer 19

Family dependency and retirement

Question 20

Buy-sell agreement

Answer 20

Provide for the sale of a business interest at death or disability of an owner. Can be funded with Life Insurance. Buyer of the business is the beneficiary

Question 21

Entity buy-sell agreement

Answer 21

The purchaser of a deceased owner’s business interest is the business entity itself. The business owns a policy on the life of each business owner

Question 22

Cross-purchase buy-sell agreement

Answer 22

The surviving owner(s) purchase the deceased owner’s interest in the business. Each partner owns a policy on the lives of each of the other partners.

Question 23

Key person coverage

Answer 23

Business owns, pays for, and is the beneficiary of the policy on the key person’s life

Question 24

Executive bonus plan

Answer 24

A business pays the premiums on a life insurance policy for which the employee owns
-nonqualified employee benefit arrangement

Question 25

Deferred compensation plan

Answer 25

-nonqualified
-employer agrees to pay an employee a stated amount of income beginning at retirement rather than paying money now
-money is not taxable until employee receives it

Question 26

Under the life insurance policy that funds a deferred compensation plan:

Answer 26

-the company is the owner, premium payer, and beneficiary

Question 27

Industrial life insurance

Answer 27

-a way for people of limited means to obtain the benefits of life insurance
-small face amounts to help pay burial expenses
-premiums due weekly and are collected in person from door to door producers

Question 28

Home service life insurance

Answer 28

-sold by industrial or home service producers in the neighborhood where they collect premiums
-Usually $10-25,000 in face value
-encouraged to pay premiums through automatic bank draft

Question 29

Three elements go into the calculation of life insurance premiums

Answer 29

1. Mortality
2. Interest
3. Expenses

Question 30

Net premium

Answer 30

The premium before loading or the mortality element minus the interest element. The net single premium will fund a policy’s benefit with one premium payment.

Net premium Mortality- interest

Question 31

Net premium=

Answer 31

Mortality - Interest

Question 32

Gross premium

Answer 32

The net premium plus the expense element, referred to as the loaded premium. The gross annual premium is the amount a policy owner pays for a policy

Question 33

Gross premium=

Answer 33

Mortality - Interest + expenses

Question 34

The premium payment mode reflects

Answer 34

How frequently premiums come due

Question 35

Premium modes

Answer 35

Annually, semi-annually, quarterly, or month. Annual is the lowest