Ch 2 Flashcards
What is the needs approach to life insurance?
Says the amount of life insurance needed as the survivors’ future needs minus the family’s current resources.
What are some needs that are taken into consideration with the needs approach to life insurance?
Final expense Debt elimination Special needs (gifts, charitable donations, trust funding, emergency funds) Family living expenses Retirement income needs
What is the human life value approach to determining life insurance?
Calculates the economic value of a person’s life based on that person’s earning capacity and others’ financial dependence on that earning capacity. (Present value of income over rest of working life less the cost of self-maintenance)
What are the parties to a life insurance contract?
Insurer
Owner (person transferring risk)
Beneficiary (NOT A PARTY TO THE CONTRACT, HOWEVER)
What are the five financial elements of life insurance?
Mortality rates
Interest
Expenses (business acquisition costs & administrative expenses)
Cash value
Net amount at risk (death benefit - cash value)
What are the 5 settlement options for life insurance?
Lump-sum
Interest only
Fixed-amount
Fixed-period
Life income
This life insurance settlement option uses the death proceeds to buy a single premium annuity that makes periodic payments to the beneficiary for his lifetime.
Life income option.
What are the costs associated with premature death?
- Lost income
- Final costs
- Outstanding debts
- Unpaid long-term obligations
- Estate planning costs
- Other types of loss (reduction in standard of living, grief)
Type of life insurance that lets the policyholder allocate premiums to an insurer’s separate account which is not subject to claims of the insurer’s creditors and is created solely to let the policyholders participate directly in the account’s investment performance.
Variable life insurance.
Term insurance with a one-year period which doesn’t require proof of insurability for successive one-year renewals. Premiums increase every renewal and there is usually a limit to the number of renewals.
Yearly renewable term
Term insurance with periods of 5, 10, 15, 20 years. Premiums increase if the policy is renewed.
Level term
Term insurance with decreasing benefits, but level premiums.
Decreasing term
What are the two types of decreasing term life insurance?
straight line and mortgage protection
How does straight line decreasing term insurance work?
Death benefit declines evenly over the term of the policy and is zero at the end.
A provision which allows an insured to submit evidence of insurability at the time of renewal to get a lower premium and in increased renewal rate guarantee period.
re-entry provision
These provisions let the insured, at an extra cost and within specified time frames, convert term to permanent insurance, usually without providing evidence of insurability.
conversion provisions
What are the two ages that can be used when someone converts term to permanent?
attained age (at time of conversion) or original date age (age when term policy first written.
Life insurance offering permanent protection.
Whole life
Are whole life premiums higher or lower on the earlier years?
Higher so a reserve can be built to pay the death benefit.
What is participating life insurance?
It pays dividends if declared by a company.
When are life insurance dividends taxable?
If they exceed total premiums paid.
This type of life insurance assumes payments will be made for the insured’s whole life. This is the cheapest policy.
Whole life
This type of life instance has a shorter duration of premiums. Types include: single premium policy; 10-pay; to age 65.
Limited pay
Whole life bundled with long-term care. These are often single premium. The cash value or accelerated death benefit can be used to pay for LTC.
Combination policy
Permanent life insurance which offers FLEXIBLE premiums and death benefits that can be increased or decreased based on insurability.
Mortality, expense, and interest charges are unbundled.
These have expense charges to maintain and administer policy. This helps the insurer recover premium taxes and business acquisition costs.
Universal life.
What happened if universal life is underfunded in (ONLY) the first year?
The owner can increase premium or decrease death benefit.
Can an owner withdraw from the cash value of a universal life policy?
Yes:; considered partial surrender.
What are the three death benefit options of universal life?
Level death benefit (option A - or 1)
Increasing death benefit based on increase in cash value. (Option B/2)
Increasing death benefit based on premiums paid. (Option C/2)
This type of life insurance has sub-accounts that contain a portfolio of securities
VUL
How are VUL policies regulated?
Subject to SEC regulation; agents need Series 6 or Series 7 and a license.
Who bears risk when insured allocates investments to separate VUL account?
Insured
Who bears risk when insured allocates investments to the fixed VUL account?
The insurer
Is there a penalty or fee to transfer money around with a VUL?
No
Life insurance designed to compensate for the loss of a key person?
Key person life.
A contact in which the estate of a deceased business owner agree to sell their share of the business.
Buy-sell agreement.
Type of buy-sell agreement where surviving business owners agree to purchase the deceased’ business interest. Each owner buys insurance on lives of other owners. Premiums not deductible.
Cross purchase.
What are the three non-forfeiture options?
Cash surrender, reduced paid-up insurance, extended term insurance (buying paid-up term insurance with same benefit)
Formula for cross purchase agreement
N x (n-1)
Buy-sell agreement where the business entity agrees to buy the business interest of a deceased, disabled, retired owner.
Entity plan agreement
Steps to selecting appropriate life insurance plan
1) determine cash needs, survivor income needs, and spouse’s retirement income needs.
2) calculate total cash needs
3) determine assets available
4) calculate total life insurance needs
5) select an appropriate life insurance plan
Does a renewability feature require evidence of insurability to renew?
No
The bulk of a life insurers’ assets are invested in?
Investment-grade bonds and mortgages
How does the benefit of mortgage protection term life differ from decreasing term life?
Mortgage protection does not decrease on a straight line so it will provide more protection.
What is interest credited on a universal life policy determined by?
The return the insurer is experiencing on the investments of its general account assets.
