Ch. 4

Question 1

Class Designation

Answer 1

A class designation is a beneficiary group designation (for example, all of my children), opposed to specifying one or more beneficiaries by name

Question 2

Common Disaster Provision

Answer 2

ensures a policy owner if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary. It also states that the primary beneficiary must outlive the insured by a specified period of time in order to receive the proceeds

Question 3

Contingent (secondary) beneficiary

Answer 3

The contingent beneficiary is the beneficiary second in line to receive death benefit proceeds if the primary beneficiary dies before the insured

Question 4

Earned Premium

Answer 4

the amount of premium paid by the policyowner for policy coverage or insurance protection received up to this point

Question 5

Expense Factor

Answer 5

a measure of what it costs an insurance company to operate, AKA loading charge

Question 6

Excess Intrest

Answer 6

Whole Life Insurance: This type of policy often guarantees a minimum interest rate on the cash value. Any additional interest earned beyond this guaranteed rate is considered excess interest

Question 7

Fixed amount installment option

Answer 7

pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted

Question 8

Fixed/Level premium

Answer 8

premium amount that remains constant throughout the life of the policy. More periodic payments = higher total premium

Question 9

Fixed period or period certain settlement option

Answer 9

A fixed period or period in which a certain settlement option pays the death benefit proceeds in equal installments over a set period of years

Question 10

Graded Premium

Answer 10

A graded premium in life insurance is a payment structure where the premiums start out lower in the initial years of the policy and gradually increase over time

Question 11

Gross (annual) Premium

Answer 11

the total amount a policyholder pays for their life insurance policy

Question 12

Interest factor

Answer 12

The interest factor is the calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums

Question 13

Interest only option

Answer 13

settlement option where the death benefit is not paid out immediately as a lump sum. Instead, the insurance company holds the death benefit and pays the beneficiary regular interest payments on that amount. The beneficiary can choose to receive these interest payments for a specified period or until they decide to withdraw the principal. Eventually, the principal amount will be paid out, either in a lump sum or according to another payment option selected by the beneficiary

Question 14

Joint and survivor option

Answer 14

payout option designed for two beneficiaries, often spouses. Under this option, the insurance policy pays benefits to the surviving beneficiary after the first person passes away. Once the first beneficiary dies, the survivor continues to receive income from the policy, typically at a reduced rate compared to the original payment

Question 15

Life income option

Answer 15

The life income option is a death benefit settlement option which provides the beneficiary with an income that they cannot outlive. Installment payments are guaranteed for as long as the recipient lives. The amount of each installment is based on the recipient’s life expectancy and the amount of principal

Question 16

Life Settlement

Answer 16

A life settlement is an agreement in which a policyholder sells or transfers ownership in all or part of a life insurance policy to a third party for compensation that is less than the expected death benefit of the policy

Question 17

Modified Premium

Answer 17

Modified premium is a premium funding option characterized by an initial premium that is lower than it should be during an introductory period of time (usually the first three to five years). After this time, the premium will increase to an amount greater than what the initial level premium would have been and then remains level or constant for the life of the policy

Question 18

Morbidity Rate

Answer 18

The morbidity rate demonstrates the incidence and extent of disability that may be expected from a given group of people

Question 19

Mortality Rate

Answer 19

A mortality rate is the measure of the number of deaths (in general, or due to a specific cause) in some population, scaled to the size of that population, per unit time

Question 20

Net payment cost index

Answer 20

formula used to determine the actual cost of a policy for a policyowner

Question 21

Net (single) premium

Answer 21

calculation used to calculate an insurer’s policy reserves

Question 22

PER CAPITA (By the head)

Answer 22

Per capita evenly distributes benefits among all named living beneficiaries (i.e., all living children)

Question 23

PER STRIPES (By the bloodline)

Answer 23

Per stirpes evenly distributes benefits amongst an insured’s according to the family line, branch, or root (i.e., children and grandchildren)

Question 24

Premium mode

Answer 24

The premium mode is the frequency in which a policyowner elects to pay premiums

Question 25

Primary Beneficiary

Answer 25

The primary beneficiary is the first beneficiary in line to receive benefit proceeds upon the death of an insured

Question 26

Policy Proceeds

Answer 26

Policy proceeds is the amount actually paid as a death, surrender, or maturity benefit

Question 27

Death Benefit (policy proceeds)

Answer 27

includes the face value plus any earned dividends less any outstanding loans and interest

Question 28

Surrender Benefit (policy proceeds)

Answer 28

the amount includes any cash value, minus surrender charges, and outstanding loans and interest

Question 29

Maturity (policy proceeds)

Answer 29

the benefit amount includes the cash value less any outstanding loans and interest

Question 30

Reserves

Answer 30

An insurer’s reserve is the money set aside (required by the state’s insurance laws) to pay future claims

Question 31

Revocable Beneficiary

Answer 31

A revocable beneficiary is a beneficiary that the policy owner may change at any time without notifying or getting permission from the beneficiary

Question 32

Settlement options (5)

Answer 32

Settlement options are optional modes of settlement provided by most life insurance policies. Options include lump-sum cash, interest only, fixed-period, fixed-amount, and life income

Question 33

Single premium funding

Answer 33

Single premium funding in life insurance refers to a payment method where the policyholder pays a large, one-time lump sum to fully fund the policy upfront, rather than making ongoing premium payments over time

Question 34

Surrender cost index

Answer 34

financial metric used in life insurance to help policyholders compare the long-term costs of surrendering different life insurance policies. It calculates the cost of a policy assuming it is surrendered (canceled) at a specific point in the future, typically after 10 or 20 years. The index expresses the cost in terms of an average annual cost per $1,000 of the policy’s face amount

Question 35

Tertiary beneficiary

Answer 35

the third beneficiary in line to receive death benefit proceeds

Question 36

Underwriting Department

Answer 36

responsible for reviewing applications, approving or declining applications, and assigning risk classifications

Question 37

Spendthrift clause

Answer 37

prevents creditors from obtaining any portion of policy proceeds upon an insured’s death. Additionally, the clause can be selected by the policyowner to prevent a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time

Question 38

Unearned premium

Answer 38

Unearned premium includes the premium that has been paid by a policyowner for insurance coverage that has not yet been provided

Question 39

Viatical settlement

Answer 39

involves someone with a terminal illness selling their existing life insurance policy to a third party for a percentage of the death benefit

Question 39

Uniform Simultaneous act

Answer 39

if the insured and the primary beneficiary die at approximately the same time, in a common accident, with no clear evidence as to who died first, the law will assume that the primary died first. Therefore, the death benefit proceeds are paid to the contingent beneficiaries

Question 40

Viatical (viatee)

Answer 40

is the new third-party owner in a viatical settlement

Question 41

Viator

Answer 41

the original policyowner in a viatical settlement

Question 42

Irrevocable beneficiary

Answer 42

cannot easily be changed or removed unless they consent

Question 43

3 main factors in premium calculations

Answer 43

Mortality rate or mortality factor, Intrest factor, expense factor

Question 44

Cost basis

Answer 44

Premiums paid into the policy minus dividends

Question 45

Section 1035 exchange

Answer 45

allows for the tax-free transfer of funds from one life insurance policy or annuity to another, under certain conditions

Question 45

Refund life income option

Answer 45

guarantees that the total amount paid into it (the principal) will be returned to the beneficiary if the insured or annuitant dies before receiving payments equal to that amount