Chapter 17-Policy Illustrations Flashcards
What is the impact of interest rates on policy illustrations?
- Higher interest rates create lower present values and higher future values
- Lower interest rates create higher present values and lower future values
What is the assumption for a policy illustration that does not include interest rate adjustments?
- The interest rate is 0
- The inflation rate is 0
What information is not shown on policy illustrations about cash values?
Method of access of available fund (loans, withdrawals, etc)
When is universal life income taxable?
When withdrawals exceed premiums paid
Who completes the life insurance Life Insurance Illustration Questionnaire (IQ)?
A member of the insurer’s home office staff to enable the Society member to better understand and explain to the client the policy illustration
(created by the Society of Financial Service Professionals)
What are some characteristics of the NAIC’s life insurance illustrations model regulation?
- sets standards for illustrations used in the sale of life insurance
- must include the name of the insurer and agent, the name, age, and sex of the insured, the insured’s underwriting class, the police name and death benefit, the dividend option selected, and any non guaranteed elements
- It prohibits using the term “vanish” or “vanishing premium”, representing the policy as something other than life insurance, and using an illustration that is not self supporting
- It requires the insurer to appoint an illustration actuary with credentials to certify compliance with regulations (the Insurance Commissioner must be notified if the insurer changes its illustration actuary and the reason why)
(UL policies are within the scope of the regulation and are subject to more disclosure requirements than other policies)
What factors does the net cost method take into account when comparing life policies?
- Premiums to be paid
- Dividends to received
- The cash value to be available
(the method does not account for the time value of money)
What are some characteristics of the NAIC’s interest adjusted indexes for comparing life policy costs?
-Created by the NAIC
-Compares two whole life policies
-Accounts for the time value of money
-Used to evaluate the cost of a life policy (payment cost index and/or surrender cost index)
-Mandates the use of a 5% interest rate factor (premiums and dividends)
-Add premiums paid (+interest) during the specified period, then subtract the surrender value at the end of that period and the dividends paid (+ interest) for that period. The result is the future net cost, then that is divided by the future value of an annuity due to determine the level annual cost/surrender cost index
(not appropriate for evaluating policy replacements)
What is involved in the cash accumulation method of comparing life policies?
- Buy term and invest the difference comparison approach
- Holding the death benefits of the policies being compared equal and constant
- The policy with the greater accumulation at the end of the comparison interval is the better contract
What are some characteristics of the equal outlay method of comparing life policies?
- The difference in the premiums for the contracts being compared is assumed to be deposited in a side fund
- Dividends from the higher premium policy are assumed to be used to buy paid up additions to the death benefit
- Results are highly sensitive to the interest rates used in the calculation
- The policy producing the larger death benefit is considered the preferable policy
What is the preferable policy when using the Belth yearly rate of return method for comparing life policies?
- The policy with the highest annual rate of return in the largest number of years in the comparison period
- The sum of the benefits each year is divided by the sum of the investments that year, then 1 is subtracted from the results to get the rate of return each year
- Yearly calculations are required
What are some characteristics of the IQ?
-Seeks non guaranteed elements of the illustration such as dividend, mortality charges, interest crediting rates, expenses, and persistency of the factors used
What are the additional requirements for universal policies?
- An annual report must be provided to the insured by the insurer specifying all debits and credits to the policy, beginning and ending cash values, surrender charges applicable, and outstanding policy loans
- Special notice is required if a premium payment is needed to keep the policy in force until the end of the next reporting period
What are some characteristics of the net cost method of life insurance?
- Unacceptable under state laws and regulations for making replacement evaluations
- Some states prohibit its use for any purpose
- Add premiums paid during the specified period, then subtract the surrender value at the end of that period and the dividends paid for that period (sometimes result in a negative cost to the insured)
- Does not account for the time value of money
What is the NAIC?
National Association of Insurance Commissioners
