chapter 2 Flashcards
describe the nature of term life insurance (renewable or not, benefit of term vs other policies) and why it is called pure death protection.
term / temporary insurance offers the greatest coverage for the lowest premium. it usually cannot be renewed after a maximum age.
its considered pure death protection because its straightforward – if you die AND still have active coverage, your face amt goes to beneficiary & there are no other benefits (cash value, etc)
for a term policy, discuss the :
protection length,
premium,
face amount,
cash value
protection length - as long as you purchase for
premium - level, figured at attained age (insured’s age at the time of transaction)
face amount - level, increasing, decreasing
cash value - n/a
describe annually renewable, return of premium (ROP), and decreasing term policies.
decreasing term policy has a level premium and face amt decreases each year over the course of the term.
ROP term policies are pure term policies, but they have an additional benefit. if the insured outlives the term limit, they get the premiums they paid back. if the insured dies, the beneficiary gets the premiums they paid on top of the death benefit. premiums are usually higher for this type of policy.
annually renewable term policies have a level premium, and gives the option to renew at the end of each year without proof of insurability. premium each year will go up since attained age increases.
for a whole life / permanent policy, discuss the :
protection length,
premium & how it is determined,
face amount,
cash value (how it is created),
living benefits
protection length - your whole life or until age 100
face amount - level
premium - level based on attained (issue) age, remains the same — the goal is to equal the face value by the time you’re 100 (the older you are, the higher your premium should be – if the face amt is 50k, subtract 100-YourAge then divide by 50k to get your premium)
cash value - created by accumulation of premium, scheduled to reach face amount/ endow at age 100. credited to the policy on a regular basis, and has a guaranteed interest rate
living benefits - policyowner can borrow against cash value while policy is in effect & can cash out when policy is surrendered
compare the differences between ordinary / straight life, limited payment, and single premium whole life policies - discuss relationship betweeen premium, cash value and face amount.
ordinary / straight — the typical description of a whole life policy. premium and face amount remains the same, and you accumulate cash value by paying premium based on attained age. lowest whole life premium
limited payment — premium gets paid up by a certain age (like 65). so rather than spreading out the cost until age 100, its spread out in a shorter span so the premiums are higher but you stop paying sooner
single premium - one lump sum payment
for adjustable life policies, describe :
- premiums
- face amount
- period of protection
- cash value
the protection length and type (term vs perm), the premium amount, face amount – all can be adjusted
the cash value only develops when the premiums paid are more than the cost of the policy
discuss :
- nickname for universal life
- universal life policies’ main unique feature
- the 2 premium types
- how withdrawal from cash value works
- two components are insurance component and cash account — what kind of insurance is the insurance component
and the death benefit options.
universal life = flexible premium adjustable life.
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premium can increase or decrease, or EVEN BE SKIPPED as long as the amount of cash value can cover that month’s premium cost
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The minimum premium is the amount needed to keep the policy in force for the current year. Paying the minimum premium will make the policy perform as an annually renewable term product.
The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.
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policyholders can do a partial withdrawal policy’s cash value w a fee & limit to how much and how often withdrawals can be made
death benefit will be reduced by the amount of partial surrender and interest on withdrawn cash will be taxed
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insurance component is always ART insurance
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death benefit options :
option a / level death benefit
option b / increasing death benefit
for a variable whole life and variable universal life policy, discuss :
who bears the risk in variable contracts and why there is risk,
protection length,
premium & how it is determined,
face amount,
cash value
POLICY OWNER BEARS RISK, investment assets held in a separate account
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variable whole life :
protection – whole up to 100
premium – level
death benefit — level
cash value – fluctuates with the performance of portfolio in which insurer invests the value (policyowner bears investment risk, assets are in a separate account)
variable universal is like universal (adjustable premium, not-guaranteed cash value, not-fixed death benefit), but the cash value fluctuates based on investment and policyowner decides where net premiums will be invested
describe the unique features of interest-sensitive / current assumption whole life and indexed life products.
insurer sets interest-sensitive premiums based on current assumptions about risk, interest and expense. cash value is credited w interest that matches money market
indexed life - cash value is based on index (S&P 500)
describe joint life and survivorship life products :
protection length,
premium determination,
death benefit
joint life :
protection - term or perm
premium - based on the average age between ages of the insureds
death benefit - paid out after first death only
survivorship life :
protection, premium is the same as joint life, but death benefit is paid after the last insured dies (usually to offset liability of estate tax)
what are annuities and what parties are involved in an annuity?
an accumulated fund that provides a stream of income for a specified period of time (or for life). often used to supplement retirement income or pay for college
owner — purchaser, has all of the rights until they die (then it is transferred to insurer).
annuitant — natural person receiving benefit, pay out period is based on their life expectancy.
beneficiary — person who receives annuity payments if annuitant dies during accumulation period
compare the accumulation period vs the annuitization period.
the accumulation period (pay-in) is period in which owner makes payments.
annuitization period (pay-out, liquidation) is the period of time where accumulated sum gets converted into income stream for annuitant
for annuities, describe the difference between funding methods (single or periodic) and when income payments begin (immediate or deferred).
funding — single (lump sum) or periodic (level or flexible payment amounts over time)
income payments begin — immediate (within one year of lump sum payment) or deferred (funded by single or periodic payments, begins after 1 year from purchase date)
for annuities, describe the difference between how premiums are invested (fixed or variable) and how proceeds are paid out (pure, refund, certain).
with fixed annuities :
level benefit payment amount (can suck for inflation);
insurance company bears risk because there is a guaranteed minimum interest rate to be credited to purchase payments
with variable annuities :
interest rate NOT guaranteed, income payment NOT guaranteed, life insurance PLUS securities, unvestments in separate account – more risky
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disposing of proceeds – PURE (paid for annuitant lifetime, then its over – highest monthly benefit); REFUND (principal is paid to annuitant, if annuitant dies beneficiary receives principal in lump sum or installments); CERTAIN (lifetime for annuitant, certain period for beneficiary)
