Chapter 2 Flashcards
Adverse selection
tendency of individuals with higher probability of loss to purchase insurance more often than those who present a lower risk
Death benefit
the amount paid upon the death of the insured in a life insurance policy
Cash value
equity amount accumulated in permanent life insurance
Estate
a person’s net worth
Illustrations
presentation or depiction of nonguaranteed elements of a life insurance policy
Life insurance
coverage on human lives
Liquidation
selling assets in order to raise capital
Lump-sum
payment of the entire benefit in one sum
Minor
a person under legal age
Solvency
ability to meet financial obligations (e.g., an insurance company maintains enough assets to pay claims)
insurable interest
policyowner must face the possibility of losing money or something of value in the event of loss
In life insurance, insurable interest must exist between the policyowner and the insured ______________; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists
at the time of application
A valid insurable interest may exist between the policyowner and the insured when the policy is insuring any of what?
- Policyowner’s own life;
2.The life of a family member (a spouse or a close blood relative); or
3.The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (for example, a debtor has a financial obligation to a creditor, so the creditor has a valid insurance interest in the life of the debtor).
survivor protection.
he death of a nonearning spouse who cares for minor children can also cause great financial hardship for the survivors. Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured’s death
The purchase of life insurance ______________.
creates an immediate estate
- Estate creation is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance policy, they will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost
some life insurance policies provide __________ to the policyowner
liquidity
- That means the policy’s cash values can be borrowed against at any time and used for immediate needs.
___________ is the use of life insurance to guard one’s wealth against creditor claims without engaging in practices that are ultimately illegal, such as concealment or fraudulent transfer.
Asset protection
Viatical settlements
allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed: before their death.
While viatical settlements are not policy options, they are____________ in which the insured sells the death benefit to a third party at a discounted rate
separate contracts
What are the important concepts you need to understand about viaticals?
- The insureds are referred to as viators;
- Viatical settlement provider means a person, other than a viator, that enters into a viatical settlement contract;
3.Viatical producers represent the providers; and
4.Viatical brokers represent the insureds.
Chronically ill
means a condition in which a person is unable to perform at least 2 activities of daily living or that requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.
Terminally ill
means a condition (illness or sickness) that can reasonably be expected to result in death within 24 months.
Viator
means the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract.
Viatical Settlement Broker
means a licensed person that, for a fee, negotiates viatical settlement contracts between the viator and viatical settlement providers. The viatical settlement broker represents the viator.
Viatical settlement provider
means a person (other than a viator) who enters into or effectuates a viatical settlement contract. This term does not include a bank, financing entity, or the issuer of a life insurance policy providing accelerated benefits.
Viatical Settlement Purchaser
means anyone who gives a sum of money as consideration for a life insurance policy or interest in the death benefits of a life insurance policy. It also means a person who owns, acquires, or is entitled to a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy which is or will be the subject of a viatical settlement contract.
Fraudulent viatical settlement act
means an act or omission committed knowingly or with intent to defraud for the purpose of depriving another of property or for monetary gain by a person
life settlement
refers to any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a third party for some form of compensation, usually cash.
viatical settlements
human life value approach (HLVA)
gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual’s life value by looking at the insured’s wages, inflation, the number of years until retirement, and the time value of money.
The needs approach is based on the predicted ___________ after the premature death of the insured.
needs of a family
Costs Associated with Death (postmortem)
taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance;
Debt Cancellation (as an alternative to Estate Liquidation)
paying off debts of the insured such as home mortgage, or auto loans. (Most lenders require a collateral assignment of life insurance as a condition for a loan.)
Emergency Reserve Funds
paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family members
Education Funds
paying for children’s education expenses so they can remain in school, or for a surviving spouse who may need additional education or training in order to re-enter the job market;
Retirement Fund
as a source of retirement income
Bequests
leaving funds to the insured’s church, school, or a charity.
key person insurance
Key person insurance may be issued as term or permanent life, with whole life and universal life policies being used most often.
A ________ agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.
buy-sell
What are the several types of buy-sell agreements?
- Cross Purchase
- Entity Purchase
- Stock Purchase
- Stock Redemption
Cross Purchase
used in partnerships when each partner buys a policy on the other
Entity Purchase
used when the partnership buys the policies on the partners
Stock Purchase
used by privately owned corporations when each stockholder buys a policy on each of the others
Stock Redemption
used when the corporation buys one policy on each shareholder
Partnership AB has two partners, Partner A and Partner B. The value of the business is $1,000,000. The partners each have an equal interest ($500,000 each). Partner A buys a life policy on Partner B for $500,000, and Partner B buys a life policy on Partner A for $500,000. If Partner A dies, Partner B gets 100% ownership of the business and A’s heirs receive $500,000. This example is what?
cross-purchase buy-sell agreement
Executive bonus
is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee.
Regarding the length of coverage, all life insurance policies fall into what 2 categories?
- Term
- Permanent Protection
Term
life insurance is temporary life insurance provided for a specific period of time. It is also known as pure life insurance
Permanent
life insurance is a general term used to refer to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid.
A ____________(mutual) life insurance policy refers to any policy that distributes its dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance
participating
A _____________ policy does not pay dividends to the policyowners.
nonparticipating
_______ life insurance or annuities are contracts that offer guaranteed minimum or fixed benefits that are stated in the contract.
Fixed
_________ life insurance or annuities are contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. Variable annuities keep pace with inflation, and are determined by the value of securities backing it.
Variable
_________ life insurance is written on a single life. The rate and coverage are based upon the underwriting of that individual.
Individual
________ life insurance is written as a master policy covering the lives of more than one individual covered under the single policy.
Group
The process of issuing a life insurance policy begins with _____________
solicitation
_____________ of insurance means an attempt to persuade a person to buy an insurance policy, and it can be done orally or in writing.
Solicitation
_____________ must be accurate and not misrepresent the facts. Advertising rules apply to any insurance advertisement intended for presentation, distribution, dissemination or other advertising use when used or made either directly or indirectly by or on behalf of the insurance company.
advertising
The ________ whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them.
insurer
What are the rules that apply to insurance advertising in PA?
- Insurers must submit three copies of all advertisement to the department of insurance for approval
- Once a mail-order solicitation has been filed, it may be used for 2 years without additional filing
- Advertising material will remain filed for 4 years, or until the next regular examination of the company, whichever is longer
- If a testimonial refers to benefits received under a contract, the specific claim data should be retained by the insurer for 4 years or until the filing of the next regular examination of that insurer, whichever is longer.
__________ means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.
illustration
A life insurance illustration must do what?
1.Distinguish between guaranteed and projected amounts;
2.Clearly state that an illustration is not a part of the contract; and
3. Identify those values that are not guaranteed as such
In Pennsylvania, certification of the aforementioned notification must be provided, __________, within 30 days of the anniversary of the original certification.
annually
The insurer must maintain the agent’s certification that a disclosure statement was delivered for either_________, or until the next regular examination, whichever is later.
3 years
A ________ provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance.
buyer’s guide
A __________ is a written statement describing the features and elements of the policy being issued. It must include the name and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider
policy summary
The _________ compares the cash values available to buyers if they surrender the policy in 10 or 20 years.
Traditional Net Cost method
____________ method considers the time value of money (or investment return on the insurance premium had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends
Interest-Adjusted Net Cost
Two versions of the interest-adjusted method are the surrender __________ and the net payment cost index
cost index
