Chapter 2-Term Life Ins

Question 1

Term life insurance

Answer 1

Contract specifying that insurance company will pay death benefit if life insured dies within term

no term insurance issued past 65/70 yrs old

Question 2

Policy holder

Answer 2

Purchased the insurance + makes all decisions

- also referred to as “the insured”

Question 3

Life insured

Answer 3

Person on whose life the insurance is on

- also called annuitant

Question 4

Single life policy

Answer 4

• Only 1 person insured

- death benefit only paid if THAT person dies

Question 5

Joint 1st to die

Answer 5

Single amount of coverage for 2 or more lives.

• death benefit paid when 1st person dies , only 1 death benefit
• when 2 or more ppl share same debt obligation
• often used to fund buy/sell agreements
• terminates after 1st person dies

Question 6

Joint last to die

Answer 6

• single coverage on 2 or more lives
• death benefit paid after last person dies
• good when risk doesn’t arise till death of last person (I.e tax liability, etc)
• on death- deemed disposed of capital property @FMV unless property goes to spouse.

Question 7

Death benefit

Answer 7

Amount insurance company pays if life insured dies during term

Question 8

Level term

Answer 8

Death benefit = face amount

- good when insurance needs NOT expected to change

Question 9

Decreasing term

Answer 9

Death benefit decreases over term, premiums stay the same

• less than level term
• good when risk decreases over time (I.e mortgage)

Question 10

Increasing term

Answer 10

Death benefit increases over term

• premiums also increase
• increase in death benefit usually applied at predetermined times (I.e every year ) –or fixed %– or ties to inflation
• increases are restricted w/ cap or # of increases)
• used when risk expected to increase over time

Question 11

Premium

Answer 11

Amount policyholder pays for insurance

• premiums typically level over term
• premium tax 2-4%

Question 12

How premiums Set

Answer 12

Term insurance is pure insurance - value relates to death benefit.
- premiums a combo of mortality costs + expenses

Question 13

Mortality costs :

Answer 13

Approximates insurance company cost of paying death benefit

=Face amt X insured prob. Of death in year.

Question 14

Expenses

Answer 14

Cost of selling policy,
underwriting,
investigating claims ,
paying death benefits

Question 15

Renewable term insurance

Answer 15

Guaranteed right to renew policy at end for another term without proof of insurance
- limited to specific age

Question 16

Non renewable term insurance

Answer 16

Expires at end of term, have to apply for new insurance , have to prove insurability

Question 17

Renewal provisions: Renewable with guaranteed rates

Answer 17

New premiums reflect age of life insured at renewal

Question 18

Renewal provision:

Re-entry term with adjustable rates

Answer 18

Subject to different renewal rate schedules

• guaranteed renewal rate
• lower rate adj. for good health
• initial premiums lower

Question 19

Convertible term insurance

Answer 19

option to convert term policy to permanent insurance

• no proof of insurability
• more expensive
• new policy is extension of old one- NOT reset

Question 20

Incontestability limitation

Answer 20

Insurance company has 2 years after issuing policy to void policy if ERROR in material fact

Question 21

Suicide exclusion clause

Answer 21

Insurance company won’t pay death benefit if life insured commits suicide working 2 years of contract issued

Question 22

Attained age

Answer 22

Age on which life insurance premiums based.
- premiums after conversion can be:
~attained age conversion
~ original age conversion - have to pay insurance lump sum to catch up

Question 23

Advantages of term insurance

Answer 23

• Lower initial cost
• premiums guaranteed
• renewable/ convertible provisions extended
• can be customized

Question 24

Disadvantages of term insurance :

Answer 24

• premiums/ coverage not guaranteed after term
• premium increase with age
• not available past certain age
• worthless after term