Chapter 2: Types of Life Policies

Question 1

Chapter 2 Introduction: Type of Policies

Answer 1

This chapter teaches you about the major types of life insurance policies, their characteristics and functions, and who is best served by each type. This chapter also includes a discussion about annuities. It teaches you about the parties to the annuity, and annuity periods, and how to recognize different classifications of annuities.

There are any types of life insurance products available for consumers. Although all life insurance products offer death protection, each type also includes its own unique features and benefits and is designed to serve different insureds’ needs.

Regarding the length of coverage, all life insurance policies fall into 2 categories: temporary and permanent protection.

Question 2

What is attained age?

Answer 2

the insured’s age at the time the policy is issued or renewed

Question 3

What is cash value?

Answer 3

a policy’s savings element or living benefit

Question 4

What is face amount?

Answer 4

• the amount of benefit stated in the life insurance policy

Question 5

What is fixed life insurance?

Answer 5

contracts that offer guaranteed minimum or fixed benefits

Question 6

What is deferred?

Answer 6

·withheld or postponed until a specified time or event in the future

Question 7

What is endow?

Answer 7

the cash value of a whole life policy has reached the contractual face amount

Question 8

What is level premium?

Answer 8

the premium that does not change throughout the life of a policy

Question 9

What is liquidation of an estate?

Answer 9

converting a person’s net worth into a cash flow

Question 10

What is Nonforfeiture values?

Answer 10

benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses

Question 11

What is policy maturity?

Answer 11

in life policies, the time when the face value is paid out

Question 12

What is Qualified plan?

Answer 12

a retirement plan that meets IRS guidelines for receiving favorable tax treatment

Question 13

What is Securities?

Answer 13

financial instruments that may trade for value (for example, stocks, bonds, options)

Question 14

What is Suitability?

Answer 14

a requirement to determine if an insurance product is appropriate for a customer

Question 15

What is variable life insurance?

Answer 15

contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance

Question 16

What is term insurance?

Answer 16

Term insurance is temporary protection because it only provides coverage for a specific period of time. It is also known as pure life insurance. Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection. There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed.

Question 17

What is pure death protection?

Answer 17

Term insurance provides what is known as pure death protection:

• If the insured dies during this term, the policy pays the death benefit to the beneficiary;
• If the policy is canceled or expires prior to the insured’s death, nothing is payable at the end of the term; and
• There is no cash value or other living benefits

Question 18

What are the three basic types of term insurance coverage available?

Answer 18

There are three basic types of term coverage available, based on how the face amount (death benefit) changes during the policy term:

• Level,
• Increasing, and
• Decreasing.

Regardless of the type of term insurance purchased, the premium is level throughout the term of the policy; only the amount of the death benefit may fluctuate, depending on the type of term insurance. Upon selling, renewing, or converting the term policy, the premium is figured at attained age (the insured’s age at the time of transaction).

Note that the topic of Increasing Term insurance will not be covered further in this cour1e material as it is not required on the state exam outline.

Question 19

What is Level Term Insurance?

Answer 19

Level term insurance is the most common type of temporary protection purchased. The word level refers to the death benefit that does not change throughout the life of the policy.

Question 20

What is level premium?

Answer 20

Level premium term, as the name implies, provides a level death benefit and a level premium during the policy term. For example, a $100,000 10-year level term policy will provide a $100,000 death benefit if the insured dies any time during the 10-year period. The premium will remain level during the entire 10-year period. If the policy renews at the end of the 10-year period, the premium will be based on the insured’s attained age at the time of renewal.

Question 21

What is Annually Renewable Term?

Answer 21

Annually renewable term (ART) is the purest form of term insurance. The death benefit remains level (in that sense, it’s a level term policy), and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as the probability of death increases.

Question 22

What is Decreasing Term policies?

Answer 22

Decreasing term policies feature a level premium and a death benefit that decreases each year over the duration of the policy term. Decreasing term is primarily used when the amount of needed protection is time sensitive, or decreases over time.

Question 23

What is mortgage or other debts and what happens to the coverage each year?

Answer 23

Decreasing term coverage is commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. The amount of coverage there by decreases as the outstanding loan balance decreases each year. A decreasing term policy is usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term.

Question 24

What is Return of Premium (ROP) term life insurance?

Answer 24

Return of premium (ROP) life insurance is an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid. The return of premium is paid if the death occurs with in a specified period of time or if the insured outlives the policy term.

Question 25

How are Return of Premium (ROP) policies structured?

Answer 25

ROP policies are structured to consider the low risk factor of a term policy but at a significant increase in premium cost, sometimes as much as 25% to 50% more. Traditional term policies offer a low-cost, simple-death benefit for a specified term but have no investment component or cash value. When the term is over the policy expires and the insured is without coverage. An ROP policy offers the pure protection of a term policy, but if the insured remains healthy and is still alive once the term limit expires, the insurance company guarantees a return of premium. However, since the amount returned equals the amount paid in, the returned premiums are not taxable.

Question 26

What is an example of a returned premiums term policy?

Answer 26

Example:

A healthy, 30-year old male pays $380 annually for a $250,000, 30-year term policy. At the end of the 30 years, he has paid a total of $11,400 in premiums which will be returned to him if he is still alive. The insurance company has determined that $250 per year, or $7,500 over 30 years, will cover the actual cost of protection. The excess funds, which the insurer invests, provide the cash for the returned premiums.