Chapter 3 - Fundamentals of Life Insurance

Question 1

What are the 3 required contract elements?
(Life Insurance as a Contract)

Answer 1

Consideration, offer, and acceptance.

Question 2

With First Premium, ____ makes the offer, and the insurance company provides a ____, and then ____.

(Life Insurance as a Contract)

Answer 2

the applicant
Conditional receipt
issues the policy or declines.

Question 3

Without First Premium, the insurance company ____. The contract conditions are (4 things).
(Life Insurance as a Contract)

Answer 3

makes the offer upon policy approval

policy delivery, first premium payment, applicant’s good health, no medical treatment.

Question 4

What are 2 elements of the conditional receipt of a life insurance contract?
(Life Insurance as a Contract)

Answer 4

Contract effective from application date if applicant is insurable.
Insurer pays benefit if applicant dies during conditional receipt period, provided they were insurable.

Question 5

Final contract drafting must be approved by….
(General Provisions)

Answer 5

state Insurance Commissioner.

Question 6

Policy and attached application represent ____, and statements in the application are ____.
(General Provisions)

Answer 6

the entire contract
representations

Question 7

Policy may be owned by (3 possible parties).
(General Provisions)

Answer 7

the insured, beneficiary, or entity with insurable interest

Question 8

Owner of a life insurance policy can (3 things).
(General Provisions)

Answer 8

assign or transfer the policy, access cash value and dividends, and borrow against it.

Question 9

What are the 3 beneficiary designations?
(General Provisions)

Answer 9

Primary Beneficiary: First to receive proceeds, can have multiple individuals.
Contingent Beneficiary: Receives proceeds if primary predeceases insured.
Revocable vs. Irrevocable: Owner can change revocable beneficiary at any time, cannot change irrevocable without consent.

Clear identification of beneficiaries is crucial to avoid ambiguity.

Question 10

After being in force for a period (usually two years), a policy is…
(General Provisions)

Answer 10

incontestable

Question 11

Insurer adjusts death benefit to reflect… This is referred to as the…
(General Provisions)

Answer 11

what premiums would have bought at the correct age
Age Misstatement

Question 12

What is a grace period?
(General Provisions)

Answer 12

Typically 30-31 days to pay premium to avoid lapse; death during this period results in deduction of due premium from death benefit.

Question 13

Policy Reinstatement requirements include…
(General Provisions)

Answer 13

lapse period not exceeding three to five years, proof of insurability, and payment of all due premiums with interest.

Question 14

This clause refunds premiums if insured ____ within the first two years. It’s called the…
(General Provisions)

Answer 14

dies by suicide
Suicide clause

Question 15

What is the War clause?
(General Provisions)

Answer 15

Refunds premiums plus interest if insured dies as a result of war.

Question 16

What are the 5 settlement options upon the insured’s death)? (the last one has 4 subtypes)

Answer 16

Lump-Sum: Full death benefit paid to beneficiary.

Interest Only: Principal remains with insurer, interest paid to beneficiary (interest taxable).

Fixed-Period Installments: Proceeds paid over a specified period.

Fixed-Amount Installments: Set amount paid until principal and interest are exhausted.

Life Income: Benefits paid as an annuity:
* Single-Life Annuity: Payments cease at beneficiary’s death.
* Life Annuity with Period Certain: Payments continue to estate or contingent beneficiary if primary dies within period.
* Life Annuity with Refund: If total payments do not equal basis, remainder paid to contingent beneficiary.
* Joint and Survivor Annuity: Payments continue to second payee after first payee’s death.

Question 17

List and describe the 3 other common provisions in life insurance policies.

Answer 17

Loan Provision: Insured can borrow against policy’s cash value.

• Automatic premium loan (APL) charges premium against cash value if unpaid.
• Outstanding loans reduce death benefit.

Dividend Provision:

• Dividends paid on participating policies can be taken in cash, used to reduce premiums, accumulate interest, purchase additional insurance, or one-year term insurance.
• Dividends are not taxable until they exceed the policy’s cost basis.

Nonforfeiture Provision:

• Entitles policyowner to cash value if premium payments discontinue.
• Options include cash surrender value, reduced paid-up insurance, and paid-up term insurance.

Question 18

What are 6 Optional Riders and Clauses?

Answer 18

Disability Waiver of Premium Rider: Waives premiums if insured becomes totally and permanently disabled.

Accidental Death Benefit Rider: Pays additional amount if death occurs due to an accident.

• Must occur within 90 days of the accident.
• Excludes suicide, disease, and acts of war.

Guaranteed Insurability Rider: Allows purchase of additional insurance without evidence of insurability.

Cost-of-Living Rider: Provides additional insurance indexed to inflation.

Common Disaster Clause: Delays settlement for a specified period if insured and beneficiary die simultaneously.

Spendthrift Clause: Protects proceeds from beneficiary’s creditors and prevents alienation or assignment of proceeds.