Chapter 3: Life Basics and Policies Flashcards
Three categories of “insurable interest”?
A person’s own life,
The lives of relatives or spouses, and
Business or financial relationships.
Only ________ ______ insurance policies build cash value.
Whole Life
A life insurance policy that builds cash value is said to have _____ ______
Living benefits
Immediate availability of funds is called ________
Liquidity
What three expenses are involved in maintaining an estate?
Estate and inheritance taxes
, Probate fees and
Estate administration.
When a terminally or chronically ill insured sells their life insurance policy to a third party in exchange for a large portion of the death benefit, this is called a ________ _________
Viatical Settlement
What is the name of the third party that purchases an insured’s life insurance policy? What is the insured now called?
Who now pays the premiums?
Viatical Settlement Provider
Viator
Viatical Settlement provider
What percentage of a death benefit will a viator receive?
50-80%
Who represents Viatical Settlement Providers? Who represents the Viators?
Viatical Producers
Viatical Brokers
TF: premiums paid toward life insurance taken out for charity are tax deductible
True
Two methods of determining the proper amount of life insurance?
Human Life value Approach
The Needs Approach
What do you call determining the amount of life insurance coverage needed based on the financial loss a family would experience if a wage earner died
Human Life Value Approach
The ______ ________ calculates the amount of money a family needs immediately upon the death of the insured to pay for their expenses and basic necessities. This may be more appropriate for families with ___________.
Needs Approach
Two Income Earners
Four pieces of info used to determine proper amount of life insurance
Expenses,
Maintenance income,
Debts/mortgages, and
Dependent children’s education.
Three income periods are called?
Dependency Period
Pre-Retirement Period
Retirement Period
What is the Family Dependency Period?
Children are dependent on parents for financial support
What is the Pre-retirement period? What is the Retirement Period?
Children aren’t dependent on parents for financial support
The surviving spouse no longer earns income (retirement benefits start)
What is the Social Security Blackout period?
The blackout period is the time during which a surviving spouse is ineligible to receive Social Security Survivors benefits. This period occurs once an unmarried child reaches the age of 16, and until the age of 18 or 19, if attending high school full time. Social Security benefits are paid to the child, not the widow.
At the earliest, the blackout period ends when the surviving spouse reaches the age of 60. Regardless of age, if a dependent child is disabled, the surviving spouse may be eligible to receive Social Security Survivors benefits.
Businesses are affected by the death of? 4
Owner
Partner
Shareholder
Officer or Key Employee
Three uses of life insurance as a business purpose?
Funding Tool
Business Interuption insurance
Employee benefit
What is Buy Sell Funding?
Buy-sell agreements are also known as business continuation agreements and are used to assure the ownership of the business is properly transferred upon the death or disability of an owner or partner.
What is key person insurance?
A business that buys life insurance on a key employee has purchased key person insurance.
All of the following are drawbacks of buying a viatical settlement, EXCEPT:
Select one:
a. Viatical settlement payouts may be subject to creditors claims if the insured has debt.
b. Viators may be unable to receive benefits through Medicaid or Supplemental Social Security Income.
c. The insured’s life insurance protection ends.
d. The portion of the death benefit the viator receives in a viatical settlement ranges from 50 to 80 percent of the death benefit.
C
In which of the following does an applicant for a life insurance policy not have an insurable interest?
Select one:
a. Himself
b. His cousin
c. His business partner
d. His sister
B
Viatical brokers represent _______; viatical producers represent _________.
Select one:
a. viators; viatical settlement providers
b. viatical settlement providers; viators
c. insurers; insureds
d. insureds; insurers
A
All of the following are true regarding the insurable interest creditors have in the lives of their debtors, EXCEPT:
Select one:
a. Creditors may take out life insurance on the lives of debtors.
b. Creditors may take out life insurance on the lives of debtors in an amount equal to the unpaid debt.
c. Creditors must have debtors, consent to take out life insurance policies on them.
d. The face amount of life insurance on debtors stays constant throughout the policy term.
D
A surviving spouse’s blackout period ends when she reaches the age of:
Select one:
a. 59 1/2
b. 60
c. 62
d. 65
60
Insurance agent David analyzed Carmen’s life insurance needs. He calculated the amount of coverage she will need based on the expenses and basic needs of her family in the event of her untimely death. These include the cost of funeral and burial, mortgage payments, education for the children, and income to support the family’s standard of living. Which of the following methods is David using?
Select one:
a. Needs approach
b. Human life value approach
c. Estate conservation approach
d. Lump-sum approach
A
Bob’s Motorcycle Company purchases a life insurance policy on Jacob, the nation’s leading sales representative. Jacob sells more motorcycles than all of the other sales representatives combined. Which of the following plans was purchased?
Select one:
a. Deferred compensation plan
b. Split-dollar plan
c. Executive bonus plan
d. Key person insurance
D
Insurance agent Maria is assisting Joshua with his life insurance needs. To determine the proper amount of life insurance for Joshua, Maria uses Joshua’s age, net annual salary, his expenses, the rate of depreciation, and the remaining number of working years before Joshua retires. What method did Maria use?
Select one:
a. Survivor method
b. Estate method
c. Human life value approach
d. Needs approach
C
Insurance agent Jessica evaluates Ben’s life insurance needs. In calculating the amount of life insurance needed, Jessica uses the cost for funeral and burial, mortgage payments, cost of education for Ben’s children, and the amount of income Ben’s dependents would need to maintain their standard of living. Which method did Jessica use?
Select one:
a. Survivor method
b. Estate method
c. Human life value approach
d. Needs approach
D
The Social Security blackout period begins when the youngest child reaches the age of:
Select one:
a. 16
b. 18
c. 19
d. 21
A
What is the term attributed to the third party that buys the death benefit from a life insurance policy?
Select one:
a. Beneficiary
b. Annuitant
c. Viatical settlement provider
d. Viator
C
TF: Members have the right to convert group life insurance to individual coverage upon leaving the group.
True
TF: To get group life insurance, all members of the group must be included and at the same rate
True
________ life insurance policies are whole life policies that are effective for the entire ife of the insured, or up to the age of 100
permament
_____ life insurance isn’t permanent; only effective for a temporary period of time
Term
Participating = Pay dividends to _______
Policyholders
Nonparticipating = Pay dividends to ____-
Shareholders (stock holders)
Fixed life insurance policies earn a _____ rate of interest, providing a _______ minimum of benefits
constant, guaranteed
Variable life insurance policies earn a ______ interest rate, and the cash value is ____ ______
fluctuating, not guaranteed
For variable life insurance policies, who chooses where to place the investments in the securities market?
The insured
TF: agents selling variable insurance policies must be registered with FINRA by holding a securities license
True
How long must insurance advertisements be kept for legal purposes?
2-5 years
5 rules to follow for insurance ads
Must be clear and not misleading
Insurer’s actual name must be on ad
Must state nature and intent of the ad
Cannot contain false statements
Testimonials must be real (must indicate if it is financial endorsement)
Who is responsible for examining records of insurance ads?
State Insurance Commissioner
Who is solely responsible for the content of insurance ads?
the insurer (not the agents)
What is the name of the safety net that exist to keep insurers from becoming insolvent?
State Life and Health Guaranty Associations (think of this like insurance FOR the insurers)
Who is exempt from state life and health guarantee associations?
Fraternal Benefit Societies and non-profit insurers
Limits for amounts paid out by state life and health guaranty associations?
200k death benefits
100k life insurance cash surrender
100k for health insurance benefits
TF: A Guaranty Association can’t be used to induce a sale of insurance or annuities.
True
TF: The policyowner must be provided with the policy summary at the time of policy delivery.
True
TF: Life insurance illustrations must differentiate between guaranteed amounts and nonguaranteed amounts.
True
TF: Illustrations are part of the insurance contract
false
Illustrations may NOT: 4 things
Be incomplete
Depict misleading nonguaranteed elements
Misrepresent the true nature of the policy
Use the term vanishing premium, implying that the policy is eventually paid up, unless such is the case
Two life insurance cost comparison methods
Comparative interest rate method
Interest adjusted net cost method
The _______-________ _____ ____ method uses the time value of money to compare policy costs
Interest adjusted net cost
The _____ _____ _____ ______ calculates an interest rate that must be earned in a side fund of a buy term and invest the difference in order for the value of the side fund to be equal to the surrender value of the policy that has the higher premium at a specific time.
Comparative Interest Rate method
Two versions of the Interest adjusted Net Cost Method?
Surrender cost index and
Net payment cost index.
The _______ ______ _____ measures the cost of an insurance policy by projecting the total amount of cash value in a policy (sum of dividends and cash accrued) and deducting the total cost of premiums after a certain number of years.
Surrender Cost Index
The _____ ______ ______ ______ excludes the cash value when predicting the average annual premium cost
Net Payment Cost Index
What three things will an insurer verify when receiving the death certificate for a claim?
That the policy was in force when the insured died,
Whether or not the suicide clause applies, and
That the proceeds are paid to the stated beneficiaries.
3 responsibilities of the producer when notified about a death claim?
Notifying the insurer of the death,
Completing any proof of death forms and having them signed by the appropriate parties – usually the legal representative or designated beneficiary, and
Submitting all forms with the death certificate to the insurer.
How long do insurers have to pay out benefits for a death claim?
up to 60 days (but they are usually paid within a few days)
three circumstances where death benefit payout could be less than face amount?
Policy loan
Premium payment overdue
Misstatement of age/sex
TF: a misstatement of age/sex is grounds for the insurer to void a life insurance policy
False (just adjust the amount to the correct amount)
Four drawbacks to policy replacement?
Proof of insurability,
New policy provisions that may not be favorable,
Higher premiums and
The replacing policy will not have cash value.
TF: In any life insurance policy transaction, the producer must ask the applicant if a replacement will be involved.
True
3 responsibilities of producer if replacement is involved with a policy purchase:
Make a list of all of the applicant’s existing life insurance policies/annuity contracts to be replaced.
Leave with the applicant a policy comparison statement and a Notice Regarding Replacement.
Provide the insurer with a copy of the policy comparison statement and the name of the insurer that corresponds to the policies being replaced.
3 insurer duties for a policy replacement
Verify that all state replacement regulations are followed.
Keep copies of all replacement paperwork.
Notify insurers of policies to be replaced, and if requested, provide insurers with the policy comparison statement.
What is window of time agent has to notify policyowner a soon to be lapsed policy will be invested in a security?
15 days
Rachel took out a $3,000 policy loan from her life insurance policy. Her policy face amount is $100,000. How will the death benefit be affected if the loan remains unpaid?
Select one:
a. The death benefit will be reduced by $3,000 plus interest.
b. The death benefit will be reduced by $3,000.
c. The death benefit will be increased by $3,000.
d. The death benefit will not be affected.
A
Which document contains detailed information about a life insurance policy regarding policy elements such as policy riders and premiums?
Select one:
a. Outline of coverage
b. Policy summary
c. Buyer’s guide
d. Illustrations
B
Securities licenses are obtained through:
Select one:
a. State insurance department
b. FINRA
c. SEC
d. SSA
B
All of the following are true regarding insurance policy illustrations, EXCEPT:
Select one:
a. Illustrations must be approved by the insurer.
b. The agency contract permits the agent to make changes to policy illustrations.
c. Illustrations show the relationship between premiums, cash value, interest, and mortality charges.
d. Illustrations are not part of the insurance contract.
B
Policy replacement is defined as all of the following, EXCEPT:
Select one:
a. Terminated coverage
b. Lapsed coverage
c. Policy loan that is not repaid
d. Converted to reduced paid-up coverage
C
A producer must do all of the following when an insurance transaction involves replacement, EXCEPT:
Select one:
a. Leave a notice regarding replacement with the applicant
b. Provide the applicant with a policy cost comparison statement
c. Make a list of all existing policies the applicant intends to replace
d. Notify existing insurers of policies to be replaced
D
The __________ is a comparison of a policy’s projected cash value to premiums paid over several years.
Select one:
a. Surrender cost index
b. Comparing investment method
c. Return on investment method
d. None of the above
A
All of the following rules apply to life insurance illustrations, EXCEPT:
Select one:
a. The illustration must clearly indicate that it is a life insurance illustration.
b. The insurer’s and producer’s names must be on the illustration.
c. The illustration must indicate the date.
d. Illustrations may use the term vanishing premium, even if the policy does not have a vanishing premium.
D
