Chapter 3: Life Insurance Policies Flashcards
Define: Attained Age
The insured’s age at the time the policy is renewed or replaced
Define: Deferred
Withheld or postponed until a specified time or event in the future
Define: Face amount
The amount of benefit stated in the life insurance policy
Define: Fixed life insurance products
Contracts that offer guaranteed minimum or fixed benefits
Define: Lapse
Policy termination due to nonpayment of premium
Define: Level premium
The premium that does not change throughout the life of a policy
Define: Nonforfeiture values
Benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses
Define: Policy maturity
In life policies, the time when the face value is paid out
Define: Securities
Financial instruments that may trade for value (for example, stocks, bonds, options)
Define: Variable life insurance products
Contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance.
What is term insurance (pure life insurance)?
Temporary protection because it only provide coverage for a specific period of time.
What is 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
- There is no cash value or other living benefits
What does term insurance provide?
It provides the greatest amount of coverage for the lowest premium. Has no cash value
What are 3 basic types of term coverage available based on how the face amount (death benefit) changes?
- Level
- Increasing
- Decreasing
What is level term insurance?
The most common type of temporary protection purchased. The term level refers to the death benefit that does not change throughout the life of the policy.
What is Annually renewable term (ART)?
It is the purest form of 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.
What is level premium?
As the name implies provides a level death benefit and a level premium during the policy term.
What is a term-to-65 policy?
A term insurance policy with level premium and level death benefits that provides coverage until the insured’s 65th birthday. Premiums will be lower.
What is decreasing term?
Policies feature a level premium and a death benefit that decreases each year over the duration of the policy term.
What is commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely?
Decreasing term coverage
What is Mortgage Protection Term Life (or Mortgage Redemption)?
A type of decreasing term insurance in which the face amount directly correlates with the amount of outstanding loan and length of time remaining on a mortgage.
What is credit insurance?
A special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor.
How is credit life usually written?
It is written as decreasing term insurance, and it may be written as an individual policy or as a group plan. When written as a group policy, the creditor is the owner of the master policy, and each debtor receives a certificate of insurance.
Who is the owner and beneficiary of the policy although the premiums are generally paid by the borrower (or the debtor)?
The creditor
What cannot pay out more than the balance of the debt, so that there is no financial incentive for the death of the insured?
Credit life insurance
What does the renewable provision allow?
It allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability.
What does the convertible provision provide?
It provides the policyowner the right to renew the coverage at the expiration date without evidence of insurability. The premium will be based on the insured’s attained age at the time of conversion.
What is permanent life insurance?
It is a general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid.
What is most common type of permanent insurance?
Whole life
What is Whole life insurance?
Provides lifetime insurance, and includes a savings element (or cash value)>
What does it mean when a whole life policy endows at the insured’s age 100?
It means the cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100.
Define: Level premium
The premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy.
Define: Death benefit
The death benefit is guaranteed and also remains level for life.
Define: Cash Value
The cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policyowner. They are credited to the policy on a regular basis and have a guaranteed interest rate.
Define: Living benefits
The policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash value (nonforfeiture value) does not usually accumulate until the 3rd policy year and it grows tax deferred.
What does whole life insurance provide?
It provides lifetime (permanent) protection and accumulates cash value.
What are the 3 basic forms of whole life insurance?
- Straight whole life
- Limited-pay whole life
- Single premium whole life
What is straight life (ordinary life or continuous premium whole life)?
Is the basic whole life policy. The policyowner pays the premium form the time the policy is issued until the insured’s death or age 100 (whichever occurs first). This has the lowest annual premium.
What is Limited-pay whole life?
It is designed so that the premiums for coverage will be completely paid-up well before age 100.
What are single premium whole life (SPWL)?
It is designed to provide a level death benefit to the insured’s age 100 for a one-time, lump-sum payment. The policy is completely paid-up after one premium and generates immediate cash
What is Adjustable life?
It was developed in an effort to provide the policyowner with the best of both worlds (term and permanent coverage)>
What are the following options for the policyowner?
- Increase or decrease the premium or the premium-paying period
- Increase or decrease the face amount
- Change the period of protection
What is another option for the policyowner?
They have the option of converting form term to whole life or vice versa. However, increases in the death benefit or changing to a lower premium type of policy will usually require proof of insurability.
Although adjustable life policies contain most of the common features of other whole life policies, the cash value of an adjustable life policy only develops when?
When the premiums paid are more than the cost of the policy.
What is Universal life insurance?
Also known as by the generic name of flexible premium adjustable life. It implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again.
Since the premium can be adjusted, the insurance companies may give the policyowner a choice to pay either of two types of what premiums?
- Minimum premium
- Target premium
What is minimum premium?
The amount needed to keep the policy in force for the current year. It will make the policy perform as an annually renewable term product.
What is target premium?
It is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.
What happens if an insured skips a premium payment on a universal life policy?
The missing premium may be deducted from the policy’s cash value. The policy will NOT lapse.
What does the insurer guarantee?
It guarantees a contract interest rate (usually 3 to 6%).
What is current interest rate?
It is a potential for a policyowner which is not guaranteed in the contract but may be higher because of current market conditions.
What 2 components does a universal life policy?
- An insurance component
- Cash account
What is the insurance component of a universal life policy?
It is always annually renewable term insurance.
What death benefit options does universal life offer to the policyowner?
- The level death benefit option
- The increasing death benefit option
What is Option A (Level Death Benefit Option)?
The death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in the later years.
What is Option B (Increasing Death Benefit Option)?
The death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases.
What is indexed universal life?
It is a universal life policy with an equity index as its investment feature. Under this policy, the policy’s cash value is dependent upon the performance of the equity index. Cash values and death benefit are not guaranteed.
What are fixed life insurances or annuities?
Contracts that offer guaranteed minimum or fixed benefits that are stated in the contract.
What are variable life insurance or annuities?
Contracts in which the cash values accumulate based upon a specific portfolio or stocks without guarantees of performance. Keep pace with inflation, and are determined by the value of securities backing it.
What is a level, fixed premium, investment-based product?
Variable life insurance
Who bears the investment risk in variable contracts (assets in a separate account) ?
The policyowner
Why must assets be held in a separate account which invests in stocks, bonds, and other securities investment options?
Because the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be kept in the insurance company’s general account.
What must each separate account must maintain?
It must maintain assets with a value at least equal to the reserves and other contract liabilities. Assets in the separate account cannot be commingled with assets in the general account.
What type of insurance that combines many features of the whole life with the flexible premium of universal life and the investment component of variable life, making it a securities version of the life universal life insurance?
Variable universal life insurance
What features and characteristics does a variable universal life insurance have?
- A flexible premium that can be increased, decreased, or skipped as long as there is enough value in the policy to fund the death benefit
- Increasing and decreasing the amount of insurance
- Cash withdrawals or policy loans
What must agents selling variable life insurance products do?
- Be registered with FINRA
- Be licensed by the state to sell life insurance
- Have received a securities license.
Any domestic insurer insurer issuing variable life insurance must establish what?
One or more separate accounts
Any person qualified in this state to sell variable life insurance product must immediately report what to the Director?
- Any suspension or revocation of their license in any other state or U.S. territory
- The imposition of any disciplinary sanction
- Any judgement or injunction involving fraud, deceit, misrepresentation, or violation of any insurance law.
What is joint life?
A single policy that is designed to insure two or more lives. Can be in form of term insurance or permanent insurance. “first to die”
What is the premium based on?
- On a joint average age that is between the ages of the insureds
- The death benefit is paid upon the first death only
The premium rates on a joint life policy are determined by what?
By determining the ages of both insureds
What is survivorship life (also referred to as “second-to-die” or “last survivor” policy)?
It is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. It pays on the last death rather than upon the first death. “second to die”
What type of policy is often used to offset the liability of the estate tax upon the death of the last insured?
Survivorship life
What is Group life insurance?
It is issued to the sponsoring organization, and covers the lives of more than one individual member of that group. It is usually written for employee-employer gourps.
What are 2 features that distinguish group insurance from individual insurance?
- Evidence of insurability is usually not required (unless an applicant is enrolling for coverage outside the normal enrollment)
- Participants (insureds) under the plan do not receive a policy because they do not own or control the policy.
What is a certificate of insurnce?
Each insured participant under the group plan will be issued this evidencing that they have coverage.
What is master policy/contract?
It is issued to the sponsor of the group, which is most often an employer. The group sponsor is the policyholder and is the one that exercises control over the policy.
What are some key points to remember about group insurance?
- Is written as annually renewable term insurance.
- The master contract is for the employer
- Certificates of insurance are for individual insureds.
Define: Purpose or nature of the group
The group must be created for a purpose other than to obtain group insurance.
Define: Size of the group
The larger the number of people in the group, the more accurate the projections of future loss experience will be. This is based on the Law of Large Numbers of similar risks.
Define: Turnover of the Group
From the underwriting perspective, a group should have a steady turnover: younger, lower-risk employees enter the group, and older, higher-risk employees leave.
Define: Financial strength of the group
Because group insurance is costly to administer, the underwriter should consider whether or not the group has the financial resources to pay the policy premiums, and whether or not it will be able to renew the coverage.
How are group life insurance plans sponsored?
May be sponsored by employers, debtor groups, labor unions, credit unions, associations, and other organizations formed for a reason other than purchasing insurance.
If the group for group life insurance is large enough why would there be no medical questions?
It would not have medical questions since the plan will be issued based upon the nature of the group and the group’s past claims experience.
Define: Grace Period
The policyowner is entitled to a grace period of 31 days for the payment of any premium due (except the first). During the grace period, the death benefit coverage must continue in force.
Define: Incontestability
Life insurance policies may not be contested, except for nonpayment of premiums, after the policy has been in force for a period of 2 years, and no statements made by the insured relating to their insurability may be used in contesting the validity of the insurance.
Define: Entire contract
A copy of the application must be attached to the policy when issued, and all statements made by the policyholder will be deemed representations and not warranties.
Define: Evidence of Insurability
The insurer reserves the right to require a person eligible for insurance to furnish satisfactory evidence of insurability.
Define: Misstatement of Age
If an insured’s age has been misstated, the insurer has the right to make equitable adjustment of premiums, benefits, or both according to the insured’s correct age.
Define: Facility of payment
If an insured dies, the designated beneficiary is entitled to the benefits. If no beneficiary is named, a benefit of up to $2,000 will be paid to the person appearing to be entitled to the benefits by reason of having incurred funeral or other related expenses.
Define: Certificate of coverage
The insurer is required to issue to the policyholder for delivery to the certificate owner an individual certificate setting forth a statement as to the insurance protection provided, to whom the insurance benefits are payable, and the rights and conditions.
Define: Coversion
If the insurance on a person covered under the policy ceases because of termination of employment, the certificate owner is entitled to have issued by the insurer, without evidence of insurability, an individual policy of life insurance without disability or other supplementary benefits. This right should be exercised within 31 days of group policy termination.
Define: Conversion on termination of policy
If a policy is terminated for a class of insureds, every insured who has been covered by the policy for at least 5 years, including their dependents, is entitled to convert to individual coverage subject to the same conditions and limitations as the group policy; however, the amount of the individual policy may not exceed the amount of the person’s group life insurance protection or $10,000.
What happens to the cash value when a whole life insurance policy matures?
Cash value is paid to the policy owner
In what type of life insurance policies can the policy owner skip premium payments without the policy lapsing?
Universal life
What is the purpose of establishing the target premium for a universal life policy?
To prevent the policy from lapsing
The policy owner of a whole life insurance policy is also the insured what age must the insured attain in order to receive the policies face amount?
Age 100
Who is insured under a juvenile life policy?
A minor
What type of life insurance policy offers pure death protection?
Term
What type of policy is typically issued without proof of insurability from the insured?
Group policy
Whole life policies provide protection until the insured reaches what age?
Age 100
Who owns a group life insurance contract?
The employer ( also known as the sponsor of the group )
Whole life insurance policies, mature, when the insured reaches the age of 100. If the owner of the whole life policy (the insured) days at age 80, and there are no outstanding loans on the policy, What portion of the death benefit will be paid to the beneficiary?
The full death benefit
How is the premium determined in a joint life insurance policy?
The premium is based on the average age of the insureds.
A policy states that it will pay a specific face amount if the insured dies during the 20 year premium – paying Period and nothing if death occurs after the 20 year period. What type of policy is this?
20 – year level term
When the amount of insurance is increased in an in adjustable life policy, what will the insurer require from the insured?
Evidence of insurability
If an employee wants to join group life insurance coverage outside of the open enrollment period, what would the employee have to provide?
Evidence of insurability
An individual has just borrowed $10,000 on a five – year note from his bank. The note is due and in installments. What type of life insurance policy would be best suited to this situation?
Decreasing term
What type of whole life insurance policy generates immediate cash value?
Single premium whole life
What type of life insurance policy is life paid – up at age 65?
Limited – pay whole life
What are the living benefits of whole life insurance?
Loan values
What happens to the premium in an annually renewable term life policy?
The premium increases with each renewal
Why are policy loans not available on term insurance?
There is no cash value to borrow against
An annually, renewable term policies, what is the annual premium based on?
The insured’s attained age
What type of premium is charged on a straight life policy?
A level premium for the life of the insured
