Chapter 3 Types of policy and riders

Question 1

Endow (mature)

Answer 1

The maturity date or time at which the policy’s cash value equals the face amount and the proceeds are paid to the policyowner. whole life is only one that endows

Question 2

Face amount

Answer 2

The death benefit amount payable on a life insurance policy. in other words, the amount of coverage the policy provides. This is sometimes referred to as the limit of liability. max liability

Question 3

Cash Value

Answer 3

Money accumulated in a permanent policy which the policyowner may borrow as a policy loan or receive if the policy is surrendered before it matures. whole life and universal

Question 4

rider

Answer 4

an added benefit attached to the policy that modifies existing coverage. A rider is usually added at the time of application and typically requires an incrase in premium.

Question 5

term insurance is considered

Answer 5

pure insurance and provides a pure death benefit. does not any cash value or living benefits. Premiums are lowest and are for highest death benefit. Can be for a specified amount of time or till someone reaches an attained age. The low initial premium outlay can increase at renewal or upon conversion. as the insured’s age advances the policy can become expensive. Rates charged are based upon underwriting class, the age and gender of the insured and upon the length of time protection. rates are higher for 10years than they are for 5.

Question 6

Types of policy

level

Answer 6

the death benefit remains level and premiums remain level during the policy term. Most group life insurance is written with a level term death benefit.

Question 7

decreasing

Answer 7

death benefit decrease but premiums remain level for the policy, often utilized to pay off outstanding mortgage balances. decreases as the mortgage balance decreases.

Question 8

Credit life insurance

Answer 8

is a special form of decreasing term. automatically names the creditor as the beneficiary. There is no option. The policy cannot be written for more than the outstanding debt, since that is the limit of the creditors insurable interest. usually sold on a group basis to a creditor such as a bank. The policy pays the outstanding balance of the debt at the time of the borrower’s death, subject to policy maximums. Debts covered way include
personal loans
loans to cover the purchase of appliances, motor vehicles
educational loans
bank credit and revolving check loans
mortgages loans

Question 9

incrasing

Answer 9

the death benefit increases over the life of the policy while the premium remains level. This type of loan is normally a rider for the return of premium on a permanent policy over a set number of years

Question 10

Annually renewable term

Answer 10

the simplest form of term life insurance is for a term of one year. The death befit remains level and the premiums increase yearly as the policy renews. while its very inexpensive initially compared to the other types of life insurance, over time it can become cost prohibitive. The death benefit is paid by the insurer if the insured dies only while the policy was in force

Question 11

Re-Entry term option

Answer 11

term policies with this option will allow the insured, upon the end of the original term, to renew based on attained age and may qualify at a discounted rate by providing evidence of insurability. The re-entry term will allow the insured to renew at a lower rate than renewable term as long as the insured meets the qualifications of insurability.

Question 12

Special features

renewable

Answer 12

a benefit that will renew the contract on the renewal date without evidence of insurability. The policy may be a one (annual), five, ten, 20 year renewable contract with premiums increasing at the beginning of each renewal period. premium is based on attained age and no evidence of insurability is required.

Question 13

convertible

Answer 13

The right to convert the existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract. The premium can be based upon attained age or issue age. The premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond. if the conversion is based on the original age, back premiums plus interest will be required to be paid at the time of conversion. term is only one

Question 14

Permanent or whole life insurance is deigned to

Answer 14

provide coverage for an entire lifetime. Whole life is permanent protection that matures at the insured age 100. At that point the cash value equals the face amount and is paid. The insurer pays the face amount to owner if insured lives to age 100.
net amount at risk is the face value minus the cash value. As cash value grows, the amount of risk to the insurance company decreases.

Question 15

These policies have a

Answer 15

level premium and level face amount. To keep the premium rate level, the premium at the younger ages exceeds the actual cost of protection. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises above the premium.

Question 16

Unlike term insurance, whole life policy cannot be

Answer 16

convertible or renewable

Question 17

Ordinary whole life

Answer 17

some traditional life policies require premiums to be paid for a set number of years such as 10 or to a specified age. Under other policies, premiums are paid throughout the policyholder’s lifetime.

The shorter the premium paying period, the higher the premium.

Question 18

straight life or continuous premium

Answer 18

The premium is level and payable to age 100 or death of the insured. The face amount remains level throughout the life of the policy has the highest total premium outlay

Question 19

Limited Payment

Answer 19

premium payments are for a specified time or to a specified age. however the face amount remains level to age 100. The annual outlay is higher than straight life.

Question 20

Single premium

Answer 20

the entire cost of the policy is paid at the time of purchase and the face amount remains level to age 100. The cash value builds more quickly because the amount of premium paid in upfront is higher.

Question 21

adjustable life

Answer 21

premium, period of protection, change the length of premium payment period, and death benefit can be adjusted. adjustable time period of coverage. Combo of term and whole, all the common features of level premium cash value life insurance are present.
These policies provide cash value, although reducing the premium could stop the cash value from increasing therefore adjusting the coverage to term insurance.

Question 22

These changes can be exercised

Answer 22

annually and are not retroactive. Changes can only be made on a policy anniversary date as approved by the insurer. Adjustable life is most appropriate for those whose income is expected to fluctuate from year to year or those persons who may have a fluctuation in needs.

Question 23

interest/market- sensitive whole life products (nontraditional whole life)
Current assumption or interest sensitive whole life

Answer 23

A form of whole life in which the insurance company can change the premiums or interest rate being credited to the account based on current money market rates. guarantee death benefits. premiums may fluctuate. usually higher interest rate.

Question 24

Universal life (flexible premium adjustable life insurance)

Answer 24

like ordinary whole life, it features insurance protection and a savings element that grows on tax deferred basis. unlike whole life, UL is an unbundled policy. this means the individual elements of the policy and premium- mortality risk and policy expenses and cash value are both transparent to the policy owner.
they have built in guarantees regarding the cost of insurance and the interest rates applied to cash values. Unlike whole life, the premium is not merely adjustable, it is totally flexible. if there is sufficient cash value to pay the cost the premium can be skipped. on the other hand, the policy owner may also make unscheduled lump sum payments (within limits) to take advantage of current interest rates or personal tax flow. The level of flexibility is described in the features below

Question 25

The features of a UL policy include

Answer 25

An adjustable face amount: any increase in face amount will require evidence of insurability
A flexible premium: The premium is a benchmark and may or may not be adopted by the policyholder. Because of the flexibility the cash value may never equal death benefit. current credit interest rates, mortality charges, and expense factor
Monthly mortality charges: are deducted from the policy’s cash value. The mortality charge is determine annually based on age. The insurance protection is calculated like annual renewable term. Since the charges are deducted monthly this could be refereed to as monthly renewable term. max established with plan
Expense charges: from the policy are deducted monthly. This is the insurance company’s cost of maintaining the policy and does not change with age but can be impacted by the overall administrative costs associated with the plan. max established with plan
Interest: is also credited to the cash value on a monthly basis. The interest is credited at the current interest rate with a guaranteed minimum rate established.

Question 26

Equity indexed universal live

Answer 26

Most of the premium 80-90% is invested in a traditional fixed income securities. The remained of the premium is invested in contracts tied to a stipulated stock index. Where there is an increase in the market, a given % of the gain is used to determine the interest credited to the policy. When the market declines, the policy is credited with the minimum guaranteed interest rate or zero interest. The policy’s values can never be impaired due to negative index performance.

Question 27

General account

Answer 27

a portion of the premium is invested by the insurance company and held in their general account. The current return on the investments is credited to the UL policy. A guaranteed min interest rate is applied to the policy means that no matter how the investments perform, the insurance company guarantees a certain minimum return on the cash value. This policy has a general account, so the producer only needs a life insurance license to sell it. Premiums are paid into and interest is credited into the general cash value. expenses, loans or withdrawals, and mortality charges are deducted from the cash value account.

Question 28

Loan and partial withdrawals

Answer 28

individual elements of a UL policy are individually viewable, subject to change, and accessible. the policyowner not only have the option to take out a policy loan, they may also take a partial withdrawal from the cash value without terminating the contract. Loan can be paid with interest. Partial withdrawal is irreversible decrease in cash value.

Question 29

Death benefit options

Answer 29

universal life allows you to choose from two death benefit options A or B.

Question 30

Option A

Answer 30

pays the face amount of the policy and provides a level death benefit. As the cash value increases, the company’s risk decreases. A universal life policy must include an amount at risk. If the cash value approaches the face amount, the death benefit must increase so as to provide for this amount at risk. This minimum separation between cash value and the death benefit is called the “risk corridor”. This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early. Death benefit stays the same

Question 31

Option B

Answer 31

Pays the face amount stated in the contract which is level term, plus any cash values accumulated over the years. This provides for an increasing death benefit. The mortality charge for option B is greater than A. Death benefit and cash value. Face value + cash value = death benefit.

Question 32

individuals purchasing option A will

Answer 32

benefit from larger cash values accumulations while individuals purchasing B will benefit from greater death benefits.

Question 33

Variable whole life is a whole life policy with certain benefits that will vary based on

Answer 33

market conditions. Variable life characteristics include:
A fixed premium
Accounts: the policy provides for both a general account and a separate account
General account (guaranteed values): is fixed and provides a guaranteed minimum death benefit to age 100. policy loans are available from the general account
Separate account (nonguaranteed values): the separate account is invested in equity securities as offered by the insurance company. The owner may select which separate account they want their premium to be invested in. cash value in the separate account will fluctuate based on the market conditions and performance of the separate account, which is similar to a mutual fund. This may act as a hedge against inflation. no guaranteed minimum return on the cash value in separate account

Question 34

The death benefit is tied to the

Answer 34

separate account and also varies along with the performance of the separate account. Death benefits are recalculated annually. since there is no guaranteed return on the separate account, the owner bears all investment risk.

Question 35

All variable products are subject to

Answer 35

FINRA regulation. variable is a security requires registration with FINRA with a series 6 or 7 registrations. This registration is in addition to a life insurance license and in some states a variable contracts insurance license. A prospectus must be provided prior to the sale of a variable policy and there are suitability requirements that must be met before a variable policy can be sold.

Question 36

Policy loans are available from either the

Answer 36

general account or the separate account. Typically 75-90% of the cash value can be borrowed. Partial surrender are not allowed from a variable whole life policy.

Question 37

Variable Universal life is a

Answer 37

combo of universal and variable life products. Like universal life, the policy provides for flexible premiums and adjustable death benefits. Options A and B are available to policyowners. like variable, a separate account is maintained and the investment return fluctuates based on the performance of the separate account. But since all premiums are credited to a separate account, there is no guaranteed minimum death benefit. the owner bears all investment risks

Question 38

The policy owner may take a policy loan or a partial withdrawal from the

Answer 38

cash value without terminating the contract. A partial withdrawal is paid from the separate account. Policy loans are available based on the amount in the separate account. 75-90% of cash value can be borrowed.

Question 39

Same thing applies from slide 35 about Fina regulations

Answer 39

See slide 35

Question 40

Since variable universal life does not have a general account,

Answer 40

all values will fluctuate based on the performance of the separate account.

Question 41

Whole life:
DB
CV
Premiums
Loans/partial surrenders
Risk

Answer 41

DB: fixed
cash value: guaranteed
premiums: fixed
Loans/partial surrenders: loans are available
Risk: insurer

Question 42

Universal life
DB
CV
Premiums
Loans/partial surrenders
Risk

Answer 42

DB: adjustable, guaranteed minimum
CV: guaranteed minimum
Premiums: flexible
Loans/partial surrenders: Loans and partial surrenders
Risk: insurer

Question 43

Variable life
DB
CF
Premiums
Loans/partial surrenders
Risk

Answer 43

DB: fixed; guaranteed minimum
CV: not guaranteed
Premiums: Fixed
Loans/partial surrenders: Loans available
Risk: policyowner

Question 44

Variable Universal Life
DB
CF
Premiums
Loans/partial surrenders
Risk

Answer 44

DB: adjustable, no guaranteed minimum
CV: not guaranteed
premiums: flexible
Loans/partial surrenders: Loans and partial surrenders
Risk: policyowner

Question 45

Jumping juvenile

Answer 45

automatically increases the face amount at a given age without evidence of insurability. The premium remains level for the life of the policy, and the usual increase in the face amount is 5 times the issue amount. It protects the insured’s future insurability and a parent is normally the premium payor.

Question 46

Joint life (first to die)

Answer 46

whole life policy that is written to cover 2 or more lives. The death benefit is paid upon the first insured to die. Once payment is made, the policy no longer exists. premiums are based upon a joint issue age; which is obtained by an average of both insureds’ ages resulting in a lower premium than two separate policies. provides income protection for spouses when both have earned income.

Question 47

joint survivorship life (last to die)

Answer 47

Whole life policy written to cover 2 or more lives and the death benefit is not paid until the last insured dies. covers estate taxes. Premiums are based upon a joint issue age determined from a special table. Couples who plan to defer estate taxes until the second spouse dies purchase this policy and have the policy owned typically by an irrevocable life insurance trust.

Question 48

return of premium term

Answer 48

this term policy is written for a specified number of years (20-30 years). if the insured is still living at the end of the term, the policy will provide a refund of all the premiums paid into the policy. Typically these policies have a higher premium than level term insurance. expense. Term and guarantee all premiums

Question 49

Life insurance policy riders
Disability riders
waiver of premium

Answer 49

if the insured becomes totally disabled, the company waives premiums for the duration of the disability, therefore the policy remains in force. There is usually a maximum 6-month elimination period before premiums are waived. drops at an age stipulated in the contract. Once on claim, the waiver continues either until the disability ends or the policy ends. cash value and dividends continue as under normal premium payments

Question 50

Payor benefit (waiver of payors premium)

Answer 50

A rider that waives the premium payment if the owner dies or becomes disabled and is unable to make the premium payment on behalf of the insured. The payer typically must show evidence of insurability before the rider can be added to the policy.

Question 51

Disability income benefit

Answer 51

In the event of total disability and after an initial waiting period, premiums are waived and the insured is paid a monthly income. The monthly disability income benefit is typically limited to a percentage of face value. The benefit is paid from the rider does not reduce the death benefits paid out upon death. insured and policyowner are the same person

Question 52

waiver of cost of insurance

Answer 52

a rider that waives the deduction of the monthly cost of insurance and expenses charges associated with a Universal life type policy while the insured is totally disabled, usually after 6 months of continuous disability. added to flexible policies

Question 53

Term riders may be attached to

Answer 53

virtually any policy, interest sensitive, or term policy to provide an amount of temporary extra insurance protection for a fixed period of time. These riders are useful when an insured needs more insurance or a decreasing amount of coverage for a limited time. added to permanent policies

Question 54

Riders covering addition insureds

Spouse (other insured) rider

Answer 54

This type of rider will provide level term coverage on the life of the insured’s spouse. Such rider will also provide a conversion provision permitting the spouse to covert to permanent coverage without evidence of insurability prior to termination of the rider or upon the death of the insured under the basic policy.

Question 55

Child rider

Answer 55

generally provide level term coverage on the life of all of the insured’s children. Such riders are usually offered at one premium rate and my cover newborns at 14 days of life and adopted children who can be added to the coverage w/o increasing the premium.

Question 56

The child will remain covered up to

Answer 56

age 21. if the primary insured should die while the rider is in force, the rider becomes a term policy and will be in force until the max age stated in the policy.

Question 57

upon reaching the max age the rider will also provide a

Answer 57

conversion provision which will permit each child to convert to permanent plan of coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy.

Question 58

Family rider

Answer 58

this is the combo of spouse and child. This may be written as a policy or a rider. normally written as a rider today. usually sold in units such as 5k for main wage earner 1500 on spouse 1k on each child

Question 59

nonfamily rider

Answer 59

covers an additional insured with an insurable interest, such as a business partner.

Question 60

Riders affecting the death benefit amount

accidental death benefit (double or triple indemnity)

Answer 60

In the event of a claim, the policy normally pays double or triple the face amount if death was a result of an accident. death needs to happen before specific age and 90 days of the accident. death due to sickness is excluded

Question 61

accidental death and dismemberment

Answer 61

this rider provides a benefit in addition to the base of the policy. The rider pays 100% of the amount of the rider, known as the principal sum, upon accidental death. If the insured suffers an accidental dismemberment loss the rider pays 50 % of the rider amount. Double dismemberment benefits are 100% of rider. loss needs to occur within 90 days of the accident.

Question 62

guaranteed insurability

Answer 62

allows the insured to purchase stated amounts of additional insurance every 3 years baed on certain ages, events, or specified dates without evidence of insurability up to a max age of 40. Premiums are based upon attained age.

Question 63

return of premium

Answer 63

increasing term insurance equal to the amount of premiums paid. if the insured dies within the term, the beneficiary would receive the face amount plus an amount equal to the premiums paid. flexibility in whole life and return of money in term.

Question 64

return of cash value

Answer 64

increasing term insurance equal to the cash value. This rider provides the payment of term insurance equal to the cash value amount at the time of death. However this does not relieve the obligation to pay loans from the claim proceeds at time of death.

Question 65

Cost of living

Answer 65

enables the insured to purchase more insurance each year to help offset increasing insurance needs due to inflation. based on increases in COL index. usually available at low rates and no evidence of insurability.

Question 66

Accelerated death benefits

Answer 66

A benefit that provides for an early payment of a portion of the face amount prior to death. These benefits could be provided based on an insured qualifying as terminally ill (death expected within 24 months), catastrophic illness. These benefits do not include disability income. do not have to be repaid if the insured’s health improves

Question 67

Two riders that provide accelerated death benefits are

Answer 67

Living needs rider and long term care rider.

Question 68

living needs rider

Answer 68

allows the early payment of a portion of the face amount before death, should the insured becomes terminally ill, usually less than 2 years to live. 50-90% of face amount. upon death the early payment will be deducted from the benefit paid to the beneficiary. The rider is normally provided w/o a premium charge because it is an advance of the death benefit.

Question 69

Long-term care rider

Answer 69

provides up to 100% of the policy benefits if the insured qualifies for long term care benefits as defined in the rider, such as inability to perform 2 out of 6 activities of daily living. any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit to the beneficiary. Long term benefits are paid income tax free after the insured meets the qualifying requirements.

Question 70

effect on the death benefit

Answer 70

after accelerated death benefits are paid and any lost interest to the insurer is deducted, the insurer must pay the balance of the face amount to the beneficiary.

Question 71

exclusions and restrictions

Answer 71

the accelerated death benefit shall not contain exclusions or restrictions that are not also exclusions or restrictions in the policy.

Question 72

Viatical settlements and life settlements

Answer 72

more than cash surrender value but less than its death benefit. the insured is provided with tax exempt discounted value during the terminal illness.