Chapter 4:

Question 1

Industrial life insurance:

Answer 1

Issues very small face amounts, such as $1,000 or $2,000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage.

Question 2

Ordinary Life Insurance;

Answer 2

is life insurance of commercial companies not issued on the weekly premium basis. It is made up of several types of individual life insurance, such as temporary (term), permanent (whole).

Question 3

Group Life Insurance:

Answer 3

is insurance written for members of a group, such as a place of employment, association, or a union. Coverage is provided to the members of that group under one master contract. The group is underwritten as a whole, not on each individual member. One of the benefits of group life coverage is usually there is no evidence of insurability required.

Question 4

Term Life Insurance:

Answer 4

gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period of time because it has a TERMination date. Term insurance is an inexpensive type of insurance, making it an attractive option for large policies. Term life is the CHEAPEST type of pure life insurance, and due to having a termination date and not having any cash value, it will ALWAYS be cheaper than a whole life policy with the same face value. It provides a pure death protection since it only pays a death benefit if the insured dies during the policy term.

Question 5

Level Term:

Answer 5

is also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. Life insurance written to cover a need for a specified period of time at the lowest premium is called Level Term Insurance. Term insurance always expires at the end of the policy period. For example, if D needs life insurance that provides coverage for the remainder of her working years and wants to pay as little as possible, D would need Level term. Level term provides a fixed, low premium in exchange for coverage which lasts a specified time period.

Question 6

Decreasing Term:

Answer 6

is term life insurance that provides an annually decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. A decreasing term policy is a type of life policy which has a death benefit that adjusts periodically (according to a schedule) and is written for a specific period of time. Decreasing term policies are usually written for a mortgage or other debt that typically decreases over time until it is paid off. For example, a 15 year decreasing term policy could protect a 15-year mortgage. As the mortgage balance reduces each year, the face value of the insurance policy will adjust accordingly to match. After the mortgage is paid off, the insurance policy will expire.

Question 7

Credit Policies:

Answer 7

are typically purchased using a decreasing term life insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining loan balance. Since Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding. For example, if you wanted an insurance policy to protect a $20,000, 5-year auto loan, you would use a 5-year decreasing term life insurance policy with an initial face value of $20,000. You will pay the same level premium every month for the 5-year term of the policy. The face value will start out at $20,000 and change according to a schedule (the decreasing balance of the auto loan). After 5 years, the car will be paid for and the insurance policy will no longer be needed.

Question 8

Increasing Term:

Answer 8

is term life insurance that provides an increasing face amount over time based on specific amounts or a percentage of the original face amount.

Question 9

Convertible Term:

Answer 9

is a provision that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. Convertible Term provides temporary coverage that may be changed to permanent coverage without evidence of insurability. For example, if you take out a term insurance policy when you are young to take advantage of your good health and the policy’s lower premium, but want the option convert the policy to a permanent one for final expense benefits once your finances improve, you would want a convertible term life policy. The conversion privilege of a group term life policy allows an individual to leave the group term (temporary) plan and convert his or her insurance to an individual (permanent) policy without providing evidence of insurability. The most important factor to consider when determining whether to convert term insurance at the insured’s attained age or the insured’s original age is the premium cost. The number one factor which impacts life insurance premium cost is the insureds current or attained age. For example, a $25,000 policy on a healthy 7-year-old boy will cost substantially less than a $25,000 policy on a 57-year-old man. Whether converting an individual or group term insurance policy, although your insurability is guaranteed, your age is typically reevaluated to your current (attained) age, not left at the age you were when you applied for the original term policy. Convertible Term would allow you to take your temporary coverage and change it to permanent coverage without evidence of insurability or good health, but your premiums will increase due to using your attained age.

Question 10

Renewable Term:

Answer 10

is term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having to prove insurability. For example, if you have a 10-year renewable and convertible term; After the 10 years are up, the policy terminates or you can renew it. If you renew it the premium price will go up, and you will have the policy for another 10 years. This cycle continues until you are too old to renew or it’s too expensive. All TERM insurance has a final TERMINATION date where you can no longer renew it.

Question 11

Annual Renewable Term:

Answer 11

is term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability.

Question 12

Term Rider:

Answer 12

is a type of life insurance product which covers children under their parent’s policy. Family plan policies usually cover the family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is always level term. This is cheaper than every family member getting their own policy. For example, the main policy may be on Dad, then mom and the children are riding on (attached to) dad’s policy as term riders. Term riders allow for additional family members to be covered under one policy by attaching everyone to a main policy. Term riders can also allow an applicant to have excess coverage by adding an additional term rider for them to the main policy.

Question 13

Whole Life Insurance:

Answer 13

provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium. All whole life has the same type of benefits. The only difference in “types” of whole life is how the policy is paid. Some will be paid straight until death or age 100, some will be paid for after a few years or by a specific age, some may give you a little discount in the early years to help you get started, etc. All whole life lasts until death or age 100, has a fixed premium, and level benefit with cash value accumulation, regardless of how it is paid. Whole life is often compared to BUYING; like BUYING a house.

Question 14

With Whole Life - Straight Life insurance

Answer 14

premiums are payable throughout the insured’s lifetime, and coverage continues until the insured’s death. Said differently, premiums are payable as long as coverage is in force. Like all other whole life policies, straight whole life provides fixed premiums, a level death benefit, and cash value. Whole life also requires the face amount to be paid out to the insured at age 100 (when the policy matures), provided a death benefit has not already been paid. If G wants a policy with a fixed level premium and a benefit that pays out at death or age 100, G would want a whole life policy. Straight whole life allows you to maintain coverage throughout your entire lifetime and spread the cost out over your entire life.

Question 15

With Whole Life - Straight Life insurance

Answer 15

premiums are payable throughout the insured’s lifetime, and coverage continues until the insured’s death. Said differently, premiums are payable as long as coverage is in force. Like all other whole life policies, straight whole life provides fixed premiums, a level death benefit, and cash value. Whole life also requires the face amount to be paid out to the insured at age 100 (when the policy matures), provided a death benefit has not already been paid. If G wants a policy with a fixed level premium and a benefit that pays out at death or age 100, G would want a whole life policy. Straight whole life allows you to maintain coverage throughout your entire lifetime and spread the cost out over your entire life.

Question 16

With Whole Life - Limited Pay

Answer 16

the coverage remains on a limited-pay life policy until age 100 or death, whichever happens first. Even though the premium payments are limited to a certain period, the insurance protection extends until the insured’s death, or to age 100. For example, if you were to purchase a 20-pay policy, premiums would need to be paid for 20 consecutive years. After that, you would not be required to make any additional premium payments, and your coverage would be guaranteed until death or age 100. A 40-year old applicant who would like to retire at age 70 and wants a policy with level premiums, permanent protection, and premiums paid up at retirement would also choose a paid-up-at age-70 limited pay policy. A limited pay life insurance policy covers an insured’s whole life with level premiums paid over a limited time

Question 17

While Life - Modified

Answer 17

is a policy where the premium stays fixed for the first 5 years, and then increases in year 6 and stays level for the remainder of the policy. Modified whole life has all of the same features of any other whole life except the insurance company cuts you a break on premium for the first few years. For example, K wants to buy life insurance because she knows it is cheaper when she is young. However, she is a college student and cannot afford the large premium associated with whole Life. The insurance company may offer her a Modified whole life to lock in her age and provide her all of the benefits of whole life, but give her a discount on premium while she is in college. After the first five years of the policy, she will be out of school and be able to afford the normal premium cost. Modified Whole Life describes a whole life policy with a premium that increases once after the first few years and then remains level for the remainder of the policy.

Question 18

Whole Life - Modified Endowment Contract (MEC)

Answer 18

is best described as a policy that exceeds the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract. A MEC does not meet the 7-pay test and is considered over-funded, according to the IRS. For that reason, the policy will lose favorable tax treatment. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a seven-year period. For example, if your annual premium for a policy was $1,000 and you paid $20,000 in the first five years, you will have failed the 7-pay test by exceeding $7,000 (7- years times one year of premium). Said differently, you have exceeded the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract.

Question 19

Joint Life Policy:

Answer 19

covers the lives of 2 individuals and save on premium cost by averaging the ages of the two insureds. Joint Life policies pay the face amount after the first person covered on the policy dies. This is similar to a Joint Checking account. The policy is shared between two people, and when one person dies, the other receives the entire account. If B and M were insured under a joint life policy and B were to die, M would receive the entire benefit and would also no longer be insured. A policy that promises to pay the face amount on the death of the first of 2 lives covered by the policy is called a Joint Life Policy.

Question 20

Joint Survivor or Last Survivor Policy:

Answer 20

cover the lives of two individuals and saves on premium costs by averaging the ages of the two insureds. Joint Life Survivor or Last Survivor policies only pay the death benefit upon the death of the last insured person. For example, say B and M purchase a joint life survivor policy. If B were to die first and then M died 10 years later, no benefits would be paid out from the policy until M died. A Joint Life and Survivor policy covers two lives but only pays benefits after the death of the last insured. A

Question 21

Family Maintenance Policy:

Answer 21

pays a monthly income from the date of death of the insured to the end of the preselected period. The payment of the face amount of the policy is payable at the end of such preselected period. If P is looking to purchase a life insurance policy that will pay a stated monthly income to his beneficiaries for 20 years after he dies and a lump sum of $20,000 at the end of that 20- year period, he should purchase a Family Maintenance policy. Family maintenance policies provide an income for a specific period starting at the death of the insured.

Question 22

Family Income Policies:

Answer 22

pay an income beginning at the insured’s death and continues for a period specified from the date of policy issue. For example, G purchased a Family Income policy at age 40, with a 20-year rider period. If G were to die at age 50, G’s family would receive an income for 10 years

Question 23

Adjustable Life Policy:

Answer 23

owner is usually looking for a policy offering flexible premiums. As financial needs and objectives change, the policyowner can make adjustments to the premium and/or face amount of an Adjustable Life insurance policy. Adjustable life policies are able to provide these features by combining whole life and term life into a single plan. If a policyowner was looking for a policy in which they could control the amount and frequency of payments with a death benefit that can be adjusted as their life needs change, they would want an adjustable life policy. There typically are no dividends involved with adjustable life policies. Increasing the face amount may require a policyowner to provide proof of insurability. Usually, a customer with an Adjustable life policy has a special need for flexible premiums.

Question 24

Universal Life Policy:

Answer 24

incorporates flexible premiums and an adjustable death benefit. The investment gains from a Universal Life Policy usually go toward the cash value. The policyowner can use the cash value to manipulate the flexible aspects of a universal life insurance policy. A customer who wants a policy that gives them the most options and the most control would be looking for a Universal Life Policy. Universal policies use gains to fund the cash value and give the policyowner options for flexible premiums and adjustable death benefits.

Question 25

Variable Life Insurance Policy:

Answer 25

Require a producer to have proper FINRA and National Association of Securities Dealers (NASD) securities registration prior to selling any variable policy contract, whether it be life insurance or an annuity, as they include regulated securities. These policies are also known as interest sensitive policies. The policies usually have a fixed level premium, but the cash value and death benefits of a Variable Life policy can fluctuate according to the performance of its underlying investment portfolio. A typical Variable Life Policy investment account grows through mutual funds, stocks, and bonds. This includes Variable Life, Universal Variable life, Variable Whole Life, and Variable Annuity. If a policyowner or applicant was looking for a policy to offset inflation, they would want to look into a variable policy. Since the policyowner is assuming all of the investment risk and the rate of return is not guaranteed, a person must have proper FINRA securities registration in addition to an insurance license to sell any variable contracts.

Question 26

Variable Universal Whole Life:

Answer 26

the policyowner controls the investment of cash values and selects the timing and amount of premium payments. Variable Universal Life policies give a policy owner the best of both Variable Life and Universal Life. If a policy owner was looking for a policy that allowed them to control how much and when premium was due, what investment accounts were used for funding, and where the returns from those investment accounts went, they would be looking for a Variable Universal Life Policy. The policy owner can control the timing and amount of premium payments, as well as the investment of cash values with a Variable Universal Life Policy.

Question 27

Equity Index Universal Life Insurance:

Answer 27

Equity Index Universal Life Insurance or Equity Indexed Life combines most of the features, benefits and security of traditional life insurance with the potential of earned interest based on the upward movement of an equity index. Unlike, a traditional whole life plan, this plan allows policyholders to link accumulation values to an outside equity index like S&P 500. 80% to 90% of the premium is invested in traditional fixed income securities and the remainder of the premium is invested in contracts tied to a stipulated stock index.

These policies are characterized by a guaranteed minimum interest rate, tax deferral of interest accumulations, and policy loan access. The equity index returns are designed to keep pace with or beat inflation which protects the policyholder against downside market risk. Equity indexed life insurance contracts combine term life insurance with an investment feature, similar to a universal life plan. Death benefit amounts are based upon the coverage amount selected by the contract owner plus the account value.

Question 28

investor (or stranger) originated life insurance policy S(I)OLI

Answer 28

when the insured dies, the policyowner (investor) benefits. In normal circumstances, it is a beneficiary with insurable interest who benefits from the death of an insured. An investor originated life insurance policy is when an investor purchases a policy on the life of someone else to profit upon that person’s death. The investor is typically the policyowner, payor, and names themselves beneficiary. Usually, this is in exchange for a monetary living benefit for the insured. For example, L, the Investor, has taken out a $100,000 life insurance policy on E, the insured. L is the policyowner who will receive the $100,000 upon E’s death. E is the insured, and in exchange for allowing the policy on his life, receives $500 a month to help with bills. Investor or Stranger Originated Life Insurance Policies are illegal, as they are designed to circumvent the insurable interest requirements of an insurance contract and position the policyowner to benefit upon the death of the insured

Question 29

Cash Value:

Answer 29

investor (or stranger) originated life insurance policy S(I)OLI

Question 30

Endowment Policy:

Answer 30

is a contract providing for payment of the face amount at the end of a fixed period, at a specified age of the insured, or at the insured’s death before the end of the stated period.

Question 31

Juvenile Insurance:

Answer 31

is written on the lives of children who are within specified age limits and generally under parental control.

Question 32

Non-Medical Life Insurance:

Answer 32

typically does not require a medical exam and tends to be more expensive than medically underwritten policies. The insurer will average out everyone’s risk and charge accordingly. Although insurers typically will not require a medical exam, they will still inquire about the applicant’s medical history and lifestyle.

Question 33

Target Premium:

Answer 33

is a suggested premium used in Universal Life policies. It does not guarantee there will be adequate funds to maintain the policy to any time, especially to life. It may give an indication of what will be needed (under conservative estimates), to maintain the policy.