Chapter 4 Flashcards
Where would policy proceeds be paid if both the insured and primary beneficiary were killed in the same accident?
Contingent beneficiary
What does a life insurance policy guarantee to the stated beneficiary up on the death of the insured?
Specified amount of money
What is affected by the frequency of an insurance policy’s premium payments?
The cost
What is the purpose of a Section 1035 exchange?
Enables a life policy to be replaced with another life policy and results in postponement of the tax consequence.
A policyowner can receive a percentage payment of death benefits prior to death by using what kind of contract?
Viatical settlement agreement
What is the primary feature of a viatical settlement?
Reduced death benefit prepayment.
What factors determine an insured’s life insurance premium?
Age, occupation, and avocation (hobby).
If the beneficiary dies from the same accident of the insured individual, the insurer will proceed as if, what?
The insured outlived the beneficiary, allowing the proceeds to go to the contingent beneficiary.
Which policies have premiums that are averaged over the policy period?
Level premium term life insurance policies
How does life insurance create an immediate estate?
After the first premium is paid, the face amount may be available to the beneficiary.
Define “mortality factor”.
The measure of the number of deaths in a given population.
What is the “expense factor”?
The “loading charge” aka operating expenses.
What is a “paid-up” policy?
A single premium funding policy paid up with a single payment, normally associated with whole life.
What is “cash value”?
- A savings element of whole life policies that are payable before death.
- Value during early years typically will be less than the premiums paid.
What types of premiums are tax deductible?
- Premiums used for charity
- Paid by ex-spouse as court-ordered alimony
- Employer-paid premiums for group life
What types of premiums are NOT tax deductible?
Premiums used for individual life policies or business purposes.
What is the tax treatment of cash value?
As long as the policy is not surrendered, it grows tax-free.
What is “cost-basis”?
The total of premiums paid into the policy minus the total dividends received in cash or used to offset premiums.
How is the cost of a policy affected when a policyowner pays premiums more frequently?
The cost increases
What premium payment mode results in the highest overall cost?
Monthly
What is considered a major tax advantage of life insurance?
Income tax is typically not owed on proceeds paid directly to a beneficiary.
Naming a contingent beneficiary as “all surviving children” is described by what term?
Class designation
Pat is insured with a life insurance policy and Karen is his primary beneficiary. They are both involved in an automobile accident where Pat dies instantly and Karen dies 5 days later. Which policy provision will protect the rights of the contingent beneficiary to receive the policy benefits?
Common disaster clause
What is a viatical settlement?
A settlement in which a terminally ill viator may sell their life insurance policy to a third party (viatical/viatee) for a percentage of the face value.
If no one is named as a beneficiary of the beneficiary dies before the insured, where does the death benefit go?
To the insured’s estate.
Name, in order of succession, the types of beneficiaries.
Primary: First in line
Contingent: Second in line
Tertiary: Third in line or the estate
Per Stirpes
“By Bloodline”: if the beneficiary dies before the insured, the benefits will be paid to the beneficiary’s heirs.
Per Capita
“By Head”: Even distribution amoung all named living beneficiaries
What happens in the event of simultaneous death of insured and primary beneficiary?
The assumption will be the primary died first, allowing death benefits to be paid to contingent beneficiaries.
What is the spendthrift clause?
States that benefits are paid in a fixed amount over a certain period of time to prevent the beneficiary from reckless spending.
