Chapter 4- life insurance premiums Flashcards
allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness and is certified by a physician as expected to die within 1-2 years.
Accelerated Benefit (Option) Rider
a beneficiary group designation (for example, all of my children), opposed to specifying one or more beneficiaries by name.
class designation
common disaster provision
a provision of the Uniform Simultaneous Death Act, which ensures a policyowner if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary.
- It also states that the primary beneficiary must outlive the insured by a specified period of time in order to receive the proceeds.
Earned premium
the amount of premium paid by the policyowner for policy coverage or insurance protection received up to this point.
expense factor (also known as the loading charge)
a measure of what it costs an insurance company to operate.
- each policy an insurer issues mist carry its proportionate share of the costs for employees’ salaries, agents’ commissions, maintenance costs, rent or mortgage payments, etc.
the cash value will increase faster than the guaranteed rate if the insurer earns a greater return than the guaranteed rate.
excess interest provision
fixed amount installment option
pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted.
-the larger the installment payment the shorter the payout period
a concept of averaging what would be the total single premium for a policy over periodic payments. More periodic payments = higher total premium.
Fixed or level premium
A fixed period or period certain settlement option
pays the death benefit proceeds in equal installments over a set period of years. The dollar amount of each installment depends upon the total number of installments.
as a premium funding option characterized by a lower premium in the early years of the contract, with premiums increasing annually for an introductory period. After the introductory period, the premium jumps to an amount higher than what the initial level premium would have been. It then remains fixed or constant for the life of the policy.
graded premium
net premium for insurance plus commissions, operating and miscellaneous expenses, and dividends.
insurer’s gross premium
interest factor
is the calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums.
- the rate of earnings on investment is one way insurance companies can reduce premium rates
as a death settlement option where the insurance company holds the death benefit for a period of time and pays only the interest earned to the named beneficiary. A minimum rate of interest is guaranteed, and the interest must be paid at least annually.
interest only option
Irrevocable beneficiary
a beneficiary that may not be changed by the policy owner without the written consent of the beneficiary
revocable beneficiary
the policy owner may change the beneficiary at any time without notifying or getting permission from the beneficiary
joint and survivor option
a settlement option that guarantees that benefits will be paid on a life-long basis to two or more people. This option may include a period certain, and the amount payable is based on the ages of the beneficiaries
life income option
A death benefit settlement option which provides the beneficiary with an income that they cannot outlive. Installment payments are guaranteed for as long as the recipient lives. The amount of each installment is based on the recipient’s life expectancy and the amount of principal
an agreement in which a policyholder sells or transfers ownership in all or part of a life insurance policy to a third party for compensation that is less than the expected death benefit of the policy.
life settlement
a death settlement option where the death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums.
- considered the automatic (or “default”) option for most life insurance contracts.
lump sum option
Modified premium
a premium funding option characterized by an initial premium that is lower than it should be during an introductory period of time (usually the first three to five years). After this time, the premium will increase to an amount greater than what the initial level premium would have been and then remain level or constant for the life of the policy
demonstrates the incidence and extent of disability that may be expected from a given group of people.
morbidity rate
a measure of the number of deaths (in general, or due to a specific cause) in a given population
- use tables to help predict the life expectancy and probability of death for a given group
mortality factor
cost basis
the premium paid into the policy minus total dividends received in cash or used to offset premiums
Net payment cost index
a formula used to determine the actual cost of a policy for a policyowner. It helps the consumer compare costs of death protection between policies that will be held for ten or twenty years.
Net (single) premium
a premium calculation used to calculate an insurer’s policy reserves factoring in interest and mortality.
evenly distributes benefits among all named living beneficiaries (i.e., all living children).
Per capita (meaning by the head)
PER STIRPES
in the event that a beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary’s heirs
(meaning by The Bloodline)
premium mode
the frequency in which a policyowner elects to pay premiums.
the first beneficiary in line to receive benefit proceeds upon the death of an insured.
Primary Beneficiary
policy proceeds:
In the case of a death benefit, it includes the __ __ plus any __ ___ less any outstanding loans and interest.
face value; earned dividends
policy proceeds:
If surrender benefit, the amount includes any ___ ___ minus ___ ____ and outstanding loans and interest.
cash value; surrender charges
policy proceeds:
If maturity, the benefit amount includes the ___ ___ less any ___ loans and interest.
cash value; outstanding
are optional modes of settlement provided by most life insurance policies. Options include lump-sum cash, interest only, fixed-period, fixed-amount, and life income.
Settlement options
Single premium funding
a policy funding option where the policy owner pays a single premium that provides protection for life as a paid-up policy
level premium funding
the policy owner pays more in the early years for protection to help cover the cost in later years, which allows the premiums to remain level
- the shorter the premium-paying period = the higher the premiums
spendthrift clause
-prevents creditors from obtaining any portion of policy proceeds upon an insured’s death.
- the clause can be selected by the policy owner to prevent a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time.
surrender cost index
a cost comparison calculation formula used to determine the average cost per thousand for a policy that is surrendered for its cash value.
- It aids in cost comparisons if the policy owner plans to surrender the policy for its cash value in ten or twenty years.
flexible premium funding
allows the policy owner to adjust the premiums throughout the life of the contract
Uniform Simultaneous Death Act
states that if the insured and the primary beneficiary die at approximately the same time, in a common accident, with no clear evidence as to who died first, the law will assume that the primary died first. Therefore, the death benefit proceeds are paid to the contingent beneficiaries.
viatical settlement
involves someone with a terminal illness selling their existing life insurance policy to a third party for a percentage of the death benefit.
the new third-party owner in a viatical settlement
Viatee
the original policy owner in a viatical settlement.
Viator
allows the insurance company to pay all or a part of the proceeds to someone not named in the policy that has a valad right.
- often done on behalf of a minor or when the named beneficiary is deceased
facility of payment
dividends are received
tax-free
1035 exchange
an existing life insurance policy is assigned to another insurer for a new contract, the transaction may be treated for tax purposes
- policy exchanges that qualify are not taxable
requires that any benefit granted to an individual that has an economic or financial value be included as compensation for income tax purposes in the year the benefit is granted
- individual life insurance generally avoids this doctrine since premature death can cause a substantial risk to a surviving family
economic benefit doctrine
life insurance proceeds paid to a beneficiary as a lump sum generally received ______
tax-free
other factors that impact the premium amount include: (6)
- age (older = higher premium)
- sex/gender (women = lower premium)
- health (poor health = higher premium)
- occupation (hazardous jobs = higher)
- hobbies (high risk hobbies = higher)
- habits (tobacco users = higher)
exception to tax treatment-tax deductible (3):
- premiums used for a charity are tax-deductible
- life insurance premiums paid by an ex-spouse as court-ordered alimony are tax-deductible
- employer-paid premiums used to fund group life insurance for the benefit of the employees are tax-deductible
