Chapter 4- life insurance premiums

Question 1

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.

Answer 1

Accelerated Benefit (Option) Rider

Question 2

a beneficiary group designation (for example, all of my children), opposed to specifying one or more beneficiaries by name.

Answer 2

class designation

Question 3

common disaster provision

Answer 3

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.

Question 4

Earned premium

Answer 4

the amount of premium paid by the policyowner for policy coverage or insurance protection received up to this point.

Question 5

expense factor (also known as the loading charge)

Answer 5

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.

Question 6

the cash value will increase faster than the guaranteed rate if the insurer earns a greater return than the guaranteed rate.

Answer 6

excess interest provision

Question 7

fixed amount installment option

Answer 7

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

Question 8

a concept of averaging what would be the total single premium for a policy over periodic payments. More periodic payments = higher total premium.

Answer 8

Fixed or level premium

Question 9

A fixed period or period certain settlement option

Answer 9

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.

Question 10

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.

Answer 10

graded premium

Question 11

net premium for insurance plus commissions, operating and miscellaneous expenses, and dividends.

Answer 11

insurer’s gross premium

Question 12

interest factor

Answer 12

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

Question 13

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.

Answer 13

interest only option

Question 14

Irrevocable beneficiary

Answer 14

a beneficiary that may not be changed by the policy owner without the written consent of the beneficiary

Question 15

revocable beneficiary

Answer 15

the policy owner may change the beneficiary at any time without notifying or getting permission from the beneficiary

Question 16

joint and survivor option

Answer 16

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

Question 17

life income option

Answer 17

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

Question 18

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.

Answer 18

life settlement

Question 19

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.

Answer 19

lump sum option

Question 20

Modified premium

Answer 20

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

Question 21

demonstrates the incidence and extent of disability that may be expected from a given group of people.

Answer 21

morbidity rate

Question 22

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

Answer 22

mortality factor

Question 23

cost basis

Answer 23

the premium paid into the policy minus total dividends received in cash or used to offset premiums

Question 24

Net payment cost index

Answer 24

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.

Question 25

Net (single) premium

Answer 25

a premium calculation used to calculate an insurer’s policy reserves factoring in interest and mortality.

Question 26

evenly distributes benefits among all named living beneficiaries (i.e., all living children).

Answer 26

Per capita (meaning by the head)

Question 27

PER STIRPES

Answer 27

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)

Question 28

premium mode

Answer 28

the frequency in which a policyowner elects to pay premiums.

Question 29

the first beneficiary in line to receive benefit proceeds upon the death of an insured.

Answer 29

Primary Beneficiary

Question 30

policy proceeds:

In the case of a death benefit, it includes the __ __ plus any __ ___ less any outstanding loans and interest.

Answer 30

face value; earned dividends

Question 31

policy proceeds:

If surrender benefit, the amount includes any ___ ___ minus ___ ____ and outstanding loans and interest.

Answer 31

cash value; surrender charges

Question 32

policy proceeds:

If maturity, the benefit amount includes the ___ ___ less any ___ loans and interest.

Answer 32

cash value; outstanding

Question 33

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.

Answer 33

Settlement options

Question 34

Single premium funding

Answer 34

a policy funding option where the policy owner pays a single premium that provides protection for life as a paid-up policy

Question 35

level premium funding

Answer 35

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

Question 36

spendthrift clause

Answer 36

-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.

Question 37

surrender cost index

Answer 37

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.

Question 38

flexible premium funding

Answer 38

allows the policy owner to adjust the premiums throughout the life of the contract

Question 39

Uniform Simultaneous Death Act

Answer 39

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.

Question 40

viatical settlement

Answer 40

involves someone with a terminal illness selling their existing life insurance policy to a third party for a percentage of the death benefit.

Question 41

the new third-party owner in a viatical settlement

Answer 41

Viatee

Question 42

the original policy owner in a viatical settlement.

Answer 42

Viator

Question 43

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

Answer 43

facility of payment

Question 44

dividends are received

Answer 44

tax-free

Question 45

1035 exchange

Answer 45

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

Question 46

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

Answer 46

economic benefit doctrine

Question 47

life insurance proceeds paid to a beneficiary as a lump sum generally received ______

Answer 47

tax-free

Question 48

other factors that impact the premium amount include: (6)

Answer 48

• 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)

Question 49

exception to tax treatment-tax deductible (3):

Answer 49

• 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