chapter 4 life insurance premiums, proceeds and beneficiaries

Question 1

primary factors in premium calculations

Answer 1

1. mortality factor
2. interst factor
3. expense factor

Question 2

A measure of the number of deaths in a given population. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

Answer 2

mortality factor

Question 3

Insurance companies invest the premiums they receive in an effort to earn interest. The rate of earnings on investments is one of the ways an insurance company can reduce premium rates.

Answer 3

interst factor

Question 4

Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums. also known as the loading charge.

Answer 4

expense factor

Question 5

other factors that impact the premium amount include

Answer 5

• Age: The older the person, the higher probability of death and disability
• Sex / Gender: Women tend to live longer than men, so their premiums are usually lower
• Health: Poor health increases probability of death and disability
• Occupation: Hazardous job increases the risk of loss
• Hobbies: High risk hobbies also increase the risk of loss
• Habits: Tobacco use presents a higher risk than non-smokers

Question 6

Premium Payment Mode

Answer 6

refers to the premium payment schedule and permits the policyowner to select the timing of premium payments. Insurance policy rates are based on the assumption that the premium will be paid annually at the beginning of the policy year and that the company will have the premium to invest (interest factor) for a full year. If the policyowner chooses to pay the premium more than once per year (example monthly, quarterly, semi-annually) there normally will be an additional charge because the company will have additional charges in billing and collecting the premium payments.

Question 7

premium payment options

Answer 7

annual, semi-annual, quarterly and monthly

Note: The higher the frequency of payments = higher premiums

Question 8

the policyowner pays more in the early years for protection to help cover the cost in later years, which allows the premiums to remain level throughout the life of the policy. The shorter the premium-paying period , the higher the premiums, and vice versa.

Answer 8

Level Premium Funding:

Question 9

Money that together with future premiums, interest, and survivorship benefits will fulfill an insurance
company’s obligations to pay future claims.

Answer 9

Reserves

Question 10

Cash value applies to the savings element of whole life insurance policies that are payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid.

Answer 10

Cash Value

Question 11

Tax Treatment of Premiums

Answer 11

generally not deductible for life insurance and business life.

EXCEPTIONS
premiums used for a charity
premiums paid by an ex-spuse as court-ordered alimony
employer paid used to fund group life insurance benefit for employees

Question 12

Tax Treatment of Cash Values

Answer 12

If cash value is surrendered, the portion that exceeds the premiums paid is taxable. For policies that are not surrendered, the cash value grows tax-free. As long as the cash value stays in the policy taxes will never be imposed on any portion, not even the amount that exceeds the cost basis.

Question 13

Death Benefits:

Answer 13

These methods are known as settlement options. The policyowner may select a settlement option at the time of the application and may change the option at anytime during the life of the insured. Once selected, the settlement option cannot be changed by the beneficiary.

Question 14

Death benefit is paid in a single payment

Answer 14

Death Benefit Settlement Options-lump sum

Question 15

Insurance company holds death benefit for a period of time and pays only the
interest earned to beneficiaries.

Answer 15

Death Benefit Settlement Options- Interst Only

Question 16

Also called period certain. The fixed period option is when the insurer
pays proceeds (including interest and principal) in minimum guaranteed dollar
payments over a specified number of years.

Answer 16

Death Benefit Settlement Options-Fixed Period

Question 17

he fixed amount installment option pays a fixed death benefit in
specified installment amounts until the proceeds are exhausted. The larger the installment payment the shorter the payout period.

Answer 17

Death Benefit Settlement Options- Fixed Amount

Question 18

The life income option 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. This gives the potential for a greater return, or the potential for greater loss, based on how long the insured lives

Answer 18

Death Benefit Settlement Options-Life Income

Question 19

Benefits will be paid on a life-long basis to two or more people.

Answer 19

Death Benefit Settlement Options-Joint survivor

Answer 19

Death Benefit Settlement Options-Joint survivor

Question 20

Living benefit

Answer 20

A living benefit is the option to use some of the future death benefit proceeds when
they may be most needed, before their death, when the insured has a terminal illness.

Question 21

Allows someone that a physician certifies as terminally ill to access the death benefit. The amount of benefit received will be tax free.

Answer 21

Living Benefit Options-accelerated benefit

Question 22

Allows someone with a terminal illness to sell their existing life insurance policy to a third party for a percentage of the death benefit. The new owner continues to make the premium payments and will eventually collect the entire death benefit.
Note: the original policyowner is called the Viator and the new third-party owner is called the Viatical, or sometimes referred to as the Viatee.

Answer 22

Living Benefit Options-viatical settlement

Question 23

transfer for value rule, which applies when a life insurance policy is sold to another party before the insured’s death. Another tax cost typically associated with death is the Federal estate tax (although most relatively simple estates do not require the filing of an estate tax return).

Answer 23

Life insurance proceeds paid to a beneficiary are usually tax free if taken as a lump sum. The exception

Question 24

By Order of Succession:
* Primary: First in line to receive death benefit proceeds
* Secondary (contingent): Second in line to receive death benefit proceeds if primary beneficiary dies first
* Tertiary: Third in line to receive death benefit proceeds. If no one named, death benefit
will go to insured’s estate.
Distribution by Descent
* Per Stirpes: (meaning by the bloodline) In the event that a beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary’s heirs.
* Per Capita: (meaning by the head) Evenly distributes benefits among all named living beneficiaries.

Answer 24

types of beneficiaries

Question 25

An irrevocable designation may not be changed without the written consent of the beneficiary. The irrevocable beneficiary has a vested interest in the policy, therefore the policyowner may not exercise certain rights (such as taking out a policy loan) without the consent of the beneficiary.

Answer 25

irrevocable beneficiary

Question 25

An irrevocable designation may not be changed without the written consent of the beneficiary. The irrevocable beneficiary has a vested interest in the policy, therefore the policyowner may not exercise certain rights (such as taking out a policy loan) without the consent of the beneficiary.

Answer 25

irrevocable beneficiary

Question 26

If the insured and the primary beneficiary die at approximately the same time for a common accident with no clear evidence as to who died first, the Uniform Simultaneous Death Act law will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries.

Answer 26

simultaneous death

Question 27

With a common disaster provision, a policyowner can be sure that 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.

Answer 27

contingent beneficiary

Question 28

a policyowner can be sure that 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.

Answer 28

Common Disaster Provision

Question 28

a policyowner can be sure that 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.

Answer 28

Common Disaster Provision

Question 29

Prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time.

Answer 29

Spendthrift clause

Question 30

allows the insurance company to pay all or part of proceeds to someone not named in the policy that has a valid right. This is usually done on behalf of a minor or when the named beneficiary is deceased.

Answer 30

Facility of Payment

Question 31

allows the insurance company to pay all or part of proceeds to someone not named in the policy that has a valid right. This is usually done on behalf of a minor or when the named beneficiary is deceased.

Answer 31

Facility of Payment

Question 32

derwriting is the process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums. The underwriter will utilize several different types of information in determining the insurability of the individual.

Answer 32

risk classification

Question 33

application
credit report
warranty
representation
medical report
inspection report
Medical information Bureau (MIB)
special questionnaire
fair credit reporting act

Answer 33

underwriting process

Question 34

Part I – General Information – Age, DOB, Sex, Address, Marital Status, Occupation Part II – Medical Information – Health History
Part III – Agent’s Report – Agent’s personal observations of the applicant. Includes the applicant’s financial condition, character, purpose of sale,
and how long agent has known the applicant.

Answer 34

application

Question 35

An applicant’s credit history is sometimes used for underwriting and to determine the likelihood of making premium payments. The Fair Credit Reporting Act requires the applicant be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

Answer 35

credit report

Question 36

Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

Answer 36

warranty

Question 36

Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

Answer 36

warranty

Question 37

Statements made by applicants that are substantially true to the best of their knowledge, but not warrantied as exact in every detail.

Answer 37

representation

Question 38

• Forwarding the application to the insurer in a timely manner
• Seeking additional information about the applicant’s medical history if requested
• Notifying the insurer of any suspected misstatements in the application

Answer 38

 FIELD UNDERWRITING PROCEDURES

Question 39

• Forwarding the application to the insurer in a timely manner
• Seeking additional information about the applicant’s medical history if requested
• Notifying the insurer of any suspected misstatements in the application

Answer 39

 FIELD UNDERWRITING PROCEDURES

Question 40

s the process of predating the application a certain number of months to achieve a lower premium. A lower age results in a lower premium. A backdated application results in a backdated policy effective date, if approved by the insurer. Applications usually can only be backdated up to 6 months. This process is also known as “saves age”.

Answer 40

backdating

Question 41

verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application.

Answer 41

the statement of good health

Question 42

the policy is a good practice as it allows the producer to explain the coverage to the insured (such as the riders, provisions, and options). Personally delivering also builds trust and reinforces the need for the coverage. All of the following acts can be considered means of delivery: mailing policy to the agent; mailing the policy to applicant; and the agent personally delivering policy.

Answer 42

personal delivery