Chapter 4: Vocab

Question 1

annual renewable term (ART)

Answer 1

type of term insurance that permits the policyholder to purchase term insurance in subsequent years without evidence of insurability, but premiums on the policy increase each year to reflect the increasing mortality risk being undertaken by the insurer.

Question 2

annuity

Answer 2

periodic payment to an individual that continues for a fixed period or for the duration of a designated life or lives

Question 3

asset accumulation phase

Answer 3

this phase is usually from the early 20s to late 50s when additional cash flow for investing is low and debt to net worth is high

Question 4

assignment

Answer 4

the process of transferring all or part of the policy’s ownership rights

Question 5

beneficiary

Answer 5

a person or institution legally entitled to receive benefits through a legal device such as a will trust or life insurance policy

Question 6

capitalized earnings approach

Answer 6

method to determine life insurance needs that suggests the death benefits of a client’s life insurance should equal an income stream sufficient to meet the family’s needs without depleting the capital base

Question 7

conservation (risk management) phase

Answer 7

this phase is from late 20s to early 70s, when cash flow assets and net worth have increased and debt has decreased somewhat. In addition, risk management of events like employment, disability due to illness or accident, and untimely death become a priority

Question 8

decreasing term insurance

Answer 8

type of term insurance that allows the owner to pay the same premiums for insurance protection each year. The death benefit on the policy will, however, decrease each year to offset he increasing mortality cost due to the passage of time

Question 9

distribution (gifting) phase

Answer 9

this phase is from the late 40s to end of life and occurs when the individual has high additional cash flow, low debt, and high net worth

Question 10

first-to-die

Answer 10

type of joint life insurance policy that covers two individuals, but the death benefit is paid upon the death of the first individual

Question 11

grace period

Answer 11

a provision in most insurance policies that allows payment to be received for a certain period of time after the actual due date without a default or cancellation of the policy

Question 12

group term insurance

Answer 12

a type of life insurance coverage offered to a group of people (often a component of an employee benefit package) that provides benefits to the beneficiaries if the covered individual dies during the defined covered period

Question 13

guideline premium and corridor test

Answer 13

one of two congress-imposed tests to determine whether a life insurance contract meets the definition of a MEC. This test calls for the policy to be tested using actuarial principles and requires the premiums to represent no more than a specified portion of the death benefit

Question 14

human value life approach

Answer 14

method to determine life insurance needs that suggests the death benefit of a client’s life insurance should be equal to the economic value of the client’s future earnings stream

Question 15

illustration

Answer 15

a projection of the financial results that can be achieved with a life insurance policy, based on assumptions about premium payments , investment earnings, and dividends

Question 16

in force policy illustration

Answer 16

allows the planner and client to monitor the performance of the policy versus what was expected, enabling them to correct any potential problems before they occur

Question 17

insured

Answer 17

the person whose life is insured by the policy

Question 18

joint and survivor annuity

Answer 18

an annuity based on the lives of two or more annuitants, usually spouses. annuity payments are made until the last annuitant dies

Question 19

level premium term insurance

Answer 19

type of term insurance that charges a fixed premium each year over a specified period of years, so the premium does not increase over that period

Question 20

limited-pay polices

Answer 20

type of whole life policy with a payment schedule (typically 10 to 20 years). At the end of the payment period, the policy is considered to be paid up, at which time no additional premium payments are due

Question 21

modified endowment contract (MEC)

Answer 21

a cash value life insurance policy that has been funded too quickly, under a MEC, the death benefit payable to the beneficiary is not subject to income tax, but policy loans or cash value withdrawals are taxable

Question 22

modified whole life policies

Answer 22

type of whole life policy with lower premiums than a regular policy for an initial policy period (often 3 to 5 years), which increase to a higher-level premium at the end of the initial period

Question 23

mortality cost

Answer 23

equals the probability of dying within the year times the face value of the policy

Question 24

mortality risk

Answer 24

the risk that an individual will die within the year

Question 25

needs approach

Answer 25

method to determine life insurance needs that suggests the death benefits of a client’s life insurance should equal the cash needs that the family will require at death plus income replacement needs

Question 26

ordinary (or straight) life

Answer 26

type of whole life policy that requires the owner to pay a specified level premium every year until death (or age 100)

Question 27

owner

Answer 27

person or institution who owns the policy and can exercise the economic rights in a policy, including assignment, sale, etc. Also the person who is generally obligated for the payment of premiums

Question 28

riders

Answer 28

provision or endorsements that are added to the life insurance policy in order to increase or decrease benefits, waive a condition, or amend the original contract in some specific manner.

Question 29

second to die

Answer 29

type of joint life insurance policy that is often used in estate planning to provide liquidity at the death of the second spouse. A second to die policy names two insureds and pays the death benefit only when the second insured dies.

Question 30

7 pay test

Answer 30

one of two congress-imposed tests to determine whether a life insurance contract meets the definition of a MEC. This test states that if the cumulative premium payments made on the policy are in excess of the net level premium for the policy during the first seven years (or following a material change to the policy), the life insurance contract will be deemed a MEC

Question 31

simultaneous death provision

Answer 31

provision in a life insurance policy for situations in which the insured and beneficiary die within a short time of one another and it is not possible to determine who died first. Generally the policy death benefit is distributed as if the beneficiary had predeceased the insured.

Question 32

single premium policy

Answer 32

type of whole or universal life policy that requires the owner to pay a limp sum in return for insurance protection that will extend throughout the insured’s lifetime. These policies will always be MECs.

Question 33

suicide clause

Answer 33

provision in a life insurance policy specifying that the insurance company will not pay the benefit if the insured attempts or commits suicide within a specified period from the beginning of the coverage. The clause is designed to hedge against the risk that individuals with suicidal thoughts will purchase life insurance and commit suicide shortly after.

Question 34

surrender charge

Answer 34

a fee levied on a life insurance policyholder upon cancellation of the policy to cover the up front costs of issuing the policy

Question 35

survivorship clause

Answer 35

provision in a life insurance policy specifying that the death benefit will only be paid to the beneficiary if the beneficiary survives the insured by a specific number of days

Question 36

term insurance

Answer 36

a life insurance policy that states that if the premium has been paid and the insured dies during the term of the policy, the insurance company will pay the specified death benefit

Question 37

underwriting

Answer 37

the process by which insurance companies decide whether to provide insurance to an applicant and under what terms

Question 38

universal life insurance

Answer 38

type of term insurance with a cash-value accumulation feature allowing individuals to make premium contributions in excess of the term insurance premium. the excess premiums are deposited into an account with various investment options

Question 39

variable life insurance

Answer 39

type of life insurance policy that permits the owner of the life insurance policy to direct the investment of the policy’s cash value. variable policies typically offer a series of investment options that often include investment funds managed by the insurer and outside investment managers

Question 40

variable universal life insurance policies (VULs)

Answer 40

type of life insurance policy that combines variable and universal life insurance and gives the policyholders the option to invest as well as alter insurance coverage

Question 41

variable whole life policies

Answer 41

type of life insurance that provides for a fixed premium payment and permits the cash value of the policy to be professionally managed by the insurance company or an outside investment manager

Question 42

whole life insurance

Answer 42

type of insurance that provides guarantees from the insurer that are not found in term insurance and universal life insurance policies