Chapter 6

Question 1

Accelerated Benefit (Option) Rider:

Answer 1

The accelerated benefit rider 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.

Question 2

Beneficiary:

Answer 2

The beneficiary is the person or entity designated in a life insurance policy to receive the death proceeds.

Question 3

Cash Value

Answer 3

The cash value is the equity or savings element of whole life insurance policies.

Question 4

Class Designation:

Answer 4

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

Question 5

Common Disaster Provision

Answer 5

The common disaster provision is 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 ( Usually 14-30 days) in order to receive the proceeds. This is to protect the contingent beneficiary. For example, let’s assume that John has a life insurance policy covering his life. He designates his wife, Mary, as the primary beneficiary and all of his children equally as the contingent beneficiaries. While traveling for business, John and Mary are involved in a plane crash. When the paramedics arrive, John is found dead at the scene of the crash, but Mary is found alive and is rushed to the hospital. Unfortunately, Mary succumbs to her injuries and dies on the way to the hospital.
In this case, Mary definitively outlived John. Under the Uniform Simultaneous Death Act, since John technically died first, the proceeds of John’s life insurance policy will be paid to Mary’s estate, potentially creating both probate and tax issues, but also possibly being subject to creditors. However, since John’s policy also contained the common disaster provision, the insurance company will act as if Mary died first and pay John’s death benefit directly to his children.

Question 6

Contingent (Secondary) Beneficiary:

Answer 6

The contingent beneficiary is the beneficiary second in line to receive death benefit proceeds if the primary beneficiary dies before the insured.

Question 7

Earned Premium:

Answer 7

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

Question 8

Expense Factor:

Answer 8

The expense factor, also known as the loading charge, is a measure of what it costs an insurance company to operate

Question 9

Excess Interest:

Answer 9

The excess interest provision in life insurance means that the cash value will increase faster than the guaranteed rate if the insurer earns a greater return than the guaranteed rate.

Question 10

Fixed Amount Installment Option

Answer 10

A fixed amount installment option pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted

Question 11

Fixed/Level Premium:

Answer 11

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

Question 12

Fixed Period Or Period Certain Option

Answer 12

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.

Question 13

Flexible Premium Funding:

Answer 13

allows the policyowner to adjust the premiums throughout the life of the contract

Question 14

Graded Premium

Answer 14

A graded premium 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.

Question 15

Gross (Annual) Premium:

Answer 15

An insurer’s gross premium is the net premium for insurance plus commissions, operating and miscellaneous expenses, and dividends. Net Premium + Insurer expenses

Question 16

Interest Factor

Answer 16

The interest factor is the calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums.

Question 17

Interest Only Option:

Answer 17

The interest only option 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.

Question 18

Irrevocable Beneficiary

Answer 18

An irrevocable beneficiary is a beneficiary which may not be changed by the policyowner without the written consent of the beneficiary.

Question 19

Joint And Survivor Option:

Answer 19

The joint and survivor option is 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 20

Life Income Option:

Answer 20

The life income option is 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 21

Life Settlement:

Answer 21

A life settlement is 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. Unlike viatical settlements, life settlements don’t require the insured to be suffering from a chronic or terminal illness to sell and transfer the policy. With a life settlement, the policyowner may sell the policy to a life settlement firm for any reason.

Question 22

Lump Sum Option:

Answer 22

The lump sum option is a death settlement option where the death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums. The lump sum option is considered the automatic (or “default”) option for most life insurance contracts.

Question 23

Modified Premium:

Answer 23

Modified premium is 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 remains level or constant for the life of the policy.

Question 24

Morbidity Rate

Answer 24

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

Question 25

Mortality Rate

Answer 25

A mortality rate is the measure of the number of deaths (in general, or due to a specific cause) in some population, scaled to the size of that population, per unit time. The probability for death.

Question 26

Net Payment Cost Index:

Answer 26

Net payment cost index is 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 27

Net (Single) Premium

Answer 27

Net premium is a premium calculation used to calculate an insurer’s policy reserves factoring in interest and mortality. Mortality cost - interest

Question 28

PER CAPITA (By The Head):

Answer 28

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

Question 29

PER STIRPES (By The Bloodline)

Answer 29

Per stirpes evenly distributes benefits amongst an insured’s according to the family line, branch, or root (i.e., children and grandchildren)

Question 30

Premium Mode

Answer 30

The premium mode is the frequency in which a policyowner elects to pay premiums. Monthly is more expensive than annually, quarterly, or semi annually due to more operating fees.

Question 31

Primary Beneficiary:

Answer 31

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

Question 32

Policy Proceeds

Answer 32

Policy proceeds is the amount actually paid as a death, surrender, or maturity benefit. In the case of a death benefit, it includes the face value plus any earned dividends less any outstanding loans and interest. If surrender benefit, the amount includes any cash value, minus surrender charges, and outstanding loans and interest. If maturity, the benefit amount includes the cash value less any outstanding loans and interest

Question 33

Reserves:

Answer 33

An insurer’s reserve is the money set aside (required by the state’s insurance laws) to pay future claims

Question 34

Revocable Beneficiary

Answer 34

A revocable beneficiary is a beneficiary that the policy owner may change at any time without notifying or getting permission from the beneficiary

Question 35

Secondary or Contingent Beneficiary

Answer 35

The secondary or contingent beneficiary is the second individual(s) in line to receive the death benefit and will only receive the death benefit only if the (or all) primary beneficiary(s) has died prior to the insured. The primary beneficiary must predecease the insured in order for this secondary beneficiary to receive any proceeds.

Question 36

Settlement Options:

Answer 36

Settlement options 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.

Question 37

Single Premium Funding:

Answer 37

Single premium funding is a policy funding option where the policyowner pays a single premium that provides protection for life as a paid-up policy.

Question 38

Spendthrift Clause:

Answer 38

The spendthrift clause prevents creditors from obtaining any portion of policy proceeds upon an insured’s death. Additionally, the clause can be selected by the policyowner 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 39

Surrender Cost Index:

Answer 39

The surrender cost index is 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 policyowner plans to surrender the policy for its cash value in ten or twenty years

Question 40

Tertiary Beneficiary

Answer 40

The tertiary beneficiary is the third beneficiary in line to receive death benefit proceeds. The tertiary beneficiary will only receive the death benefit if both the primary and contingent beneficiaries die before the insured.

Question 41

Total Premium:

Answer 41

The earned and unearned premiums make up the insurer’s total premium

Question 42

Underwriting Department:

Answer 42

The underwriting department is the department within an insurance company responsible for reviewing applications, approving or declining applications, and assigning risk classifications.

Question 43

Unearned Premium

Answer 43

Unearned premium includes the premium that has been paid by a policyowner for insurance coverage that has not yet been provided. For example, let’s assume that an individual’s insurance policy costs $120 per year, and she pays the full amount on January 1. On April 1, the insurance company has only earned $30 ($120 ÷12 months x three months of coverage). If the individual cancels her policy with an effective cancellation date of 7/1, the insurance company owes her a refund of $60 for unearned premium ($10/month x six months remaining of the amount paid in advance).

Question 44

Uniform Simultaneous Death Act:

Answer 44

The 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.

Question 45

Viatical Settlement

Answer 45

A 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 owner continues to make the premium payments and eventually collects the full death benefit when the original owner dies

Question 46

Viatical (Viatee):

Answer 46

A Viatee or viatical is the new third-party owner in a viatical settlement.

Question 47

Viator:

Answer 47

The Viator is the original policyowner in a viatical settlement

Question 48

Index Numbers:

Answer 48

are designed to give consumer a means of comparing the cost of policies of the same generic type.