Chapter 6 Flashcards
Accelerated benefit (option) 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.
this option is typically capped at 50% of the face value. to be considered terminally ill, a physician must certify that the person has a condition or illness that will result in death in two years. the amount of benefit received will be subtracted from the death benefit and is received tax free.
beneficiary
the person or entity designated in a life insurance policy to receive the death proceeds
cash value
the equity or savings element of whole life insurance policies
the primary living benefit that a whole life (permanent) insurance plan possesses during the life of the policy is its cash value build up. the cash that accumulates may be borrowed against or may be used as collateral. in addition, cash value may also be utilized as supplemental retirement income or may be withdrawn for emergencies or other situations where cash is needed.
Keep in mind, while cash value is available to the policy owner, depending on the policy, accessing that cash value can result in additional fees, taxes, interest charges, and or a reduction of the death benefit. during the early policy years the cash value of an insurance policy will typically be less than the premiums paid. remember, cash value is different from the insurance companies reserves (money set aside to pay future claims)
class designation
a beneficiary group designation (for example, all of my children), opposed to specifying one or more beneficiaries by name.
Common disaster provision
a provisions of the Uniform Simultaneous Death Act which ensures a policy owner 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 a specified period of time in order to receive the proceeds.
the goal of this clause is to protect the contingent beneficiary by not paying the proceeds to the primary beneficiary’s estate, as this would potentially cause undesired death taxes and probate charges to be assessed before the heirs receive what remains. if there is not a contingent beneficiary listed, the benefits will be paid to the insured’s estate, just as if the primary beneficiary died before the insured.
Contingent (secondary) beneficiary
the beneficiary second in line to receive death benefit proceeds if the primary beneficiary dies before the insured
earned premium
the amount of premium paid by the policy owner for policy coverage or insurance protection already received.
expense factor
aka loading charge. A measure of what it costs an insurance company to operate
derived from operating expenses, or funds the insurer pays out. these expenses include but are not limited to: death benefits paid; commissions or salaries to producers and other employees; and other administrative costs (i.e. rent). as mentioned previously, each state sets a minimum reserve, or funds the insurer must set aside to pay future claims.
Fixed amount installment option
pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted
fixed/level premium
a concept of averaging what would be the total single premium for a policy over periodic payments. more periodic payments = higher total premium
fixed period or period certain opetion
pays the death benefit proceed in equal installments over a set period of years. The dollar amount of each installment depends upon the total number of installments.
the fixed period option is valuable when the most important consideration is to provide income for a definite period of time (ex. until all children graduate from high school)
graded premium
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, and then remains fixed or constant for the life of the policy.
Gross (annual) premium
the net premium for insurance plus commissions, operating and miscellaneous expenses, and dividends
interest factor
a calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums
the interest is one of the ways an insurance company can lower the premium rates
interest only option
a death settlement option where the insurance company holds death benefit for a period of time and pays only the interest earn to the named beneficiary. a minimum rate of interest is guaranteed and the interest must be paid at least annually.
this option provides the beneficiary with flexibility since the proceeds may be left with the insurer which frees him or her of any investment worry while guaranteeing both principal and a minimum rate of return (ie. interest)
irrevocable beneficiary
a beneficiary which may not be changed by the policy owner without the written consent of the beneficiary
joint and survivor option
a settlement option which guarantees that benefits will be payed 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 payment is based on the recipients life expectancy and the amount of principal.
Life settlement
an agreement in which a policy holder sells or transfer 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
the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. unlike viatical settlements, life settlements do not require the insured to be suffering from a chronic or terminal illness in order to qualify to sell and transfer the policy. as with viatical settlements, a life settlement broker represents the policy owner and must hold an appropriate life settlement license.
Lump sum option
a death settlement option where death benefit is paid in a single payment, minus any outstanding policy loan balances and over due premiums. the lump sum option is considered the automatic (or default) option for more life insurance contracts.
Not taxable as income.
Modified premium
a premium funding option characterized by an initial premium that is lower than it should be during an introductory period of time (normally 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.
Morbidity Rate
demonstrates the incidence and extent of disability that may be expected from a given group of persons
Mortality rate
a 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 number of deaths in a group of people is usually expressed as deaths per thousand. insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group
Net payment cost index
a formula used to determine the true cost of a policy for a policy owner. it uses the same formula as the Surrender Cost Index with the exception that it doesn’t assume that the policy will be surrendered at the end of the period. the net payment cost is useful if one’s primary concern is the amount of death benefits provided in the policy.
Net single premium
a premium calculation used to calculate an insurers policy reserves factoring in interest and mortality
per capita (by the head)
evenly distributes benefits amongst all named living beneficiaries
per stirpes (by the bloodline)
evenly distributes benefits amongst a beneficiary’s heirs in the event that a beneficiary dies before the insured
primary beneficiary
the first beneficiary in line to receive benefit proceeds upon death of an insured
policy proceeds
the amount actually paid as a death, surrender, or maturity benefit. in the case of 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 less surrender charges and outstanding loans and interest. If maturity benefit the amount includes the cash value less any outstanding loans and interest.
reserves
the money set aside (required by the state’s insurance laws) to pay future claims
revocable beneficiary
a beneficiary that the policy owner may change at any time without notifying or getting permission from the beneficiary
settlement option
optional modes of settlement provided by most life insurance policies. options include lump-sum cash, interest-only, fixed-period, fixed-amount, and life income
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
Spendthrift clause
a clause which prevents creditors from obtaining any portion of the policy proceeds upon an insured’s death. additionally, the clause can be selected by the policy owner to prevent a beneficiary from recklessly spending benefits by requiring the benefits be paid in fixed amounts or installments over a certain period of time.
surrender cost index
a cost comparison calculation formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of that period
tertiary beneficiary
the third beneficiary in line to receive death benefit proceeds if the primary and contingent beneficiaries both die before the insured
unearned premium
premium which has been paid by a policy owner for insurance coverage which has not yet been provided
uniform simultaneous death act
states that 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 law will assume that the primary died first, this allows the death benefit proceeds to be 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. in this agreement, the owner of a life insurance policy sells the policy to another person in exchange for a bargained for payment, which is generally less than the expected death benefit under the policy. The original policy owner is called the Viator and the new third-party owner is called the Viatical, or sometimes referred to as the Viatee
life insurance premiums are calculated based on three primary factors
mortality factor or mortality rate
interest factor
expense factor
additional factors that may influence the premium
age sex/gender health occupation hobbies habits
benefits - naturally the higher the death benefit amount, the more the policy will cost. additionally, living benefits (ex. cash value in a whole life vs. no cash value in term) will also increase the policy cost
options and riders
premium mode - the mode utilized by the policy owner allows the insurer to assess an extra charge if premiums are paid quarterly, semi-annually or monthly (i.e. anything other than on an annual basis). these additional modes available make it more convenient for the policy owner to pay premiums.
premium mode
refers to the policy feature that permits the policy owner to select the timing (frequency) of premium payments.
aka Mode of Premium provision.
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. There is normally an additional charge if the policy owner chooses to pay the premium more than once per year because the company cannot earn as much interest and will have additional administrative costs in billing and collecting the premium payments. Therefore, the higher the frequency of payments, the more policy will cost the insured in total.
minimum deposit financing
a method of financing life insurance best suited for individuals in high marginal tax brackets. it allows the policy owner to use the policy loans to pay premiums due each year.
ex. the policy owner is allowed each year to borrow, subject to certain tax restrictions, that year’s cash value increase and use it to pay the premium. the policy owner only pays the difference between the premium due and the amount borrowed (plus interest on the policy loan)
policy dividends
a refund of part of the premium under a participating policy or a share of surplus funds. mutual company insurers derive dividends from savings in mortality and expenses. dividends may be used by the policy owner for cash payments, to pay the insurance premium, to purchase additional paid-up whole life insurance, to purchase one year term insurance, or as an investment to accumulate interest. Dividends do not reduce the death benefit.
2 methods to change a beneficiary
filing or recording method: the predominant method used and requires that the policy holder notify the insurer in writing of the desired change. the effective date of the change is the date of the request. some insurers require that the request be signed by a witness.
endorsement method: When the endorsement method is utilized, the policy is returned to the insurer so that the new beneficiary designation can be added to the policy.
Facility of payment
this provision permits an insurer to pay a portion or all of the policy proceeds to ANY individual who appears to be equitably entitled. Generally such a payment is provided to a party who paid for medical or financial expenses of the deceased insured. This may occur when a death claim is not filed within two months following the death of the insured.
Additionally this provision may be triggered when a minor is listed as beneficiary
Tax treatment of individual life insurance
premiums paid for individual life insurance policies are considered to be a person expense, and as such, are not tax-deductable.
premiums paid of life insurance may be tax-deductable to an employer if the insurance is used as an employee benefit. additionally, premiums for an insurance policy to benefit an ex-spouse as court-ordered alimony are tax-deductible.
Taxaction of proceeds paid at death
since premiums paid are not tax-deductable, the proceeds (death benefit) from the life insurance policy are generally paid income tax-free (tax exempt) to the named beneficiary, if taken as a lump sum.
