Chapter 6 - Choosing and Replacing Life Insurance Policies

Question 1

Define Rating Services.

Answer 1

Refer to various company ratings to evaluate the financial strength of an insurer

Question 2

List the 5 factors Affecting Financial Strength of Insurer-Safety.

Answer 2

• Adequate surplus reserves.
• Quality and diversification of the investment portfolio.
• Cash flows and liquidity.
• Recent and historical earnings, earnings ability, and stability.
• Quality and continuity of the management team.

Question 3

Define Policy Illustrations

Answer 3

Hypothetical representation by the insurance company projecting policy performance.

Question 4

What are the 2 Types of Values in Policy Illustrations?

Answer 4

Guaranteed Values: Values guaranteed by the insurance company based on policy provisions (e.g., minimum earnings rate on cash value, level death benefit).
Nonguaranteed Values: Values not guaranteed by the insurance company, based on current or anticipated rates higher than the minimum guaranteed rate.

Question 5

List 3 risk factors in Policy Performance.

Answer 5

Mortality Assumptions: A major component of price and performance for term and whole life policies.
Investment Experience: Key for whole life policies (interest rate dependent), term policies not affected by interest rates, and variable products passing investment risk to the insured.
Lapse Experience: Pricing is better for companies with higher persistency rates; lapse and persistency statistics can be obtained from rating services.

Question 6

List the 2 Policy Evaluation Criteria.

Answer 6

Underwriting, investment performance, and management.
Appropriateness of illustration assumptions.

Question 7

Detail the 5 steps of analyzing a policy for evaluation.

Answer 7

Compare past dividend and interest rate histories with original illustrations.
Assess new features added to current policyholder’s policy.
Determine if the product line is a major business segment of the insurer.
Compare the average policy size of the sample to the policy size in question.
Set reasonable expectations based on historical experience and track performance.

Question 8

Define Replacement of a Life Insurance Policy.

Answer 8

Replacement occurs when a new policy is purchased and an existing policy is surrendered, lapsed, materially modified, or terminated.

Question 9

What are 2 reasons for a Life Insurance Policy replacement?

Answer 9

Changing life insurance needs.
Existing policy no longer meets the client’s needs.

Question 10

List 6 disadvantages of replacing a life insurance policy.

Answer 10

Insured may no longer be insurable or may be insurable only at higher rates.
The incontestable period may reset in the new policy.
Older policy may have features not available in new policies.
New policy may generate new acquisition costs.
Surrendering existing policy may result in taxable gain.
Premiums for replacement policy may be higher based on the insured’s attained age at issue.

Question 11

When considering a life insurance policy, one might also consider (3 things).

Answer 11

Assess the financial stability of the company issuing the new policy compared to the existing policy’s issuer.
Keep the existing policy in force until the new policy is received and examined.
Most states allow policyowners to return new policies for a full refund within a designated period (“free-look” period).