Chapter 6: Life Insurance Premiums, Proceeds and Beneficiaries Flashcards
Common Disaster Provision
Uniform Simultaneous Death Act
If both the insured and the primary beneficiary die withing a short period of time, the death benefits will be paid to the contingent beneficiary.
The primary beneficiary must outlive the insured by a specified period of time.
Expense Factor
AKA Loading Charge
A measure of what it costs an insurance company to operate.
Excess Interest
Whehe n the cash value will increase faster than the guaranteed rate if the insurer earns a greater return than the guaranteed rate.
Fixed Amount Installment Option
Pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted.
Fixed/Level Premium
Concept of averaging the cost over monthly periodic payments.
More periodic payments = higher total premium.
Interest Factor
Calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums.
Life Settlement
An agreement where the policyholder sell or transfer ownership in all or part of a life insurance party to a third party for less than the expected death benefit.
Modified Premium
Initial premium is lower than it should be (3-5 years).
After, premium increases and then remains level for the rest of the policy
Morbidity Rate
Incidence and extent of disability that may be expected from a given group of people.
Mortality Rate
Measure of the number of deaths, scaled to the size of population, per unit time
Net Payment Cost Index
A formula used to determine the actual cost of a policy for a policyowner.
Helps the consumer compare costs of death protection between policies that will be held for ten or twenty years.
Per Capita
AKA By the head
Evenly distributes benefits among all named living beneficiaries
Per Stirpes
AKA By Bloodline
Evenly distributes benefits amongst insured’s family line
Policy Proceeds
Amount actually paid as a death, surrender or maturity benefit.
Settlement Options (5)
1) Lump sum cash
2) Interest Only
3) Fixed-period
4) Fixed-amount
5) Life Income
Spendthrift Clause
Prevents creditors from obtaining any portion of policy proceeds upon death.
Also, the policyowner can prevent the beneficiary from spending it all by having the benefits paid out in fixed amounts over time after death.
Surrender Cost Index
A cost comparison calculation formula used to determine the average cost-per-thousand for a policy that is surrendered for its cash value.
Uniform Simultaneous Death Act
States that if the insured and the primary beneficiary die at approx the same time, in a common accident, the law will assume the primary died first.
Viatical Settlement
When someone with a terminal illness selling their existing life insurance policy to a third party for a percentage of the death benefit.
Viatical (Viatee)
New third party owner in a viatical settlement
Viator
The original policyowner in a viatical settlement
Factors in the premium calculation (3)
- Mortality
- Interest
- Expenses
Where does the mortality factor originate from?
The Commissioners Standard Ordinary Mortality Table
Interest Factor
An insurer’s return on investment.
Expense Factors (4)
AKA Loading Charge/Factor
Operating expense including:
Death benefits paid
Commissions
Salaries
Admin costs
Other factors that influence premium cost (7) include:
- Age
- Sex
- Health
- Occupation
- Hobbies
- Habits
- Travel
Net Premium Formula
Makes provision for mortality cost and interest.
Net single premium = mortality - interest.
Gross Premium
Actual premium paid
Gross premium = Net Premium + Insurer Expenses
Fixed/Level Funding
Averages the single premium over the policy period.
Policyowner pays more than the actual cost of insurance in early years to help cover the cost of insurance in later years; that is how it remains level
Minimum Deposit/Financed Insurance
Not an actual policy type
Best suited for individuals who are in a high marginal tax bracket; allows them to use policy loans to pay premiums that are due each year.
Use the cash value increase to pay the premium
Reserves
AKA Unpaid Claim Reserves
Funds set asided by an insureer to pay current and future claims.
Fixed liability
Legal Reserve
Amount of funds an insurance commissioner requires an insurer to maintain based on the CSO Mortality table and the assumed rate designated by the state commissioner or state insurance law.
What does the Interest Adjusted Net Cost Method provide information for? (4)
Provide information for :
1. Premiums
2. Death benefits
3. Cash value
4. Dividends
Index Numbers
Designed to give consumer a means of comparign the cost policies of the same generic type.
What 2 interest adjusted indexes must be used in policy illustrations according to the NAIC reg?
Surrender cost index
Net payemnt cost index
Net payment cost index
Useful for the insured who is concerned by the death benefit over the cash value.
Surrender Cost Index
Useful for the insured who is concerned over the cash value over the death benefit
Comparative Interest Rate Method
AKA Buy term and invest the rest strategy
Determines the rate of return thats required on an investment account to yield the same return as a life insurance policy that has cash value
Chronically ill
A person who need considerable supervision due to cognitive impairment or is unable to perform at least two activities of daily living
Terminally Ill
A person who’s not expected to survive a medical condition for more than 24 months
Life Settlement
The sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than the net death benefit.
Unlike viatical settlements, the insured doesn’t have to be chronical or terminally ill.
Life settlements do not include the following alternatives: (5)
1) Policy assigned as collateral for loan
2) Policy loans
3) 1035 exchange
4) An agreement in which all of the parties are closely related to the insured by blood law or substantial economic interest
5) Legitimate corporate or pension benefit plans
Death Benefit (other names, 5)
- Face Value
- Face Amount
- Coverage Amount
- Coverage Limit
- Policy Proceeds
Life Income Options (4)
- Single, Pure or Straight Life
- Refund Life Income
- Life Income w/ Period Certain
- Joint & Survivor Option
Single, Pure or Straight Life
- Life income, monthly payments
- Most significant amount of income
- Most risk due to no survivorship
Refund Life Income Option
AKA Joint Life Option
Guarantees the return of an amount that’s equal to the principal minus any payments.
Minimum guaranteed return
Once the primary beneficiary dies, his survivors may receive the refund on an installment basis or in a lump sum
Life Income w/ Period Certain
Pays a monthly income for as long as the beneficiary lives.
However if the beneficiary dies before a predetermined number of years, the insurer will continue monthly payments to a second beneficiary for the remainder of the years
Joint and Survivor Options
Guarantees that benefits will be paid on a life-long basis to 2 or more people.
May include a period certain with reduction in benefits once the primary beneficiary dies.
Amount payable is based on the age of both beneficiaries.
What are the 2 standard methods for changing a beneficiary?
- Filing method
- Endorsement method
Testementary Trust
Created at the time of the insured’s death according to a will.
Inter vivos trust
AKA Living Trust
Created during the life of the insured
Common Disaster Provision
Requires the beneficiary to survive 14-30 days past the insured.
If both die, then the death benefits are paid to the contingent beneficiary.
If the primary beneficiary lives past the minimum period, then the estate receives the payemnt
Spendthrift Clause
Protects a beneficiary from creditors with regard to life insurance proceeds.
When the death benefit is left with the insurer, no creditors can attach a lien of any kind to the proceeds.
When can life insurance be tax deductible? (3)
- To an employer (employee benefit)
- To provide for charitable contributions
- To benefit an ex-spouse as court-ordered alimony
Taxation of accelerated death benefit
Terminally ill (death within 2 years) will receive benefits tax free
Taxation of policy dividends
Tax exempt since they’re considered a return of overpaid/excess premiums.
What are the 3 exchanges allowed under the 1035 Rule?
- Life insurance > life insurance, endowment, annuity
- Endowment > endowment, annuity
- Annuity > annuity
It is not allowed to change an annuity > life insurance.
