Definitions (Chapter 4, Section 1)

Question 1

Industrial life

Answer 1

insurance issues very small face amounts, such as $1000 or $2000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage.

Question 2

Ordinary Life Insurance

Answer 2

is life insurance of commercial companies not issued on the weekly premium basis. It is made up of several types of individual life insurance, such as temporary (term), permanent (whole).

Question 3

Group Life insurance

Answer 3

insurance written for members of a group, such as place of employment, association, or a union. Coverage is provided to the members of that group under one master contract. The group is underwritten as a whole, not on each individual member. One of the benefits of group life coverage is usually there is no evidence of insurability required.

Question 4

Term life

Answer 4

Gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period of time because it has a termination date. Term insurance is an inexpensive type of insurance, making it an attractive option for large policies. Term life is the CHEAPEST type of pure life insurance, and due to having a termination date and not having any cash value, it will ALWAYS be cheaper than a whole life policy with the same face value. It provides a pure death protection since it only pays a death benefit if the insured dies during the policy term.

Question 5

Level Term

Answer 5

is also called level premium level term, has level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. Life insurance written to cover a need for a specified period of time at the lowest premium is called Level Term Insurance.

Question 6

Decreasing Term

Answer 6

is term life insurance that provides an annually decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. A decreasing term policy is a type of life policy which has a death benefit that adjusts periodically (according to a schedule) and is written for a specific period of time. Decreasing term policies are usually written for a mortgage or other debt that typically decreases over time until it is paid off. After the debt is paid off, the insurance policy will expire.

Question 7

Credit Policies

Answer 7

are typically purchased using a decreasing term life insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining loan balance. Since Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding.

Question 8

Increasing term

Answer 8

is term life insurance that provides an increasing face amount over time based on specific amounts or a percentage of the original face amount.

Question 9

Convertible Term

Answer 9

is a provision that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. Convertible term provides temporary coverage that may be changed to permanent coverage without evidence of insurability. The conversion privilege of a group term life policy allows an individual to leave the group plan and convert his or her insurance to an individual (permanent) policy without providing evidence of insurability.

Question 10

Renewable term

Answer 10

is term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period. For example, if you have a 10 year renewable and convertible term; after the 10 years are up, the policy terminates or you can renew it. If you renew it the premium price will go up, and you will have the policy for another 10 years. This cycle continues until you are too old to renew or it’s too expensive. All TERM insurance has a final TERMINATION date where you can no longer renew it.

Question 11

Annual renewable term

Answer 11

is term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability.

Question 12

Term Rider

Answer 12

is a type of life insurance product which covers children under their parent’s policy. Family plan policies usually cover the family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is always level term. This is cheaper than every family member getting their own policy.

Question 13

Whole life

Answer 13

insurance provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium. All whole life has the same type of benefits. The only difference in types of whole life is how the policy is paid. Some will be paid straight until death or age 100, some will be paid for after a few years or by a specific age, some may give you a little discount in the early years to help you get started, etc. All whole life lasts until death or age 100, has a fixed premium, and level benefit with cash value accumulation, regardless of how it is paid.

Question 14

Whole life - Straight Life

Answer 14

premiums are payable throughout the insured’s lifetime, and coverage continues until the insured’s death. Said differently, premiums are payable as long as coverage is in force. Like all other whole life policies, straight whole life provides fixed premiums, a level death benefit, and cash value.

Question 15

Whole life - Limited Pay

Answer 15

the coverage remains on a limited-pay life policy until age 100 or death, whichever happens first. Even though the premium payments are limited to a certain period, the insurance protection extends until the insured’s death , or to age 100. For example, if you were to purchase a 20-pay policy, premiums would need to be paid for 20 years. After that, you would not be required to make any additional premium payments, and your coverage would be guaranteed until death or age 100.

Question 16

Whole life - Modified

Answer 16

is a policy where the premium stays fixed for the first 5 years, and then increases in year 6 and stays level for the remainder of the policy. Modified whole life has all of the same features of any other whole life except the insurance company cuts you a break on premium for the first few years.

Question 17

Whole Life - Modified Endowment Contract (MEC) - (Nontraditional Life Policy)

Answer 17

is best described as a policy that exceeds the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract. A MEC does not meet the 7-pay test and is considered over-funded, according to the IRS. For that reason, the policy will lose favorable tax treatment. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a 7 year period.

Question 18

Joint Life - (Special Use Policy)

Answer 18

Policy covers the lives of two individuals and saves on premium cost by averaging the ages of the two insureds. Joint life policies pay the face amount after the first person covered on the policy dies. The policy is shared between two people, and when one person dies, the other receives the entire benefit but would also no longer be insured.

Question 19

A Joint Survivor or Last Survivor- (Special Use Policy)

Answer 19

cover the lives of two individuals and saves on premium costs by averaging the ages of the two insureds. They only pay the death benefit upon the death of the last insured person. Said another way, it only pays out when the last person on the policy dies.

Question 20

Family Maintenance - (Special Use Policy)

Answer 20

policy pays a monthly income from the date of death of the insured to the end of the preselected period. The payment of the face amount of the policy is payable at the end of such preselected period.
-This is a combination of Whole life and level term insurance.

Question 21

Family Income- (Special Use Policy)

Answer 21

policies pay an income beginning at the insured’s death and continues for a specified period from the date of policy issue.
-This is a combination of Whole life and decreasing term insurance. (Because of the decreasing term insurance, the benefit begins to decrease as soon as the policy begins)

Question 22

Adjustable Life - (Nontraditional Life Policy)

Answer 22

policies owner is usually looking for a policy offering flexible premiums. As financial needs and objectives change, the policyowner can make adjustments to the premium and/or face amount of an Adjustable Life insurance policy. If a policyowner was looking for a policy in which they could control the amount and frequency of payments with a death benefit that can be adjusted as their life needs change, they would want an adjustable life policy. There typically are no dividends involved with adjustable life policies. Increasing the face amount may require a policyowner to provide proof of insurability.
-Adjustable life policies are able to provide these features by combining whole life and term life into a single plan.

Question 23

Universal life - (Nontraditional Life Policy)

Answer 23

incorporates flexible premiums and an adjustable death benefit. The investment gains from a Universal life Policy usually go toward the cash value. The policy owner can use the cash value to manipulate the flexible aspects of a universal life insurance policy. A customer who wants a policy that gives them the most options and the most control would be looking for a Universal Life Policy. Universal policies use gains to fund the cash value and give the policy owner options for flexible premiums and adjustable death benefits.

Question 24

Variable Life - (Nontraditional Life Policy)

Answer 24

policies require a producer to have proper FINRA and National Association of Securities Dealers (NASD securities registration prior to selling any variable policy contract, whether it be life insurance or annuity, as they include regulated securities. These policies are also known as interest sensitive policies. The policies usually have a fixed level premium, but the cash value and death benefits of a variable life can fluctuate according to the performance of its underlying investment portfolio. A typical Variable life policy investment account grows through mutual funds, stocks, and bonds. This includes Variable Life, Universal Variable Life, Variable Whole Life, and Variable Annuity. If a policyowner or applicant was looking for a policy to offset inflation, they would want to look into a variable policy. Since the policyowner is assuming all of the investment risk and the rate of return is not guaranteed, a person must have proper FINRA securities registration in addition to an insurance license to sell any variable contracts.

Question 25

Equity Index - (Nontraditional Life Policy)

Answer 25

Is permanent life insurance that allows policyholders to tie accumulation values to a stock market index such as the S&P 500. The cash value of an equity index policy will have a minimum rate of return. If the gain on the index goes beyond the policy’s minimum rate of return, the cash value will mirror that of the index. For example, say you have an Equity Index Policy with a guaranteed return rate of 5%. If the index (group of securities) tied to that policy generates a return of 10%, your cash value return rate will be 10%. If the index (group of securities) tied to that policy generates a return of 2%, your cash value return rate will be 5% (the guaranteed minimum). Equity index life insurance is permanent life insurance that allows policyholders the comfort of a guaranteed rate of return with the possibility of seeing a larger return.

Question 26

Investor (or stranger) originated life insurance policy (S(I)OLI) - (Nontraditional Life Policy)

Answer 26

when the insured dies, the policyowner (investor) benefits. In normal circumstances it is a beneficiary with insurable interest who benefits from the death of an insured. An investor originated life insurance policy is when an investor purchases a policy on the life of someone else to profit upon that person’s death. The investor is typically the policyowner, payor, and the names themselves beneficiary. Usually, this is in exchange for monetary living benefit for the insured. Investor or Stranger-Originated life insurance policies are illegal, as they are designed to circumvent the insurable interest requirements of an insurance contract and position the policyowner to benefit upon the death of the insured.

Question 27

Cash Value

Answer 27

is the equity amount or “savings” accumulation in a whole life policy.

Question 28

Endowment Policy

Answer 28

is a contract providing for payment of the face amount at the end of a fixed period, at a specified age of the insured, or at the insured’s death before the end of the stated period.

Question 29

Face amount plus cash value policy

Answer 29

is a contract that promises to pay at the insured’s death the face amount of the policy plus a sum equal to the policies cash value.

Question 30

Juvenile Insurance

Answer 30

is written on the lives of children who are within specified age limits and generally under parental control.

Question 31

Non-Medical Life Insurance

Answer 31

typically does not require a medical exam and tends to be more expensive than medically underwritten policies. The insurer will average out everyone’s risk and charge accordingly. Although insurers typically will not require a medical exam, they will still inquire about the applicant’s medical history and lifestyle.