Insurance - ch 4 Flashcards

Question

UNIVERSAL LIFE INSURANCE Advantages ? Disadvantages ?

Answer 1

UNIVERSAL LIFE INSURANCE Advantages * Flexible premiums * Death benefit may increase. * Tax-deferred growth in the accumulation account * Cash value can be accessed through loans or withdrawals. Disadvantages * More expensive than term insurance * If target premiums not met, a large amount may be needed to policy in force

Answer 2

Whole Life Insurance or Permanent Life Insurance * Whole life policies provide lifetime protection if premiums are paid as agreed. * All whole life policies pre-fund future higher mortality costs using present value analysis. * Cash Value Increases to face value at age 100 (or 120) * Death Benefit Level throughout the term of the policy * Premium Typically, level throughout the term of the policy

Answer 3

WHOLE LIFE INSURANCE Whole Life Insurance * Premium patterns may vary widely from single premium to increasing premiums. * Whole life policies have a savings or investment component with earnings accruing on the residual of the premium less the cost for the year plus any previous savings balance. * Cash values may be accessed via loans or may be received if the policy is surrendered. * Cash values usually have a minimum guaranteed rate of interest. * Whole life policies may be participating or non-participating.

Answer 4

Whole Life Insurance: Various Types * Ordinary Life: Pay premiums until age 100 (or 120) or death * Limited Pay Life: Premiums are higher than ordinary life, only pay premiums for a specified number of years or until a specific age. * Variable Life: Cash value is invested in subaccounts that invest in securities such as stocks, bonds, real estate, or money market instruments

Answer 5

WHOLE LIFE INSURANCE "FIXED PRODUCT " Advantages * Tax deferred growth of cash value (the earnings portion on the cash value is not taxed each year) * Permanent until age 100 (or 120). * Guaranteed premium , Growth on Cash Value, Death Benefit * Cash value can be accessed WITH LOANS * Compulsory savings Disadvantages * Expensive, and premiums are inflexible. * Low guaranteed returns on the cash value * Insured may not be able to purchase as much protection. * NO hedge against inflation ( since a fixed product )

Answer 6

WHOLE LIFE INSURANCE uses : * Permanent life insurance needs * Estate planning purposes ( term is NOT good for estate planning since its only not permanent)

Answer 7

CUSTOMIZED WHOLE LIFE POLICIES First-to-Die $$$ * Provides death benefits when the first insured dies. First-to-die life expectancy is less than either single life expectancy. Second-(or Last-) to-Die $ * Provides death benefits when second (or last) insured dies * Second-to-die life expectancy is greater than either individual life expectancy. * Ready for Estate taxes

Answer 8

WHOLE LIFE DIVIDEND OPTIONS " C R A P O " May receive dividends in the form of: * C ash * R educed premiums * A ccumulate at interest * P aid-up additions * O ne-year term (5th dividend

Answer 9

SURRENDER CHARGES * Costs of issuing a policy typically exceeds first year premium * Surrender charges help insurance company recoup costs for policies surrendered early

Answer 10

LIFE INSURANCE: NONFOREITURE OPTIONS: * Cash Surrender Value - take cash and run * Reduced Paid-up Insur. - Stop paying, but get lower DB * Extended Term Insur. - Step paying, get TERM for X yrs w/ full DB

Answer 11

LIFE INSURANCE POLICY ILLUSTRATIONS * A projection of the financial results that might be achieved with a life insurance policy * Used to educate applicants on how the policy will (may) perform * In-force policy illustrations are used by financial planners to monitor the performance of the policy versus what is expected

Answer 12

MODIFIED ENDOWMENT CONTRACTS MEC Withdrawals - LIFO * If the policy is a Modified Endowment Contract (MEC), then withdrawals and loans are taxed on a LIFO basis. - A MEC is determined at inception of the policy if you pay faster than a 7-year corridor (7 pay test). IF FAILS, THEN A MEC - A single premium policy (issued on or after June 21, 1988) is always a MEC. - Policy that is not a MEC upon issue may become a MEC if there are material changes made to the contract. - Withdrawals and loans taxed as ordinary income until all earnings have been withdrawn. - MECs subject to a 10% penalty on taxable withdrawals/loans before the age of 59½.

Answer 13

Group Term Insurance * A popular employee fringe benefit covering eligible employees under one master contract * Death benefit for each employee may be a flat amount or a multiple of salary. * Premiums paid by the employer are deductible by the employer. * The first $50,000 of death benefit paid for by the employer is tax free to the employee. * Premiums for death benefits in excess of $50,000 paid for by the employer are taxable to the employee based on the Table 1 rates, reduced by amounts paid by the employee.

Answer 14

TAXATION OF GROUP TERM BENEFITS RECEIVED DURING LIFE * Frodo, age 40, earns $75,000 per year and has group term life insurance through his employer equal to twice his salary. The employer pays the full premium. What amount will Frodo be taxed on? * Based on Table 1 for IRC Section 79 the monthly cost for excess coverage is $0.10 per $1,000 in excess coverage, therefore: $75,000 x 2 = $150,000 Death Benefit $150,000 - $50,00 exclusion = $100,000 in excess coverage (100,000/1,000) * 0.10 * 12 = $120 imputed income

Answer 15

group Whole Life Insurance * Allows employee to accumulate savings for retirement through cash value of policy * Premiums paid by the employer are taxable income to the employee (including premiums paid on the first $50,000 of coverage)

Answer 16

LIFE INSURANCE POLICY PROVISIONS (1 OF 3) Grace Period___________________________________ * Typically, 31-61 days after the premium due date in which policy remains in force Incontestability * Time period after which the policy can not be canceled Misstatement of Gender or Age * Policy adjustment will be made Assignment: __________________________________ Owner assigns rights to someone else * Absolute Assignment - full transfer to another person * Collateral Assignment - policy used as collateral for loan Suicide_______________________________________ * Coverage is excluded if suicide committed within 1or 2 years of purchasing the policy.

Answer 17

LIFE INSURANCE POLICY PROVISIONS Reinstatement - " beyond the grace period " * The policy will specify that reinstatement without evidence of insurability is available for a short time after expiration of the grace period (usually 31 days), after which evidence of insurability will be required. Policy Loan Provisions - " borrow against the policy " * Any loan outstanding at the death of the insured, plus accrued interest on the loan, is deducted from the death benefit paid to the policy beneficiary

Answer 18

BENEFICIARY DESIGNATIONS * The individual or organization that will receive the death benefit upon the death of the insured is referred to as the primary beneficiary. * Contingent beneficiaries will receive the death benefit if the primary beneficiary is not available to receive the policy proceeds.

Answer 19

COMMON RIDERS * Waiver of premium rider- "don't pay if disabled " * Double indemnity rider - "if die in accident pays 2X the DB " * Guaranteed insurability option (GIO, or guaranteed purchase options, GPO) rider * Long-term care rider

Answer 20

SETTLEMENT OPTIONS FOR LIFE INSUR. " death benefit options " * Lump-Sum Payment * Interest Only * Annuity Payments Fixed Amount Life Income Fixed Period Life Income with Period Certain Joint and Last Survivor Income

Answer 21

POLICY REPLACEMENTS * An existing life insurance policy is replaced by a newly-issued policy. * Advantages: Ability to adjust to life changes Newer policies may have enhanced features. * Disadvantages: Higher premiums due to increased age Subject to initial year costs and clauses EXCHANGING AN ANNUITY TO > LIFE IS TAXABLE !!!

Answer 22

Annual Renewable Term (ART) - Type of term insurance that permits the policyholder to purchase term insurance in subsequent years " without evidence of insurability," but premiums on the policy increase each year to reflect the increasing mortality risk being undertaken by the insurer

Answer 23

Assignment - The process of transferring all or part of the policy’s ownership rights.

Answer 24

Capitalized-Earnings Approach - Method to determine life insurance needs that suggests "the death benefits of a client’s life insurance should equal an income stream " sufficient to meet the family’s needs without depleting the capital base.

Answer 25

"meets the definition of a MEC. " " death benefit."

Answer 26

" economic value of the client’s future earnings stream."

Answer 27

payment schedule (typically 10 or 20 years). payment period,

Answer 28

" too quickly. " MEC Under a MEC, the death benefit payable to the beneficiary is " not subject to income tax," but policy loans or cash value withdrawals are " taxable. "

Answer 29

" lower premiums " " increase to a higher-level premium "

Answer 30

Mortality Cost - Equals the probability of dying within the year times the face value of the policy.

Answer 31

" the cash needs that the family will require at death plus income replacement needs. "

Answer 32

level premium every year until death (or age 100)

Answer 33

"liquidity at the death of the second spouse." "when the second insured dies."

Answer 34

MEC. " "excess of the net level premium for the policy during the first seven years "

Answer 35

" not possible to determine who died first," " beneficiary had predeceased the insured."

Answer 36

a lump sum " " MECs. "

Answer 37

beneficiary survives the insured by a specific number of days.

Answer 38

" term insurance with a " "cash-value accumulation Feature" various investment options.

Answer 39

direct the investment of the policy’s cash value. investment funds managed by the insurer and outside investment managers.

Answer 40

variable and universal life insurance

Answer 41

fixed premium payment professionally managed by the insurance company or an outside investment manager.

Answer 42

guarantees term insurance and universal life insurance policies.

Answer 43

Solution: The correct answer is F. F, Variable Life

Answer 44

VARIABLE LIFE FIXED premium, variable death benefit, DB has a guarantied min. but can increase with cash value growth No Min rate of return guarantee Insured directs investments

Answer 45

VARIABLE UNIVERSAL LIFE Flexible premium, variable death benefit, insured directs investments FLEXIBLE - PREM, CASH , DEATH BENEFIT No Min guaranteed rate of return or interest Insured direct investments (SUBACCOUNTS )

Answer 46

Nonforfeiture Options * Cash Surrender Value -Insured receives the accumulated cash value when terminating the life insurance policy. -Surrender charges may be imposed. * Reduced Paid-up Insurance -Receives the cash value in the form of a paid-up policy with a smaller face amount. * Extended Term Insurance - Receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.

Answer 47

TERM LIFE -------------------------------------------------------------- * Premiums -LEVEL and LOWER * Face Value / Death Benefit - LEVEL * Savings Component NO * Investment Options NO * Who directs investment of cash values NO * Mortality - only benefit, Temprary "renting" tied to something" college cost, mortgage" etc,,, GOOD_________ -LOW COST -CONVERT TO PERMANENT BAD___________ -TEMPORARY -RENEWALS ARE HIGHER -NO CASH VALUE

Answer 48

WHOLE LIFE ------------------------------------------------------------------- * Premiums - FIXED GUARANTEED * Face Value / Death Benefit -FIXED GUARANTEED DB * Savings Component - CASH VALUE * Investment Options - CASH * Who directs investment of cash values - INSURANCE COMPANY GOOD _______________ -Guaranteed Premiums, growth of cash and Death benefit -Permanent protection -Cash value assess thru loans -Compulsorily savings BAD ____________ -NO HEDGE AGAINST INFLATION -LOW RETURNS GUARANTEES -HIGH PREM IN EARLY YEARS

Answer 49

VARIABLE LIFE ------------------------------------------------------------------- * Premiums - FIXED * Face Value / Death Benefit FIXED * Savings Component - CASH VALUE * Investment Options * Who directs investment of cash values OWNER DRIVEN GOOD________________ -Potential for higher cash value growth -DB may increase with increase with cash BAD ________________ -Higher fees -Cash value could fall to 0 -Add'l prem may be required -complex -Restrictive policy loans

Answer 50

UNIVERSAL & VARIABLE UNIVERSAL ------------------------------------------------------------------ * Premiums - FLEXIBLE , ( has TARGET PREM ) * Face Value / Death Benefit -FLEXIBLE * Savings Component - YES UNIVERSAL - CASH, / VARIABLE - SUBACCOUNTS * Investment Options * Who directs investment of cash values * Taxation of Withdrawals if a MEC - IF VIOLATES THE 7 PAY TEST- MEANS ITS OVER FUNDED -TAXED LIFO " GAINS ARE FIRST "

Answer 51

1, 3, and 4. Rationale This question asks what information is needed to calculate the value of a life. Clearly you need options 1, 3, and 4. Social Security benefits are generally received after retirement and, therefore, are not counted.

Answer 52

A 20-year term insurance policy. Rationale Marsha has insufficient income and net worth to meet both objectives, and therefore she should meet the most important objective of protecting her child from her untimely death. Options b, c, and d are all permanent life insurance policies with premiums seven to ten times higher than the premium for the 20-year term insurance policy for the same death benefit.

Answer 53

Those beneficiaries who live only a short time provide funds to sustain the benefits for the fortunate survivors. Rationale Those who elect the straight or pure life-income option and then die within a short time leave no continuing benefit for anyone. The life insurance company actuary can determine the probability of survival or death for a large group of beneficiaries. Those who die do not receive the full amount of their death proceeds. What the deceased people do not receive can be given to those who survivE

Answer 54

A two-year incontestable clause makes the misstatement of age clause inapplicable after two years.

Answer 55

The coverage is generally issued without evidence of insurability.

Answer 56

GROUP TERM LIFE Rationale Group term life insurance is the most common type of group life insurance due to the relatively inexpensive premiums and the tax benefit to the employee on the first $50,000 of death benefits paid for by the employer.

Answer 57

1, 3, and 4. Rationale The value of the life lost is not considered. Rather, the focus is on the needs of the surviving dependents.

Answer 58

$1,000. Rationale The amount to be received free of tax is the full face amount of the policy, which is $10,000. The beneficiary chooses to receive this sum on a fixed-period option over 10 years. The nontaxable portion each year is, therefore, $1,000, the face amount of the policy ($10,000) divided by the payment period (10 years). Amounts received annually in excess of $1,000 are taxable to the beneficiary. as interest income.

Answer 59

The net premium is greater than the mortality costs of the early years. Rationale Since mortality is lower in the early years than in the later years for the whole group of insured lives, the insurer has more dollars received from premium payments than are needed to pay death benefits in the early years. The excess dollars build the cash values for the surviving insured-policy owners.

Answer 60

1, 2, and 3. Rationale All three statements are correct

Answer 61

Whole life. Rationale Whole life will have fixed premiums that will force Booker to pay premiums and build cash value. The policy is permanent, so it will last for his lifetime.

Answer 62

1 and 2. Rationale Statement 1 is a correct statement because the premium amount which is waived is essentially the amount of the disability income payable. Statement 2 is a correct statement because the death benefit increases if death occurs within 90 days of the accident. Statement 3 is not a correct statement because evidence of insurability is not required.

Answer 63

1 and 3. Rationale Only the funds supporting variable annuities and variable life insurance are invested through an insurer’s separate accounts (subaccounts). For all other individual contracts, the funds are invested as part of the general accoun

Answer 64

c. The death benefit is guaranteed to be equal to the face value. Rationale All statements are correct except option c. The minimum death benefit of the variable universal life policy is guaranteed. In addition, another characteristic of the policy is that the premium payments on the policy can be variable, subject to a required minimum to prevent laps

Answer 65

The period of time when the youngest child has reached age 16 and the spouse’s Social Security retirement or widow(er) benefits have not started. Rationale The blackout period is after the children have reached age 16 and before the surviving spouse is eligible for Social Security retirement or widow(er) benefits.

Answer 66

Consequently, a surrender of the policy for its cash value would result in taxable income to the contract owner (Rosa), amounting to the difference between the cash value and the contract cost basis (generally, premium paid less dividends received). ___________________________________________________________________ Statement 3 is not a correct statement because life insurance proceeds paid by reason of death are not taxable income even if the policy is a MEC.

Answer 67

UNIVERSAL LIFE FLEXIABLE because the insured may adjust: - Premiums -Face Value - Cash Value * insured DOES NOT direct the investment portion. * Cash value can be used to pay the premiums. Universal Life-A DB = Face value of policy * A flexible premium, adjustable death benefit unbundled life insurance contract Universal Life-B DB = Death Benefit + cash ) * Same as universal A except that death benefits vary directly with the cash values Variable Universal Life * A product with investment options and no minimum guaranteed rate of return or interest GOOD _________ * Flexible premiums * The death benefit may increase. * Tax-deferred growth in the accumulation account * Cash value can be accessed through loans or withdrawals. BAD ________ * More expensive than term insurance * If target premiums not met, a large amount may be needed to policy in force

Answer 68

Neither 1 nor 2. Rationale Statement 1 is incorrect because withdrawals are taxed on a LIFO basis. Statement 2 is incorrect because withdrawals before age 59½ are subject to the 10% penalty tax.