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CFP NOV 2024 Prep > Insurance - ch 4 > Flashcards

Insurance - ch 4 Flashcards

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1
Q

Adverse selection risk (the risk that ONLY ____________________________________________________.

A

” unhealthy insureds will renew

                                    their term life insurance coverage"
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2
Q

3 PARTIES TO A CONTRACT ?

A

PARTIES TO A LIFE INSURANCE CONTRACT

Insured
Owner of the policy
Beneficiary

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3
Q

When the owner, insured, and beneficiary within an Insurance policy are all DIFFERENT PARTIES. This is commonly referred to as the “____________________________________________________”

When this occurs, the owner of the policy is deemed to have made a ___________________________________________ Planners need to be very careful about potential gift and estate tax consequences of this type of arrangement

A

UNHOLY TRINITY

Taxable transfer or gift to the beneficiary.

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4
Q

What are he factors that affect whether a company will issue a life insurance policy ?

A

Factors that affect whether a company will issue a life insurance policy
include the insured’s:
* Age
* Height and weight
* Gender
* General state of health
* Lifestyle
* Medical history
* Avocation
* Financial status
* Hobbies
* Driving record
* Tobacco use

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5
Q

LIFE INSURANCE UNDERWRITING may include: ?

A

LIFE INSURANCE UNDERWRITING may include:
Medical records from their doctors
Oral swab - check tobacco, drug use, HIV
Paramedical exam
Insurance blood profile (IBP)
Urine specimen
EKG or electrocardiogram to check basic heart health
Full medical exam by a physician
Health and lifestyle impact the mortality risk.

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6
Q

LIFE INSURANCE UNDERWRITING INCLUDES WHAT TYPES OF UNDERWRITING ?

A

LIFE INSURANCE UNDERWRITING

  • Preferred: Above average health, lower premiums
  • Standard: Average health, standard premiums
  • Table Rated: Below average health, higher premiums
    Insurers use various table ratings; example:
  • Table A = 25% premium surcharge
  • Table B = 50% premium surcharge
  • Table C = 75% premium surcharge
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7
Q

What is the mortality risk with a life insurance policy ?

A

Risk exposures from dying early

As individuals age, their
mortality risk (the risk that they will die within the year) increases

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8
Q

Why buy life insurance ?

A

WHY PURCHASE LIFE INSURANCE

Changes as a person moves through the life cycle
* Income Replacement
Income for readjustment period
Financial support for dependents
Other personal financial goals

Estate Preservation
* Medical expenses prior to death
* Disposal and ceremonial expenses
* Probate expenses

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9
Q

What are the 3 ways to measure the Life insurance need ?

A
  • The Human Life Value Approach
    Income less insured’s expenditures
  • The Needs Approach
    Determined by needs and goals
  • The Capitalized-Earnings Approach
    Determined by needs and goals
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10
Q

What are the steps to the Calculating the human Value approach to measuring Life insurance needs ?

A

STEPS IN CALCULATING THE HUMAN VALUE:

 Annual Earnings  -   Taxes     ( % of the annual earnings )  -    Personal expenses  ---------------------------------------------  =  Annual family need
  • Determine the client’s work life expectancy (WLE)
  • Adjust family need using an inflation-adjusted rate of return
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11
Q

What are the steps to the Calculating the NEEDS APPROACH to measuring Life insurance needs ?

A

STEPS IN NEEDS APPROACH: “ List “

  • Estimate the cash needs that the family will require at and after the death of the insured
  • Some of the financial needs considered:
    Payment of final expenses
    Eliminating debt
    Funding specific goals
    Income needs of the surviving spouse and the family
    Retirement needs of the surviving spouse
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12
Q

What are the steps to the Calculating the CAPITALIZED -EARNINGS APPROACH to measuring Life insurance needs ?

A

THE CAPITALIZED-EARNINGS APPROACH
* The Capitalized-Earnings Approach is a modification of the human life value approach.

  • The modification is that there is no need to determine the work life expectancy because, if the investment returns are realized, the lump sum death benefit will yield enough earnings each year to provide the desired income for a perpetual period of time.
  • This is a very efficient method to determine the approximate amount of life insurance needed for one who has dependents and life insurance needs
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13
Q

THE CAPITALIZED-EARNINGS APPROACH: ?????
EXAMPLE

Assume the following:

earnings = $100,000
Raise Rate = 4%
Inflation rate = 3%
Riskless rate = 5%
consumption by insured 15%
federal and state taxe 25%

  • The Numerator: Earnings – Consumption – Taxes
A

THE CAPITALIZED-EARNINGS APPROACH:

Numerator: Earnings – Consumption – Taxes

Denominator: 1 + investment rate
—————————– - 1
1 + Inflation Rate

$100,000 - $25,000 - $11,250 $63,750
—————————————- = ————- = $3,283,125
( 1.05 / 1.03 ) - 1 .0194175

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14
Q

Purpose for Term insurance ?

A

Term Insurance
* Pure insurance protection
* Specified term
* Premiums level for a term
* Increasing premiums upon renewal
* Face amount may be level or decreasing
* No savings component
* Inexpensive at young ages
* Budget friendly coverage

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15
Q

What are 3 provisions for a Term policy ?

A

Term Insurance: Provisions:

  • Renewable:
    Annual or based on selected term
  • Convertible:
    Provision to convert term to a whole life policy
  • Waiver of Premium:
    Waives premium during a period of disability
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16
Q

What are limitations of Term Life ?

A

Term Insurance: Limitations:

  • Exponentially increasing premiums for older age entry or renewal . The mortality cost of the premium increases each year
  • Most term policies lapsed without collection by insured
  • No savings component
  • May NOT meet permanent insurance needs
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17
Q

3 types of Term life ?

A

TERM LIFE INSURANCE POLICIES (1 OF 6)

  • Annual Renewable Term
  • Level Term
  • Decreasing Term
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18
Q

What is Annual Renewable Term ?

A

Annual Renewable Term ART

  • Premium increases annually
  • No cash value build up within the policy
  • The death benefit is fixed
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19
Q

What are Annual Renewable Term

Advantages ?

Disadvantages ?

A

Annual Renewable Term ART

Advantages:_______________________
* Pure death benefit protection – inexpensive
* Max. death benefit for each dollar in premiums
* Converted to perm. policy without proving insurability

Disadvantages:____________________
* Becomes costly at older ages
* No savings component
* Premiums increase each year

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20
Q

Level Term ?

Premiums ?
cash value ?
Death Benefit ?

A

Level Term

  • Level Premiums for a period of time
  • NO cash value build up within the policy
  • Death benefit is fixed
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21
Q

Decreasing Term ?

Premiums ?
Cash value ?
Death benefit ?

A

Decreasing Term

  • Level premiums throughout the policy
  • No cash value build up within the policy
  • Death benefit decreases over time
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22
Q

Term Life Life insurance policies ?

Advantages ?

Disadvantages ?

A

TERM LIFE INSURANCE

Advantages:______________________________________
* Premiums remain level throughout the term
* Pure death benefit protection – cheap
* Maximum death benefit for each dollar in premiums
* Converted to perm. policy without proving insurability

Disadvantages:_____________________________________
* “Overpay” premiums initially when compared to an annual renewable term policy (ART)

  • Renewals require a higher premium at higher ages
  • Coverage is temporary unless renewed or converted
  • Renewals are not available beyond a specified age (usually 75-80)
  • No cash value to accumulate savings or from which to borrow
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23
Q

Universal Life Insurance main benefit with prems, cash value and death benefit ?

Does Owner direct the cash value into investments ?

Can the cash value be used to pay the premium ?

A
  • FLEXIBILITY - may adjust:
    Premiums
    Face Value
    Cash Value
  • Cash invested by Insurer - Company

Flexible premium, variable death benefit, insurer directs investments

  • Cash value can be used to pay premiums
  • Mortality and expenses increasing each yr. and Prems must be paid to keep in force

The insured has the flexibility to adjust premiums, face value and cash value of the policy.
Insured has flexibility without the investment responsibility of the cash value.
Cash value of the policy can be used to pay the premiums.

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24
Q

Universal Life-A death benefit

Universal Life-A death benefit

A

Universal Life-A
* A flexible premium, adjustable death benefit unbundled life insurance contract

Universal Life-A
* 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

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25
Q

UNIVERSAL LIFE INSURANCE

Advantages ?

Disadvantages ?

A

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

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26
Q

Whole Life Insurance or Permanent Life Insurance

A

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
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27
Q

WHOLE LIFE

A

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.
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28
Q

Whole Life Insurance: 3 Various Types ?

A

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
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29
Q

WHOLE LIFE INSURANCE POLICIES

Advantages ?

Disadvantages ?

A

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 )

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30
Q

WHOLE LIFE INSURANCE

Appropriate Uses ?

A

WHOLE LIFE INSURANCE uses :

  • Permanent life insurance needs
  • Estate planning purposes

( term is NOT good for estate planning since its only not permanent)

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31
Q

CUSTOMIZED WHOLE LIFE POLICIES

First to die

Second to die

A

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

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32
Q

WHOLE LIFE DIVIDEND OPTIONS

May receive dividends in the form of: ???

A

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
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33
Q

SURRENDER CHARGES

A

SURRENDER CHARGES

  • Costs of issuing a policy typically exceeds first year premium
  • Surrender charges help insurance company recoup costs for policies surrendered early
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34
Q

What are the 3 NON forfeiture options with Life insurance polices ?

A

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
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35
Q

LIFE INSURANCE POLICY ILLUSTRATIONS

A

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
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36
Q

MODIFIED ENDOWMENT CONTRACTS

Withdrawals are taxed how ?

A

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.
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37
Q

Group Term Insurance

A

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.
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38
Q

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?

A

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
39
Q
A

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)
40
Q

Life insurance policy provisions:

Grace period

Assignment

Suicide

A

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.

41
Q

LIFE INSURANCE POLICY PROVISIONS
Reinstatement

Policy Loan provisions

A

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

42
Q

BENEFICIARY DESIGNATIONS

A

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.
43
Q

COMMON RIDERS

A

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
44
Q

SETTLEMENT OPTIONS FOR LIFE INSURANCE

A

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
45
Q

POLICY REPLACEMENTS

A

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 !!!

46
Q

Annual Renewable Term (ART) - Type of term insurance that permits the policyholder to purchase term insurance in subsequent years____________________________________ but premiums on the policy increase each year to reflect the increasing mortality risk being undertaken by the insurer

A

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

47
Q

Assignment - ?

A

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

48
Q

Capitalized-Earnings Approach - Method to determine life insurance needs that suggests ____________________________________________________________sufficient to meet the family’s needs without depleting the capital base.

A

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.

49
Q

Guideline Premium and Corridor Test - One of two Congress-imposed tests to determine whether a life insurance contract ____________________________________

This test calls for the policy to be tested using actuarial principles and requires the premiums to represent no more than a specified portion of ___________________t.

A

“meets the definition of a MEC. “

” death benefit.”

50
Q

Human-Life Value Approach - Method to determine life insurance needs that suggests the death benefit of a client’s life insurance should be equal to the _____________________________________________.

A

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

51
Q

Limited-Pay Policies - Type of whole life policy with a ______________________________________________.

At the ________________________, the policy is considered to be paid-up, at which time no additional premium payments are due.

A

payment schedule (typically 10 or 20 years).

payment period,

52
Q

Modified Endowment Contract (MEC) - A cash value life insurance policy that has been funded ________________.

Under a MEC, the death benefit payable to the beneficiary is _____________________, but policy loans or cash value withdrawals are _________________.

A

” 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. “

53
Q

Modified Whole Life Policies - Type of whole life policy with __________________________ than a regular policy for an initial policy period (often 3 to 5 years), which _____________________________ at the end of the initial period

A

” lower premiums “

” increase to a higher-level premium “

54
Q

Mortality Cost - ?

A

Mortality Cost -

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

55
Q

Needs Approach - Method to determine life insurance needs that suggests the death benefits of a client’s life insurance should equal ______________________________________________________.

A

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

56
Q

Ordinary (or Straight) Life - Type of whole life policy that requires the owner to pay a specified____________________________________________>

A

level premium every year until death (or age 100)

57
Q

Second-to-Die - Type of joint life insurance policy that is often used in estate planning to provide ____________________________________________________________

A second-to-die policy names two insureds and pays the death benefit only _________________________________

A

“liquidity at the death of the second spouse.”

“when the second insured dies.”

58
Q

7-Pay Test - One of two Congress-imposed tests to determine whether a life insurance contract meets the definition of a ____________.

This test states that if the cumulative premium payments made on the policy are In________________________________________________________ (or following a material change to the policy), the life insurance contract will be deemed a MEC

A

MEC. “

“excess of the net level premium for the policy during the first seven years “

59
Q

Simultaneous Death Provision - Provision in a life insurance policy for situations in which the insured and the beneficiary die within a short time of one another and it is ______________________________________

Generally the policy death benefit is distributed as if the _____________________________________.

A

” not possible to determine who died first,”

” beneficiary had predeceased the insured.”

60
Q

Single-Premium Policy - Type of whole or universal life policy that requires the owner to pay _____________________ in return for insurance protection that will extend throughout the insured’s lifetime.

These policies will always be ________________.

A

a lump sum “

” MECs. “

61
Q

Survivorship Clause - Provision in a life insurance policy specifying that the death benefit will only be paid to the beneficiary if the________________________________________.

A

beneficiary survives the insured by a specific number of days.

62
Q

Universal Life Insurance - Type of _____________with a _________________________ allowing individuals to make premium contributions in excess of the term-insurance premium.

The excess premiums are deposited into an account with ____________________________.

A

” term insurance with a “

“cash-value accumulation Feature”

various investment options.

63
Q

Variable Life Insurance - Type of life insurance policy that permits the owner of the life insurance policy to _______________________________________________________.

Variable policies typically offer a series of investment options that often include _______________________________________________________.

A

direct the investment of the policy’s cash value.

investment funds managed by the insurer and outside investment managers.

64
Q

Variable Universal Life Insurance Policies (VULs) - Type of life insurance policy that combines ____________________________________________________________and gives the policyholders the option to invest as well as alter insurance coverage.

A

variable and universal life insurance

65
Q

Variable Whole Life Policies - Type of life insurance that provides for a __________________________________________

and permits the cash value of the policy to be _________________________________________________________.

A

fixed premium payment

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

66
Q

Whole Life Insurance - Type of life insurance that provides _____________________ from the insurer that are not found in __________________________________________________________ life insurance policies.

A

guarantees

term insurance and universal life insurance policies.

67
Q

Level premium, variable death benefit, insured directs investments

A. Annual Renewable Term
B. Whole Life
C. Decreasing Term
D. Universal Life
E. Variable Universal Life
F, Variable Life

Solution: The correct answer is F.

A

Solution: The correct answer is F.

F, Variable Life

68
Q

VARIABLE LIFE

A

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

69
Q

VARIABLE UNIVERSAL LIFE

A

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 )

70
Q

Nonforfeiture Options

A

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.
71
Q

Any cash value life insurance policy that lapses is a ______________event

A

TAXABLE

72
Q

TERM LIFE

A

  • 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
73
Q

WHOLE LIFE

A

  • 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

74
Q

VARIABLE LIFE

A

  • 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

75
Q

UNIVERSAL & VARIABLE UNIVERSAL

A

  • 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 “
76
Q

Which of the following is needed to calculate the client’s human-life value?

  1. Average annual earnings to the age of retirement
  2. Estimated annual Social Security benefits after retirement
  3. Costs of self-maintenance
  4. Number of years from the client’s present age to the contemplated age of retirement
A

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.

77
Q

Marsha, age 35, is a single mother of one daughter, Skyler, age 9. Marsha is a secretary with annual income of $35,000 and a negative net worth. Marsha has two objectives: (1) to protect Skyler in the event of her untimely death and (2) to save for her own retirement. Which of the following life insurance policies should she buy?

A

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.

78
Q

Why does the straight or pure life-income settlement option provide the life insurance beneficiary with a larger life income than any of the period-certain life-income options?

A

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

79
Q

Which of the following statements concerning the incontestable clause is correct?

An incontestable clause is an optional provision in a life insurance contract.

An incontestable clause permits an insurer to contest a policy during the contestable period.

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

A two-year incontestable clause makes an aviation exclusion rider ineffective after two years.

A

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

80
Q

Which of the following is a major characteristic of group term life insurance?

he premium is based on the level of the employee’s annual wage earnings.

The cost is higher than for an individual term policy because of adverse selection
.
The coverage is generally issued without evidence of insurability.

The amount of coverage is determined by a formula that, unfortunately, too often invites adverse selection.

A

The coverage is generally issued without evidence of insurability.

81
Q

The most common type of group life insurance is:

A

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.

82
Q

When utilizing the needs approach in the determination of the amount of life insurance, which factors should be considered?

  1. The family expenses that will remain after the wage earner dies
  2. The value of the wage earner’s life in the event he or she dies
  3. The income that can be generated by the surviving spouse
  4. The number of dependents
A

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.

83
Q

Hal designates his daughter as beneficiary of his life insurance death proceeds in the amount of $10,000. The beneficiary elects to receive the death proceeds under the fixed-period option over a ten-year period. What part of each annual payment will the beneficiary receive free of federal income taxes?

A

$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.

84
Q

ou have just sold Anne a whole life policy and pointed out to her that, in addition to providing death benefit protection, the policy builds up a cash value. Anne asks you where the cash value comes from. What should you tell her?

A

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.

85
Q

Which of the following statements concerning universal life insurance is (are) correct?

  1. The policy’s cash value appreciates on the basis of current investment yields, rather than yields available when the policy was issued.
  2. The annual increase in the policy’s cash value attributable to investment income is not currently included in the policy owner’s gross income for tax purposes.
  3. The policy owner might elect to pay premiums for five years and then pay no premiums for two years with no decrease in the amount of his or her life insurance coverage
A

1, 2, and 3.
Rationale

All three statements are correct

86
Q

Booker, age 35, has a wife and two children. He feels that they are not able to save any of what they earn due to their spending habits. He would like a recommendation for a life insurance program that would help them. What kind of policy would be most appropriate for Booker?

A

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.

87
Q

Which of the following statements concerning life insurance policy riders is (are) correct?

  1. The waiver-of-premium provision essentially provides a limited amount of disability income for the insured policy owner.
  2. The accidental death (double indemnity) provision provides for an increased death benefit if death results from an accident.
  3. The guaranteed insurability option permits the insured policy owner, at stated intervals, to purchase specified amounts of additional life insurance, but only if evidence of insurability can be provided.
A

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.

88
Q

In which of the following types of life insurance products are the funds supporting the contract invested as part of the insurer’s general account?

  1. Universal life insurance
  2. Variable annuities
  3. Whole life insurance
  4. Variable universal life insurance
A

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

89
Q

Terry has been advised by his insurance agent to purchase a variable universal life insurance policy. He has sought your advice regarding this purchase. All of the following are characteristics of a variable universal policy, except

A> The policy features increasing or decreasing death benefits and flexibility of variable premium payments.

b, The policy owner has exclusive investment control over the cash value of the policy.

C. The death benefit is guaranteed to be equal to the face value.

d. The death benefit is guaranteed to be equal to the face value.

A

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

90
Q

The blackout period is:

A

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.

91
Q

Rosa bought a life policy in July 1998 with a single premium. Under these circumstances, which of the following statements is (are) correct?

  1. Rosa can borrow the amount of the policy’s investment income without incurring income tax liability.
  2. If Rosa surrenders the policy for its cash surrender value, she is in receipt of taxable income to the extent the policy’s cash surrender value exceeds Rosa’s cost basis.
  3. If Rosa dies after borrowing the policy’s cash surrender value, the designated beneficiary will be in receipt of taxable income.
A

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.

92
Q
A

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

93
Q

which of the following is (are) among the advantages of most single-premium whole life insurance policies?

  1. Withdrawals from the policy are taxed on a FIFO basis.
  2. Withdrawals from the policy are exempt from the 10% penalty tax.
A

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.

94
Q
A

CFP NOV 2024 Prep (80 decks)

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