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CFP > Insurance: Chapter 6 > Flashcards

Insurance: Chapter 6 Flashcards

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1
Q

What needs does life insurance address when the breadwinner dies?

A
  1. Final expenses
  2. Survivor’s income
  3. Education needs
  4. Mortgage debt
  5. Outstanding debt
  6. Special desires (lifestyle adjustment that a family makes when a loved one dies)
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2
Q

What needs does life insurance address when a non-working spouse dies?

A
  1. Care of children
  2. Care of parents
  3. Mortgage debt
  4. Special desires (lifestyle adjustment that a family makes when a loved one dies)
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3
Q

What needs does insuring the joint death cover when both spouses die?

A
  1. Estate tax
  2. Effective transfer to heirs
  3. Family goals
  4. Special desires (lifestyle adjustment that a family makes when a loved one dies)
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4
Q

What are the two main ways to determine the amount of life insurance required?

A
  1. Needs analysis: estimates survivors needs that must be met and compares them to the resources available.
  2. Human life value analysis: based on the insured individual’s income-earning ability. It
    is the present value of the income lost by dependents as a result of the insured’s
    death and does not consider other resources available to provide for income.
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5
Q

What are the options for short-term need/low cost/no cash value Term life insurance?

A
  1. Annual renewable term (ART): Premiums increase annually
  2. Level term: Premiums are level for the number of term year
  3. Re-entry: Re-qualify for low-cost premium through abbreviated underwriting
  4. Decreasing term: Decreasing death benefit with level premium
  5. First-to-die/Joint life: Buy-sell or mortgage protection
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6
Q

With a long-term need for life insurance what is the main difference between short term?

A

High cost cash value

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7
Q

What are the two risk options and their fundamentals for long-term life insurance?

A
  1. Low Risk: Insurer controls investment return and assets are part of general account
  2. High Risk: Client controls investment return and assets are part of separate account
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8
Q

What are the options for low risk tolerance long term life insurance?

A
  1. Whole life:
    a. Straight whole life: Lifetime payments
    b. Limited-pay whole life: Payments for a specified number of years
  2. Universal life: Premiums and level of protection can be adjusted up or down
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9
Q

What are the options for high risk tolerance long term life insurance?

A
  1. Variable life: Premium is fixed
  2. Variable universal life: Premiums and the level of protection can be adjusted up or
    down
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10
Q

Why would you need a single life application?

A
  1. Death of the primary income provider
  2. Need to pay off debt/education expenses
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11
Q

Why would you need a survivorship life / second-to-die application?

A
  1. Estate liquidity
  2. Lower cost
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12
Q

What is term insurance?

A

Pays the face amount of the policy if the insured dies during the term of the policy. Provides protection for a definite but limited period of time.

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13
Q

What is a annual renewable term (ART) or yearly renewable term (YRT) policy?

A

Provides protection for one year, but only permits insured to renew the policy for successive periods at a higher premium and the insured doesnt have to furnish evidence of insurability.

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14
Q

What is the disadvantage of ART or YRT?

A

Death benefit remains level but the premiums increase each year, increase becomes substantial in the later years.

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15
Q

What is a level term policy?

A

Has the initial premium guaranteed (level) for a period of 5,10,15 or 20 years. The longer the term the higher the premium.

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16
Q

What is the disadvantage of a level term policy?

A

At the end of the term, the premium at renewal generally escalates via re-entry provision.

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17
Q

What is re-entry provision?

A

Allows the insured to re-qualify at a new level premium (age-based) through a simplified underwriting process to continue the policy at a relatively low rate. If the insured doesn’t qualify due to declining health, they may keep the policy at a much higher premium.

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18
Q

What is a decreasing term policy?

A

A policy that has a level premium but the amount of the death benefit decreases. Can be used in line with a mortgage, as the mortgage principal decreases so does the death benefit in a straight line.

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19
Q

What is a first to die (joint-life) policy?

A

A policy written on the lives of two or more persons and payable upon the death of the first person to die. Can be in the form of term insurance or some insurance form that has cash value. Can be used for mortgage protection, buy-sell arrangements or as debt protection.

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20
Q

What is the renewability provision for term insurance?

A

Guarantees the policy owner has the right to renew the policy for a limited number of years, but the carrier usually imposes an age limit beyond which the renewal is not permitted

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21
Q

What is the convertibility provision for term insurance?

A

Permits the policyowner to exchange a term contract for a contract of permanent insurance within a specific time frame without evidence of insurability

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22
Q

Under what circumstances is recommending term insurance appropriate?

A
  1. There is a limited time needed for protection
  2. When the dollars available for coverage are limited
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23
Q

What is permanent life insurance?

A

Refers to any life insurance policy that covers the insured until death. Straight whole life limited-pay whole life, universal life, variable universal life, endowments and second-to-die/ survivorship life.

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24
Q

What is whole life insurance?

A

Provides protection for the life of the insured. Does not describe how the premiums are paid just the duration of the policy.

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25
Q

What is straight whole life insurance?

A

A policy in which premiums are based on the assumption that they will be paid until the insured’s death.

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26
Q

What is limited-pay whole life insurance?

A

Policy in which premiums are limited by contract to a specific number of years (like 20 year term or life paid up at age 65). Premium will be higher than straight whole life because it is paid over a shorter time.

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27
Q

When would you use limited-pay vs straight whole life?

A

When the insured has a long life expectancy.

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28
Q

What are the advantages of whole life insurance?

A
  1. Provides permanent protection
  2. Has a level premium
  3. Combines savings with protection
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29
Q

What are the disadvantages of whole life insurance?

A
  1. Premiums must be paid for lifetime (or limited-pay)
  2. Premiums are higher than term at the beginning
  3. It is generally not flexible to meet changing needs
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30
Q

What is the noteworthy feature of universal life insurance?

A

Within limitations, the premiums, cash values, and level of protection can be adjusted up or down during the life of the permanent contract to meet the owner’s changing needs. Interest credited to policy’s cash value is paid at current interest rates.

If the premiums paid plus the current cash value are not adequate to cover the cost of maintaining the policy then additional premiums must be paid to keep the policy in force.

Premiums paid + Cash value - expenses = amount to keep the policy in force

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31
Q

Can a loan or withdrawal take place from a Universal Life Insurance policy?

A

Yes the withdrawal can be taken and there is no requirement to repay the loan, the death benefit will be reduced by the outstanding loan balance. The company normally credits a lower interest rate on that cash value associated with the policy loan

32
Q

What are the two types of death benefits?

A

Level death benefit: Option 1 or Type A as its known is constant, when the cash value
exceeds certain benchmarks the death benefit will increase
Increasing death benefit: Option B or Type B as its known the death benefit increases by
the same amount as the cash value increasing

33
Q

What is the benefit of a variable universal life policy?

A

Offers many of the features of universal life insurance but offers policyowner directed investment options of a variable annuity. They are classified as securities and subject to regulation by the SEC.

34
Q

What are the purpose of separate accounts in a variable universal life policy?

A

The cash value of the insured is invested in a separate account, while the general account is a liability of the insurance carrier (also called the reserve account.

35
Q

On the exam what does Brett Danko say about Endowment contracts as an answer?

A

They are wrong or not usable answers

36
Q

What is a second-to-die/ survivorship life contract?

A

A contract that insures two lives and promises to pay only after the 2nd death.

37
Q

What is the main usage of a second-to-die / survivorship contract?

A

The policy’s main usage is to provide liquidity to pay federal estate taxes as the death of the second spouse. The premium on these policies is significantly lower than the cost of two separate policies.

However with significant increases in federal estate tax exemptions, it is likely that new purchases of these policies will decline.

38
Q

What is the difference between provisions and riders?

A

Provisions cost no extra premium while riders an extra premium applies.

*Grace period, APL and misstatement of age are all designed to keep the policy in force.

39
Q

What is the automatic premium loan provision?

A

If APL is selected and the policyholder doesn’t pay the premium during the grace period, the premium will be charged against the cash value of the policy

40
Q

What is the grace period?

A

Additional time, normally 31 days, to pay the premium

41
Q

What is the reinstatement clause provision?

A

Gives the owner of a lapsed policy the right to reacquire the coverage under certain conditions (proof of insurability and payment of premium and interest in arrears)

42
Q

What is the misstatement of age clause?

A

The benefits under the policy will be adjusted to that which the premium paid would have purchased at the correct age

43
Q

What is the incontestable clause?

A

The insurer will not contest the policy after it has been in force for a specific period, usually 2 years.

44
Q

What are the exceptions to the incontestable clause?

A
  1. No insurable interest at the inception of the policy
  2. Intent to murder
  3. A healthier person impersonated the applicant in the medical examination
45
Q

What is the suicide clause?

A

If the insured commits suicide during the first two years of the policy, the insurer will be liable only for a return of the premium

46
Q

What is a disability waiver of premium?

A

With whole life policies the company agrees to waive all premiums due after the policy owner has become totally and permanently disabled, but the cash value is credited as if the policyholder had paid it.

47
Q

What is a disability waiver of premium?

A

With whole life policies the company agrees to waive all premiums due after the policy owner has become totally and permanently disabled, but the cash value is credited as if the policyholder had paid it.

48
Q

What are the two choices for disability waiver with universal and variable universal life policies?

A
  1. The company just waives the charges for mortality and administration expenses but
    does not include increment to policy’s cash value
  2. The company waives the full premium that the client would normally pay
49
Q

How can a client purchase a guaranteed purchase option or guaranteed insurability option?

A

A client may purchase additional insurance at three-year intervals and up to a specific age, regardless of insurability

50
Q

What is accidental death/double idemnity?

A

This doubles the standard death benefit if the insured dies accidentally.

51
Q

What is the dividend cash option?

A

Dividends paid to the policy owner in cash. Generally not taxable

52
Q

What is the dividend reduction of premiums option?

A

The insurance company subtracts the dividend from the premium due and sends a premium notice for the remainder

53
Q

What is the dividend accumulated with interest option?

A

Dividends remain with the insurance company in an interest bearing account. Interest paid on dividends is taxable. Dividends are added to death proceeds or cash value if surrendered

54
Q

What is the dividend purchase paid-up additions option?

A

Each dividend is used to purchase a small amount of additional, fully paid-up whole life insurance. The additions are added to the policy face value

55
Q

What is the dividend one-year term insurance option?

A

All or a portion of the dividend is used to buy one-year term insurance equal to the policy’s base cash value. On the test this is the fifth or 5th dividend option

56
Q

What is the cash option for nonforfeiture of a policy?

A

The policy may be surrendered at any time for its cash value less any policy indebtedness plus accumulated dividends. Protection terminates, and a 6 month delay clause applies to distribution of cash values (prevents carrier from bankruptcy)

57
Q

What is the reduced paid-up insurance nonforfeiture of a policy?

A

The face amount of the policy will be reduced. the paid-up insurance death benefit will be the amount the cash value would purchase as a net single premium. No additional premium is due

58
Q

What is the paid-up term insurance nonforfeiture of a policy? Also called extended term

A

The policy may be continued in force for as long as the cash value will permit. No additional premiums are due. If the insured outlives the term, the policy stops. At the end of the term, the cash value is zero.

59
Q

What is the cash settlement option upon surrender or insured’s death?

A

Owner or beneficiary takes a lump sum

60
Q

What is the interest option upon surrender or insured’s death?

A

The proceeds are retained temporarily by the insurer, and only interest is paid. This gives the owner or beneficiary time to consider other settlement options.

61
Q

What is the installments for a fixed period option upon surrender or insured’s death?

A

The proceeds plus interest are paid out over a specific interval (up to 30 years)

62
Q

What is the installments for a fixed amount option upon surrender or insured’s death?

A

The proceeds are paid out in a fixed amount for as long as the proceeds plus interest will last. The installment options may operate as spendthrift options. The spendthrift clause denies the beneficiary the right to assign their interest in the policy proceeds.

63
Q

What is the life income options upon surrender or insured’s death?

A

The same options for life insurance distributions as are available under the annuity settlement options (pure life or single life, period certain, joint and survivor, and refund)

64
Q

Summary of life insurance policy options

A

Nonforfeiture
1. Cash
2. Reduced paid-up insurance
3. Extended term

Dividend options
1. Cash
2. Reduced premium due
3. Accumulate with interest
4. Paid-up additions
5. 5th dividend

Settlement options
1. Cash
2. Interest only
3. Fixed period
4. Fixed installments
5. 4 life income options

65
Q

What are policy illustrations used for and when should they be given?

A

The provide financial information regarding a new policy and a preliminary illustration should be given to the client, when the policy is issued a final illustration must be included. Great for comparing multiple carriers.

66
Q

Who is the NAIC? and what does it stand for?

A

National Association of Insurance Commissioners. They are a voluntary association of the insurance administrators from each state. They have no legal power over insurance regulation, but do coordinate regulatory activities.

67
Q

What is the life insurance policy illustration model law?

A

The model law specifies how an insurance company may illustrate life insurance policy values. Where the law applies, illustrations must meet the requirements of the law.

68
Q

NAIC life insurance illustrations - model regulation (applies to non-variable life policies)

A
  1. All illustrations must be certified annually by an illustration actuary
  2. Copies of illustrations must be sent to insurer along with policy application
  3. Copies of illustration must be signed by applicant and the agent
  4. Insured must be given an annual report on the insurance company at time of sale
  5. The policy cannot be represented as anything other than a life insurance policy
  6. The model prohibits the use of the term “vanish” or “vanishing premium”
69
Q

Illustrations (must be labelled life insurance illustration) must include the following

A
  1. Name of insurer
  2. Name and address of the producer
  3. Name, age, and sex of proposed insured
  4. Underwriting and rating classification
  5. Initial death benefit
70
Q

What is the watch list for the NAIC?

A

The 12 financial ratios that help NAIC keep tabs on insurance companies. If company has 4 of its 12 ratios outside the usual ranges, they are put on NAIC watch list

71
Q

What is a viatical settlement?

A

Entail the sale of the policy for less than full face value. Such a sale typically occur when the insured is terminally or chronically ill.

72
Q

What is an accelerated benefit rider?

A

This rider pays a portion of the policy’s death benefit of the contract early if the insured is medically certified to be terminally ill. Such medical conditions that drastically limits the insured life span (2 years or less). To qualify lifetime payments must reduce the death benefit payable under the contract

73
Q

What standards does a person have to meet for the IRC to define them as chronically ill?

A
  1. Unable to perform at least two activities of daily living
  2. A certain level of disability
  3. Requires supervision for protection due to severe cognitive impairment
74
Q

What is viatication?

A

Entails the sale of a terminally ill person’s life insurance policy to a business that specializes in such transactions.

75
Q

What is a life settlement?

A

Usually a transaction involving an insured who is not terminally or chronically ill and is generally over age 65. They are taxed as follows.

  1. Premium paid (tax free basis)
  2. Basis to the policies cash surrender value (ordinary income)
  3. The higher of either the cash surrender value/federal income tax basis or the net
    settlement proceeds (long term capital gain)

CFP (20 decks)

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