Insurance/Life Insurance

Question 1

What are provisions of term life insurance?

Answer 1

Renewable: most can be renewed without evidence of insurability

Convertible: must can be converted to whole life without evidence of insurability for a particular period of time

Waiver of premium: premiums waived during period of total disability

Question 2

What are term life limitations?

Answer 2

Exponentially increasing premiums for older age entry or renewal

May not meet permanent insurance needs, like when insured needs life insurance throughout their lifetime

Question 3

Describe annual renewable term (art), advantages and disadvantages

Answer 3

ART premiums increase annually
No cash value
Death benefit fixed at face amount of policy

Adv:
Pure, inexpensive death benefit
Maximum DB for each dollar in premiums
Can be converted to permanent policy without proving insurability

Disadv:
May be too costly at older age
No savings component
Premiums increase each year

Question 4

Describe level term, advantages and disadvantages

Answer 4

Premiums level for period of time, insured pre pays later more expensive premiums earlier in policy

No cash value

DB fixed at face amount of policy

Adv:
Level premiums, help with budgeting
Inexpensive, pure death benefit
Max DB for each premium dollar
Can be converted to permanent policy without proving insurability

Disadv:
Overpay premiums initially
No savings component

Question 5

Describe decreasing term, most appropriate use?

Answer 5

Premiums level
No cash value
DB decreases over term of policy

To payoff a mortgage

Question 6

What are appropriate use of term life policies?

Answer 6

Only for temporary needs; education finding, paying off debts, or to cover expenses during the grieving process

Question 7

Describe whole life insurance:

Answer 7

Provide lifetime protection if premiums paid

Pre-fund future higher mortality costs using present value analysis

Have a savings and investment component with earnings accruing on the residual of the previous less the cost for the year plus she previous savings balance

Cash values may be used for loans or received if policy surrendered

Question 8

What are advantages and disadvantages of whole life?

Answer 8

Adv:
Provide tax deferred growth of cash value
Provides permanent protection until age 120

Disadv:
Expensive, no flexibility in premium payments
Cash value grows gradually
Insured may not be able to purchase as much protection

Question 9

What is ordinary life insurance?

Answer 9

A type of whole life insurance

Insured pays premiums until age 120 or death
Cash value increases to face value at age 120
DB is level throughout the term of the policy

Question 10

What is limited pay life insurance?

Answer 10

A type of whole life insurance

Insured only pays premiums until a certain age
Premiums higher than ordinary life

Question 11

What is variable life insurance?

Answer 11

A type of whole life insurance

Cash value invested in stock, bond, and money market mutual funds
Opportunity for higher returns on cash value
DB and CV fluctuate based on investment performance

Question 12

What is current assumption whole life (CAWL)?

Answer 12

Insure uses new money rates and new mortality rates to establish premiums
If interest rates are too high send premiums too low, insurer reserves right to adjust premium once, usually at 5 year mark
Lo CAWL - low premium assuming higher interest rates for crediting (interest rate sensitive insurance designed to create demand due to lower premiums (
Hi CAWL - high premium, assuming lower interest rate

Question 13

What are appropriate uses of whole life insurance?

Answer 13

Anyone with lifetime or permanent needs

Estate planning purposes to provide liquidity to pay transfer taxes

Insured has a need for investment like performance/returns

Question 14

Describe first to die and second/last to die individual life insurance policies:

Answer 14

FTD: provides DBs when first insured dies; FTD life expectancy less than either single life expectancy

2nd/last: provides DBs when second it last insured dies
Second-to-die life expectancy greater than either individual life expectancy
Appropriate to pay estate taxes and provide liquidity

Question 15

What is the difference between nonparticipating and participating whole life insurance dividend options?

Answer 15

NP: does not pay dividends

P: pays dividends

Question 16

How to remember life insurance dividend options?

Answer 16

Dividends are CRAP-O

Cash option - clients receive money and can use it invest as they wish

Reduce premiums - decreases out of pocket expense for premiums

Accumulate at interest - company investsv the dividends and they are tax-free up to the clients basis in the policy. Interest paid on dividends is taxable

Paid-up additions - purchases additional insurance each year for insured regardless of health or occupation

One-year term - adds term insurance each year to the policy face amount equal to the cash value of the policy (5th dividend option on CFP exam!)

Question 17

What are the settlement options for life insurance?

Answer 17

Lump sum
Interest only
Annuity payments:
Fixed amount/fixed payments until proceeds depleted
Life income/ DB converted to annuity for life of beneficiary
Fixed period/annuity certain; in FP engagements may be preferential to life income if insured needs income for a certain period of time (such as until retirement age or if they have a shorter life expectancy and would like to preserve some of DB value for successor beneficiary if primary dies before term expires
Life income with period certain
Joint and last survivor income

Question 18

What are the life insurance non forfeiture options?

Answer 18

Cash surrender value - insured receivers accumulated cash value (less surrender charges) on termination of policy

Reduced paid up insurance - insured receives cash value in form of a paid-up policy with smaller face amount

Extended term insurance - insured receives cash value in form of a paid-up term policy for a specified duration, with the same face amount as the original policy

Question 19

Describe life insurance accelerated death benefit:

Answer 19

If terminally ill, insured can take an ADB
Can be lump sum or monthly income
Payments deducted from face value
Life expectancy must be less than 24 months
Income from ADB not taxable to insured
No restrictions on what ADB can be used for

Question 20

What is universal life insurance?

Answer 20

Insured can adjust: premiums paid, face value and cash value
Insured does not direct investment portion of the cash value
Cash value can be used to actually pay the policy premiums

Question 21

What is universal life A?

Answer 21

Flexible premium, adjustable death benefit, unbundled life insurance contract

If cash value gets high enough, DB will increase

Normally, amount of insurance purchased declines as the cash value rises, keeping the total DB level (pure insurance is reduced)

Question 22

What is universal life B?

Answer 22

Same as universal A except death benefits vary directly with the cash values

More expensive than universal A because the DB is equal to a specified amount of insurance plus the cash value, and the total DB will typically rise (pure insurance stays constant)

Question 23

What are the aspects of variable universal life?

Answer 23

Product with investment options; stocks, bonds and money market funds

No minimum guaranteed rate of return or interest

Cash value is invested in a separate account, not the insurers general account

Cash value not guaranteed but if insurance company fails, separate account not treated as an asset of the insurance company

Question 24

What is the difference between non direct and direct recognition programs?

Answer 24

NDRP - does not adjust dividends paid in a policy when there is an outstanding loan against cash value of policy

DRP - dividends are reduced by outstanding loan against the policy

Question 25

Describe life insurance policy provisions:

Answer 25

Grace period: 31-61 days after premium due date in which policy remains in force. If insured dies during grace period, insurer assumes insured would have renewed, pays DB less premium

Suicide: coverage excluded if committed within one or two years of purchasing policy

Disability waiver of premium:
Whole life: insurer will waive premiums after disability
Universal/variable: insurer will waive charges related to mortality and administration OR waive the entire premium

Question 26

What is absolute assignment of s life insurance contract?

Answer 26

Owner transfers all policy ownership rights

Question 27

What is collateral assignment of a life insurance contract?

Answer 27

Assignment limited ownership rights, used for collateral on debt
Assignment automatically terminates when debt is satisfied
Most participating whole life policies use direct recognition, which reduces dividends and interest for the portion of the cash value used as collateral for loans

Question 28

What are characteristics of group term life insurance?

Answer 28

• most common form of insurance offered by employers
• Premiums for first $50,000 in coverage is tax free
• Premiums paid by employer are tax deductible
• Premiums paid by employees are with after-tax dollars
• Income must be imputed based on coverage in excess of $50,000

Question 29

What are characteristics of group whole life insurance?

Answer 29

• allows employees to accumulate savings for retirement through the cash value of the policy
• Generally, premiums paid by the employer are taxable income to employee