Insurance/Life Insurance Flashcards
What are provisions of term life insurance?
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
What are term life limitations?
Exponentially increasing premiums for older age entry or renewal
May not meet permanent insurance needs, like when insured needs life insurance throughout their lifetime
Describe annual renewable term (art), advantages and disadvantages
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
Describe level term, advantages and disadvantages
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
Describe decreasing term, most appropriate use?
Premiums level
No cash value
DB decreases over term of policy
To payoff a mortgage
What are appropriate use of term life policies?
Only for temporary needs; education finding, paying off debts, or to cover expenses during the grieving process
Describe whole life insurance:
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
What are advantages and disadvantages of whole life?
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
What is ordinary life insurance?
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
What is limited pay life insurance?
A type of whole life insurance
Insured only pays premiums until a certain age
Premiums higher than ordinary life
What is variable life insurance?
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
What is current assumption whole life (CAWL)?
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
What are appropriate uses of whole life insurance?
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
Describe first to die and second/last to die individual life insurance policies:
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
What is the difference between nonparticipating and participating whole life insurance dividend options?
NP: does not pay dividends
P: pays dividends
How to remember life insurance dividend options?
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!)
What are the settlement options for life insurance?
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
What are the life insurance non forfeiture options?
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
Describe life insurance accelerated death benefit:
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
What is universal life insurance?
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
What is universal life A?
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)
What is universal life B?
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)
What are the aspects of variable universal life?
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
What is the difference between non direct and direct recognition programs?
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
Describe life insurance policy provisions:
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
What is absolute assignment of s life insurance contract?
Owner transfers all policy ownership rights
What is collateral assignment of a life insurance contract?
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
What are characteristics of group term life insurance?
- 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
What are characteristics of group whole life insurance?
- 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
