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CFP Module 6 > Introduction to Life Insurance and Annuities > Flashcards

Introduction to Life Insurance and Annuities Flashcards

Learning Objectives 6-1: Identify life risk exposures facing a client in a given situation. 6-2: Identify types, uses, and limitations of various types of individual life insurance policies. 6-3: Compare the purposes of the general provisions of a life insurance policy. 6-4: Describe a characteristic of a viatical agreement. 6-5: Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time. 6-6: Identify appropriate dividend options available u

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1
Q

Personal Needs Examples of Life Risk Exposures

A

• General debt-related requirements
• Pure life annuitant not outliving spouse (who
subsequently would lose income)
• Payor of an installment obligation to the client dying before finishing the obligation
o note that there is a potential disability exposure as well
• Goals or obligations that must be funded upon the death of the client, including charitable
objectives

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2
Q

Family Needs Examples of Life Risk Exposures

A 
• Last expenses
• Death of a primary
income earner
• Dependent income
• Education needs
• Family goals
• Parents
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3
Q

Business Needs Examples of Life Risk Exposures

A
  • Death of a partner
  • Death of a key employee
  • Employee retention programs
  • Business liquidity
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4
Q

Question 1 - Personal Risk Exposures
All of the following are personal risk exposures
that may indicate a need for life insurance except

A

a. death before debt repayment.
b. death of a client with considerable liquid assets.
c. spouse outliving pension plan pure life annuitant.
d. death of client before reaching personal goals.

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5
Q

Buy-Sell Agreements

Type: Stock redemption

A

• The business agrees to buy the deceased shareholder’s stock
(i.e., entity plan)

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6
Q

Buy-Sell Agreements

Type: Cross-purchase

A

• Each business owner agrees to buy out the

interest of the deceased business owner

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7
Q

Business Continuation Option

Type: Wait & See

A

• Upon the death of a business owner, the remaining owners decide the best way to proceed

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8
Q

Business Continuation Option

Type: Third Party Buyout

A

• A non-related party agrees to purchase the

deceased owner’s interest

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9
Q

Amount of protection for Term Insurance Definition

A

Level: Remains constant during term

Decreasing: Decreases over the specified time frame

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10
Q

Amount of protection for Whole Life

A

Remains constant unless loans have reduced the face amount, dividends are used to increase the
face amount, or riders are purchased

Established in contract

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11
Q

Amount of protection for Variable Life

A

May increase or decrease during the period

Minimum benefit usually established in contract at the original face amount

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12
Q

Amount of protection for Universal Life

A

Constant unless option 2 (which increases the death benefit by the cash value amount) is chosen, loans have reduced the face amount, or riders are purchased

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13
Q

Amount of protection for Variable Universal Life

A 
Generally level (may increase due to investment
results)
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14
Q

Savings element (cash value) For Term insurance

A

Level: None

Decreasing: None (actually some policies
actually, have small savings)

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15
Q

Savings element (cash value) For Whole Life

A

Established in contract but may be increased
by dividends or excess interest in current assumption whole life products Early on, the annual
level premium more than pays for insurance
protection Guaranteed minimum rate of return

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16
Q

Savings element (cash value) For Variable Life

A

Cash value from separate accounts varies; an established ratio to amount of protection is maintained to prevent conversion to MEC or non-life insurance

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17
Q

Savings element (cash value) For Universal Life

A

Varies based on premium payment, death benefit, and interest rate paid on the cash fund

Has a guaranteed minimum rate of return

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18
Q

Savings element (cash value) Variable Universal Life

A

Cash value from separate accounts varies based on investment results

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19
Q

Income-tax-deferred buildup Term Life

A

Level: Not present
Decreasing: Not present; no buildup (usually)

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20
Q

Income-tax-deferred buildup Whole Life

A

Yes, if meets MEC rules: Occurs where a

single premium life policy is set up. Used as an ILIT.

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21
Q

Income-tax-deferred buildup Variable Life

A

Present, thus tax-deferred buildup if meets

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22
Q

Income-tax-deferred buildup Universal Life

A

Yes, if meets MEC rules

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23
Q

Income-tax-deferred buildup Variable UL

A

Yes, if meets MEC rules

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24
Q

Taxation of death benefit Term Life

A

Level: Same as whole life
Decreasing: Same as whole life

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25
Q

Taxation of death benefit Whole Life

A

Income tax free to beneficiary Estate taxable if
insured held incidents of ownership in the policy at death, if insured had transferred it within 3 years of death or if it death, was payable to or for the benefit of the estate

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26
Q

Taxation of death benefit Variable Life

A

Same as whole life

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27
Q

Taxation of death benefit Universal Life

A

Same as whole life

28
Q

Taxation of death benefit Variable UL

A

Same as whole life

29
Q

Appropriate use Term Life

A

Level: Temporary need for death protection

When low initial premium is a factor

Decreasing: When need decreases over time; examples—home mortgage or until children are self-sufficient

30
Q

Appropriate use Whole Life

A

When lifetime death protection is desired

When forced savings is desired

Can borrow against cash value

When no change in premium amount is desired

31
Q

Appropriate use Variable Life

A

When client wants lifetime death protection and cash value invested in securities

32
Q

Appropriate use Universal Life

A

When maximum flexibility is desired

When the savings element is desired

When need is for whole of life

33
Q

Appropriate use Variable UL

A

When client wants the combined elements of

variable life and universal life

34
Q

Duration of Protection Term Life

A

Level: Specified period; if insured
dies after the period, no benefit;
may be renewable

Decreasing: Same as above; not renewable

35
Q

Duration of Protection Whole Life

A

Whole life of the insured

If insured is alive at age 100/120, face amount is paid

36
Q

Duration of Protection Variable Life

A

Whole life of the insured

37
Q

Duration of Protection Universal Life

A

Can be structured for a term or for whole of insured’s life

Failure to maintain cash value can terminate policy

38
Q

Duration of Protection Variable UL

A

Can be structured for a term or for insured’s life

Failure to maintain cash value can terminate policy

39
Q

Cost/ premium as compared to other forms Term Life

A

Level: Stated in contract; increases over time

Decreasing: Stated in contract; usually level for life
of contract

40
Q

Cost/ premium as compared to other forms Whole Life

A

Level amount; determined in advance by insurance company

Outlay higher than term initially at same age; lifetime cost is lower than term

41
Q

Cost/ premium as compared to other forms Variable Life

A

Level premium

42
Q

Cost/ premium as compared to other forms Universal Life

A

Flexible premium payments

43
Q

Cost/ premium as compared to other forms Variable UL

A

Flexible premiums; poor investment results will increase premiums required

44
Q

Question 2 - Universal Life
Which one of the following is not an advantage
of universal life (UL) insurance?

A

a. It has flexible premium payments.
*b. It lends itself to a compulsory savings
program.
c. It has an adjustable death benefit.
d. It has an unbundled structure.

45
Q

Tax Treatment

Normal tax status

A

• withdrawals taxed as ordinary income
o any amount above basis
• death benefit received by beneficiary income tax free
• death benefit may be subject to estate tax
o incidents of ownership; paid to estate; transferred
within three years

46
Q

Tax Treatment

Modified Endowment Contract (MEC)

A

• fails seven pay test
seven-• loans or withdrawals taxed as ordinary income (LIFO)
• 10% penalty if withdrawal taken before age 59½
• death benefits retain normal tax status

47
Q 
Modified endowment contracts can only be
created in which of the following types of life
insurance policies?
I. Term Life Policies
II. Whole Life Policies
III. Universal Life Policies
IV. Variable Universal Life Policies
A

a. I and II only.
b. III and IV only.
c. II, III, and IV only.
d. I, II, III, and IV.

48
Q

Life Insurance Policy Provisions

Ownership clause

A

The designated owner has vested privileges including the right to transfer the policy, receive cash values and dividends, or borrow against the policy

49
Q

Life Insurance Policy Provisions

Entire contract clause

A

The policy and application attached to it constitute the entire contract between insurer and insured.

50
Q

Life Insurance Policy Provisions

Grace period

A

The period after failure to pay a premium, during which the policy remains in force.

51
Q

Life Insurance Policy Provisions

Reinstatement

A

The insured may reinstate a lapsed policy within a

specified period of default in payment by meeting certain requirements.

52
Q

Life Insurance Policy Provisions

Misstatement of age clause

A

The amount payable will be what the premium paid

would have purchased for the correct age.

53
Q

Life Insurance Policy Provisions

Contestable period

A

The period following which an insurer may not deny a claim because of error, misstatement, or concealment by the insured.

54
Q

Life Insurance Policy Provisions

Suicide clause

A

If the insured commits suicide within a stated period after policy issuance, the insurer is only liable to return to the beneficiary the premiums paid, generally with accumulated interest.

55
Q

Life Insurance Policy Provisions

Policy loan

A

The insured may borrow from the insurance company using the policy cash values as collateral.

56
Q

Life Insurance Policy Provisions

Automatic premium loan

A

If the insured defaults on payment of premiums they may be paid out of the policy loan value

57
Q

Life Insurance Policy Provisions

Delay clause

A

The insurer may postpone payment of cash value or a loan for six months after the request date.

58
Q

Beneficiary Designations/Provisions

Primary

A

• The person or entity first entitled to proceeds of the policy after the
death of the insured

59
Q

Beneficiary Designations/Provisions

Contingent

A

• The person entitled to proceeds of the policy if the primary beneficiary is deceased at the death of the insured or is ineligible to receive them.

60
Q

Beneficiary Designations/Provisions

Revocable

A

• The insured reserves the right to change the beneficiary designation at any time.

61
Q

Beneficiary Designations/Provisions

Irrevocable

A

• The insured cannot change beneficiary designation, acquire a policy loan, or assign the policy without consent of the primary beneficiary.

62
Q

Per Capita Example

A

Children of deceased child (grandchildren) share equally with
surviving children

63
Q

Per Stirpes Example

A

• Grandchildren receive only the share of the deceased child
• Other per stirpes include: “Per stirpes at each generation” (surviving grandchildren split deceased children’s shares equally) and “Per stirpes; primary beneficiaries only” (no contingent beneficiaries
receive anything until all primary beneficiaries are deceased).

64
Q

Viatical Agreements

A

• HIPAA codified rules for viatication
• Insured diagnosed as terminally ill
o under two years life expectancy
• Life Settlements (Senior Settlements)
o life expectancy of more than two years
o may or may not be considered terminally ill
o proceeds may be taxable
• Death benefit taxable to purchaser as an
investment (i.e., amount above basis taxable)

65
Q

Question 4 - Viatical Arrangements
Which of the following is not true regarding
viatical agreements?

A

a. The insured sells his or her life insurance
policy to someone else.
b. The buyer usually pays 60% to 90% of the
death benefit.
c. The buyer must continue to pay premiums
after purchasing the policy.
d. On the death of the insured, the buyer receives the amount of money spent to purchase the policy.

CFP Module 6 (3 decks)

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