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
Personal Needs Examples of Life Risk Exposures
• 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
Family Needs Examples of Life Risk Exposures
• Last expenses • Death of a primary income earner • Dependent income • Education needs • Family goals • Parents
Business Needs Examples of Life Risk Exposures
- Death of a partner
- Death of a key employee
- Employee retention programs
- Business liquidity
Question 1 - Personal Risk Exposures
All of the following are personal risk exposures
that may indicate a need for life insurance except
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.
Buy-Sell Agreements
Type: Stock redemption
• The business agrees to buy the deceased shareholder’s stock
(i.e., entity plan)
Buy-Sell Agreements
Type: Cross-purchase
• Each business owner agrees to buy out the
interest of the deceased business owner
Business Continuation Option
Type: Wait & See
• Upon the death of a business owner, the remaining owners decide the best way to proceed
Business Continuation Option
Type: Third Party Buyout
• A non-related party agrees to purchase the
deceased owner’s interest
Amount of protection for Term Insurance Definition
Level: Remains constant during term
Decreasing: Decreases over the specified time frame
Amount of protection for Whole Life
Remains constant unless loans have reduced the face amount, dividends are used to increase the
face amount, or riders are purchased
Established in contract
Amount of protection for Variable Life
May increase or decrease during the period
Minimum benefit usually established in contract at the original face amount
Amount of protection for Universal Life
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
Amount of protection for Variable Universal Life
Generally level (may increase due to investment results)
Savings element (cash value) For Term insurance
Level: None
Decreasing: None (actually some policies
actually, have small savings)
Savings element (cash value) For Whole Life
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
Savings element (cash value) For Variable Life
Cash value from separate accounts varies; an established ratio to amount of protection is maintained to prevent conversion to MEC or non-life insurance
Savings element (cash value) For Universal Life
Varies based on premium payment, death benefit, and interest rate paid on the cash fund
Has a guaranteed minimum rate of return
Savings element (cash value) Variable Universal Life
Cash value from separate accounts varies based on investment results
Income-tax-deferred buildup Term Life
Level: Not present
Decreasing: Not present; no buildup (usually)
Income-tax-deferred buildup Whole Life
Yes, if meets MEC rules: Occurs where a
single premium life policy is set up. Used as an ILIT.
Income-tax-deferred buildup Variable Life
Present, thus tax-deferred buildup if meets
Income-tax-deferred buildup Universal Life
Yes, if meets MEC rules
Income-tax-deferred buildup Variable UL
Yes, if meets MEC rules
Taxation of death benefit Term Life
Level: Same as whole life
Decreasing: Same as whole life
Taxation of death benefit Whole Life
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
Taxation of death benefit Variable Life
Same as whole life
Taxation of death benefit Universal Life
Same as whole life
Taxation of death benefit Variable UL
Same as whole life
Appropriate use Term Life
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
Appropriate use Whole Life
When lifetime death protection is desired
When forced savings is desired
Can borrow against cash value
When no change in premium amount is desired
Appropriate use Variable Life
When client wants lifetime death protection and cash value invested in securities
Appropriate use Universal Life
When maximum flexibility is desired
When the savings element is desired
When need is for whole of life
Appropriate use Variable UL
When client wants the combined elements of
variable life and universal life
Duration of Protection Term Life
Level: Specified period; if insured
dies after the period, no benefit;
may be renewable
Decreasing: Same as above; not renewable
Duration of Protection Whole Life
Whole life of the insured
If insured is alive at age 100/120, face amount is paid
Duration of Protection Variable Life
Whole life of the insured
Duration of Protection Universal Life
Can be structured for a term or for whole of insured’s life
Failure to maintain cash value can terminate policy
Duration of Protection Variable UL
Can be structured for a term or for insured’s life
Failure to maintain cash value can terminate policy
Cost/ premium as compared to other forms Term Life
Level: Stated in contract; increases over time
Decreasing: Stated in contract; usually level for life
of contract
Cost/ premium as compared to other forms Whole Life
Level amount; determined in advance by insurance company
Outlay higher than term initially at same age; lifetime cost is lower than term
Cost/ premium as compared to other forms Variable Life
Level premium
Cost/ premium as compared to other forms Universal Life
Flexible premium payments
Cost/ premium as compared to other forms Variable UL
Flexible premiums; poor investment results will increase premiums required
Question 2 - Universal Life
Which one of the following is not an advantage
of universal life (UL) insurance?
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.
Tax Treatment
Normal tax status
• 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
Tax Treatment
Modified Endowment Contract (MEC)
• 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
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. I and II only.
b. III and IV only.
c. II, III, and IV only.
d. I, II, III, and IV.
Life Insurance Policy Provisions
Ownership clause
The designated owner has vested privileges including the right to transfer the policy, receive cash values and dividends, or borrow against the policy
Life Insurance Policy Provisions
Entire contract clause
The policy and application attached to it constitute the entire contract between insurer and insured.
Life Insurance Policy Provisions
Grace period
The period after failure to pay a premium, during which the policy remains in force.
Life Insurance Policy Provisions
Reinstatement
The insured may reinstate a lapsed policy within a
specified period of default in payment by meeting certain requirements.
Life Insurance Policy Provisions
Misstatement of age clause
The amount payable will be what the premium paid
would have purchased for the correct age.
Life Insurance Policy Provisions
Contestable period
The period following which an insurer may not deny a claim because of error, misstatement, or concealment by the insured.
Life Insurance Policy Provisions
Suicide clause
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.
Life Insurance Policy Provisions
Policy loan
The insured may borrow from the insurance company using the policy cash values as collateral.
Life Insurance Policy Provisions
Automatic premium loan
If the insured defaults on payment of premiums they may be paid out of the policy loan value
Life Insurance Policy Provisions
Delay clause
The insurer may postpone payment of cash value or a loan for six months after the request date.
Beneficiary Designations/Provisions
Primary
• The person or entity first entitled to proceeds of the policy after the
death of the insured
Beneficiary Designations/Provisions
Contingent
• 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.
Beneficiary Designations/Provisions
Revocable
• The insured reserves the right to change the beneficiary designation at any time.
Beneficiary Designations/Provisions
Irrevocable
• The insured cannot change beneficiary designation, acquire a policy loan, or assign the policy without consent of the primary beneficiary.
Per Capita Example
Children of deceased child (grandchildren) share equally with
surviving children
Per Stirpes Example
• 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).
Viatical Agreements
• 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)
Question 4 - Viatical Arrangements
Which of the following is not true regarding
viatical agreements?
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.
