Life Insurance Flashcards
what are the 2 approaches to calculate life insurance amount to purchase?
- needs approach
2. human life value approach
life insurance needs approach
evaluates the income replacement and lump-sum needs of survivors in the event of an income producer’s untimely death
life insurance human life value approach
uses projected future earnings less self-maintenance costs as the basis for measuring life insurance needs
term life insurance - definition
pure insurance protection which pays a predetermined sum if the insured dies during a specified period of time
protection ceases at the end of the term unless renewed
does term life insurance have a cash value?
no
who is term life insurance best for?
younger ages, those that can’t afford to pay high premiums
what does it mean that a term life insurance policy is renewable?
can be renewed without evidence of insurability
what does it mean that a term life insurance policy is convertible?
can be converted to a whole life policy without evidence of insurability for a particular period of time
what is the waiver of premium provision for term life insurance policies?
if the insured becomes totally disabled, the premiums are waived during the period of disability
disadvantages of term life insurance
- exponentially increasing premiums for older age entry or renewal
- may not meet permanent life insurance needs
Annual Renewable Term (ART) life insurance policy
- premiums increase annually
- every year the policy becomes more expensive
- no cash value
- death benefit is fixed at the face amount of the policy
- may become too costly at older ages
Level Term life insurance policy
- premiums are level for a period of time such that the insured prepays some of the later more expensive premiums earlier in the policy
- no cash value
- death benefit is fixed at face amount
Decreasing Term life insurance policy
- premiums are level
- no cash value
- death benefit DECREASES over the term of the policy
- most appropriate use is to pay off a mortgage
what are the 3 types of term life insurance?
- annual renewable term (ART)
- level term
- decreasing term
whole life insurance - definition
- provide lifetime protection if premiums are paid as agreed
- have a savings or investment component
- cash values may be used for loans or may be received if the policy is surrendered
advantages of a whole life insurance policy
- provide tax-deferred growth of cash value
- provides permanent protection until age 120
disadvantages of a whole life insurance policy
- premiums are expensive
- no flexibility with the premium payments
- cash value grows gradually
- insured may not be able to purchase as much protection
what are the 4 types of whole life insurance?
- ordinary life
- limited pay life
- variable life
- current assumption whole life (CAWL)
ordinary life insurance policy
- insured pays premiums until age 120 or death
- cash value increases to face value at age 120
- death benefit is level through the term of the policy
limited pay life insurance policy
-premiums are higher than ordinary life because the insured only pays premiums until a certain age
variable life insurance policy
- cash value is invested in stock, bond, and money market mutual funds
- opportunity for higher returns on cash value
- death benefit and cash value fluctuate based on investment performance
current assumption whole life (CAWL) insurance policy
- insurer uses new money rates and new mortality rates to establish premiums
- Lo CAWL is low premium assuming a higher interest rate for crediting
- Hi CAWL is high premium assuming a lower interest rate for crediting
when is it best to use whole life insurance?
- for 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
first-to-die policy
provides death benefit when the first insured dies
second or last-to-die policy
provides death benefit when second or last insured dies
which has the greater life expectancy, first-to-die or last-to-die?
last-to-die
non-participating life insurance policy
whole life policy does NOT pay dividends
participating life insurance policy
whole life policy DOES pay dividends
dividend options for a participating life insurance policy
- cash
- accumulate at interest
- reduce premiums
- paid-up additions
- one-year term
settlement options for life insurance
- lump sum payment
- interest only
- annuity payments
what is the lump sum payment settlement option for a life insurance policy?
pay the lump sum directly in the form of a check to the beneficiary
what is the interest only settlement option for a life insurance policy?
receive periodic payments of interest on the policy proceeds
what are the 5 types of annuity payment settlement options for a life insurance policy?
- fixed amount
- life income
- fixed period
- life income with period certain
- joint and last survivor income
fixed amount annuity payment option from life insurance settlement
beneficiary will receive fixed payments until the proceeds are depleted
life income annuity payment option from life insurance settlement
the life income option converts the death benefit into an annuity contract for the life of the beneficiary
fixed period annuity payment option from life insurance settlement
the death benefit proceeds may be used to purchase an annuity certain, which will make payments for a specified number of periods
life income with period certain annuity payment option from life insurance settlement
transforms the death benefit into a life annuity contract based on the age and health of the beneficiary, yet promises to make a specified number of payments under the contract
joint and last survivor income annuity payment option from life insurance settlement
annuity payments are made over the joint lives of 2 individuals
when one of the annuitants dies the survivor will receive a reduced payment for the rest of his/her life
what are the 4 life insurance nonforfeiture options?
- cash surrender value
- reduced paid-up insurance
- extended term insurance
- accelerated death benefits
cash surrender value - nonforfeiture option
insured receives the accumulated cash value when terminating the life insurance policy
cash surrender value is the cash value less surrender charges
reduced paid-up insurance - nonforfeiture option
insured receives the cash value in the form of a paid-up policy with a smaller face amount
extended term insurance - nonforfeiture option
insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy
accelerated death benefits - nonforfeiture option
- used if an insured becomes terminally ill
- may be a lump sum or monthly income
- life expectancy must be 24 months or less
- income is not taxable to insured
- no restrictions on what the accelerated death benefit can be used for
universal life insurance
- insured may adjust premiums paid, face value of the policy, and cash value
- insured does NOT direct the investment portion of the cash value
- cash value can be used to pay the policy premiums
universal life A
- flexible premium, adjustable death benefit, unbundled life insurance contract
- if cash value gets high enough, death benefit will increase
universal life B
- same as universal life A, but the death benefits vary directly with the cash values
- more expensive than universal life A
variable universal life (VUL)
- product with investment options
- no minimum guaranteed rate of return on investment
- cash value is invested in a separate account and not the insurer’s general account
- cash value is not guaranteed
non-direct recognition program
does not adjust the dividends paid on a policy when there is an outstanding loan against the cash value of a policy
direct recognition program
dividends are reduced by any outstanding loan against the policy
grace period
typically 31-61 days after the premium due date in which the policy remains in force
what happens if the insured dies during the grace period?
insurer assumes the insured would have renewed, and the insurer will pay the death benefit and deduct the premium
what happens when there is a misstatement of age or gender on a life insurance policy?
death benefit will be paid, but reduced by what premiums would have been if age/gender was accurately stated
what happens if the insured commits suicide?
coverage is excluded if suicide is committed within 1 or 2 years of purchasing the policy
if suicide is committed within the exclusion period, premiums are returned
what is the disability waiver of premium for a whole life insurance policy?
insurer will waive all premiums after disability
what is the disability waiver of premium for universal and variable universal life insurance policies?
insurer will waive the chargers related to mortality and administration, OR will waive the entire premium
group term life insurance
- the most common form of insurance offered by employers
- premiums for the first $50k in coverage is tax free
- premiums paid by employer are tax deductible
- premiums paid by employee are with after-tax dollars
- income must be imputed based on the coverage in excess of $50k
group whole life insurance
- allows employees to accumulate savings for retirement through the cash value of a policy
- generally premiums paid by the employer are taxable income to the employee
life annuity contracts
- period payments to an individual that continues for a fixed period or the duration of a designated life or lives
- provides protection from outliving your assets
immediate annuity
payments to annuitant begin immediately and is purchased with one single lump sum
deferred annuity
payments to annuitant begin at some future date, and can be purchased using either a lump sum or periodic installment premiums
flexible premium deferred annuity (FPDA)
- allows insured to vary the premiums paid
- retirement income is a function of total premiums paid
single premium deferred annuity (SPDA)
- a lump sum payment of premium
- earnings accumulate tax free until distributed
- proceeds from a life insurance policy can be used to purchase a single premium annuity
fixed annuity
- annuity accumulates a fixed interest rate over a period of time
- provides the owner with more security than a variable annuity contract
variable annuity
- owner may invest in stock or bond mutual funds held in sub-accounts
- no guarantee of a return on investment
- owner accepts more investment risk
- appropriate if the client wants to keep pace with inflation
equity indexed annuity
- form of fixed annuity, linked to an index
- limits downside risk of index
- index term typically ranges from 1-10 years
- index is most often the S&P 500
pure life annuity
- payments are made to the annuitant over his lifetime
- payments stop at death of annuitant
- primary risk is receiving one payment, then dying
life annuity with guaranteed minimum payments
- payments continue for a minimum term and payments are payable to the annuitant’s beneficiary if death occurs prior to expiration of the minimum term or until death of annuitant if annuitant’s life exceeds the minimum term
- payout is less under this method than a pure life annuity
installment refund annuity
if total payments to the annuitant are less than the premiums paid for the policy at the owner’s death, the policy will payout the difference between premiums paid and what has already been paid out
joint and survivor annuity
- an annuity is paid out over the lifetime of 2 annuitants
- payments are lower than a pure life annuity
how are the death benefits of a life insurance policy taxed?
generally excludable from taxable income
how are the dividends earned on the cash value of a life insurance policy taxed?
not taxed until withdrawn
how is the cash value of a life insurance policy taxed?
not taxable if withdrawn at death
how are loans against a life insurance policy taxed?
tax free (exception is a modified endowment contract, MEC)
is there a taxable event if you exchange a life insurance policy for another life insurance policy?
no
is there a taxable event if you exchange a life insurance policy for an annuity?
no
is there a taxable event if you exchange an annuity for another annuity?
no
is there a taxable event if you exchange an annuity for a life insurance policy?
yes
how are premiums paid the insured taxed?
not tax deductible by the insured
how are group life insurance premiums paid by an employer taxed?
deductible by the employer, taxable to the employee
first $50k of coverage is not taxable to an employee
exclusion ratio
exclusion ratio = (basis) / (total payments)
where:
total payments = (monthly payment)(12 months)(life expectancy)
how are withdrawals taxed for annuities purchased prior to 1982?
LIFO tax treatment (withdrawals are taxed to the extent of earnings before basis is returned)
how are withdrawals taxed for annuities purchased after 1982?
FIFO tax treatment (withdrawals up to the owner’s basis are not taxable but rather are treated as a return of capital)
