Life Insurance Flashcards
Insurance Policy
a social device, legal contract, or policy for the transfer of financial risks
Transfer of Risks
through insurance individuals transfer to insurance companies financial risks they cannot individually afford
Pooling of Risks
when a large group of people contribute money to a fund out of which their losses can be paid. the larger the gouup, the better it works financially
Premium
the money paid by the policyowner to the insurance company in exchange for the policy. the premium must be sufficient to pay sales commissions and other marketing costs, pay administrative costs, and provide a loss reserve from which claims are paid
A lapse
when a policy is terminated to non-payment of premiums
Policyowner
the person or organization to whom benefits are payable at the insured’s death
The insured
the person at whose death the insurance company pays benefits to the beneficiary
Beneficiary
the person or organization to whom benefits are payable at the insured’s death
Rider
is a form that can be added to an insurance policy. it is usually added for an extra premium charge to add coverage. It can, however, sometimes be added to limit or restrict coverage
Actuarial tables
statistical tables that are used when calculating premium rates and mortality loss reserves. They tell insurance companies how many claims are likely to be made each year enabling the insurance companies to estimate what their losses will be
Mortality actuarial tables
actuarial tables that tell the insurance companies how many people of each age and sex are likely to die each year
Mortality loss reserve
is the money set aside by the insurance company to pay life insurance claims
the law of large numbers
indicates that the larger the group, the more accurate the mortality actuarial tables will become and the losses will become more predictable and manageable.
Premature death
a. is dying before the normal age according to the mortality actuarial tables
b. also defined as dying with unsatisfied responsibilities
Through life insurance policies, which are issued by life insurance companies, insureds transfer to insurance companies the…
financial risks of premature death in a defined amount
Four premature death risks
- loss of income
- unsatisfied major obligations
- incomplete financial goals
- final expenses
Loss of income
the face amount of life insurance is determined as a multiple of income (such as 6, 7, 8 times income) depending on the age of the insured’s children, the insured’s family circumstances, other benefits such as employment provided group insurance benefits, and social security benefits.
Unsatisfied major obligations (debts)
home, vehicles, credit cards, investments
Incomplete financial goals
childrens educations, family financial security, husband and wife’s financial independence at old age
Final expenses
a. funeral expenses
b. burial expenses
c. last illness or injury expenses
d. taxes
e. unpaid bills
f. legal expenses
g. family readjustment expenses
h. estate taxes
Final expenses can be paid at an individual’s death four ways:
- In cash out the deceased’s person’s savings
- by borrowing
- by liquidating property
- with life insurance benefits
Cash out of the deceased’s person’s savings
since no one knows when they are going to die, most people do no accumulate enough money before death. When people do have enough savings, it is usually invested and there are penalties for withdrawal
By borrowing
often not all heirs have the credit or are willing to incur the debt. when expenses are paid by borrowing, the loans have to be paid back PLUS INTEREST INCREASING THE COST of death
by liquidating property
or investments or business interests. when property, investments, or business interests are liquidated within a limited time period under adverse circumstances, usually the seller realizes a substantial loss
With life insurance benefits
a. timely - life insurance provides the sum of money needed at exactly the time that it is needed
b. immediate estate - if the insured were to die the next day after purchasing the policy, the full face amount would be paid. if the individual were to provide for family loss of income, unsatisfied major obligations, incomplete financial goals and final expenses through a savings or investment program, the full amount needed usually would not be available until after several years of saving or investing
c. discounted dollars - the totals premiums paid on a life insurance policy are usually less than the benefits paid at the insured’s death
d. life insurance benefits can be set up to avoid probate- life insurance benefits are usually set up to be paid by the insurance company directly to a beneficiary without going through the legal and court process called probate. The beneficiary receives the benefits quicker and without legal expense
3. Tax advantages
Life annuity
a life annuity contract which is issued by a life insurance company protects an individual agains the financial risk of outliving a normal life expectancy according to the mortality actuarial tables and running out of money in old age
How long does a life annuity pay out?
it guarantee monthly income benefits to the annuitant for the rest of their life no matter how long they live
Power of compounding interest
interest and/or earnings on annuities company without any withdrawal for taxes (tax deferred). the policyowner makes continuing contributions and does not withdraw moneys during the accumulation period. this allows the value of a life insurance company issued annuity to increase at a fast rate during the accumulation period.
Policyowner of annuity
person who applies for the plan and pays the premium
annuitant
person to whom monthly income benefits are paid
Insurable interest
to buy an insurance policy, a person must be in a position where they will lose money should loss occur
in the case of a life insurance policy, the policyowner must be in a position where they will…
lose money should the insured die prematurely
parties who have insurable interest
a. the insured
b. family members
c. an employer
d. a business partner
e. a creditor
f. anyone else who proves a financial interest
the policyowner must be in a position of insurable interest when?
only at the time the policy is issued
tax qualified plans
contributions can be tax deducted
non qualified plans
contributions cannot be tax deducted
tax deferred plans
tax on the interest and/or earning is postponed as it compounds and accumulates until it is withdrawn
tax free
when there is no tax on benefits
cost basis
the total contributions made to a plan
a. on a cash value life insurance policy, cost basis is the total premiums that have been paid
b. when a policy owner, while still alive, terminates a cash value life insurance policy, surrenders it to the insurance company and receives the proceeds, he/she is usually considered to be the first recovering the cost basis in the cash value life insurance policy. there is usually no tax on the cost basis which is recovered (tax free)
c. proceedds that exceed cost basis are called gain. there is usually tax only on the gain
Premiums paid on individual life insurance policies usually cannot be…
tax deducted (non qualified). there is usually no tax on the benefits paid to the beneficiary at the insured’s death (tax free)
premiums on group life insurance policies paid by an employer on face amounts up to $50000 usually can be tax deducted by who?
the employer (tax qualified). there still is usually no tax on the life insurance benefits when paid to the beneficiary at the insured’s death (tax free)
Some insurance policies, but not all, pay…
what are those type of plans called?
dividends. participating policy. there is no tax on dividends paid to the policyowner on participating policies (tax free)
Cash value interest and/or earning are..
tax deferred
Because the interest on cash value is tax deferred, dividends are tax free and life insurance benefits paid to a beneficiary at the insured’s death are tax free, some people have used cash value life insurance as tax shelters. The IRS has written rules that define when a life insurance policy does have a real, valid life insurance purpose and is in substance an investment or savings plan.. what is this plan called?
Modified Endowment Contract
In addition to tax on gains withdrawn there is a tax penalty on all amounts withdrawn if the withdrawal is prior to age ___ on cash value life polices that have been classified as ____ ______ ______. Similar tax penalties apply to moneys withdrawn prior to age ___ from annuity contracts and some retirement plans
59.5 and Modified Endowment Contract
Underwriter
an insurance company employee who reviews applications and additional information and decides whether the applicant is acceptable and what the correct premium rate should be.
Application, medical reports, errors and changes to app, Attending physician statement (APS), Medical information Bureau (MIB) report, credit report, and inspection report are items that the underwriter may want to see when?
when underwriting the policy
Age, gender, occupation, dangerous recreational activities, aviation, smoking, and agent’s report are all included in what?
the application
What two things go with each other for underwriting?
application and medical reports
HIPAA states that insurance producers and insurance companies must keep applicants medical information ____
confidential
What are the reasons for the inspection report? 2
to verify the producer completed the application correctly and accurately AND to determine if the applicant has any moral or character risks
Insurance companies must give notice as to whom the medical information may be disclosed to all ___
applicants
insurance applicants must be given notice as to their ____. they must also be given notice of the ____
Privacy rights AND right to refuse dissemination of medical records
Fair credit reporting act
applicant’s right to information
Under the fair credit reporting act, what are some of the applicant’s rights? 5
- right to be advised that there might be information collected from outside sources
- right to the name and address of the inspecting firm if rated or rejected
- right to see the inspection report
- right to have the medical information sent to their physician
- right to dispute information in the inspection report to the inspecting firm
* ** NEVER REQUIRED TO SEND A COPY OF THE REPORT TO THE APPLICANT
Representations are statements in an application upon which the insurance company can contest the policy within the first two years of the policy if the statement is: (3)
- Concealed or false AND
- Material AND
- Intentional
When speaking of material, it needs to be significant and it woudve ____
changed the underwriter’s decision on acceptability or the premium rate
Specific, GUARANTEED STATEMENTS in an application attachment regarding extra risks upon which the insurance company can contest the policy within the first two years of the policy if the statement is in any way CONCEALED OR FALSE
Warranties
Contesting the policy
- if within the first two years of the policy, while the insured is still alive, the insurance company discovers a false representation or false warranted statement, the insurance company can do what?
rescind the policy and refund the premiums that have been paid
Contesting the policy
- if within the first two years of the policy, the insured dies and the insurance company discovers false representation or false warranted statement, the insurance company can do what?
refuse to pay the claim and refund the premiums that have been paid
Required by law, provides that after the policy has been in effect for 2 years, the insurance company cannot contest a policy (either rescind or refuse to pay a claim) due to any misstatement or concealment in the application
Incontestability Clause
When a policy is executed is the same as…
when the policy takes effect
Situation: the application, including the medical report of physical is completed, the premium paid and a conditional receipt issued, the policy takes effect….
Immediately. upon completion of the application including the medical report or physical that is required to subject to the condition that the underwrite would have found the insured acceptable at the premium rate according to the insurance company’s standard practices
in order to be legally binding, a contract must have both an ____ and ____
offer and acceptance
the applicant makes an offer by….
filling out an application including whatever medical report is required and paying a premium
the insurance company conditionally accepts the offer by…
issuing a conditional receipt
the insurance company can ratify the condition acceptance by ____ . or it can reject the offer thereby rescinding the ____. or it can also make a ____
issuing a policy. conditional acceptance. counteroffer
if the insured dies before the owner has accepted the counteroffer, there is no offer and acceptance and therefore no binding contract. What will the insurance company then do?
they are only obligated to refund the premiums that have been paid
Situation: the application is completed, no premium paid and no receipt has been issued. the policy takes effect __
A. a policy must be personally delivered
B. insured must still be in insurable health and must sign a statement of continuing good health
C. Premium paid
Temporary coverage:
a. it provides temp. coverage from date of application to the date of policy delivery. coverage is subject to the condition that the underwriter would have found the applicant acceptable at the premium rate paid according to the insurance company’s standard practices
b. provides coverage in the same face amount and the same form of coverage as the policy that is to replace it
c. when the policy is issued, the insured is covered from then on subject to no conditions
What is this called?
conditional receipt
Temp coverage:
A. it provides temp. term life insurance coverage from the date of application until the date the insured wants a permanent policy to take effect
B. it will pay death benefits if the insured dies prior to the effective date of the permanent policy
c. it guarantees convertibility to a permanent policy without evidence of insurability
What is this called?
Temporary insurance agreement (interim term insurance)
What is this? Required by law
a. it must give the policy owner at least 10 days
b. it is from the date of receiving the policy.
c. it allows the policyowner to read the policy over and to return it to the insurance company for a full premium refund without giving a reason
ten day free look provision
Consumers that do not want to be called by telemarketers can place themselves on the _____ which is maintained by the federal trade commission (FTC)
National do not call list
a. this is a federal anti-money laundering law. its purpose is to protect the US against terrorists and to prevent money-laundry of funds that were obtained illegally or which may be intended for illegal purposes such as terrorism
b. it allows the US attorney general or the Secretary of Treasury to subpoena records of accounts that people have with financial institutions which includes insurance companies
c. requires financial institutions including insurance companies to clearly identify owners of financial institution accounts
US Patriot Act
if a ____ ___ ____ ___ ___ is added to a policy, coverage is excluded while the insured is engaged in the excluded activities or flying as something other than a fare paying passenger on a commercial airline
dangerous recreation or aviation exclusion
if an individual truthfully answers no to the dangerous recreation or aviation questions, the policy is issued, and then the individual engages in one dangerous activities, the insurance company __
cannot rate up or add exclusions to the policy after the policy has been issued
What is another name for additional premium charges and what are 4 types of additional charges
rating up the policy
- rated table
- temp. surcharge - temp flat extra charge
- graded premiums - sometimes called modified premiums.. premiums that increase by specified amounts at specified intervals until they arrive at a long term, permanent rate
- graded benefits - benefits increase by specified amounts at specified intervals until they equal face amount
misstatement of age provision
- says that if the insured has misstated their age or gender so as to pay too low premiums, the insurance company can reduce benefits to what they would normally provide to a person of the insured’s actual age
- applies after the two year incontestability period
- insurance company must refund the premiums that were overpaid if applicable
- the purpose of the provision is to allow the insurance company to issue the policy without proof of age or gender
What is this?
- if added for an extra premium charge, it guarantees the insured the right to purchase additional insurance at the premium rate for the insured’s attained age with evidence of insurability
- options may be exercised at intervals such as every 3 years. usually start at age 25 with options ending at age 40.
- if the insured marries or has a child, he or she is usually allowed to immediately move up his or her options
- if the insured up an option and does not exercise it, it is lost and cannot be recovered.
Guaranteed Insurability Rider - optional and extra charge
Accidental death coverage
pays benefits for death caused by injuries sustained by ACCIDENTAL means.. can be refereed to double or triple indemnity
