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CFP > Life Insurance > Flashcards

Life Insurance Flashcards

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1
Q

Two Primary Types of Life Insurance

A
  • Term

- Cash Value

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2
Q

factors to consider when choosing life insurance

A
  • duration of need
  • the amount of life insurance needed
  • the amount of disposable income of the proposed policy owner
  • the financial self-discipline of the policy owner
  • the risk tolerance level of the policy owner
  • the attitude the policy owner has toward life insurance.
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3
Q

participating and non-participating policies

A

-participating policies pay dividends, while non-participating policies do not.

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4
Q

Whole Life Insurance

A

-basic form of traditional permanent insurance
-features a guaranteed death benefit, premium, and cash value
Variations include: ordinary whole life, limited pay whole life, graded premium or modified whole life, and current assumption whole life.

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5
Q

universal life insurance

A
  • there is no fixed premium and the premium is not tied to the face amount except in the first year.
  • premiums are paid into an accumulation fund
  • There are two options for the death benefit:
    • Option A- the death benefit includes the cash accumulation fund. The mortality charges are based on the net at risk, the face amount of the policy minus the accumulation fund.
    • Option B- increasing death benefit, the death benefit it equal to the face amount plus the accumulation fund.
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6
Q

Entire Contract

A

-the policy with the application attached is the whole contract. There are no other documents that may be considered in interpreting the provisions of the policy

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7
Q

Insurable Interest

A

-an insured cannot acquire insurance in an amount greater than his or her insurable interest.

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8
Q

Ownership

A

-since life insurance is a financial asset, it must be owned by either a natural person or an approved entity.

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9
Q

Collateral Assignment

A

-in conjunction with ownership, not only can the owner transfer the policy to another person, referred to as an absolute assignment, he or she may also make a collateral assignment, essentially using the policy as collateral for a loan.

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10
Q

Incontestable Clause

A

-gives the insurance company 2 years to discover any information about the insured that could have affected the issuance of the policy.

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11
Q

Grace Period

A

-so long as the premium is received within 30 days of the due date, it will be accepted and the policy will not lapse.

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12
Q

Reinstatement

A
  • permits the owner, if an insurable interest still exists and if the insured is still insurable, to reinstate a policy that has lapsed for non-payment of premium.
  • if the policy was surrendered for its cash value, it may not be reinstated.
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13
Q

Suicide Clause

A
  • if the insured commits suicide within the first two years after the policy was issued, the insurance company will pay only the cumulative premiums plus interest.
  • after two years, full death benefit will be paid.
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14
Q

Conversion

A
  • Applies only to term insurance

- gives the right to the owner of the policy to convert it from term to permanent insurance.

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15
Q

Spendthrift Clause

A

-if the insurance company continues to manage the beneficiary’s insurance proceeds, then creditors of the beneficiary cannot access those funds.

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16
Q

Automatic Premium Loan

A
  • available only with permanent traditional forms of insurance.
  • if a premium is late and the grace period has expired, the insurance company will automatically grant a policy loan adequate to pay the premium.
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17
Q

Participating policy dividend options

A
  • Cash
  • Premium Reduction
  • accumulate at interest
  • paid-up dividend additions
  • one year term dividend option
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18
Q

3 non-forfeiture Options

A
  • Cash - the full cash surrender value may be taken in a lump sum
  • reduced paid up insurance - permits the owner to maintain some insurance with no premiums due.
  • Extended Term Insurance - takes the surrender value and applies it as a single premium to purchase the original face amount of insurance as a term policy for as long as it will last.
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19
Q

Cash Settlement Option

A

-the most common type of distribution of death benefits, surrender values and endowment maturity payments.

20
Q

Specified Amount of Income Settlement Option

A

-the insurance company will use a current guaranteed annuity payout schedule to determine how long the principle will last after the beneficiary chooses monthly income to be received.

21
Q

Payments for a fixed period settlement option

A
  • beneficiary states how long they want the income to be distributed.
  • the insurance company then calculates how much each payment will be
22
Q

Interest Only Settlement Option

A

-the insurance company makes payments of the interest earned on the lump sum until one or more other settlement options are chosen.

23
Q

Life Income Settlement Option

A
  • provide income for the life of the beneficiary.
  • life only provides the highest monthly payout, but ends at the death of the beneficiary.
  • can also be life income with a period certain.
24
Q

Viatical and Life Settlements

A
  • viatical agreements are contracts that transfer ownership of life insurance policies from terminally ill individuals to investors, also known as the “viatical settlement provider”
  • allows the insured to use the money for current medical needs.
25
Q

Requirements to obtain a viatical settlement

A
  • insured had to have owned the policy for at least 2 years
  • the current beneficiary signs a release or waiver
  • the insured is terminally ill.
  • the insured signs a release allowing the viatical settlement provider access to his or her medical records.
26
Q

Requirements for a group-term policy to be deemed nondiscriminatory

A
  • the plan must benefit at least 70% of EE’s
  • No more than 15% of participants can be key EE’s
  • the plan must benefit a nondiscriminatory class of EE’s
  • the plan if part of the ER’s cafeteria plan for EE’s
27
Q

2 types of group insurance

A
  • group term insurance which is typically offered to all employees
  • group permanent insurance is almost always reserved for highly valued employees, like corporate executives.
28
Q

Group Paid Up

A
  • consists of increasing units of permanent life and decreasing units of term insurance
  • employee makes after-tax contribution to pay for the policy
  • employer pays for enough term insurance to provide the needed face amount
  • at retirement the employee can cash out the policy or leave the paid-up portion of insurance in force with no premium payments.
29
Q

Group Ordinary

A
  • gives employees the opportunity to participate in a whole life funded by the employer and employee contributions
  • Employees can choose to waive contributory permanent coverage, but they will still benefit from the noncontributory
30
Q

Group Universal Life

A
  • individual UL policies with potentially higher interest returns, flexible premiums, flexible time of making payments, DB options
  • group underwriting provides decreased costs
  • evidence of insurability is not required = guaranteed issue
  • employee generally pays the premium
31
Q

Group Survivor Income

A
  • Monthly benefit paid to surviving spouse and/or children
  • NO choice of beneficiary
  • benefit can be flat amount, a percentage of compensation, percent of term insurance, or a monthly amount based on salary brackets
  • spouse’s benefit continues for a specified period of time or until remarriage; child benefit continues until age 18 (age 23 if full time student)
  • no lump sum distribution
32
Q

Converting group term to individual life policy for a terminated employee, factors to consider

A
  • evidence of insurability is not required
  • face amount of the new individual policy cannot exceed the face amount under the group coverage
  • the EE can select any type of policy offered by the insurer except term insurance
  • premium is determined by the EE’s attained age & date of conversion
  • certain supplementary coverages, such as disability benefits may not be available under the conversion policy.
33
Q

Group Carve-Out Plans

A
  • individual, discriminatory benefits provided to selective employees
  • amount of coverage will vary from executive to executive
  • cost of coverage must be included in the executive’s gross income and is deductible to the employer
  • sometimes referred to as a premium bonus plan
  • may be used to bring group term insurance into compliance with FINRA
  • may be used to reduce the cost of the group term plan
  • policy owned by the employee; employee names beneficiary; fully portable when employee leaves employer.
34
Q

Taxation of dividends from a life insurance policy

A
  • generally not taxable since they are considered to be a return of premium that reduces the policy owner’s basis in the policy
  • if the dividends paid out exceeds the premiums paid to date (rare event), the excess amount of dividends is taxable as ordinary income to the policy owner.
35
Q

Modified Endowment Contracts (MECs)

A
  • a life insurance policy in which premiums paid within the first seven years of a new policy or within 7 years of a “material change” to an existing policy exceed specified amounts under the Internal Revenue Code rules.
  • if the seven pay test is violated, the insurance policy will be treated as a MEC.
  • typically single premium life insurance policies
  • the use of the cash value is treated differently than a traditional life insurance policy and they are taxed as “LIFO”, meaning that the withdrawal is taxable from the first dollar taken.
36
Q

A “material change” in an insurance policy takes place when:

A
  • the death benefit increases by more than $100,000
  • the death benefit is increased by any amount, but the insured did not have the right to obtain the increase without having to prove continued insurability
  • a term policy is converted to an individual permanent or cash-value type policy.
37
Q

Transfer for Value Rule

A

-if a life insurance policy is sold (not gifted) by the owner to another person or entity, there is a transfer for value unless the transfer is excepted from the rule. If not excepted from the rule, the death benefit will lose its tax free advantage. The portion taxable is equivalent to the extent that the death benefits received exceed the purchasers basis.

38
Q

Exceptions to the transfer for value rule

A
  • transfer to the insured
  • transfer to a corporation where the insured is an officer or shareholder
  • transfer to a partnership or a partner in a partnership where in the insured is a partner
  • transfer where the basis of the policy owner remains the same, meaning for practical purposes, when the policy is a gift to a spouse or other family member.
39
Q

types of insurance policies that can be exchanged via a 1035 exchange

A
  • a life insurance policy for a life insurance policy
  • an annuity for an annuity
  • a life insurance policy for an annuity
40
Q

Buy-Sell Agreement

A
  • sometimes known as a business continuation agreement.
  • it is a contract between the outgoing owner or owners of the business with its new or incoming owners to continue business operation at the outgoing owner’s death, disability, or retirement.
41
Q

Cross-Purchase Agreement

A
  • each business owner purchases a sufficient amount of life insurance on the life of the other owner. Provides a cash flow to purchase the deceased owner’s share of the business.
  • an advantage is that the purchasers receive a step up in basis of the deceased owner’s business interest
  • disadvantage is the number of policies that may need to be used.
42
Q

Entity Purchase Agreement

A

-the business entity itself buys and owns life insurance policies on each business owner.
-primary advantage is the ability to generate liquidity for the business.
-

43
Q

Key-Employee Life Insurance

A

-life insurance applied for, owned by, and payable to the business on the life of key employees, typically management employees or corporate executives.
-premiums paid are not deductible
-

44
Q

Split-Dollar Life Insurance

A

-a method of paying premiums on the insurance; it is not a separate type of policy.

45
Q

Endorsement method of Split-Dollar Life Insurance

A
  • employee/employer both own the policy
  • premiums are not deductible
  • employer retains the cash value in the policy
  • the remainder of the death benefit goes to the employee’s designated beneficiary.
46
Q

Collateral Assignment method of Split-Dollar Life Insurance

A
  • employee owns the policy
  • policy premiums are non deductible
  • employer is refunded loan equal to premiums paid
  • the remainder of the death benefit goes to the employees designated beneficiary.
47
Q

Business overhead expense insurance

A
  • designed to cover the ordinary and necessary expenses associated with the operation of a business should the owner become disabled.
  • will not reimburse the owner for his or her salary during the time they are disabled.
  • policy premiums are a deductible business expense and the proceeds payable are taxable as income to the employer or entity.

CFP (51 decks)

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