Life Insurance Flashcards
For two term polices with the same death benefit, for the same insured, the monthly premium cost rises as the length of the term rises (e.g. from 10 years to 15 years). Why?
A longer coverage period creates a higher probability that the benefit will be paid out (i.e. there is more time over someone might die for any variety of covered reasons)
At the fundamental level, what differentiates term life insurance from whole life insurance?
Term is pure insurance, and is designed and priced to provide coverage for a set period of time, typically up to 30 years (i.e. the term). It is not permanent.
Whole insurance is composed of term life insurance priced to age 100 plus an investment side account. Premium pricing is set to provide for both the cost of the insurance and a contribution to the savings account over the entire life time of the insured.
What are the primary problems/issued associated with whole life?
- The high premium cost prevents families from getting enough insurance when they need the coverage the most. Whole life owners are often grossly underinsured.
- The high premium, part of which goes to the savings component, prevents or limits the degree to which holders can contribute to retirement plans with much more attractive tax and investment features (401k, Roth IRA, etc.)
- Returns on the savings component are typically very low, partly due to fees.
True or False: Insurance company profits and agent commissions are much higher with whole life than with term.
True.
What is meant by the phrase “Life insurance is sold, not bought.”
It means that most life insurance is sold by agents, often aggressively. This is especially true of whole life insurance, which generates larger profits for insurance companies, and much bigger commissions for agents, than does term insurance, which can now be purchased without an agent online.
According to several financial authors, all things considered, what simple phrase sums up the optimal approach to life insurance?
Buy term, and invest the difference.
According to financial planner, teacher, and licensed life insurance agent, what type of people buy whole life insurance?
The uninformed, aka stupid people
What % of insurance companies are stock versus mutual?
What is the difference between the two types of companies?
About 70% of insurance companies are stock companies, and 30% are mutual. About 20% of policies are participating, and 80% are non-participating.
How does the “participating” life insurance policy work?
These are offered by mutual life insurance companies. They have stated, maximum premiums that are higher than non-participating policy. However, policy holders participate in the risks and benefits of the underwriting of insurance, and if the mortality experience of the company is better than expected, then the policy holders receive “dividends,” which in fact are simply rebates rather than true dividends, and which lower the premium in most cases to levels below those of non-participating policies.
True or False - Premiums for participating policies are unpredictable, but are generally lower than for non-participating policies?
True. The unpredictability comes from the fact the premium is adjusted over time through the payment or non-payment of “dividends” which in turn reflect the underwriting/mortality experience of the company. Policy holders are usually compensated for assuming this risk with lower premiums over time, although there is no guarantee this will occur.
In the basic terms, what is whole life insurance?
It is life insurance with a tax deferred savings vehicle attached.
According to one observer, the life insurance introduces new variations on whole life coverage about every 5 years, always with a new name (variable life, universal life, permanent life, etc, etc). What is the reason for this?
Whole life insurance has a developed such a poor reputation due to its very high expenses, complexity, low returns, and aggressive sales practices, that the LI industry feels it must tweak the product and change the name and marketing practices.
If a 32 y/o healthy insured male with preferred status can purchase $500,000 of 20 year term life insurance for $250 per year (a reasonable) expectation, then approximately would that same person have to pay for the same amount of whole life coverage?
Approximately 10 to 12 times more, or about $250 per month.
Which of the following statements about the cash value savings of a whole life insurance is false:
- ) The first contributions to the savings portion often go to insurance company fees instead
- ) Rates of return are typically very low, currently around 1 or 2%
- ) To access the money and keep the policy, you must borrow against it, paying interest to the insurance company
- ) Upon death, the insurance company pays the face value, and keeps the savings
- ) If you die with a loan balance, the loan balance is subtracted from the policy payout.
None of the above statements is false.
T or F - Insurance is regulated at the state level, and virtually every insurance commissioner’s office publicly states every year that term is virtually always better than whole life insurance.
True - The vast majority of consumers groups say the same thing.
T or F - U.S. law prohibits the purchase of speculative insurance true.
True. You cannot buy insurance on another’s home and then hope it burns down. The same is true with disability, long-term care, etc.
What reasons are there to buy life insurance on a child?
None!! The only possible exception might be a high earning child actor on whose the family depends (not very common!)
