Life Insurance Flashcards
1
Q
Peril
A
Cause of loss
Insurer agrees to cover losses covered by a specified peril
2
Q
What is peril for life insurance?
A
Death
3
Q
What is peril for health insurance?
A
Accidents or illness
4
Q
Law of large numbers
A
The larger the group the more accurate losses can be predicted.
Allows carriers to charge each insured a premium that polled together will cover all claims and operating costs.
5
Q
Stock insurance companies
A
Issues non-participating or non-par policies
6
Q
Non-participating or non-par policies
A
Profits are paid as dividends to shareholders
7
Q
Mutual insurer
A
Owned by policyholders
Board of directors chosen by policyholders
Profits returned to policyholders as no taxable dividends
Issues participating policies
8
Q
Participating or par policies
A
Pay dividends to policyholders
Whole life policies
9
Q
Domestic
A
The state where a company has its home office
10
Q
Foreign
A
Any state other than home office state
11
Q
Alien
A
Home office is in any country other than USA
12
Q
Financial strength rating
A
Report card of the company
13
Q
Legal contract (LACC)
A
Insurance policies are legal contracts
Legal purpose-risk transfer doesn’t violate law
Agreement-offer and acceptance
Consideration-giving something of value
Competent parties-insured age 18 and sane
14
Q
What is insured consideration?
What is insurance companies consideration?
A
Insured gives info and premium
Company gives promise to pay (policy)
15
Q
Adhesion
A
Contract is written by company and insured must adhere or abide by entire policy-policy itself, riders, application
If ambiguous courts will side with insured
16
Q
Aleatory
A
Not equal value-small premium for large amount of coverage
17
Q
Unilateral
A
Only one promise made
Company promises to pay covered loss
Insured does not promise to pay premium
18
Q
Conditional
A
Insured must pay premium for coverage and file a claim if a loss occurs
19
Q
Representation
A
Statement that is believed to be true
All answers on application are considered to be representations
20
Q
Misrepresentation
A
Representation that is actually false
21
Q
Material misrepresentation
A
Misrepresentation that has determining factor in insurer’s acceptance of the risk.
Insurer has 2 years to discover
22
Q
Underwriting
A
Process of evaluating risk to determine if it is acceptable based on established insurance company guidelines
23
Q
Changes in application
A
Must be initialed by applicant
24
Q
Backdating
A
Used to save person’s age
Most state laws allow 6 months backdating
Applicant must pay any additional premium
25
Required signatures
Insured
Producer/agent
Applicant or owner of policy
26
Producers report
Only seen by agent and underwriter
27
Conditional receipt
Premium paid with application.
Effective on date of application or date of medical examination whichever is later.
It is the date of the application as long as the applicant is found to be insurance under the company’s standard underwriting rules.
28
Binding receipt
Temporary, 30-60 days
Not common in life insurance
Eff date is date of app
29
Attending Physician’s Statement (APS)
Underwriter can ask current doctor to find applicant’s current medical condition and medical history
30
2 types of medical examinations
Paramedical-nurse
| Complete physical-by insurance company doctor
31
Medical Information Bureau
Non-profit insurance trade association
Maintains underwriting info on applicants
To reduce misrepresentation and fraud
32
4 classifications of risk
Standard
Preferred
Substandard
Declined
33
When does COD policy become effective
Policy issued
Client accepts policy
Client pays
Statement of continued good health
34
Statement of good health
Required if no premium with application
| If health changed, agent can’t deliver policy
35
Effective date of coverage
Conditional receipt-eff date is date of app if premium collected at the time of application
Substandard and pays additional premium-eff date is date policy issued
No receipt-eff date is policy issue date if premium paid at delivery
36
Fair Credit Reporting Act
Third party information
Notice to applicant required
Consumers have rights and can dispute information in files
Penalty: fines max $5k and imprisonment max 1 year
37
Insurable Interest
Risk of loss: person applying for the policy must be at risk of suffering a significant loss if the insured dies. Loss may be emotional or economic.
Assumed in one’s self and relationships (spouse, children)
38
When must insurable interest exist?
At time of application
39
Survivor Protection
Survivors are protected financially
40
Human Life Value
Purpose of life insurance is to replace an individual’s economic value.
Calculation: individual’s annual income X number of years until retirement
41
Needs Approach
Looks at financial situation the survivors will face.
| 2 categories of financial needs: cash needs and income needs
42
Blackout Period
Social Security Administration provides benefits to spouse and children until youngest turns 16 and does not resume until spouse turns 60
43
Buy-Sell Funding
Buy-sell agreements provide for the sale of business interest at the death or disability of an owner.
44
Buy-Sell Entity plan
Purchaser of deceased owner’s business interest is the business entity.
When funded by life insurance, business entity owns policy
If business is corporation plan is called stock redemption plan
45
Buy-Sell Cross-Purchase Plan
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Surviving owner(s) purchase deceased owner’s interest.
Each partner owns a policy on the lives of each other partners.
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46
Key Person Coverage
Business owns, pays for, and is the beneficiary of the policy on the key person’s life. Insurance proceeds used to offset direct financial losses.
47
Individual Life Insurance Plans
Individual always gets policy
48
Group Life Insurance Plans
Individual never gets policy
49
Premium Elements
Mortality - relative frequency of death in a specific population, death rate
Interest - earnings on premium dollars btw time collected and time paid
Expenses - insurer’s operation costs
50
Net Premium
Mortality - Interest
51
Gross Premium
Mortality - Interest + Expenses
52
Premium Payment Mode
Annual - lowest
Semi-annual
Quarterly
Monthly
53
2 Basic Classes of Life Insurance
Term
| Permanent
54
Term Insurance
Simplest type
Only offer death benefit
Remains in force for a specified period of time
Length is variable
55
Level Term
Death benefit is level
| Premium is level for the term
56
Decreasing Term
Death benefit decreases
Premium remains level
Cheapest
Protects against debt (mortgage)
57
Increasing term
Death benefit increases
Premium increases
Used as rider on permanent cash building policy
Purpose is to have death benefit keep pace w/ inflation
58
Return of Premium Term
Returns all or part of premium paid at end of term if insured is still alive.
Premium is higher than a regular term policy.
59
Renewability
Guarantees policy will renew at end of term w/o new app
3 options: 10-year, 5-year, annual (A.R.T. - Annual Renewal Term).
Death benefit remains same but premium increases at renewal based on insured’s age at renewal (attained age).
Policy expires at an age specified in the policy.
Not all term policies.
60
Convertibility
Allows conversion from term to permanent without evidence of insurability or application.
Must be made before expiration.
61
Premium for converted policy based on 2 options
Attained age - insured’s age at time of conversion (99% of policies)
Original age - age at time original policy, lump sum amount (down payment) is required that equals cash value of permanent policy if it was original purchased instead.
62
Level Premium
Purpose is to make lifetime coverage affordable at older ages.
Premium does not increase even into old age.
63
Fixed Premium Schedule
Level premium on a fixed schedule
64
Fixed, Level Death Benefit
Fixed and level death benefit
65
Cash Value
Reflect reserves necessary to assure payment of guaranteed death benefit
66
2 Ways to Access Cash Value While Alive
Policy surrender
Policy loans - interest must be paid on amount borrowed, amount borrowed and interest is deducted from death benefit if not paid back before insured’s death
67
Continuous Premium Whole Life
Premiums are same each year for duration of policy
| AKA straight life or ordinary life
68
Limited-Payment Whole Life
Allow lifetime of premiums to be paid in a shorter period of time.
Common forms: 1) 10-pay or 20-pay, 2) Life paid-up at age 65 - level installments annually.
Cash value builds up faster and interest is paid at guaranteed rate at end of premium-paying period.
69
Single Premium Whole Life
One payment at time of purchase.
| Creates immediate cash value.
70
Modified Premium Whole Life
Lower premiums for first 3-5 years.
| Premiums increase afterwards and remain level for life of policy.
71
Graded Premium Life Insurance
Lowest initial premium.
| Increases every year for 5-10 years until leveling off.
72
Indeterminate Premium Whole Life
Premiums adjusted by company.
| Has a guaranteed maximum premium.
73
Interest Sensitive Whole Life
Cash value can increase beyond guaranteed amount.
Has a current interest rate.
Guaranteed interest rate.
74
Adjustable Life Insurance
Options to adjust face value/death benefit, premium, premium duration, how fast cash value builds up, and length of coverage
w/o having to change policies.
Increase requires proof of insurability.
75
Universal Life
Flexible premiums and flexible coverage.
Cash Account - premiums accumulate interest in cash value with current or guaranteed interest.
Can decrease or increase death benefit.
76
2 options for Universal Life Death Benefit
Option A - level death benefit equal to policy’s face value, more of premium is placed in cash amount which makes cash value rise quicker.
Option B - increasing death benefit equal to face value plus cash account, cash value does not increase as quickly bc more of premium is applied to higher cost of increasing death benefit.
77
Grace period
Universal life has 61 day grace period
| Whole life has 31 day grace period
78
Equity Indexed Universal Life
Current interest on cash account.
Up or down based on stock market index.
Account still guaranteed by the company.
79
Variable Policies
Allow policyowner to participate in various types of options while not being taxed on the earnings until the policy is surrendered.
Life insurance plus investments.
80
Separate Account
Fund held by company and maintained separately from the insured’s assets.
Holds premiums used to purchase funds/investments.
No guarantee on how cash value will grow b/c ins co uses securities but has scheduled premium for minimum guaranteed benefit. Can go higher if separate account does well.
81
Variable Insurance Producer/Agent Registration
Agents must have life insurance license.
| Agents must register with SEC and Financial Industry Regulatory Association (FINRA) to sell investment products.
82
Variable Life
Has a separate account instead of guaranteed cash value.
2 guaranteed death benefit options.
Death benefit can increase of account does well.
Has guaranteed death benefit regardless of how account does.
83
Variable Universal Life
Universal life with separate account.
| No guaranteed death benefit.
84
Joint Life Policies
Used for married couple to pay mortgage.
Used for buy-sell.
Also called first-to-die policies.
Covers 2 or more lives.
85
Survivorship Policies
Insures 2 individuals.
Will pay when last survivor dies.
Always covers husband and wife.
Only for estate planning.
86
Juvenile Policies
Written on life of minor or child.
Child can sign at age 16.
Death benefit may increase at future age.
Jumping Juvenile - auto death benefit increase at age 18 or 21.
87
Waiver of Premium Riders
Pays premiums if policyholder becomes disabled.
Insured must be unable to work for certain period of time - Waiting period.
Expires between ages of 60 and 65.
88
Disability Income Rider
Provides monthly benefit check
89
Payor Benefit Rider
Usually found with juvenile policies.
| Premiums are waived until certain age if payor of premium becomes disabled or dies.
90
Accelerated Benefits Rider
Insured can apply for an advance on death proceeds before death.
Eligibility requires qualifying event
- terminal illness - 24 months to live
- serious illness - cancer, reduced life expectancy
- long-term care
- admittance to hospice or permanent nursing home
- catastrophic illness - organ transplant
Reduces the death benefit to beneficiary.
Disclosure must be provided to insured.
91
Other (Additional) Insurance Riders
Provides convertible term insurance for spouse or immediate family member. Usually called spouse rider or children’s rider.
Family rider covers both spouse and children.
92
Term Rider on the Insured
Add term insurance to permanent insurance.
3 riders available: 1) level, 2) decreasing, 3) increasing
Premium lower than a separate policy.
Limited time for rider, expires at a certain age or after a number of years.
93
Accidental Death Benefit (ADB)
Pays extra benefit if insured dies as a result of an accident.
Death must occur within 90 days of accident.
Doubles or triples the face value.
94
Accidental Death or Dismemberment Rider (AD&D)
| Death Benefit
Principal sum is 100% of death benefit.
| Paid if death is due to accident and within 90 days of accident date.
95
Accidental Death or Dismemberment Rider (AD&D)
| Dismemberment
Dismemberment - severance of feet, arms, legs, or hands; loss of sight or hearing; paralysis
Capital Sum = 50% of principal sum
Max for multiple dismemberment claims is principal sum
96
Guaranteed Insurability Rider
Add life insurance up to a specified amount w/o proof of insurability.
Can be done:
- Between ages 25-40 at 3 year intervals.
- Life events - marriage, birth, or adoption
Cost based on insured’s attained age
97
Settlement Options
```
Lump sum
Interest income (only) option
Fixed period option
Fixed amount option
Life income option
Life only option
Life with period certain
Life with refund
Joint-and-Survivor life
```
98
Partial Surrenders
Universal Life
| Variable Universal Life
99
Policy Dividends
```
CARPPO - dividends are not guaranteed
Cash
Accumulation of interest
Reduced Premium
Paid Up Additions
Paid Up Insurance - abbreviating or vanishing premium
One-Year Term Insurance
```
100
Nonforfeiture Options
| Nonforfeiture clause
Insured receives all or a portion of benefits or a partial refund on premium paid if payments missed and policy lapses
Cash Surrender - policy is cancelled and insured receives current cash value
Reduced paid-up insurance - insured obtains a reduced paid-up whole life insurance based on attained age
Extended term insurance - net cash surrender value is used to buy term insurance policy with original death benefit based on attained age
101
Free Look
Begins when the owner receives the policy
Usually no fewer than 10 days
Policy can be returned for a full refund
102
Insuring Clause
Usually found on the first page of policy
Insurers promise to pay upon death
Includes the face amount
Usually signed by an officer of the company
103
Ownership Rights
```
Insured can change without consent of beneficiary
Name or change the beneficiary
Select settlement option
Borrow or withdraw policy cash values
Receive policy dividends
Surrender or cancel the policy
Assign or transfer ownership
Select/change the premium payment mode
Select a non-forfeiture option
```
104
Policy Assignment
Transfer of owner’s right partial or whole
1) Collateral assignment - pledge for a loan (partial)
2) Absolute - permanent change
105
Entire Contract
Policy plus
Copy of the application plus
Any riders or amendments (if any)
106
Endorsements
Must be made in writing and agreed to by both insured and insurer
Must be signed by executive officer and cannot be authorized by agent
Can only be made by company
Owner can request a change
107
Consideration
Insured’s consideration = Money
| Insurer’s consideration = Promise to pay
108
Grace Period
```
If premium not paid by due date
Usually 31 days following due date
Insurance still in force
Death benefit paid minus premiums due
Universal & Variable Universal Life have 61 days grace period
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109
Reinstatement
```
Policy lapsed for nonpayment of premiums
Up to three years to reinstate
Policy was not surrendered for cash
Must pay missed premiums + interest
Prove insurability
Saves original policy + issue age
Premium will stay the same
```
110
Incontestability
Policy cannot be taken away usually after 2 years
| Even if material misrepresentation or fraud (concealment)
111
Suicide Clause
If insured commits suicide prior to having a policy for 2 years, only the premium will be paid back.
After 2 years the full face amount will be paid.
112
Misstatement of Age
Incontestability clause does not apply.
Used to protect insurance company.
If insured older than application states death benefit will be reduced to correct premium amount.
If insured younger death benefit increased.
113
Payment of Claims
Immediately
| Usually no longer than 60 days
114
Life Insurance Policy Provisions
```
Free look
Insuring clause
Ownership rights
Assignment
Entire Contract
Modifications (endorsements)
Consideration
Payment of Premiums
Grace Period
Reinstatement
Incontestability provision
Misstatement of age or sex
Payment of claims
```
115
Who can be a beneficiary?
```
Individuals
Classes - i.e. my children, my siblings
Trusts
Minors
Estates
Charities
University/Colleges
```
116
Multiple Beneficiaries in the Same Class
Default is Per Capita - divides death benefit equally, not inheritable
Per Stirpes - by branch, benefit goes to children’s children, inheritable
117
Levels of Beneficiaries
Primary
Contingent or secondary
Tertiary
Estate of insured - if no beneficiary named or alive
118
Revocable vs. Irrevocable
Revocable can be changed by owner at any time.
Irrevocable can’t be changed without beneficiary consent, loans or withdrawals need permission of beneficiary, becomes revocable upon death of irrevocable beneficiary.
119
When does change of beneficiary take effect?
Date of written request
120
Common Disaster Provision
If insured and primary beneficiary die in common accident or die within 30-60 days after accident.
Proceeds paid as if the primary beneficiary died first.
Proceeds are paid to contingent beneficiary.
121
Spendthrift provisions
May be included in the policy.
Death benefit cannot be paid in lump sum.
Death benefit cannot be claimed by creditors before payment to beneficiary.
Death benefit cannot be pledged by the beneficiary to a creditor.
Death benefit cannot be used by beneficiary as collateral for a loan.
122
Group Life Conversion
Convert group life to individual policy due to
Termination of employment
Employer stops plan
```
Must be within 31 day
Convert to individual permanent plan.
Cost based on attained age.
No medical questions.
Death during conversion is covered.
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123
Accumulation period
Pay-In phase when principal and periodic deposits grow with credited interest.
Owner can make additional premium payments or deposits.
Take withdrawals from the accumulated value.
Surrender annuity for cash value.
Make changes to contract.
124
Annuitization Period
Pay-Out phase, money is converted to series of regular payments.
No additional premium payments can be made.
No withdrawals can be taken.
Annuity cannot be surrendered.
Owner can’t change contract.
Owner does not have to annuitize.
125
Non-qualified Annuities
Based on growth and never on deposits.
126
Immediate Annuity
Benefit payments began within 12 months of purchase.
Purchased with a single premium (SPIA).
Has no or short accumulation period.
127
Deferred Annuity
Payments postponed until retirement age.
Bough with single premium (SPDA) or flexible premiums (FPDA).
Has accumulation period.
Owner decides annuitization at a later time.
128
Annuity Surrender or Withdrawal
10% tax if withdrawn before 59.5.
Surrender period - waiting period.
Surrender fee - penalty for early withdrawal.
129
Annuitization Payout Options
Life Only - guarantees income for life, death stops payments, largest monthly check from life options.
Life - Period Certain - income for life they live, annuitant chooses period of time.
Joint Life and Survivor - payout % and age difference b/w annuitants impacts payout.
130
Factors Affecting Annuity Payment Amount
Age
Gender
Length of payment guarantee
Assumed interest rate
131
Variable Annuities
Separate Account
No guarantees - owner assumes all risk
Premium buys accumulation units
If annuitized accumulated money buys annuity units
132
Equity Indexed Annuities
Fixed annuities - guaranteed by insurer’s general account
Interest tied to stock market index
No securities license required
133
Use of Annuities
Life income
Tax favored savings
Funding individual retirement accounts (IRA)
Education funds
134
Are life insurance premium payments tax-deductible?
No
135
Interested Earned on Cash Values
Tax deferred
Not taxed with in policy
Taxed if gain is withdrawn
136
Full Surrenders Taxation
Any gain is taxable
137
Taxation for Universal Life and Variable Universal Life Withdrawals
Taxed only if withdrawal exceeds premiums paid.
| Only gain is taxed.
138
Taxation of Cash Value Loans
Not taxed while policy is in force.
Taxed if policy is surrendered and there is a gain.
Interested paid on loans is not tax-deductible.
139
Taxation of Dividends
Not taxed.
| Interested earned is taxed.
140
Taxation of Lump Sum Death Beneftis
Not taxable
141
Taxation of Accelerated Death Benefits
Same tax treatment as regular death benefits (tax exempt).
Critically ill
Terminally ill
Death
142
Modified Endowment Contract
Life policy becomes MEC if too much premium is paid in first 7 years of policy.
Can be flexible premium universal life or single premium whole life.
Interest not taxed while in policy.
Withdrawals or loans are taxed.
Interest is paid out first.
10% penalty on interest if withdrawn before age 59.5 unless insured is disabled.
Once a MEC always a MEC.
143
Section 1035 Exchanges
Part of tax code that allows moving cash values from one contract to another without gains being taxed at that time.
Not taxable - life to life, annuity to annuity, life to annuity
Gains taxed - annuity to life bc does not eliminate surrender charge for annuity
144
Required Minimum Distribution of Traditional IRAs
Minimum withdrawals must start at age 70.5.
First withdrawal can be delayed until April 1 of following year.
50% penalty on taxes owed if min distributions not taken.
Annual min based on owners life expectancy.
145
Pension Plans
Defined benefit - benefits specified in plan
| Defined contribution - benefit not specified, contribution is specified
146
Profit Sharing
Contributions made by employer
Based on company profits
Contributions not made every year
Maximum contribution is 25% of total employee payroll
147
Keith (HR-10)
Individual sole proprietor
Partnerships
Self employed individuals
