Life Insurance & Advanced Concepts (Chapter 4 & 5) Flashcards
Used to purchase life insurance so that the proceeds are not included in the gross estate of the insured in order to avoid estate taxes on the proceeds.
ILIT - Irrevocable Life Insurance Trust
This requirement serves the goal of preventing speculation on human life
Insurable Interest
If Wally is the insured, Hilda is the policy owner, and Ed is the beneficiary. When Wally dies, the death benefit is considered a taxable gift from who for estate tax purposes?
Hilda
The process by which insurance companies decide whether to provide insurance to a customer and under what terms?
Underwriting
When is the asset accumulation phase?
20’s to mid 50’s
Is the process of transferring all or part of the policies ownership rights.
Assignment
When is the distribution gifting phase?
Mid 40’s to life expectancy
This phase is characterized by relatively high debt and low savings.
Asset Accumulation
This approach of death benefit calculation for an insurance policy suggests that the death benefit of a clients life insurance should equal the economic value of his future earnings stream discounted to its present value while considering his tax and consumption patterns.
Human-Life Value Approach
What are the 3 steps in calculating human life value for insurance coverage needs?
1) Determine the families share of earning by identifying annual earnings of person minus personal expenses and taxes
2) Determine WLE (number of years they would have continued to accrue income)
3) Calculate the PV of families share using inflation adjusted ROR
Approach that estimates the cash needs of family at death of the insured: final expenses, eliminating debt, funding goals, income needs for spouse/family, retirement needs for surviving spouse
Needs Approach
6 months to 2 years after the death of the bread winner
Readjustment period
The period where the present value of cash needed over the dependent parents remainder of live and children’s lives until they reach age of majority
Dependency Period
The period between the cessation of survivor benefits and the receipt of widow(er) or retirement benefits is sometimes referred to as the ___________.
Blackout Period
A method for calculating death benefit that divides the families share of earnings by an inflation-adjusted discount rate, which takes into consideration expected ROR and inflation.
Capitalized Earnings Approach
What is the general benchmark metric that is the general guide for life insurance needed?
12-16 times gross pay
What are the four most common types of permanent life insurance?
1) Universal
2) Whole
3) Variable
4) Modified Endowment Contracts
Equals the probability of dying within the year times the Face Value of the Policy
Mortality Cost
This type of policy permits the policyholder to renew the purchase for the same amount of term insurance in subsequent years without evidence of insurability, but premiums on the policy increase each year to reflect the increasing mortality risk being undertaken by the insurer.
Annual Renewable Term
This type of insurance charges a fixed premium each year over a specified period of years so the premium does not increase within the period.
Level Premium Term Insurance
This type of insurance allows the owner to pay the same premium for the insurance protection each year. The death benefit will decrease each year, however, to offset the increasing mortality cost due to the passage of time. (ie. Use when paying off mortgage)
Decreasing-Term insurance
Insurance that allows for unequal and varied premium payments. Excess premiums are deposited into a cash accumulation account earning limited interest. The policy will not lapse as long as there is sufficient cash to cover mortality and expense fees.
Universal Life Insurance
Permanent policy that requires the owner pay a specific level premium each year until the year of death (or age 100, 120)
Ordinary (or straight) Life Policy
Making premium payments on a permanent policy over a limited time period.
Limited-Pay Policies
This type of policy gives a person the opportunity to purchase a whole life policy with initial lower premiums which increase as the insureds income increases.
Modified Whole Life
Policy that provide for a fixed premium payment and permit the cash value of the policy to be professionally managed by the insurance company or an outside investment manager.
Variable Whole Life Policies
How are growth in cash value and death benefit subject to taxation?
They are exempt as long as policy is not surrendered during insured’s lifetime
Congress imposed 2 tests to determine whether a life insurance contract meets the definition of a MEC
1) Guideline Premium & Corridor Test
2) 7-Pay Test
The first _________ received by employees under a group term insurance contract paid for by employer is excluded from tax unless employee is a sole proprietor, partner, or more than 2% shareholder.
$50,000
Good place to look for an outline for the most pertinent information regarding a life insurance policy
Declarations page
Life insurance can be back dated to take advantage of lower rates at a younger age. Backdating usually does not exceed 6 months and requires payment of premiums back to that date. The date the contract begins is called the ________________.
Effective Date
Al, age 50, receives $150k in group term insurance paid by company. Al’s marginal tax rate is 25% and insurance for his age is $0.23 per thousand dollars. 1) What is the amount of taxable excess insurance coverage? 2) The imputed premium of insurance in excess of tax free group limit is? 3) What is the out of pocket cost?
1) $100k
2) 276 = (.23 * 12 months * 100 units)
3) $69 = (.25 * 276)
Typically spans 31 days after premium due date for policy owner to avoid overdue premium and undergoing additional underwriting.
Grace Period
States that once the policy has been in force for a period of time (typically 2 years) the insurer may not cancel the policy if it later discovers a material misrepresentation, ommission, or concealment.
Incontestability
Death Benefit Calculation
Monthly Premium / Cost per unit x 1000 (per thousand $’s)
Suicide Clause
1) Insurance policy will not pay DB to beneficiary but will refund premiums paid within 2 years
2) Usually comes with a 2-year exclusion (meaning after 2 years suicide will pay out benefit)
Provided that past premiums are paid to the insurer, and satisfactory evidence of insurability is provided the insurer may reinstate a life insurance policy up to ____________ after the policy lapse.
5 years
Specifies that the death benefit will only be paid to the beneficiary if the beneficiary survives the insured by a specific number of days (usually 30-60).
Survivorship Clause
If the insured and the beneficiary die in a common accident and the order of deaths is uncertain, the policy death benefit is distributed as if the beneficiary had predeceased the insured and is distributed to the contingent.
Simultaneous Death Provision
What is another word for a policy “rider?”
Endorsement
Gives the policyowner the right to buy additional specified amounts of insurance at specified dates or events without the insured having to prove insurability
Guaranteed Insurability Rider
What is the pneumonic for remembering the 6 Activities of Daily Living and what are they?
BED TC
1) Transferring
2) Bathing
3) Eating
4) Dressing
5) Toileting
6) Continence
In this type of contract selection if the beneficiary dies early the insurance company promises to make a specified number of payments under the contract.
Income with Period Certain
With this contract settlement option when one annuitant dies the survivor will receive a reduced payment for the rest of his/her life.
Joint and Last Survivor Income