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CFP Risk Mgmt, Insurance & Employee Benefits > Life Insurance and Annuities > Flashcards

Life Insurance and Annuities Flashcards

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1
Q

What are the client’s key facts for considering life insurance alternatives?

A 
Client profile
Client goals and objectives
Survivors' needs
Estate liquidity
Risk tolerance
Existing insurance
Amount of insurance needed
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2
Q

What is level term?

A

A term policy with a term between 5-30 years whereas the premium remains the same

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3
Q

What is reentry term?

A

A term policy that allows the insured to be underwritten every 5 years, and depending on the classification, the rate could go up or down

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4
Q

What is a decreasing term policy?

A

A term policy where the premium remains level, but the payout decreases over time, generally to cover home mortgages

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5
Q

What is the most common form of permanent insurance?

A

Whole life. The cash value is guaranteed and saved in a general fund.

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6
Q

What is a nonforfeiture value?

A

A benefit paid to the policy owner if they stop paying premiums before death occurs.

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7
Q

What is the difference between a participating and non-participating policy?

A

Participating: a whole life policy that receives dividends (stock companies)
Non-participating: a whole life policy that does not receive dividends (mutual companies)

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8
Q

What is a variable life policy?

A

Combines the traditional protection through savings of a life policy with the growth potential of a mutual fund-type investment

The cash value of the policy is not guaranteed because it is an investment.

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9
Q

What is a limited pay life policy?

A

A whole life policy with a shorter premium paying period. Due to the shorter premium paying period, premiums are usually higher

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10
Q

What is a single premium whole life policy?

A

Only one premium payment is made up front and no other.

There are significant surrender charges for this if you cash in.

There are special tax treatments for this type of policy

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11
Q

What is modified whole life?

A

A whole life policy usually preceded by a term policy at lower premium rates which then leads into whole at potentially lower premium rates

Another modification is to cover the kids until they reach an age between 18-25

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12
Q

What is graded premium life?

A

Designed to ease people into a whole life policy. First years’ premium is fairly low but then it increases over the next 5-7 years until it levels out for the rest of its life.

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13
Q

What is an endowment policy?

A

A policy designed to have the death benefit and the cash surrender value be equal on a specific date, at which point the face amount of the policy is paid out at likely ordinary income (tax problem)

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14
Q

What is the “net amount at risk” (NAR)?

A

The difference between the cash value of a the universal life policy and the death benefit

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15
Q

In universal life, what is Option A, level death benefit?

A

It means that while the death benefit remains level, the NAR decreases as the cash value grows which theoretically should become cheaper over time to maintain

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16
Q

In universal life, what is Option B, increasing death benefit?

A

It means that the NAR remains level and because mortality costs get more expensive with age, this option will become more expensive over time to maintain

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17
Q

What is the Universal life calculation?

A

Flexible premium paid - mortality charges - admin expenses + interest = cash value (period 1)

Cash value (period 1) + flexible premium paid…

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18
Q

What is a universal life policy?

A

It gives the insured the flexibility to adjust the premium, death benefit, and cash value to meet their needs.

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19
Q

What are the differences between a variable life and a variable universal life policies?

A

In variable life, there is a guaranteed death benefit and the policy provides the ability for the insured to invest the cash value.

In VUL, nothing but the mortality rate is guaranteed. The entire premium is investible. If it gains, the death benefit gains. If it loses however, the insured will have to pay whatever premiums required to pay for the admin fees or else the policy lapses.

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20
Q

What is equity-indexed universal life?

A

Built on the universal policy chassis, these policies provide a minimum fixed interest rate, but also provide an index option to potentially earn a better rate. That better rate is limited however, by the participation rate and the rate cap.

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21
Q

What is the participation rate and rate cap?

A

Participation rate dictates a specific percentage of the index gain that will be credited to a equity-indexed universal life policy. (Likely never to be 100% of the rate).

The rate cap also limits the credited rate, meaning if it’s set at 12% and the index is 15%, the policy will only earn 12.

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22
Q 
Sum up:
Whole life
Variable life
Limited-Pay life
Modified whole life
Graded Premium life
A

Whole life - guaranteed death benefit - cash in general fund
Variable life - guaranteed death benefit - cash in mutual fund
Limited-Pay life - guaranteed death benefit - shorter premium period
Modified whole life - whole life, preceded by term life
Graded Premium life - ease into premium payments

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23
Q 
Sum up:
Universal life Option A
Universal life Option B
Variable universal life
Equity fixed universal life
A

All universal life policies give flexible premiums, death benefits, and cash value
Universal life Option A - level death benefit, reduces premiums over time
Universal life Option B - increasing death benefit, increases premiums over time
Variable universal life - high risk, entire premium is invested
Equity fixed universal life - cash value tied to index for potential to earn more

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24
Q

What is unbundled?

A

Means the insurance contract is broken down into its independent parts (mortality charge, admin expenses). The policy owner can see exactly what the premium is paying for

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25
Q

What is adjustable life?

A

Described as “changeable life”, adjustable life can be altered throughout for its guaranteed death benefit term, premium, etc.

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26
Q

What are joint life policies?

A

Survivorship polices.
First to die - provides benefits to the first of at least one other survivor and can be terminated after that. This is so you don’t have to get two policies.
Second to die - terminates after the surviving spouse passes. Good for estate planning.

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27
Q

What is low-load life?

A

A policy that does not pay commissions - usually for someone who knows what they want.

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28
Q

What is private placement life insurance (PPLI)?

A

A specialized policy that is so much more like an investment, only securities agents can purchase PPLI.

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29
Q

What is the general tax treatment of life policies?

A

The death benefit is received tax free by the beneficiary. This does not mean it is exempt from estate tax. Withdraws from the policy are tax free up to the basis (premiums paid).

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30
Q

What is a Modified Endowment Contract (MEC)?

A

Classified as an investment in that any money borrowed from the policy is taxed as ordinary income and subject to a 10% early withdraw period until age 59 1/2.

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31
Q

How does a policy become classified as a MEC?

A

If it fails the 7 pay rule. The policy owner cannot pay into the policy more than the equivalent of the policy premiums for the first 7 years.

Ex: premium is $2000. The policy cannot have more than $2000 in premiums the first year, $4000 the second, $6000 the third…

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32
Q

What is a vatical settlement?

A

This is when a terminally ill policy holder sells his policy for less than the face value for cash. The buyer then receives the death benefit when the original owner dies tax free

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33
Q

What is the declarations page of an insurance contract?

A

AKA the dec page, it contains the name of the insured & owner, type of policy, amount of insurance, policy in force dates

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34
Q

What is “the entire contract” clause?

A

States the the entire contract including attachments is the contract and must be changed in writing and with the signature of an officer

35
Q

What is a collateral assignment of a contract?

A

Used as a means to secure a loan - assigns temporary rights to the lender to pay off a loan first in case of death

36
Q

What is the difference between revocable and irrevocable beneficiaries?

A

Revocable means that beneficiaries can be changed at any time.

Irrevocable means that to do anything with the policy except make the premium payments, the owner must have written permission from the beneficiaries.

37
Q

What is the typical grace period of insurance premiums?

A

30 days

38
Q

What is an automatic premium loan?

A

This prevents policy lapse by loaning the premium payment from the cash value of the policy

39
Q

What is the reinstatement clause?

A

Provides that once the policy has lapse, the policy owner can buy it back after catching up the premiums and any loans that existed. Proof of insurability has to be redone

40
Q

What is the misstatement of age clause?

A

States that upon death, if the insured was older or younger, the the benefit will be adjusted to provide the correct amount for the age

41
Q

What is the contestable clause?

A

Gives the insurance company 1-2 years to determine if they should not have issued the policy. If the insured dies within that 1-2 years, the clock stops until they can determine if there was any misrepresentation

42
Q

What is the suicide clause?

A

Provides a way for insurance companies to pay only cumulative premiums minus any debts to the beneficiary if the death occurred within 1-2 years. Outside of 1-2 years, the insurance is paid as in any regular death

43
Q

What are the three options if someone no longer wishes to pay premiums?

A
  1. Receive the cash value of the policy
  2. Purchase a “reduced paid up insurance” policy which reduces the death benefit, but satisfies the premium for good.
  3. Purchase an extended term policy using the cash value as a single premium.
44
Q

What are two types of policy loans?

A

Automatic policy loans (APL): keeps premium paid using cash value

Standard policy loans: policy holder can borrow up to the cash value minus the interest due on the loan at the end of the year.

45
Q

What is a conversion clause?

A

A provision that allows the policy owner to covert the term insurance into a cash value form of insurance.

46
Q

What is the common disaster clause?

A

When the insured and the beneficiary both die within unto 30 from each other, this clause states it will assume the beneficiary died first so that the benefits will transfer straight to the secondary beneficiaries.

47
Q

What is the spendthrift clause?

A

Prevents a beneficiary, who is unable to manage money, from assigning any benefits they may eventually get while the insured is alive.

48
Q

What are the settlement options; interest, fixed period, fixed amount, life income?

A

Interest: paid just the interest each month
Fixed period: sum split evenly over a stated period of time
Fixed amount: stated amount paid until the money is gone
Life income: amount is annuitized

49
Q

If someone dies within a policy grace period, how is the policy face value affected?

A

The face value is reduced by the premium payment

50
Q

What is the formula for recalculating a policy for age?

A

A: Total an premium for the age stated

B: What the premium would have been per specified face value (e.g. $1000 increments)

(A / B) x per specified face value (e.g. $1000) = new face value

51
Q

What is surplus in insurance?

A

Revenue in excess of expenditures

52
Q

What are the 5 dividend options?

A
  1. Cash - pay cash
  2. Reduced premium - reduces the annual premium
  3. Accumulate at interest - company holds these funds in a separate account and pays them out in addition to the policy at death (taxed)
  4. Paid-up additions - the in-full purchase of insurance which grows taxed deferred
  5. One year term (aka 5th dividend option) - gives the policy holder a larger payout for the year
53
Q

What is a term rider?

A

A term policy amount (larger death benefit) riding the whole policy (lesser premium) for a certain period of time.

54
Q

What is a rider that increases the death benefit by inflation each year?

A

Cost of living rider

55
Q

What is the accidental death benefit rider?

A

An additional death benefit if the insured dies of a listed accident

56
Q

What is the guaranteed insurance option?

A

Permits owners to purchase more insurance on a younger insured at specific times and amounts without proving insurability.

57
Q

What is a spouse of children’s rider?

A

Typically, a level term policy added to the insured for a significantly lesser death benefit. There are benefits though for the spouse and children to be able to convert into a cash policy.

58
Q

What is a disability waiver of premium rider?

A

Provides that if the policy holder is disabled, the insurance company will waive the premium for the base policy and generally all riders. This is to ensure the policy DOES NOT LAPSE. Disability must generally occur for more than 6 months

59
Q

What is presumptive disability?

A

A provision that may result in the waiver of a premium being effective without a total disability of the policyholder. Presumptive loss examples: both feet, both eyes, one of each, etc.

60
Q

What is the universal life variations on waivers of premium?

A

Usually only waives the monthly charges for mortality, riders and expenses.

61
Q

What is the disability income rider (DIR)?

A

Provides both a waiver of premium and a supplemental income if the insured is totally disabled.

62
Q

What is a critical illness rider?

A

Allows the a client to accelerate (use) a portion of the death benefit on care for specified illnesses over an extended period of time.

63
Q

What is a long term care rider?

A

Allows the policyholder to access the death benefit to pay for long term care related expenses.

64
Q

What is an accelerated death benefit rider?

A

Allows a policy holder, when meeting the criteria for terminally ill, to access the death benefits for care. This has reduced the need for viatical markets.

65
Q

What is the family income rider?

A

Automatically makes the choice for dispersement that the death benefit will be paid out in monthly payments.

66
Q

What is a return of premium rider?

A

This is a rider for a term policy and may cost 20-40% more than normal term.

67
Q

In calculating the needed death benefit, what is the multiple of salary method?

A

The simplest method by multiplying the annual salary by 8, 10, 15 years. Not very accurate.

68
Q

In calculating the needed death benefit, what is the human life method?

A

Calculates the income-earning potential of the deceased over their lifetime and inflates it.

69
Q

What are expenses potentially included in final expenses?

A

Funeral, emergency fund, medical bills, adjustment fund, bequeathed to charity/child

70
Q

What is the acronym LIFE in calculating the insurance needs?

A

L - Liabilities
I - Income replacement
F - Final expenses
E - Education expenses

Total = amount needed for insurance

71
Q

What is a dividend scale?

A

This scale is used to determine how much money can be paid to policy owners (participating insurance)

72
Q

What is a 1035 exchange?

A

It is an exchange of a policy for another policy, endowment, annuity, or LTC contract without triggering a taxable event.

Cash value policy ———-> Cash Value policy, LTC, Annuity, endowment

Endowment ——————> Endowment, LTC, annuity

Annuity ————————> Annuity, LTC

73
Q

What is the difference between a qualified and non qualified annuity?

A

Nonqualified are paid with after-tax dollars

Qualified are held in IRAs and qualified plans

74
Q

What are the types of variable annuities?

A
  • Guaranteed minimum income benefits (GMIB) - guarantees a minimum income to the annuitant regardless of adverse investment performance
  • Guaranteed minimum accumulation benefit (GMAB)- guarantees that there will be a minimum accumulation by a specified date
  • Guaranteed minimum withdraw benefit (GMWB) - guarantees a return of principle or payout amount through a systematic period of withdraws over a specified period
  • Guaranteed lifetime withdraw benefit (GLWB) - guarantees the right to withdraw up to a certain percentage each year for life
75
Q

What is a single premium immediate annuity?

A

Provides guaranteed income for life beginning one month after purchase. Usually fixed amount that will not increase with inflation, but the risk of longevity is transferred to the insurance

76
Q

What is a qualified longevity annuity contract and what is its benefit?

A

A QLAC allows its annuitant to place up to 25% or IRS stated maximum from a qualified account into this annuity which can then wait to annunitize until age 85, well after RMDs are required on the qualified account.

77
Q

What are the basic rules on annuity taxation?

A

Last in, first out. Earnings, out first, are taxed as ordinary income. Annuity purchases are done with after tax dollars and therefore not taxed during withdraws.

Any withdraws made before 59 1/2 are subject to a 10% excise tax, but only on the earnings

At annuitization, each payment is a partial return of principle and partial earnings, the latter will be taxed

78
Q

What is superannuation?

A

The fear of running out of money before death

79
Q

What are the proper names of the 1st and 2nd beneficiaries of an insurance policy?

A

Primary and contingent

80
Q

What is an exclusion ratio?

A

The ratio of basis and growth in an annuity payout

81
Q

What is a policy illustration?

A

A policy or sales illustration is an educational tool that shows a prospective or new insurance policyholder how a life or disability insurance policy works.

82
Q

What is capital retention and how is it calculated?

A

Structuring an annuity in order to maintain the principle, using only the interest to make payments

Divide the amount desired by the inf adj interested rate

83
Q

What is capital utilization and what is the calculation?

A

Structuring an annuity in order to spend the principle and interest down to zero by the last payment in the time period desired.

PV = N (of yrs desired), PMT (amount each yr), I/YR (inf adj)

CFP Risk Mgmt, Insurance & Employee Benefits (6 decks)

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