Life Insurance and Annuities

Question 1

What is a peril?

Answer 1

Cause of a financial loss

Question 2

What is a hazard

Answer 2

Condition that increases the probability that a loss will occur

Question 3

What are the three hazards?

Answer 3

Physical hazard

Moral hazard

Morale hazard

Question 4

What is a physical hazard?

Answer 4

Physical characteristics of the person or property that increase the chance of loss

Example oily rags left near a furnace or high blood pressure

Question 5

What is moral hazard?

Answer 5

Chance of loss from dishonesty

Question 6

What is morale hazard?

Answer 6

Indifference to loss which creates carelessness and increases the chance of loss

Question 7

What is loss in insurance?

Answer 7

Disappearance or reduction in value

Question 8

What are the four classifications of risk?

Answer 8

Financial and non-financial risk

Static and dynamic risk

Fundamental and particular risk

Pure and speculative risk

Question 9

What is financial risk?

Answer 9

Risk that may cause financial loss

Question 10

What is non-financial risk?

Answer 10

Risk that does not cause financial loss, example, pain, and suffering

Question 11

What is static risk?

Answer 11

Risk that is always present

Occurs regularly and our insurable

Examples, natural disaster, earthquake, death, or flood

Question 12

What is dynamic risks?

Answer 12

Result of the economy changing

Insurance does not cover these risks

Question 13

What is fundamental risk?

Answer 13

Risk that affects a large group of people

Question 14

What is particular risk?

Answer 14

Individual in nature, or affects a small group of people

Question 15

What is pure risk?

Answer 15

Involves only the chance of loss or no loss and is insurable

Question 16

What are the four forms of pure risk?

Answer 16

Personal risk

Property risk

Liability risk

Risk for failure of others

Question 17

What is personal risk?

Answer 17

Loss of income or assets, resulting from the loss of ability to earn income, caused by a disability, death or sickness

Question 18

What is property risk?

Answer 18

Direct or indirect loss to the property itself from theft or destruction

Question 19

What is liability risk?

Answer 19

Intentional or unintentional injury to property or others

Question 20

What is risk from the failure of others?

Answer 20

Failure to meet or follow through on an obligation example breach of contract

Question 21

What is speculative risk?

Answer 21

Chance of both loss or gain example gambling is not insurable

Question 22

An insurance contract must contain the following five elements

Answer 22

Offer and acceptance

Consideration

Legal object

Legal capacity

Legal form

Question 23

What does indemnity mean with an insurance contract?

Answer 23

Insured may recover from the insurance company only to the extent of the actual financial loss

Question 24

What are the unique characteristics of insurance contracts?

Answer 24

Contract of indemnity

Personal contract, meaning, non-transferable

Contract of adhesion, take it, or leave it

Contract of utmost, good faith

Unilateral contract , only insurer makes legally enforceable promises

Conditional contract , premium must be paid and a covered loss must occur

Aleatory contract, outcome affected by chance dollars collected by the parties may not be equal

Subrogation, if the insured pays the insured for a loss caused by a third party, the insured is required to assign his right to recover from the third-party to the insurer

Question 25

The owner of the life insurance policy can be reasigned or transfer the policy, true or false

Answer 25

True

Question 26

What is a single life annuity?

Answer 26

The beneficiary receives a specified amount of money periodically tell the beneficiary dies at which time annuity payments cease

Highest periodic payment

Question 27

What is a life annuity with period certain?

Answer 27

Beneficiary is paid a specified amount of money periodically for life

Payments are guaranteed for a certain number of periods

If beneficiary died before the specified period ends payments continue to the beneficiaries estate or to a contingent beneficiary until the guaranteed period ends

Question 28

What is a life annuity with refund?

Answer 28

Beneficiary is paid income periodically for life. Death benefit has not been recovered at the time of the beneficiaries death, which is toll amount, payment received, does not equal or exceeds the basis of the annuity. the remainder up to the basis of the annuity is paid to the contingent beneficiary, either in installments, or in a lump sum

Question 29

What is a joint and survivor annuity?

Answer 29

Provides payments to two payees, at the death of the first payee. A payment may or may not be decreased to the second payee, but will cease on the death of the second payee.

Question 30

Are dividends taxable income in an insurance policy?

Answer 30

Dividends are not taxable income until the amount received in dividends, exceeds the policies cost basis, which is usually the amount of premium paid less any distributions

Question 31

What are the types of life insurance?

Answer 31

Annual Renewable Term

Whole Life

Variable Life

Universal Life A and B

Variable Universal Life A and B

Question 32

Types of Term Insurance?

Answer 32

Annual Renewable Term: level face amount, exponentially increasing annual premiums

Level term, level face amount premiums remained fixed (five, 10, 15, 20, 25, or 30 years)

Decreasing term, level premiums, decreasing face amount, historically used for mortgage protection.

Question 33

What are the characteristics of whole life insurance?

Answer 33

Provides lifetime protection

Cash value accumulation

Policies may be participating

Appropriate for people who have long-term insurance need or desire, a cash savings investment feature

Question 34

Whole life insurance

What are the policy types?

Answer 34

Whole life (ordinary, or straight)

Limited pay life

Graded premium whole life

Modified premium whole life

Question 35

Whole life insurance

What is whole life ordinary or straight?

Answer 35

Premiums are level and are paid for life face amount of insurance remains constant for life

Benefits, those who have lower risk tolerances

Insurance company guarantees a minimum cash value, build up at each age and assumes the investment risk

Cash value is invested in the insurance companies general account

Question 36

Whole life insurance

What is limited pay life?

Answer 36

Amount of protection remains constant for life premiums paid for a specific term, after which no further premiums are paid

Question 37

Whole life insurance

What is graded premium whole life?

Answer 37

Low first year premium, increases each year early policy years, and then levels off usually within the first 5 to 10 years

Question 38

Whole life insurance

What is modified premium whole life?

Answer 38

Premiums are lower for the first 3 to 5 years, and then increase to a higher level premium

Question 39

Whole life insurance

What is variable life?

Answer 39

Premium is fixed face amount may vary with no guarantee of cash value

Choose from a wide variety of investment options

Death benefit may go up in value, but cannot fall below a guaranteed minimum face amount, consist of two parts minimum an excess amount created by favorable investment returns

Suitable only for clients with a higher risk tolerance

Question 40

Whole life insurance

What is current assumption whole life?

Answer 40

Interest sensitive policy in which the insurers current investment experience under non-participating painting policies is credited to cash values

Question 41

What is universal life insurance?

Answer 41

A flexible premium

Adjustable death benefit

Unbundled life insurance contract

Policyholder may raise policy, death benefits (subject to insurability), policy, cash values and pure insurance cost are unbundled, cash value accumulation is determined by current interest rates

Question 42

Universal life insurance

What is the difference between universal life A and B?

Answer 42

Universal Life A, known as option, one or a level death benefit, death benefit is simply the face amount of the policy

Universal life B, known as option to or increasing death benefit. Death benefit is the face amount of the policy plus the cash value.

Question 43

Universal life insurance

Who is typically not suitable for universal life insurance?

Answer 43

Individuals on fixed, incomes, or individuals who cannot manage the flexibility of the policy

Question 44

What is variable universal life insurance?

Answer 44

Combines many features of universal and variable life insurance

Are universal life product with investment options for cash value, and no minimum guaranteed rate of return or interest

Death benefits are not guaranteed cash value can decline to zero

Suitable for individuals with higher risk tolerance, and those with investment experience

I also come on with the options of A and B

A - level death benefit

B - increasing death benefit, benefit is the face amount of the policy plus the cash value

Question 45

What is a First to Die life insurance coverage?

Answer 45

Provides a death benefit when the first insured dies

Cost less than two separate policies

May be cost effective in a business application, characterized by several key employees in contrast to purchasing multiple policies at the same face value

Question 46

What is a survivorship (second to die policy?

Answer 46

Provides death benefits when the second or last insured dies

Used for estate, planning, or spouses, intend to make substantial use of the marital deduction

Usually cost effective because of combined life expectancy

Question 47

What are the three methods for calculating life insurance needs?

Answer 47

Capital retention method

Human life value method

Financial needs analysis method

Question 48

Calculating life insurance needs

What is the capital retention method?

Answer 48

Method of determining the amount of life insurance needed that uses interest only to furnish the continued support of the family

Calculated as follows

Annual income needed (salary minus Social Security benefits)

Annual income needed divided by rate of return equals amount of life insurance needed then add the annual amount of income needed because this amount will be needed in the first year

This method does not take into account inflation

Question 49

Calculating life insurance needs

What is a human life value method?

Answer 49

Replace an individuals economic value

Considers the income of the individual through the remaining work, life expectancy, including raises. Then applying a discount rate to this total to determine present value.

Question 50

Calculating life insurance needs

What is the financial needs analysis method?

Answer 50

Examines all recurring expenses to dependent survivors and any unusual expenditures that may result from the death of the insured

Question 51

What are annuities?

Answer 51

Are insurance based products that can be used to for retirement on a tax advantage basis

Provide a periodic payments for a specified period or for someone’s lifetime

Can be annuitized if the owner elects to convert the money to an annuity into a stream of periodic income payments

Question 52

What is the difference between an immediate or a deferred annuity?

Answer 52

Immediate annuity - purchased with a single premium income benefits begin immediately

Deferred annuity - annuitization until some point in the future, chosen by the owner

Question 53

What are the three premium payment methods for an annuity?

Answer 53

Single premium deferred annuity (SPDA)

Flexible premium deferred annuity (FPDA)

Single premium immediate annuity (SPIA)

Question 54

Annuities

What is a single premium deferred annuity? (SPDA)

Answer 54

Lump sum premium within an annuity. Deferred until some point in the future, premium earns interest that accrues tax deferred

Question 55

Annuities

What is a flexible, premium deferred annuity (FPDA)?

Answer 55

Allows periodic, non-fixed contributions, earnings, accumulate free from current income tax, and are then distributed at some point in the future

Question 56

Annuities

What is a single premium immediate annuity (SPIA)?

Answer 56

Annuity payments to the annuitant begin one payment interval, following the premium payment

Question 57

What is twisting?

Answer 57

Practice of using misrepresentation to induce a policy owner with one company to forfeit or surrender a life insurance or annuity policy for the purpose of taking out a policy with another company

Question 58

How are life insurance death benefits taxed to individual beneficiaries?

Answer 58

They are not included in gross income

Question 59

How are partial withdraws from life insurance treated tax wise?

Answer 59

received tax free up to basis

Question 60

How are policy loans taxed from life insurance?

Answer 60

Tax free

Question 61

How do you determine the basis of a life insurance contract?

Answer 61

Investment in the contract (basis) = premiums paid - dividends received - outstanding loans or withdrawals.

Question 62

How do you determine the gain on a life insurance policy at surrender?

Answer 62

Gain at surrender (taxed as ordinary income) = cash surrender value - investment in the contract

Question 63

Life insurance dividends

How are dividend distributions treated?

Answer 63

Are not taxable, considered a return of premium reduces the policy owners investment in the contract (basis)

Question 64

Life insurance dividends

What if dividends distributed exceed premiums?

Answer 64

Excess amount of dividends received above the policy owners basis is taxed as ordinary income

Question 65

Life insurance dividends

How are dividends taxed if the policy owner chooses to leave the dividends with the insurance company?

Answer 65

Any interest earned on the dividends is taxed as ordinary income in a year earned

Question 66

1035 exchange

What all can a life insurance policy be exchanged for?

Answer 66

Life insurance policy, endowment policy, annuity contract, qualified long-term care insurance policy

Question 67

1035 exchange

What can an annuity contract be exchange for?

Answer 67

Another annuity contract, qualified long-term care insurance policy

You cannot exchange an annuity contract for a life insurance policy and be tax free

Question 68

1035 exchange

What can you exchange a qualified long-term care insurance policy for?

Answer 68

Another qualified, long-term care insurance policy

Question 69

What are the five instances where the transfer of a policy will cause the death benefit to retain it’s tax free status

Answer 69

Transfers to

The insured, a partner of the insured, a partnership, in which the insured is a partner, a corporation in which the insured is an officer or shareholder, and a transferee, whose basis in the policy is determined by reference to the transfers basis

Question 70

Income taxation of life insurance

Lump sum death benefits?

Answer 70

Excludable from gross income

Question 71

Income taxation of life insurance

Interest only payments on death benefits?

Answer 71

Interest payments are taxable as ordinary income in the year earned

Question 72

Income taxation of life insurance

Installment payments of death benefits?

Answer 72

Beneficiary receives, installment payments, principal portion is tax free interest, portion of installment payments, accruing after the date of insured’s death is taxable to the beneficiary as ordinary income

Question 73

Income taxation of life insurance

Life insurance proceeds, received as an annuity?

Answer 73

Each payment has a return of basis component in an interest component

Use the exclusion ratio

Question 74

Federal estate taxation of life insurance benefits

Life insurance, death benefits

Answer 74

Avoid probate if there is a named beneficiary

Question 75

Federal state taxation of life insurance benefits

What are the situation’s that will cause the death proceeds from a life insurance policy to be included in the decedents insured’s gross estate?

Answer 75

Decedent gifted the policy within three years of the decedent’s death

Proceeds are payable to the estate, executor of the estate, creditors of the estate

Decedent insured, retained incidence of ownership in the life insurance policy at death, incidence of ownership are the right to assign the policy, right to change the beneficiary, right to change policy provisions

Question 76

Federal taxation of life insurance

If decedent owns the policy and proceeds are payable to the spouse?

Answer 76

Proceeds are included in the decedents gross estate, but unlimited marital deduction can be utilized, proceeds can then be deducted from decedents gross estate and removed from estate taxation

Question 77

What is a Viatical Settlement?

Answer 77

Selling your insurance policy, if you are terminally ill or chronically ill

Question 78

Viatical Settlement

What is required and what are the tax consequences?

Answer 78

Insured is expected to die within 24 months certified by doctor proceeds not subject to income tax

Chronically ill must also be certified by a doctor and gains from the sale of the policy must be used for the insured‘s long-term care

Third parties who purchase the policies do not qualify for tax relief

Question 79

How are the withdraws from an annuity treated for tax consequences?

Answer 79

Last in first out, so withdraws are presumed to come from earnings first and are taxed to the extent of earnings

Question 80

How are taxes treated with withdrawals from a fixed annuity?

Answer 80

Each payment is considered a partial return of tax free basis and taxable income by use of the exclusion ratio.

Question 81

What is the fixed annuity exclusion ratio?

Answer 81

Fixed Annuity Exclusion Ratio = investment in the contract / expected return of all payments

Question 82

Fixed annuity

What happens to payments from a fixed annuity if the individual lives beyond life expectancy, or dies before life expectancy?

Answer 82

Payments beyond life expectancy are fully taxable

Dies before life, expectancy, uncovered basis is deductible on the final income tax return as a miscellaneous itemized deduction, not subject to the 2% floor of AGI

Question 83

How are taxes treated with withdrawals from a variable annuity?

Answer 83

All payments in excess of the exclusion amount are taxable payments beyond projected life expectancy are fully taxable

Question 84

Variable annuity

How do you determine the exclusion amount with a Variable annuity?

Answer 84

Variable annuity, exclusion amount = investment in the contract / annuitants life

Note: this will give you the yearly amount you will need to divide by 12 the final number to get the monthly payment exclusion