Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFP > Life Insurance and Annuities > Flashcards

Life Insurance and Annuities Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

What is a peril?

A

Cause of a financial loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a hazard

A

Condition that increases the probability that a loss will occur

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the three hazards?

A

Physical hazard

Moral hazard

Morale hazard

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a physical hazard?

A

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

Example oily rags left near a furnace or high blood pressure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is moral hazard?

A

Chance of loss from dishonesty

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is morale hazard?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is loss in insurance?

A

Disappearance or reduction in value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the four classifications of risk?

A

Financial and non-financial risk

Static and dynamic risk

Fundamental and particular risk

Pure and speculative risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is financial risk?

A

Risk that may cause financial loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is non-financial risk?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is static risk?

A

Risk that is always present

Occurs regularly and our insurable

Examples, natural disaster, earthquake, death, or flood

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is dynamic risks?

A

Result of the economy changing

Insurance does not cover these risks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is fundamental risk?

A

Risk that affects a large group of people

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is particular risk?

A

Individual in nature, or affects a small group of people

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is pure risk?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the four forms of pure risk?

A

Personal risk

Property risk

Liability risk

Risk for failure of others

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is personal risk?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is property risk?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is liability risk?

A

Intentional or unintentional injury to property or others

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is risk from the failure of others?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is speculative risk?

A

Chance of both loss or gain example gambling is not insurable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

An insurance contract must contain the following five elements

A

Offer and acceptance

Consideration

Legal object

Legal capacity

Legal form

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What does indemnity mean with an insurance contract?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are the unique characteristics of insurance contracts?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

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

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is a single life annuity?

A

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

Highest periodic payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is a life annuity with period certain?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is a life annuity with refund?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is a joint and survivor annuity?

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Are dividends taxable income in an insurance policy?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What are the types of life insurance?

A

Annual Renewable Term

Whole Life

Variable Life

Universal Life A and B

Variable Universal Life A and B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Types of Term Insurance?

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What are the characteristics of whole life insurance?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Whole life insurance

What are the policy types?

A

Whole life (ordinary, or straight)

Limited pay life

Graded premium whole life

Modified premium whole life

35
Q

Whole life insurance

What is whole life ordinary or straight?

A

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

36
Q

Whole life insurance

What is limited pay life?

A

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

37
Q

Whole life insurance

What is graded premium whole life?

A

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

38
Q

Whole life insurance

What is modified premium whole life?

A

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

39
Q

Whole life insurance

What is variable life?

A

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

40
Q

Whole life insurance

What is current assumption whole life?

A

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

41
Q

What is universal life insurance?

A

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

42
Q

Universal life insurance

What is the difference between universal life A and B?

A

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.

43
Q

Universal life insurance

Who is typically not suitable for universal life insurance?

A

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

44
Q

What is variable universal life insurance?

A

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

45
Q

What is a First to Die life insurance coverage?

A

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

46
Q

What is a survivorship (second to die policy?

A

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

47
Q

What are the three methods for calculating life insurance needs?

A

Capital retention method

Human life value method

Financial needs analysis method

48
Q

Calculating life insurance needs

What is the capital retention method?

A

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

49
Q

Calculating life insurance needs

What is a human life value method?

A

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.

50
Q

Calculating life insurance needs

What is the financial needs analysis method?

A

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

51
Q

What are annuities?

A

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

52
Q

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

A

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

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

53
Q

What are the three premium payment methods for an annuity?

A

Single premium deferred annuity (SPDA)

Flexible premium deferred annuity (FPDA)

Single premium immediate annuity (SPIA)

54
Q

Annuities

What is a single premium deferred annuity? (SPDA)

A

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

55
Q

Annuities

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

A

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

56
Q

Annuities

What is a single premium immediate annuity (SPIA)?

A

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

57
Q

What is twisting?

A

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

58
Q

How are life insurance death benefits taxed to individual beneficiaries?

A

They are not included in gross income

59
Q

How are partial withdraws from life insurance treated tax wise?

A

received tax free up to basis

60
Q

How are policy loans taxed from life insurance?

A

Tax free

61
Q

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

A

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

62
Q

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

A

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

63
Q

Life insurance dividends

How are dividend distributions treated?

A

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

64
Q

Life insurance dividends

What if dividends distributed exceed premiums?

A

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

65
Q

Life insurance dividends

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

A

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

66
Q

1035 exchange

What all can a life insurance policy be exchanged for?

A

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

67
Q

1035 exchange

What can an annuity contract be exchange for?

A

Another annuity contract, qualified long-term care insurance policy

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

68
Q

1035 exchange

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

A

Another qualified, long-term care insurance policy

69
Q

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

A

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

70
Q

Income taxation of life insurance

Lump sum death benefits?

A

Excludable from gross income

71
Q

Income taxation of life insurance

Interest only payments on death benefits?

A

Interest payments are taxable as ordinary income in the year earned

72
Q

Income taxation of life insurance

Installment payments of death benefits?

A

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

73
Q

Income taxation of life insurance

Life insurance proceeds, received as an annuity?

A

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

Use the exclusion ratio

74
Q

Federal estate taxation of life insurance benefits

Life insurance, death benefits

A

Avoid probate if there is a named beneficiary

75
Q

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?

A

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

76
Q

Federal taxation of life insurance

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

A

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

77
Q

What is a Viatical Settlement?

A

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

78
Q

Viatical Settlement

What is required and what are the tax consequences?

A

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

79
Q

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

A

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

80
Q

How are taxes treated with withdrawals from a fixed annuity?

A

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

81
Q

What is the fixed annuity exclusion ratio?

A

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

82
Q

Fixed annuity

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

A

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

83
Q

How are taxes treated with withdrawals from a variable annuity?

A

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

84
Q

Variable annuity

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

A

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

CFP (17 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions