Life Insurance Basics

Question 1

Cash value

Answer 1

Equity amount accumulated in permanent life insurance

Question 2

Estate

Answer 2

A person’s net worth

Question 3

Illustrations

Answer 3

Presentations or depictions of nonguaranteed elements of a life insurance policy

Question 4

Solvency

Answer 4

Ability to meet financial obligations

Question 5

Insurable interest

Answer 5

Where the policyowner must face the possibility of losing money or something of value in the case of loss. Aka the policyowner would experience financial hardship upon the passing of the insured

Question 6

Who can be insured?

Answer 6

“Blood and business”

Question 7

Personal uses of life insurance

Answer 7

Survivor protection
Estate creation
Cash accumulation
Liquidity
Estate conservation

Question 8

Cash accumulation

Answer 8

Life insurance may be used to accumulate specific amounts of monies for specific needs, available during the policy term

Question 9

Liquidity

Answer 9

With some life insurance, cash values can be borrowed against at any time and be used for immediate needs

Question 10

Viator

Answer 10

Someone with a life-threatening condition who sells their life insurance for use before their death

Question 11

Viatical settlement broker

Answer 11

Negotiates viatical settlement contract, on behalf of viator

Question 12

Viatical settlement provider

Answer 12

Enters into (effectuates) a viatical settlement with a viator

Question 13

STOLI (Stranger-originated-life-insurance)

Answer 13

Where policyowner has no relationship with insured (companies try to prevent)

Question 14

Human life value approach (HLVA)

Answer 14

What would be lost to the family in the event of the premature death of the insured

Calculates wages, inflation, number of years to retirement, and time of money

Question 15

Needs approach

Answer 15

Predicted needs after the premature death of the insured. Lump-sum for immediate and incoming needs. More thorough than human life approach
Lump-sum needs:
Costs associated with death, debt cancellation, emergency reserve funds, education funds, retirement fund, and bequests
Income needs:
Replacing insured’s salary or lost services, social security income “blackout” period, liquidation vs. retention of capital

Question 16

Buy-sell agreement

Answer 16

Legal agreement that will determine what will be done with a business upone the death or disablement of the owner

Also referred to as a business continuation agreement

Question 17

Cross purchase agreement

Answer 17

Used in partnerships where the partners buy policies on one another

Question 18

Entity

Answer 18

Used when the partnership buys policies on the partners

Question 19

Stock purchase

Answer 19

Used when the stockholders buy polcies on one another

Question 20

Stock redemption

Answer 20

Used when the coporation buys one policy on each of the shareholders

Question 21

Permanent life insurance

Answer 21

Remains in effect until 100

Includes a cash value savings element

Question 22

Industrial (home service) life insurance

Answer 22

Provides insurance to industrial workers or people who are unable to afford insurance for bigger amounts. Can be payable on weekly or monthly basis

Question 23

Disclosure Authorization Notice

Answer 23

States the insurer’s practice regarding collection and use of personal information

Question 24

Guaranty associations

Answer 24

Protect policy owners, insured, beneficiaries, and anyone entitled to payment under an insurance policy from the incompetence and insolvency of insurers

Question 25

Life insurance policy cost comparison methods

Answer 25

1. Internet-adjusted net cost method
   Time value of money — investment return on insurance premium had it been invested elsewhere
2. Comparative interest rate method (CIR)
   Buy-term-invest-the-difference plan — the rate of return that must be returned on a hypothetical “side fund” to equal the illustrated cash surrende value of the higher-premium policy at a designated point in timef

Question 26

Conditional receipt

Answer 26

Used when the applicant submits a prepaid application. Coverage will be effective on the day of the application or the day of the medical exam, whichever is last

Question 27

Approval conditional receipt

Answer 27

Coverage begins only when the prepaid application is approved by the insurer

Question 28

Unconditional (binding) receipt

Answer 28

Coverage begins immediately for a specific length of time, like 30 or 60 days, often with property or causality insurance

Question 29

Investigative report

Answer 29

General report of applicant’s finances, character, work, hobbies, and habits

Question 30

Medical Information Bureau (MIB)

Answer 30

A nonprofit trade organization that receives and maintains confidential adverse medical information for insurance companies.

Helps uncover concealment and misrepresentation

Question 31

Mortality tables

Answer 31

Help predict the expectation of life and probability of death of a given group

Question 32

Net single premium

Answer 32

Mortality - interest = net premium

Question 33

Gross annual premium

Answer 33

One year cost for mortality + the cost of running the company

Question 34

Statement of good health

Answer 34

Verifies that the insured has not suffered injury or illness since the application date

Question 35

Exposure

Answer 35

A unit of measure used to determine rates charged for insurance coverage. Considers the following:
The age of the insured
Medical history
Occupation
Sex

Question 36

Executive bonus

Answer 36

An arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. The employee owns the policy and has the rights to the policy. Since the employer treats the premium as a bonus, the amount is taxed or up to go to the employer and income taxable to the employee

Question 37

Agent responsibilities

Answer 37

Solicitations and sales presentation
Underwriting: field and company
Premium determination
Policy issue and delivery