Life Insurance Premiums Proceeds and Beneficiaries

Question 1

ACCELERATED BENEFIT (OPTION) RIDER

Answer 1

allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness and is certified by a physician as expected to die within 1-2 years.

Question 2

BENEFICIARY

Answer 2

The person or entity designated in a life insurance policy to receive the death proceeds.

Question 3

CASH VALUE:

Answer 3

The equity or savings element of whole life insurance policies.

Question 4

CLASS DESIGNATION:

Answer 4

A beneficiary group designation (for example, all of my children), opposed to specifying one or more beneficiaries by name.

Question 5

COMMON DISASTER PROVISION

Answer 5

A provisions of the Uniform Simultaneous Death Act which ensures a policyowner if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary. It also states that the primary beneficiary must outlive the insured a specified period of time in order to receive the proceeds.

Question 6

CONTINGENT (SECONDARY) BENEFICIARY:

Answer 6

The beneficiary second in line to receive death benefit proceeds if the primary beneficiary dies before the insured.

Question 7

EARNED PREMIUM:

Answer 7

The amount of premium paid by the policyowner for policy coverage or insurance protection already received.

Question 8

EXPENSE FACTOR

Answer 8

Also known as the loading charge, is a measure of what it costs an insurance company to operate.

Question 9

FIXED AMOUNT INSTALLMENT OPTION:

Answer 9

Pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted.

Question 10

FIXED/LEVEL PREMIUM:

Answer 10

A concept of averaging what would be the total single premium for a policy over periodic payments. More periodic payments = higher total premium.

Question 11

FIXED PERIOD OR PERIOD CERTAIN OPTION:

Answer 11

Pays the death benefit proceed in equal installments over a set period of years. The dollar amount of each installment depends upon the total number of installments.

Question 12

GRADED PREMIUM:

Answer 12

A premium funding option characterized by a lower premium in the early years of the contract with premiums increasing annually for an introductory period. After the introductory period, the premium jumps to an amount higher than what the initial level premium would have been, and then remains fixed or constant for the life of the policy.

Question 13

GROSS (ANNUAL) PREMIUM:INTEREST FACTOR:

Answer 13

The net premium for insurance plus commissions, operating and miscellaneous expenses, and dividends.

Question 14

INTEREST FACTOR

Answer 14

A calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums.

Question 15

INTEREST ONLY OPTION:

Answer 15

A death settlement option where the insurance company holds death benefit for a period of time and pays only the interest earned to the named beneficiary. A minimum rate of interest is guaranteed and the interest must be paid at least annually.

Question 16

IRREVOCABLE BENEFICIARY:

Answer 16

A beneficiary which may not be changed by the policyowner without the written consent of the beneficiary.

Question 17

JOINT AND SURVIVOR OPTION:

Answer 17

A settlement option which guarantees that benefits will be payed on a life-long basis to two or more people. This option may include a period certain and the amount payable is based on the ages of the beneficiaries. LIFE INCOME OPTION: A death benefit settlement option which provides the beneficiary with an income that they cannot outlive. Installment payments are guaranteed for as long as the recipient lives. The amount of each installment is based on the recipient’s life expectancy and the amount of principal.

Question 18

LIFE SETTLEMENT:

Answer 18

An agreement in which a policyholder sells or transfer ownership in all or part of a life insurance policy to a third party for compensation that is less than the expected death benefit of the policy.

Question 19

LUMP SUM OPTION:

Answer 19

A death settlement option where death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums. The lump sum option is considered the automatic (or “default”) option for most life insurance contracts.

Question 20

MODIFIED PREMIUM

Answer 20

A premium funding option characterized by an initial premium that is lower than it should be during an introductory period of time (normally the first three to five years). After this time, the premium will increase to an amount greater than what the initial level premium would have been, and then remains level or constant for the life of the policy.

Question 21

MORBIDITY RATE:

Answer 21

Demonstrates the incidence and extent of disability that may be expected from a given group of persons.

Question 22

MORTALITY RATE

Answer 22

A measure of the number of deaths (in general, or due to a specific cause) in some population, scaled to the size of that population, per unit time.

Question 23

NET PAYMENT COST INDEX

Answer 23

A formula used to determine the true cost of a policy for a policyowner. It uses the same the same formula as the Surrender Cost Index with the exception that it doesn’t assume that the policy will be surrendered at the end of the period. The net payment cost index is useful if one’s primary concern is the amount of death benefits provided in the policy.

Question 24

NET (SINGLE) PREMIUM:

Answer 24

A premium calculation used to calculate an insurer’s policy reserves factoring in interest and mortality.

Question 25

PER CAPITA (by the head):

Answer 25

Evenly distributes benefits among all named living beneficiaries.

Question 26

PER STIRPES (by the bloodline):

Answer 26

Evenly distributes benefits amongst a beneficiary’s heirs in the event that a beneficiary dies before the insured.

Question 27

PREMIUM MODE:

Answer 27

The frequency in which a policyowner elects to pay premiums.

Question 28

POLICY PROCEEDS:

Answer 28

The amount actually paid as a death, surrender, or maturity benefit. In the case of a death benefit, it includes the face value plus any earned dividends less any outstanding loans and interest. If surrender benefit, the amount includes any cash value less surrender charges and outstanding loans and interest. If maturity benefit the amount includes the cash value less any outstanding loans and interest.

Question 29

RESERVES:

Answer 29

The money set aside (required by the state’s insurance laws) to pay future claims.

Question 30

REVOCABLE BENEFICIARY:

Answer 30

A beneficiary that the policy owner may change at any time without notifying or getting permission from the beneficiary

Question 31

SETTLEMENT OPTIONS:

Answer 31

Are optional modes of settlement provided by most life insurance policies. Options include lump-sum cash, interest-only, fixed-period, fixed-amount, and life income.

Question 32

SINGLE PREMIUM FUNDING:

Answer 32

A policy funding option where the policyowner pays a single premium that provides protection for life as a paid-up policy.

Question 33

SPENDTHRIFT CLAUSE:

Answer 33

A clause which prevents creditors from obtaining any portion of policy proceeds upon an insured’s death. Additionally the clause can be selected by the policyowner to prevent a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time.

Question 34

SURRENDER COST INDEX:

Answer 34

A cost comparison calculation formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of that period.

Question 35

TERTIARY BENEFICIARY

Answer 35

The third beneficiary in line to receive death benefit proceeds if the primary and contingent beneficiaries both die before the insured.

Question 36

UNEARNED PREMIUM:

Answer 36

Premium which has been paid by a policyowner for insurance coverage which has not yet been provided.

Question 37

UNIFORM SIMULTANEOUS DEATH ACT:

Answer 37

states that if the insured and the primary beneficiary die at approximately the same time for a common accident with no clear evidence as to who died first, the law will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries.

Question 38

VIATICAL SETTLEMENT:

Answer 38

Involves someone with a terminal illness selling their existing life insurance policy to a third party for a percentage of the death benefit. In this agreement, the owner of a life insurance policy sells the policy to another person in exchange for a bargained for payment, which is generally less than the expected death benefit under the policy. The original policyowner is called the Viator and the new third-party owner is called the Viatical, or sometimes referred to as the Viatee.

Question 39

Purpose of Premiums

Answer 39

The insurer receives premium from a policyowner in exchange for insurance protection. The premium is part of the policyowner’s consideration, or the “binding force” in the contract which cements the agreement between the insurer and policyholder.

Question 40

Mortality Factor

Answer 40

A measure of the number of deaths in a given population. Mortality is based on a large risk pool of people and time. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

Question 41

Interest Factor

Answer 41

Insurance companies invest the premiums they receive in an effort to earn interest. The rate of earnings on investments is one of the ways an insurance company can reduce premium rates.

Question 42

Expense Factor:

Answer 42

Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums. The expense factor is also known as the loading charge.

Question 43

Other factors that impact the premium amount

Answer 43

Age: The older the person, the higher probability of death and disability.
Sex / Gender: Women tend to live longer than men, so their premiums are usually lower.
Health: Poor health increases probability of death and disability.
Occupation: Hazardous job increases the risk of loss.
Hobbies: High risk hobbies also increase the risk of loss. Remember these are typically only important at time of application. If you tell them you never went sky diving (and that is true) then 5 years later you go sky diving for the first time and die, they will pay.
Habits: Tobacco use presents a higher risk than non-smokers
Benefits, options, and riders:The number and kinds of benefits provided by a policy affect the premium rate. The greater the benefits, the higher the premium. To state it another way, the greater the risk to the company, the higher the premium.
Premium Mode: refers to the premium payment schedule and permits the policyowner to select the timing of premium payments. Options include: annual, semi-annual, quarterly, monthly. The more payments you make, the more it is going to cost you overall. Ideally, if you could make 1 payment in a lump sum to start and “Pay up” the policy, you would save the most amount of money. Also, your cash value would begin accumulating right away. The higher your premium payments are, the quicker you accumulate cash value. The higher the frequency of payments = higher premiums.

Question 44

Premium Terms and Funding

Reserves

Answer 44

Money that together with future premiums, interest, and survivorship benefits will fulfill an insurance company’s obligations to pay future claims. Each state has its own reserve requirements.

Question 45

earned premiums

Answer 45

(the amount an insurer is entitled for coverage provided)and unearned premiums (the premium collected from the policyholder for future coverage) make up the insurer’s total premium.

Question 46

Cost basis:

Answer 46

The total of the premiums paid into the policy minus total dividends received in cash or used to offset premiums.

Question 47

Net Premium

Answer 47

is a premium that makes provision for mortality (death benefit) losses only, while being influenced by the interest rate assumed, gender, benefit to be provided and the mortality rate.

Question 48

Gross Premium

Answer 48

is the premium charged by an insurer that is comprised of or influenced by all factors of mortality, interest and expenses. It is the actual premium paid by the policyowner for life insurance coverage. Gross Premium = Net Premium + insurer expenses.

Question 49

Single Premium Funding

Answer 49

The policyowner pays a single premium that provides protection for life as a paid- up policy. This provides for the lowest total premium and fastest build up of cash value.
For example, John, a 30-year old nonsmoker buys a $100,000 whole life policy for one single premium of $70,000.

Question 50

Level (fixed) Premium Funding:

Answer 50

The policyowner pays more in the early years for protection to help cover the cost in later years, which allows the premiums to remain level throughout the life of the policy. The shorter the premium-paying period, the higher the periodic premiums BUT, the lower the total premium paid and quicker cash value builds. For example,
John can buy that same $100,000 whole life policy for 10 (annual) level premiums of $8,000 each ($80,000 total premiums); or
John can buy that same $100,000 whole life policy for 840 level premiums (monthly for 70 years) for $105 each ($88,200 total).

Question 51

Modified Premium Funding

Answer 51

is characterized by an initial premium that is lower than it should be during an introductory period of time (normally the first three to five years). After this time, the premium will increase to an amount greater than what the initial level premium would have been, and then remains level or constant for the life of the policy.
For example, John can buy that same $100,000 whole life policy for 36 initial fixed premiums (monthly for 3 years) for $50 each ($1,800 total introductory) and then an additional 804 fixed premiums (monthly for 67 years) for $110 each ($88,440 total remainder). ($1,800 introductory + $88,440 for reminder = $90,240 total).

Question 52

Graded Premium Funding

Answer 52

is a contract characterized, like modified, by a lower premium in the early years of the contract. However, premiums increase annually or every year for the initial period. It then jumps to an amount higher than what the initial level premium would have been, and then remains level or constant for the life of the policy.
For example, John can buy that same $100,000 whole life policy for monthly payments of $20 each year 1, $40 each year 2, $50 each year 3, $75 each year 4 ($2,220 total introductory) and then an additional 792 fixed premiums (monthly for 66 years) for $120 each ($95,040 total remainder). ($2,220 introductory + $95,040 for reminder = $97,260 total).

Question 53

Flexible Premium Funding

Answer 53

allows the policyowner to adjust the premiums throughout the life of the contract.

Question 54

Minimum deposit financing

Answer 54

allows the policyowner to use policy loans to pay premiums due each year. The policyowner only pays the difference between the premium due and the amount borrowed (plus interest on the policy loan).
Depending on the type of policy, a policyowner may be able to use the policy’s cash value and dividends to pay premium.

Question 55

Surrender Cost Index

Answer 55

Uses a complicated calculation formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of that period.

Question 56

Net Payment Cost Index

Answer 56

Uses the same the same formula as the Surrender Cost Index with the exception that it doesn’t assume that the policy will be surrendered at the end of the period. The net payment cost index is useful if one’s primary concern is the amount of death benefits provided in the policy. It is helpful in comparing future costs, such as in 10 to 20 years, if one will continue to pay premiums and does not take the policy’s cash value.
The interest adjusted cost method calculates the cost of life insurance, taking into account the time value of money (i.e., the investment return on sums placed in premium dollars had these sums been invested elsewhere).
The traditional net cost method adds a policy’s premiums and subtracts dividends, if any, and cash value.

Question 57

Living Benefits

Answer 57

A living benefit is the option to use some of the future death benefit proceeds before death.

Question 58

Cash Value

Answer 58

The cash (equity) that accumulates may be borrowed against, used as collateral, utilized as supplemental retirement income, or may be withdrawn for emergencies or other situations where cash is needed.

Question 59

Accelerated Benefit

Answer 59

Allows someone that a physician certifies as terminally ill to access the death benefit. To be considered terminally ill, a physician must certify that the person has a condition or illness that will result in death in two years. Since your doctor has certified you are going to die soon the insurance company feels confident you aren’t going to stop paying your insurance premiums now. Since the insurance company also now knows they are going to have to pay out the benefit soon, they will give YOU some of the proceeds NOW and deduct it from what would go to your beneficiary.

Question 60

Viatical Settlement

Answer 60

Allows someone with a terminal illness to sell their existing life insurance policy to a third party for a percentage of the death benefit. The new owner continues to make the premium payments and will eventually collect the entire death benefit. The original policyowner is called the Viator and the new third-party owner is called the Viatical, or sometimes referred to as the Viatee.

Question 61

Life Settlement:

Answer 61

A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. An insured does not have to have a terminal illness to participate in a life settlement.

Question 62

Policy Dividends:

Answer 62

Dividends are a refund of part of the premium under a mutual insurer’s participating policy. Dividends may be used by the policyowner for cash payments, to pay the insurance premium, to purchase additional paid-up whole life insurance, to purchase one year term insurance, or as an investment to accumulate interest. While not directly tied to the policy proceeds, dividends are still considered a living benefit.

Question 63

Death Benefit settlement options:

Answer 63

While normally selected by the beneficiary, the policyowner may select a settlement option at the time of the application and may change the option at anytime during the life of the insured. If selected by the policyowner, the settlement option cannot be changed by the beneficiary.

Question 64

Death benefit settlement options include:

Answer 64

Lump Sum: Death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums. The lump sum option is considered the automatic (or "default") option for most life insurance contracts.
Interest Only: Insurance company holds death benefit for a period of time and pays only the interest earned to beneficiaries. A minimum rate of interest is guaranteed and the interest must be paid at least annually.
Fixed Period (Period Certain): The fixed period option is when the insurer pays proceeds (including interest and principal) in minimum guaranteed dollar payments over a specified number of years.
Fixed Amount: The fixed amount installment option pays a fixed death benefit in specified installment amounts until the proceeds are exhausted. The larger the installment payment the shorter the payout period.
Life Income: The life income option provides the beneficiary with an income that they cannot outlive. Installment payments are guaranteed for as long as the recipient lives, the amount of each installment is based on the recipient's life expectancy and the amount of principal.
Joint and Survivor: Benefits will be paid on a life-long basis to two or more people. This option may include a period certain and the amount payable is based on the ages of the beneficiaries.

Question 65

Examples of who can be beneficiaries include:

Answer 65

Individuals
Businesses
Trust
Estates
Charities
Minors
Class (having a group named as the beneficiary instead, such as the children of the insured)w

Question 66

Distribution by Descent

Answer 66

Per Stirpes: (meaning by the bloodline) In the event that a beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary’s heirs.
Per Capita: (meaning by the head) Evenly distributes benefits among all named living beneficiaries.

Question 67

Changing a Beneficiary

Revocable Beneficiary

Answer 67

The policyowner may change the beneficiary at any time without notifying or getting permission from the beneficiary.

Question 68

Irrevocable Beneficiary

Answer 68

An irrevocable designation may not be changed without the written consent of the beneficiary. The irrevocable beneficiary has a vested interest in the policy, therefore the policyowner may not exercise certain rights (such as taking out a policy loan) without the consent of the beneficiary.

Question 69

Simultaneous Death:

Answer 69

If the insured and the primary beneficiary die at approximately the same time for a common accident with no clear evidence as to who died first, the Uniform Simultaneous Death Act will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries.

Question 70

Common Disaster Provision

Answer 70

With a common disaster provision, a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary.

Question 71

Spendthrift Clause:

Answer 71

Prevents the decease’s creditors from obtaining the death benefit and prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time.

Question 72

Facility of Payment:

Answer 72

allows the insurance company to pay all or part of proceeds to someone not named in the policy that has a valid right. This is usually done on behalf of a minor or when the named beneficiary is deceased.

Question 73

Premiums paid on individual life insurance policies and premiums paid for life insurance used for business purposes (the company’s benefit) are generally not tax-deductible.

Exceptions to the rule includes:

Answer 73

Premiums on an insurance policy to benefit a charity are tax-deductible.
Premiums on an insurance policy to benefit an ex-spouse as court-ordered alimony are tax-deductible.
Employer-paid premiums used to fund group insurance for the benefit of employees are tax-deductible for the employer and neither tax-deductible nor taxable to the employee.

Question 74

Living benefits have can have tax implications depending on the situation.
Cash Value: For policies that are not surrendered, the cash value grows tax-free.

Answer 74

If cash value is surrendered, the portion that exceeds the premiums paid is taxable.
As long as the cash value stays in the policy taxes will never be imposed on any portion, not even the amount that exceeds the cost basis.
Proceeds from a policy loan do not count as taxable income, according to the IRS. However, if you surrender your policy or if your policy lapses, the IRS is notified of the taxable event and taxes may be required.

Question 75

Accelerated Death Benefit

Answer 75

When benefits are paid under a life insurance policy to a terminally ill person, the benefits are received tax-free.

Question 76

Dividends

Answer 76

are received tax free however, if the policyowner chooses to leave the dividends with the insurance company as an investment, any interest which accumulates will be subject ordinary income tax.
The transfer for value rule applies when a life insurance policy is sold to another party before the insured’s death. For this reason, most states require a Viatical Settlement Company or Life Settlement Company to inform the client that the proceeds could be taxable in certain situations and recommend they consult a tax advisor.

Question 77

1035 Exchange

Answer 77

When an existing life insurance policy is assigned to another insurer for a new contract, the transaction may be treated for tax purposes as a Section 1035 exchange. Policy exchanges that qualify as a 1035 exchange are not taxable.

Question 78

Economic Benefit Doctrine

Answer 78

requires that any benefit granted to an individual that has economic or financial value be included as compensation for income tax purposes in the year the benefit is granted. Individual life insurance generally avoids this doctrine since premature death can cause a substantial risk to a surviving family.

Life insurance proceeds paid to a beneficiary as a lump sum are generally received tax free. Additionally, Proceeds pass directly to the beneficiary and are not subject to attachment by the insured’s creditors.
If death benefits are paid to a beneficiary in installments, as opposed to a lump sum, the principal is received tax free and any interest received is taxable.
Another tax cost typically associated with death is the Federal estate tax (although most relatively simple estates do not require the filing of an estate tax return).