Life Insurance Premiums, Proceeds, and Beneficiaries

Question 1

What 3 primary factors determine life insurance premiums?

Answer 1

1. Mortality Factor
2. Interest Factor
3. Expense Factor

Question 2

Mortality Factor

Answer 2

A measure of the number of deaths in a given population.

Question 3

Interest Factor

Answer 3

The rate of earnings on investments is helps an insurance company reduce premium rates.

Question 4

Expense Factor

Loading Charge

Answer 4

Operating expenses that are factored into the premium.

Question 5

What is an indicator of the higher probability or death and disability?

Answer 5

Age

Question 6

Sex / Gender

Answer 6

Women tend to live longer than men, so their premiums are usually lower

Question 7

Poor _____ increases probability of death and disability

Answer 7

Health

Question 8

Occupation

Answer 8

Hazardous job increases the risk of loss.

Question 9

High risk _____ also increase the risk of loss.

Answer 9

hobbies

Question 10

Tobacco use is an example of what that presents a higher risk than non-smokers?

Answer 10

Habit

Question 11

Premium Payment Mode

Answer 11

-Mode=payment schedule

permits the policyowner to select the timing of premium payments.

Question 12

What are four Premium Payment Options?

Answer 12

• Annual
• Semi-Annual
• Quarterly
• Monthly

Question 13

The higher the frequency of payments = ?

Answer 13

higher premiums

Question 14

Level Premium Funding

Answer 14

-pay more in the early years for protection
to help cover the cost in later years

-shorter premium-paying period = higher premiums (and vice versa)

Question 15

Money that together with future premiums, interest, and survivorship benefits will fulfill an insurance
company’s obligations to pay future claims.

Answer 15

Reserves

Question 16

Cash Value

Answer 16

applies to the savings element of whole life insurance policies that are
payable before death

Question 17

Tax Treatment of Premiums

Answer 17

• Premiums paid on individual life insurance policies are generally not deductible.
• Premiums for life insurance used for business purposes are generally not tax-deductible.

Question 18

What tax treatments or premiums exceptions to the general rule?

Answer 18

• Premiums used for a charity are tax
deductible.

• Life insurance premiums paid by an ex-spouse as court-ordered alimony are tax-
deductible.

• Employer-paid premiums used to fund group life insurance for the benefit of employees are tax-deductible

Question 19

Tax Treatment of Cash Values

Answer 19

If cash value is surrendered, the portion that exceeds the premiums paid is taxable.

not surrendered=tax free

Question 20

What are settlement options also known as?

Answer 20

Death Benefits

Question 21

Once selected, can the settlement option

be changed by the beneficiary?

Answer 21

NO

Question 22

Lump Sum

Answer 22

Single Payment

Question 23

Fixed Period

period certain

Answer 23

-pays proceeds (including interest and principal) in minimum guaranteed dollar
payments over a specified number of years

Question 24

When a fixed death benefit in

specified installment amounts is paid to beneficiary until the proceeds are exhausted it is called what?

Answer 24

Fixed Amount

Question 25

Life Income

Answer 25

• provides the beneficiary with an income that they cannot outlive
• amount of each installment is based on the recipient’s life expectancy and the amount of principal.

Question 26

Benefits will be paid on a life-long basis to two or more people.

Answer 26

Joint and Survivor

Question 27

What are the 2 living benefit options and how do they work?

Answer 27

• Accelerated Benefit – Allows someone
that a physician certifies as terminally ill to access the death benefit.

• Viatical Settlement – Allows someone with a terminal illness to sell their existing life insurance policy to a third party for a percentage of the death benefit.

Question 28

In a Viatical Settlement who is the Viator and who is the Viatical (also known as the Viatee)?

Answer 28

• original policyowner = Viator

- new third-party owner = Viatical

Question 29

2 Policy Proceeds

Answer 29

• Death Benefits

- Living Benefits

Question 30

Tax Treatment of Proceeds

Answer 30

• Premiums: Not tax deductible
• Death Benefit: Tax- free lump sum to a named beneficiary.(not
subject to attachment by the insured’s creditors.)
• Death Benefit Installments: Principal is tax- free – interest is taxable

Question 31

Taxation of Proceeds Paid at Death

Answer 31

• transfer for value rule, applies when a life insurance policy is sold to another party before the insured’s death
• Federal estate tax

Question 32

Taxation of Proceeds Paid During the Insured’s Lifetime

Answer 32

• Policy Surrender
• Accelerated Death Benefit
• 1035 Exchange

Question 33

Policy Surrender

Answer 33

When a policy is surrendered for the cash value, some of the cash value received may be taxable, if the value was more than the amount of the premiums paid for the policy.

Question 34

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

Answer 34

Accelerated Death Benefit

a physician must certify that the person has a condition or illness that will result in death in two years.

Question 35

1035 Exchange

Answer 35

Policy exchanges that qualify as a 1035 exchange are not taxable

Question 36

What are the following examples of?
• Individuals
• Businesses
• Trust
• Estates
• Charities
• Minors
• Class (such as the children of the insured)

Answer 36

BENEFICIARIES

Question 37

When the policyowner lists themselves as the ________, they

will require proof of insurable interest.

Answer 37

beneficiary

Question 38

In types of beneficiaries, what is the Order of Succession?

Answer 38

• Primary: First in line
• Secondary (contingent): Second in line if primary beneficiary dies first
• Tertiary: Third in line to receive death benefit proceeds.
( If no one named, death benefit will go to insured’s estate.)

Question 39

When death benefits are evenly distributed among all named living beneficiaries it is called?

Answer 39

Per Capita (meaning by the head)

Question 40

Per Stirpes

meaning by the bloodline

Answer 40

In the event that a beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary’s heirs.

Question 41

Is there a time limit on when the policyowner may change the beneficiary?

Answer 41

No

Question 42

What is a Revocable Beneficiary?

Answer 42

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

Question 43

Why can a policyowner NOT change an irrevocable designation without the
written consent of the beneficiary?

Answer 43

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 44

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, what will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries.

Answer 44

Simultaneous Death

Question 45

Common Disaster Provision

Answer 45

-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 46

Spendthrift Clause

Answer 46

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 47

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

Answer 47

Facility of Payment