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Exam FAM > Long-Term Insurance Coverages > Flashcards

Long-Term Insurance Coverages Flashcards

1
Q

What are two components of insurable interest?

A
  1. An insurable interest exists if the death of the insured would cause the policyholder to suffer a financial loss.
  2. An insurance payoff should not leave the beneficiary financially better off than if the insured life had not died.
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2
Q

What is term insurance?

A

Term insurance pays a lump sum benefit on death if the death occurs within a fixed term.

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3
Q

What are two purposes of term insurance?

A
  1. Family protection
  2. Key Person Insurance/COLI (Company Owned Life Insurance): Protect business against deaths of key employees
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4
Q

What are the four types of term insurance policies?

A
  1. Level term insurance: Death benefit is level throughout the term of the contract; premiums are regular and level
  2. Decreasing term insurance: Death benefit and (usually) premiums decrease over the term of the contract
  3. Renewable term insurance: Policyholders have the option to renew the policy at the end of the original term without further evidence on their state of health, normally at increased rates of premium upon renewal
  4. Convertible term insurance: Policyholders have the option to convert the term insurance policy to a whole life insurance policy at the end of the original term without further evidence on their state of health
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5
Q

What is yearly renewable term (YRT) insurance?

A

YRT insurance is a common renewable term insurance in North America under which the contract is written for one year at a time, but the policyholder is guaranteed to be able to renew the contract for some fixed period.

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6
Q

What is whole life insurance?

A

Whole life insurance pays a lump sum benefit on death whenever the death occurs.

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7
Q

What are three components of whole life insurance related to cash values?

A
  1. It may pay a cash value/surrender value upon lapse or surrender after an initial period.
  2. In the early years of the policy, the cash values tend to be low. In later years, the cash values may be substantial, but typically less than the sum insured.
  3. Non-forfeiture laws require insurers to pay specified cash values, or equivalent, for traditional whole life insurance.
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8
Q

What are non-forfeiture laws?

A

Non-forfeiture laws are laws that regulate what insurers can keep and what they must pay to policyholders when a policy lapses.

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9
Q

What is lapse-supported insurance?

A

Lapse-supported insurance is when cash values may not be available for some policies, particularly those intended for older policyholders, if the policy is terminated or lapses. The excess funds from these lapsed policies can be used to support the remaining policies, resulting in lower premiums.

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10
Q

What is stranger owned life insurance (STOLI)?

A

Stranger owned life insurance is an arrangement in which an investment firm holds a life insurance policy without insurable interest on the insured.

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11
Q

What is a viatical settlement?

A

A viatical settlement is a special type of STOLI where the policyholder diagnosed with a terminal illness sells their policy to a third party.

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12
Q

What is interest spread?

A

Interest spread is the difference between the market rate and the interest rate used to calculate the premium.

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13
Q

What is participating (par) insurance?

A

Participating insurance shares profits on invested premiums with policyholders:

  • In North America, profits are shared in the form of cash dividends or reduced premiums.
  • In the UK and Australia, profits are used to increase the death benefit through bonuses.
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14
Q

What are the two types of bonuses used to increase the death benefit in participating insurance in the UK and Australia?

A
  1. Reversionary bonuses: Applied to the contracts in force, increasing the benefits by a specified percentage.
  • Simple reversionary bonus: Bonus rate is applied to the original sum insured only
  • Compound reversionary bonus: Bonus rate is applied to the total of the sum insured and previous reversionary bonus
  • Super-compound reversionary bonus: Two bonuses rate each year; the first applies to the original sum insured, and the second applies to the total of previous bonus declarations
  1. Terminal bonuses: Awarded and paid on death or end of the term
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15
Q

What are six key differences between cash dividends and bonuses?

A

Cash Dividends:
1. Easy to understand
2. Flexible
3. Not tax-efficient
4. Policyholders lose at most one-year’s profit share on surrender
5. Require the insurer to liquidate assets
6. Expensive to operate

Bonuses:
1. More complex
2. Not flexible
3. Tax efficient
4. Policyholders who surrender may only receive a small portion of the profits
5. Provides more potential for future profit
6. Easier to be smoothed

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16
Q

What is endowment insurance?

A

Endowment insurance pays a lump sum benefit either on the death of the insured or at the end of a specified term, whichever occurs first.

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17
Q

What are nine options and variations on traditional insurance (riders)?

A
  1. Joint life insurance: Premiums and benefits are dependent on the survival of two people, typically spouses
  2. Multiple life insurance: Benefit is payable on the first death or on each death of a specified group of individuals
  3. Guaranteed cash values: Can be locked in by paying additional premium; required by law in some jurisdictions
  4. Policy loans: Policyholders borrow money from the insurer, using the cash value of the policy as collateral
  5. Accelerated death benefit: Early payment of death benefit to policyholders suffering from a terminal illness
  6. Accidental death benefit: An increased sum insured payable to death caused by an accident
  7. Premium waiver on disability: A rider that allows policyholders to suspend paying premiums during periods of severe illness or disability
  8. Family income benefit (FIB): A rider that pays a specified amount at regular intervals between the policyholder’s death and the end of the original contract term
  9. Critical illness insurance: A benefit is paid on diagnosis of a specified set of critical illnesses or disabilities
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18
Q

What are modern insurance contracts and four reasons for the changes to traditional insurance contracts?

A

Modern insurance products are more flexible and usually combine insurance coverage with a significant investment element. Four reasons for the changes include:

  1. Competition with mutual funds and banks for policyholders’ savings
  2. Changing demographics and lifecycles impact insurance design
  3. Developments in science and technology
  4. Better informed customers
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19
Q

What are three types of modern insurance products?

A
  1. Universal life (UL) insurance
  2. Unitized with-profit (UWP)
  3. Equity-linked insurance
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20
Q

What is universal life insurance?

A

Universal life insurance is generally issued as a whole life contract, but with transparent cash values. Accordingly, a universal life policy can be viewed as a form of savings account with built-in life insurance.

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21
Q

What are four components of universal life insurance?

A
  1. The death benefit may be fixed or increase as the invested premiums earn interest.
  2. Profits from the insurer are shared through the credited interest rate.
  3. Premiums and credited interest are deposited into a notional account, which is subject to monthly deductions to cover the cost of life insurance and expenses.
  4. Policyholders may reduce or skip paying premiums as long as the account balance in the notional account is sufficient to cover costs.
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22
Q

What is unitized with-profit insurance (UWP)?

A

UWP is an insurance contract where premiums are used to purchase shares/units of an investment fund, where an increase in value increases the death benefits in the form of bonuses.

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23
Q

What is equity-linked insurance?

A

Equity-linked insurance is when benefits are linked to the performance of an investment fund and may increase or decrease over time. They often come with a Guaranteed Minimum Death Benefit (GMDB) and a Guaranteed Minimum Maturity Benefit (GMMB).

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24
Q

What is equity-linked insurance known as within and outside of North America?

A

Within North America: Variable annuities or segregated funds; GMDB and GMMB riders are common.
Outside of North America: Unit-linked insurance; GMMB rider is usually not offered.

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25
Q

What are two key differences between equity-linked insurance policies and unitized with-profit policies?

A
  1. Benefits of an equity-linked insurance policy are based on a real fund, not a notional collection of assets within the insurer’s general account, as for a UWP contract.
  2. Equity-linked insurance benefits may increase or decrease over time, while the benefits for UWP will only increase or stay the same.
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26
Q

What are two distribution methods that insurers use to sell insurance products?

A
  1. Commission system: Insurers hire brokers or other financial advisors to sell their products.
  2. Direct marketing: Insurers sell directly to the public through television advertising or other telemarketing methods.
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27
Q

What is front-end load?

A

Front-end load refers to the brokers’ compensation schedule. The percentage paid on the first premium to brokers is usually higher than on subsequent premiums.

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28
Q

What is underwriting?

A

Underwriting is the process by which insurance companies collect and evaluate information on applicants of life insurance contracts.

29
Q

What three things does the level of underwriting depend on?

A
  1. Type of insurance being purchased: Term insurance policies are generally more strictly underwritten than whole life insurance policies.
  2. Amount of benefit: Policies with larger benefits are generally more strictly underwritten than policies with smaller benefit.
  3. Distribution method: Policies sold through the commission system are more strictly underwritten than those sold through direct marketing.
30
Q

What are the four classifications of applicants as a result of the underwriting process?

A
  1. Preferred lives: Have very low mortality risk.
  2. Standard/Normal lives: Have some increased risk factors compared to preferred lives, but they are still insurable at standard rates of premium.
  3. Substandard/Rated lives: Have one or more risk factors at raised levels but can still be insured for a higher premium.
  4. Uninsurable lives: Have such significant risk that the insurer will not enter an insurance contract at any price.
31
Q

What is adverse selection (a.k.a., anti-selection)?

A

Individuals with very high risk buy disproportionately high amounts of insurance, leading to excessive losses to the insurer.

32
Q

What are two ways that premiums can be paid?

A
  1. Single premium: Payable at the start of the contract.
  2. Regular premiums (annuity): Payable annually, semi-annually, quarterly, monthly, or weekly.
33
Q

What is assessmentism?

A

Assessmentism is the practice of matching annual income (cash inflows) and annual expenses (cash outflows). As the policyholder ages, they are more likely to die, which leads to higher cash outflows, and higher premiums. This discouraged policyholders from renewing their contracts, and assessmentism is no longer being used today.

34
Q

What are life annuities?

A

Life annuities are annuities that depend on the survival of the recipient, known as the annuitant.

35
Q

What is a whole life annuity?

A

A whole life annuity contract makes payments until the death of the annuitant.

36
Q

What is a temporary life annuity?

A

A temporary life annuity (or term life annuity) contract makes payments for some maximum period while the annuitant is alive.

37
Q

What is a Single Premium Deferred Annuity (SPDA)?

A

The policyholder pays a single premium to purchase a single premium deferred annuity contract, where the annuity payments are deferred to start at some future date.

38
Q

What is a Single Premium Immediate Annuity (SPIA)?

A

The policyholder pays a single premium to purchase a single premium immediate annuity contract, where the annuity payments start immediately after the policy is in effect.

39
Q

What is a Regular Premium Deferred Annuity (RPDA)?

A

The policyholder pays regular premiums throughout the deferred period, where the annuity payments start at some future date after the deferred period is over.

40
Q

What are four additional types of life annuities outside of SPDA, SPIA, and RPDA?

A
  1. Joint life annuity: Makes payments until the first death.
  2. Last survivor annuity: Makes payments until the last death.
  3. Reversionary annuity: Makes payments to the annuitant after the death of the insured, for as long as the annuitant survives.
  4. Guaranteed annuity: Makes payments for a minimum period, regardless of whether the annuitant is alive or dead, then payments continue as long as the annuitant survives.
41
Q

What is the waiting/elimination period?

A

The amount of time the insured must wait to receive benefit payments after they become disabled.

42
Q

What is the benefit term?

A

The maximum length of time over which benefits will be paid.

43
Q

What is the off period?

A

The minimum length of time that must pass between two periods of disability for them to be considered separate.

44
Q

What is disability income insurance?

A

Disability income insurance is designed to replace a portion of the policyholder’s income if they are unable to work due to sickness or injury.

45
Q

What are the premium and benefit features of disability income insurance?

A

Level premiums are payable at regular intervals during the term of the policy while the insured is healthy.

Benefits are paid at regular intervals while the insured is disabled until the earliest of:
- The recover of the policyholder to full health
- The end of the benefit term
- The death of the policyholder

46
Q

What are the four factors that affect the level and/or timing of the disability benefits?

A
  1. Extent to which the insured can work after the disability
    * Total disability: Unable to perform any job
    * Partial disability: Able to work but cannot earn full salary
  2. Other sources of income (workers compensation or from a government benefit program)
  3. Types of coverage
    * Own job: Pay benefits when insured cannot perform their own job
    * Any job: Pay benefits when insured cannot perform any job at all
  4. Inflation
47
Q

What is return to work assistance?

A

Return to work assistance provides benefits such as re-training that help an insured return to work smoothly after a disability.

48
Q

What is long-term care insurance (LTC)?

A

Long-term care insurance is designed to cover the cost of care when a policyholder is unable to continue living independently due to advanced age.

49
Q

What are the premium and benefit features of long-term care insurance?

A

Level premiums are payable at regular intervals during the term of the policy while the insured is healthy.

Benefits are paid when the policyholder cannot perform at least two out of six Activities of Daily Living (ADLs)

(some contracts require three ADLs; benefits can also be triggered when the policyholder suffers from a severe cognitive impairment)

50
Q

What are the 6 Activities of Daily Living (ADLs)?

A
  1. Bathing
  2. Dressing
  3. Eating
  4. Toileting (ability to use the toilet and manage personal hygiene)
  5. Continence (ability to control bladder and bowel functions)
  6. Transferring (getting in an out of a bed or chair)
51
Q

What are the two forms of LTC benefit payments?

A
  1. Reimbursement: Benefit payments are made directly to the caregiving organization.
  2. Fixed annuity payments: Benefit payments are made to the policyholder regularly during the benefit term.
52
Q

What are the two approaches that hybrid LTC and life insurance policies use to pay benefits?

A
  1. Return of premium: Any excess of total premiums paid by the policyholder over the total LTC benefits that they have received will be “returned” to the policyholder as a death benefit upon the death of the policyholder.
  2. Accelerated benefit: The face amount of the policy is set at issue. LTC benefits will be paid from the face amount and will reduce the face amount directly. If the LTC benefits do not exhaust the face amount, the balance will be paid as a death benefit. The policyholder may add an extension of benefits rider, which allows the LTC benefits to be extended for a certain period, typically 2 to 5 years, after the original face amount is exhausted.
52
Q

What is critical illness insurance (CII)?

A

Critical illness insurance pays a lump sum benefit when a policyholder is diagnosed with a covered illness or condition. It can be offered as an accelerated benefit rider on a life insurance policy.

52
Q

What is severe dependency and mild dependency?

A

Severe dependency is defined as being bedbound or chairbound, needing constant assistance, or having a cognitive imparment requiring constant monitoring.

Mild dependency refers to conditions that require help with eating, bathing, and/or some mobility, but not being bed- or chairbound.

53
Q

What is chronic illness insurance?

A

Chronic illness insurance pays a lump sum benefit or annuity when the insured is diagnosed with a chronic illness, defined as an incurable illness that is severe enough that the policyholder cannot perform two or more ADLs. It is typically added to a life insurance policy as an accelerated benefit rider.

54
Q

Describe the difference between mutual and proprietary insurers.

A

Mutual
* Owned by with-profit policyholders
* Distribute all profits to the with-profit policyholders through dividends or bonuses

Proprietary
* Owned by shareholders
* Profits are shared in some predetermined proportion between shareholders and with-profit policyholders

55
Q

What is demutualization and some reasons for it?

A

Demutualization is the process of transitioning from a mutual company to a proprietary company by issuing shares or cash to the with-profit policyholders. Some reasons for demutualization include increased access to capital, clearer company structure, and improved efficiency.

56
Q

What are continuing care retirement communities (CCRCs)?

A

Continuing care retirement communities are residential facilities for seniors that provide a continuum of care based on the changing needs of residents.

57
Q

What are the three levels of residence with CCRCs?

A
  1. Independent living units (ILUs): Usually first live independently in an ILU with minimal assistance.
  2. Assisted living units (ALUs): Usually need help with at least one ADL, where they will receive non-medical assistance such as help with bathing and dressing.
  3. Skilled nursing facility (SNF): Usually need ongoing medical care in this hospital-like facility.

*Memory care unit (MCU): Offered for seniors with severe dementia or other cognitive impairment

58
Q

What are the three types of CCRC contracts?

A
  1. Full life care / life care (insurance): Residents pay a large entry fee and monthly payments in exchange for guaranteed access to all services provided in the facility at no extra cost. (possibly increase for COLA)
  2. Modified life care (insurance): Residents pay a lower entry fee and monthly payments when they join. Monthly paymens increase when a resident moves from ILU to ALU and ALU to SNF.
  3. Fee-for-service (not insurance): Residents pay an even lower entry fee and monthly payments, which only cover the accommodation costs. They will have to pay for all health care that they receive at the current market rates since there is no pre-funding of health care costs.
59
Q

What is a structured settlement?

A

A structured settlement is a payment schedule where the responsible party (RP) compenstates the injured part (IP)

60
Q

What is maximum medical improvement (MMI)?

A

Maximum medical improvement is when the final structured settlement will be determined after interim benefits are paid.

61
Q

What is dissipation risk?

A

Disspiation risk is the risk of overspending, resulting in subsequent financial hardship.

62
Q

What are two approaches to determine annuity payments in a structured settlement?

A
  1. Top-down approach: Determine an appropriate lump sum amount, then convert that amount to an annuity.
  2. Bottom-up approach: Determine an appropriate income stream, then calculate the expected present value of the payments.
63
Q

What is a pension plan?

A

A pension plan is a type of retirement plan where an employer contributes to a fund used to pay for an employee’s retirement benefits.

64
Q

What are the two types of pension plans?

A
  1. Defined contribution (DC) pension plans: Specifies the amount, usually as a percentage of salary, the employer and the employee will contribute into the pension fund.
  2. Defined benefit (DB) pension plans: Specifies the amount of annual pension the employee will receive.
65
Q

What is the formula for annual retirement benefit?

A

Annual retirement benefit = n * *S𝛼

n is the total number of years of service,
𝛼 is the accrual rate, typically between 0.01 and 0.02,
S is the pensionable salary.

65
Q

What are the three different pension plan types?

A
  1. Final (average) salary pension plan: S is the average salary over the last few years of employment.
  2. Career average earnings pension plan: S is the average of the emoloyee’s salary throughout their career at the company.
  3. Career average revalued earnings pension plan: S is the average of the employee’s salary throughout their career, but with all salaries adjusted for inflation.

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