Miscellaneous Life Insurance Topics

Question 1

Warranty

Answer 1

A absolute true statement upon which the validity of the insurance policy depends. Breach of warranty can be grounds for voiding the contract. Sets aments made at application aren’t considered warranties.

Question 2

Indemnity

Answer 2

Reimbursement. A provision in a policy that states in the event of loss an insured or beneficiary is permitted to collect only the extent of the financial loss and not allowed to gain financially.

Question 3

Representations

Answer 3

Statements believed to be true to the best of one’s knowledge. Misrepresentations could void the contract. Material misrepresentations are statements that if discovered would alter the underwriting decision by the insurance company. Intentional misrepresentations are considered fraud.

Question 4

Concealment

Answer 4

Intentional withholding of information of material fact crucial in decision making. Can void policy.

Question 5

Impersonation

Answer 5

False pretense. Act of assuming the name or identity of another person for the purpose of committing fraud, e.g., taking the medical for another insured. Illegal!

Question 6

Unilateral contract

Answer 6

Only one of the parties of the contract is legally bound to do anything. The insured makes no legally binding promises.

Question 7

Adhesion

Answer 7

Contract of adhesion is prepared by one of the parties (insurer) and accepted or rejected by the other party. Insurance contracts are offered on a take it or leave basis.

Question 8

Aleatory

Answer 8

Exchange of unequal amounts or values. The premium amount may be small compared to the amount that will be paid by the insurer.

Question 9

Conditional

Answer 9

Conditional contract requires that certain conditions be met by the policy owner and the company in order for the contract to be executed. E.g., insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.

Question 10

Conditional receipt

Answer 10

Says the effective date of policy will either be the date of application or date of medical exam, whichever occurs last.

Question 11

Approval conditional receipt

Answer 11

Coverage begins only when the paid application is approved by the insurer. No approval during underwriting process.

Question 12

Unconditional (binding) receipt

Answer 12

Most often with property and casualty insurance. Coverage begins immediately for a specific period of time.

Question 13

Underwriting

Answer 13

The risk selection and classification process.

Question 14

Interest adjusted net cost method

Answer 14

Considers the time value of money (or investment return had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends. Surrender cost index, Net payment cost index.

Question 15

Comparative interest rate

Answer 15

(CIR) the rate of return that must be earned on a ‘side fund’ in a buy term invest the difference plan so that the value of the side fund will be equal to the surrender value of the higher premium policy at a designated point in time.

Question 16

Business insurance

Answer 16

Find business continuation. Reimburse a business for lost revenue or profit following the death of a key employee. Provide employee benefits.

Question 17

Buy and sell agreements

Answer 17

Allow surviving partner or partners to purchase the deceased partner’s share of the business from the deceased’s family. Life insurance can in part or wholly fund the buy-sell agreement.

Question 18

Cross purchase plan

Answer 18

Each partner involved buys insurance on every other owner.

Question 19

Entity

Answer 19

The business itself is obligated to buy out the ownership of any deceased or disabled partner.

Question 20

Group underwriting

Answer 20

Considers: Purpose of the group, Size of the group, Turnover of the group, Financial strength of the group.

Question 21

Types of groups

Answer 21

Credit union for all of its members. Credit life for the life of a debtor usually decreasing term. Mortgage life usually decreasing term.

Question 22

Tax treatment of premiums, proceeds and dividends

Answer 22

Premiums: not tax deductible. Death benefit (proceeds): tax free when taken as a lump sum to a named beneficiary or when taken in installments, the principal is tax free, the interest is taxable. Dividends: not taxable. Dividend interest: taxable in the year earned (accumulations).

Question 23

Tax treatment of cash value

Answer 23

Policy owner is not taxed on the annual increase in cash value. If policy owner withdraws the cash value or surrenders the policy, the amount that exceeds the premiums paid will be taxed as ordinary income. Partial surrender: FIFO interest last basis.

Question 24

Tax treatment of policy loans

Answer 24

A loan for the cash value is not taxable. One cannot receive a tax deduction for interest paid on a policy loan.

Question 25

Estate taxation

Answer 25

Death benefit may be included in taxable estate. If the insured owns the loan, it will be included in the estate for tax purposes. If the policy is given away and the insured dies within three years, it will be included in the estate.

Question 26

Group life premium taxation

Answer 26

Premiums paid by an employer for life insurance as a benefit to an employee are tax deductible.

Question 27

Business insurance taxation

Answer 27

Key employee insurance, Stock redemption or entity purchase agreement, Split dollar insurance. Not tax deductible.

Question 28

Cash value of a business owned life insurance policy

Answer 28

Accumulates on a tax deferred basis. Policy loans are not taxable to businesses. However, unlike individuals, businesses may deduct interest on a policy loan up to 50,000.

Question 29

7-pay test

Answer 29

Cumulative premiums paid during the first 7 years of the policy must not exceed the total amount of net level premiums that would be required to pay the policy using guaranteed mortality costs and interest.

Question 30

Modified endowment contract

Answer 30

Any policy that fails the 7 pay test becomes a MEC and loses its tax benefits.

Question 31

MEC taxation rules

Answer 31

Tax deferred accumulations. Any distributions are taxable, withdrawals and policy loans. Distributions are taxed on LIFO basis. Interest first. Distributions before age 59 1/2 are subject to a 10% penalty.

Question 32

Tax qualified retirement plan

Answer 32

Approved by the IRS. Gives both employer and employee tax benefits.

Question 33

IRA tax exemptions

Answer 33

10% penalty is waived but still subject to standard income taxation. Age 59 1/2, Totally disabled, Down payment on a home; not to exceed 10k, Post-secondary education expense, Catastrophic medical expenses or death.

Question 34

Tax sheltered annuities

Answer 34

Tax deferred annuity 403b plan available to nonprofit organizations under sec 501(c)(3) or public schools.

Question 35

Keogh plans

Answer 35

HR-10 makes it possible for a self-employed person to be covered under IRS qualified retirement plan.

Question 36

SEP

Answer 36

Simplified employee pension plan for small employers or self-employed. SEP has a larger contribution value, the lesser of 25% of employee compensation or IRS value.