Part 1 - Life Insurance Products Flashcards
1
Q
UL death benefit pattern - option A or 1
A
Death benefit remains level; the NAR decreases as the account value increases (and vice versa)
2
Q
UL death benefit pattern - option B or 2
A
Level NAR, death benefit equals what is sometimes called the face amount plus an additional death benefit equal to the account value.
3
Q
UL death benefit pattern - option C or 3
A
Death benefit = face amount + sum of premiums paid.
The NAR is the difference between the combination of the two death benefits and the account value.
4
Q
3 types of mortality tables
A
1) select
2) ultimate
3) aggregate
5
Q
Policy provisions that make payment less secure
A
1) suicide clause
2) delay clause
3) exclusion clauses - eg aviation (rare), war (related to persons in the military)
6
Q
Provisions that make payment more secure
A
(Required in all life insurance sold in the US)
1) entire contract clause
2) incontestable clause (validity of contract can’t be contested after 2 years)
3) premium provision
4) grace period provision
5) reinstatement clause
6) nonforfeiture provision (applicable to cash value, non variable policies)
7) participation/policy value provision
8) misstatement of age or sex provision
7
Q
Revocable beneficiary designation
A
Can be changed by policyowner without the beneficiary’s consent
8
Q
Irrevocable beneficiary designation
A
(Policy) Can be changed only with the beneficiary’s express consent
9
Q
Nonforfeiture provision
A
Required of cash value policies stating the options available if the policy is terminated.
Options are activated automatically or can be elected by policyholder if they choose to terminate. 3 options:
1) cash (net cash surrender value)
2) reduced paid up insurance
3) extended term insurance
10
Q
3 categories of health insurance
A
1) medical expense
2) LTC
3) disability income
11
Q
Riders providing life insurance coverage (4 generic types)
A
1) term riders
2) family riders
3) accidental death benefit riders
- guaranteed insurability option
4) living benefit riders
- terminal illness coverage
- catastrophic illness coverage
- LTC riders/combination plans
12
Q
Survivorship clause
A
(aka time clause)
Provides that beneficiary must survive the insured by a fixed period of time (eg 60 days) to be entitled to the proceeds
13
Q
3 categories of morbidity based policies
A
1) medical expense
2) LTC
3) disability income
14
Q
Non can policies
A
i.e. noncancellable
Health insurance policy under which premiums are guaranteed and the insured has a contractual right to continue the policy by the timely payment of premiums, usually to a specified age, such as 65
15
Q
4 requirements for ideal insurable risk
A
1) large # of independent and homogenous exposure units
2) accidental losses (unintentional)
3) losses easily determinable as to the time, amount and type
4) economically feasible premiums
16
Q
Exposure unit
A
A person, place, or thing exposed to the possibility of loss or other insured event
17
Q
Interdependent/correlated risks
A
When exposure units in insurance pools are all subject to the possibility of suffering losses due to a single catastrophic event - the risks are systematic and are no longer statistically independent
18
Q
Annuities
A
Series of periodic payments (or receipts)
19
Q
Separate accounts
A
Mutual find type account maintained by a life insurer to receive premiums and other payments from its contract holders who bear 100% of the investment risk
20
Q
Provisions that provide flexibility
A
1) right to return policy (aka free look)
2) death benefit provision
3) beneficiary clause
4) settlement options
5) nonforfeiture options
6) policy loan provision
7) dividend options
8) assignment/ownership provision
21
Q
Reentry feature
A
(Term life policy feature)
Allows policyholders to pay lower premiums than the guaranteed renewal premium if insured can demonstrate they meet continuing insurability criteria
22
Q
Conversion feature
A
Feature of term life
Affords policyowner the option to change the term policy for a cash value insurance contract, without evidence of insurability
23
Q
4 types of personal life insurance products
A
1) term
2) universal
3) whole
4) endowment
24
Q
Homogeneous (or identically distributed) exposure units
A
Random variables whose probability distributions prescribe the same probability to each potential occurrence, which renders the distribution’s expected values and variance equal
25
Ruin
When total insured losses exceed total premiums and investment returns received by an insurance pool
26
3 pricing objectives
1) adequate
2) equitable
3) economically feasible
27
4 policy pricing components (life insurance)
1) mortality charges
2) investment credits
3) loading charges (i.e. taxes and expenses, profits and contingencies)
4) persistency
28
Persistency
Percentage of a block of life insurance policies not terminated by lapse or surrender during a given time period
29
Lapse
Termination of a life insurance policy and the insurer’s obligations after expiration of its grace period for failure to pay a premium necessary to maintain it in full effect
30
Surrender
Voluntary termination of a life insurance policy by its owner for its cash surrender value
31
Endowments
Life insurance that makes 2 mutually exclusive promises to pay a stated death benefit if:
1) the insured dies during the term, or
2) if the insured survives the policy term
32
Cash surrender value
Amount payable to the policyholder on voluntary termination, ignoring policy loans, and less any surrender charges
33
Cash value/policy value
Life insurance policy’s internal savings before deduction of any surrender charges or policy loans
aka: account value, accumulated value, or gross cash value
34
Net amount at risk (NAR)
Difference between the policy’s death benefit and the cash value or policy reserve
35
Current assumption policies
Unbundled life insurance policy containing non guaranteed policy elements
36
Cost of insurance (COI)
Charge assessed to pay for the policy’s internal term insurance - the NAR
internal age-based rate assessed against each life insurance policy based on its NAR to cover its share of mortality charges for the period
37
Participating (par) policies
“with bonus”
Policies entitled to receive dividends declared by an insurer
38
Term life insurance
Policy that pays a prescribed death benefit if the insured dies during the policy term, which is a specified # of years (eg 10 or 20 years), or to a specified age (eg 85 years old)
39
3 categories of cash value policies
1) universal
2) whole life
3) endowment
40
Variable life insurance (aka unit linked life insurance)
May be bundled or unbundled
Policyholder allocates premium payments to separate accounts offered by the insurer, with the cash values and usually death benefits directly determined by the investment performance of the assets held in these accounts which are separate from the insurer’s general asset accounts
Can be WL or UL
41
Level-premium WL (ie ordinary life)
(lowest premiums, lowest cash values)
Uniform premiums payable for the entirety of the insured’s life
42
Limited-payment WL
Uniform premiums payable over some period shorter than the insured’s entire possible lifetime, such as age 65, after which the policy guarantees that no further premiums will be due
43
Single-Premium WL
(highest premium, highest cash values)
Only one premium payment is made
44
Paid up
Condition under which a policy is guaranteed to remain in effect with no further premium payments due, in accordance with the terms of the contract
45
Renewable (aka yearly renewable term, annual renewable term)
Right of a policyholder to continue an insurance policy for one or more policy periods merely by paying the billed premium.
Premiums increase at renewal
46
Guaranteed renewable
Contractual right within a health insurance policy to continue the policy by timely payment of premiums, usually to a specified age such at 65, but with no guarantee as to the magnitude of future premiums
47
Universal life (UL) insurance policies
Unbundled policy
Characterized by flexible premium payments and adjustable death benefits whose cash value and coverage period depend on the premiums paid into it
48
Whole life (WL) insurance
(aka ordinary life)
Typically bundled policy
Characterized by fixed death benefits and fixed uniform premiums designed to enable the policy to remain in effect for the entirety of the insured’s life
49
Private placement life insurance
Individually tailored variable life insurance designed specifically for, and available only to, qualified investors and not subject to SEC registration requirements
50
Accredited investor
Wealthy investor who meets SEC requirements as to minimum net worth (> $1 million) or annual income (> $200k)
51
Qualified purchaser
Any individual or family organization with net investments of $5 million or more
52
Joint life insurance
(i.e. first to die life insurance)
Life insurance that promises to pay the face amount on the first death of two or more in insureds
53
Split option
(under a survivorship policy)
Option to divide the policy into two individual policies of the same generic type (one on the life of each insured)
Can only be elected under certain conditions, such as divorce
54
Last to die life insurance
Promises to pay the face amount on the death of the second insured or the last insured to die
(aka survivorship life insurance or second to die life insurance)
55
Current assumption whole life (CAWL)
Unbundled, non-par with nonguaranteed elements
(aka interest sensitive WL or fixed premium UL)
56
Non-guaranteed policy elements
Insurer may change elements at any time, as long as policy guarantees are respected
Commonly includes: Mortality charges, loading charges, interest crediting rate, dividends, premium (sometimes)
(aka current assumptions)

57
Equity-indexed UL (EIUL)
(Funds held in general account)
Owner elects the proportion of account value to be allocated to the insurer’s general account based interest crediting rate and to an indexed account whose crediting rate is tied directly to some external index (i.e. S&P 500)
58
No lapse guarantee (UL)
(NLG)
Rider or policy provision
Insurer guarantees policy will not lapse if at least a minimum continuation premium is paid
59
Specified premium test
(No lapse guarantee (NLG) mechanism)
Guarantee remains in effect if actual premiums paid equals or exceeds a cumulative minimum premium requirement to date
60
Shadow account
(NLG mechanism)
Derived from modified UL account value calculation using a set of guaranteed policy elements different from the set applicable to the regular account value calculation.
If neither the regular account nor the shadow account has a positive value, the policy lapses.
Re NLG mechanisms: some products include provisions for catch-up and/or reset

61
Managed care
Programs that are designed to reduce costs and increase the quality of care by:
1) providing economic incentives for providers and beneficiaries to choose less costly forms of care
2) Implementing utilization review/management
3) Implementing cost sharing by beneficiaries
4) Implementing pre-certification procedures
5) Implementing discharge planning procedures (limit length of hospital stays to medically necessary minimum)
6) Providing economic incentives for outpatient procedures
7) Selective contracting with providers
8) Intensive management of high cost individual cases
62
Minimum premium plan (MPP)
Contract owner assumes liability for all but the largest claims or very unfavorable total experience of the plan
63
Self funded plans
Claims are paid in cash as they arise with no element of pre-funding through commercial insurance
Intent is to avoid the administrative cost of transferring individual risks
64
Stop loss reinsurance
Reimburses a self-funded employer for claims incurred above certain limits and is available on an individual or aggregate basis
65
Administrative services only (ASO)
Employer purchases specific administrative services from an insurance company or from an independent third-party administrator
66
Combination plans
Life insurance or Annuity contracts that include long-term care insurance riders commonly providing for an acceleration of a policy’s death benefit payment in the form of monthly payments for qualified expenses
67
Living benefit riders
(aka Accelerated benefit riders)
Promise to pay some or all of a policy’s face amount prior to the insured’s death if the insured suffers some specified adverse health condition
3 forms: Terminal illness, catastrophic illness, LTC riders/combination plans
68
Guaranteed insurability option
(aka Additional or guaranteed purchase option)
Permits the purchase of additional insurance on the insured’s life without providing evidence of insurability, at periodic intervals and stated life events
69
Accidental death benefit riders
Sometimes called double indemnity
Provides that double (or other multiple) of the face amount is payable if the insured dies as a result of an accident
70
Term blending
Replaces portions of the cash value policy death benefit with term insurance
71
Variable annuities (VA)
Performance and benefit depend directly on the performance of separate account funds specified by the owner
72
Fixed annuities (FA)
Annuity contract that credits investment returns based indirectly on the performance of the insurer’s general account investments or directly on changes in a specified inflation or equity index, subject to a guaranteed minimum crediting rate
73
Four pillars of retirement funding
1) Government benefits
2) Employer benefits
3) Individual savings
4) Part-time employment
74
Medicare Part A
Covers hospital and nursing home care facility charges
Deductibles and co-pays apply
There is no coverage for non-institutional care in the home or on an outpatient basis
75
Medicare Part B
Pays for physician, nursing, and testing services as well as durable medical equipment such as mobility devices, prosthetics, and oxygen supply machines
Deductibles/co-pays apply
76
Medicare Part C
Provides the option of receiving Medicare benefits under private insurance plans known as Medicare Advantage Plans
Provides most of Part A (Hospital Insurance) and Part B (Medical Insurance) coverage and typically offer extra benefits such as vision, hearing and dental care.
Available to beneficiaries with both Part A and B coverages
77
Medicare Part D
Provides prescription drug benefits under stand alone plans that are distinct from Parts A, B and C
Available only through private insurers
78
Presumptive disability (clause)
An insured is always considered totally disabled, even if he/she is at work, if sickness or injury results in the loss of eyesight in both eyes, hearing in both ears, power of speech, or the use of any two limbs
Insurer usually starts benefits immediately and waives the medical care requirement
79
3 basic components of the disability benefit provision
1) Elimination period (ie. waiting period)
2) Benefit period (time period for which benefits are paid)
3) Monthly benefit amount (usually fixed)
80
Stated value basis
Stated policy benefit is paid without regard to the actual economic loss suffered
81
Transplant benefit
(Other disability income insurance provision)
If totally disabled because of an organ transplant from the insured’s body, insurer will deem him/her disabled as a result of sickness
82
Rehabilitation benefit
(Other disability income insurance provision)
Allows a specific sum (i.e. 12 times monthly benefit) to cover costs not paid by other insurance or public funding when the insured enrolls in a formal retraining program to help him/her return to work
83
Non-disabling injury benefit
(Other disability income insurance provision)
Pays a specific sum (i.e. 1/4 of monthly benefits) to reimburse the insured for medical expenses incurred for treatment of an injury that did not result in total disability
84
Principal sum benefit
(Other disability income insurance provision)
Lump sum amount payable if the insured dies accidentally, caused directly and independently by an injury, and death occurs within a specified number of days from the injury (ie 90 or 180 days)
85
(Disability income)
Guarantee of future insurability
(aka Future increase option)
Guarantee designed to adjust insurance benefits for individuals who anticipate substantial annual income growth that is above the average national rate for salary changes or who expect periodic substantial changes in income as they mature in their careers
Allows an insured to purchase additional disability income insurance in future years without evidence of insurability
86
(Disability income)
Residual disability benefit
(common optional or supplemental benefits)
Provides reduced monthly benefit in proportion to the insured’s loss of income when he/she has returned to work at reduced earnings
87
(Disability income)
Partial disability benefit
(common optional or supplemental benefits)
Typically 50% of the monthly total disability indemnity and is payable for up to six months or, if less, for the remainder of the policy benefit period when the insured has returned to work on a limited basis after a period of compensable total disability
88
(Disability income)
Social insurance supplement
(common optional or supplemental benefits)
Provides an additional disability income benefit that approximates Social Security disability benefits but which is payable only if the insured meets the policy’s definition of total disability and doesn’t qualify for any social insurance disability income benefit
89
(Disability income)
Inflation protection benefits
(common optional or supplemental benefits)
COLA benefits: adjusts benefits while the insured is receiving disability income to account for changes in the cost of living from the start of the disability
90
(Disability income)
Provisions for increased future benefit amounts
(common optional or supplemental benefits)
Flexibility offered to insureds (prior to a claim) to accommodate inflation and increased earnings
(Automatic increase benefit, guarantee of future insurability i.e. future increase option)
91
(Disability income)
Automatic increase benefit
Designed to keep benefits current with changes in earned income or financial needs as a result of modest annual salary increases or the effects of inflation while the insured is not disabled
Scheduled increases with annual premium increases; insured has the right to refuse one or more of the automatic increases
92
Annuity certain
If the annuitant dies before the end of the annuity period, payments continue to a named beneficiary for the balance of the prearranged period
93
3 Special individual insurance coverages
1) Hospital confinement indemnity - Coverage pays a fixed sum for each day of hospital confinement
2) Specified disease policies (aka dread disease insurance) - Provides individual health insurance that pays a variety of benefits up to substantial maximums solely for the treatment of a disease named in the policy (i.e. cancer or heart disease)
3) Medicare supplement policies - Pays benefits for services not fully covered under Medicare
94
Health savings accounts (HSA)
vs
Health reimbursement accounts (HRA)
HSAs - Permit individuals to accumulate pretax contributions to pay qualified medical expenses associated with high deductible health plans. Remain under the control of employee.
HRAs - Permit tax-free employer contributions on both high deductible and traditional healthcare plans. Balances may be forfeited to the sponsor on termination of employment.
Both HSAs and HRAs roll over and accumulate from year to year.
95
Flexible spending account (FSA)
Accumulate pre-tax salary deductions to be applied to the reimbursement of a variety of plan participant healthcare, dependent care, and other benefits.
Unused funds are forfeited at the end of the year to the employer sponsor.
96
Subrogation
Is the transfer of one party’s legal rights against a third-party to another
97
Medical necessity
Means that it must be generally reasonable, necessary, and appropriate based on accepted clinical standards of care.
98
Point of service PPOs (POS)
Hybrid PPOs under which beneficiaries typically are treated by an in-network primary care physician who may make referrals to in-network or out-of-network specialists as the beneficiary chooses
99
Provider networks
vs
Out of network providers
Provider networks are affiliated healthcare providers
whereas
Out of network providers are unaffiliated healthcare providers and are compensated by cash payments for expenses incurred for services rendered
100
Preferred provider organizations (PPO)
Healthcare intermediaries between sponsors and physicians, and other healthcare providers, who agree to provide services at discounted rates
101
Health maintenance organizations (HMO)
Healthcare financing and delivery corporations that contract with doctors, hospitals, and other providers to provide services to beneficiaries rather than cash reimbursement
102
“BUCA”
Health insurance in the US is dominated by:
“B” - Blue Cross and Blue Shield associations
“U” - United Healthcare
“C” - CIGNA
“A” - Aetna
103
Moral Hazard
Asymmetric information problem resulting from the presence of insurance causing a change in loss prevention behavior (ie ex ante moral hazard) or loss minimization behavior (ie ex post moral hazard) of the insured
104
Disability income insurance
Usually provides stated periodic payments when an insured loses income because of injury or sickness
105
Long term care (LTC) insurance
Pays stated benefits when insureds incur exceptional expenses because of their need for assistance arising from an inability to perform the essential activities of daily living
106
Medical expense insurance (aka Health insurance)
Reimburses insureds or pays providers directly for hospital, medical care, and related services
107
Contingent deferred annuities (CDA)
(aka Standalone living benefits)
Guarantee lifetime withdrawal benefits from the owner’s mutual fund or managed investment account
If the account value is exhausted, the insurer continues the guaranteed withdrawals for the life of the annuitant
108
Guaranteed lifetime withdrawal benefit (GLWB)
Guarantees the annuitant will receive a guaranteed stream of income payments, regardless of the contract account value, and provides complete access to a substantial part of the account balance throughout the deferral and liquidation periods
109
Assumed interest rate (AIR)
(Also called benchmark rate or target return)
The interest rate which, if earned uniformly throughout the liquidation period, would produce level annuity benefit payments
110
Riders protecting against policy lapse
1) Waiver of premium/charges - Pay or “waive” premiums otherwise due under fixed premium products if the insured becomes disabled
2) Overloan protection riders (OPR) - Purpose is to guarantee that a policy will not lapse. As policy loans equal or exceed a policy value and the policy lapses, a significant income tax event may be created for its owner
3) No lapse guarantee riders - Guarantee that the policy will not lapse for specified period or for life, even if the account value goes to zero, if a specified minimum premium is paid
