Personal Uses of Life Insurance Flashcards
Survivor Protection
List 5 common needs survivors face?
People buy personal life insurance most often to protect survivors against the loss of income resulting from the insured’s death.
Common needs that survivors face and that life insurance can help meet are
- providing income to meet daily living expenses;
- retiring a mortgage on the survivor’s home;
- setting up an education fund for the children of the decease;
- paying off existing debts;
- and paying death expenses, such as medical and funeral costs.
Describe how a lfe insurance policy can Create an Estate
Life insurance is a financial vehicle that can create an instant estate.
In this context, an estate is all that a person owns at the time of death.
What are Accumulated Cash Values for Living Benefits often used for?
As permanent life insurance policies mature, they accumulate a cash value that represents a “living benefit” to the policyowner.
Cash value is available to the policyowner through a policy loan, withdrawal (in the case of a universal life insurance policy), or surrender
Common “living benefit” uses for a life policy’s cash value include
- paying for a child’s college education;
- supplementing retirement income; and
- serving as a source of funds in an emergency.
Withdrawing the cash value from the policy will result in a reduction in the death benefit.
What is Liquidity and how liquid are permanent life insurance products?
Liquidity refers to the ease that asset can be converted to cash.
- Permanent life insurance policies are recognized as very liquid assets.
- The ease and relative lack of expense with which one may obtain the cash value is the key to permanent life insurance’s “living benefits.”
How does life insurance achieve Estate Conservation?
Besides being a way to create an estate, life insurance is a useful way to preserve an estate.
- A policy’s death benefit reduces or eliminates the need to sell assets to pay estate taxes, other costs, or debts the estate may face upon a person’s death.
- death benefit payments bypass the probate process makes it possible to set up special cash bequests that are outside the terms of an insured’s will and thereofre not taxable.
What type of Financial Security can an insurance policy offer a insured with regard to creditors?
Life insurance provides financial security to individuals and their families. More important, it provides peace of mind.
Insureds find comfort in knowing their life insurance proceeds are paid directly to the policy’s beneficiaries and are exempt from the claims of creditors. This protection is provided through the policy’s spendthrift clause.
4 characteristics of Viatical Settlements
Policyowners have the abilty to tap into the policy death benefit when facing a terminal illness or permanent disability through the accelerated death benefits provision.
Another way is through a viatical settlement.
- a timely method for receiving needed funds–usually within 30 to 45 days after the settlement agreement has been signed.
- the policyowner sells the life insurance policy to a 3rd party, known as a “via” viatical settlement provider.
- The viatical settlement provider buys the policy for a sum of money, typically ranging from 50 to 80 percent of the death benefit.
- The viatical settlement provider then becomes the policyowner and is thereafter responsible for paying the premiums.
In most cases, viatical settlements are available only to people whose policies are beyond the contestable period.
Who are the 4 players in a Viatical Settlement?
List the 3 requirements to be considered terminally or chronically ill?
- The viator is the policyowner who is selling the policy to a viatical settlement provider in a viatical settlement.
- Working on behalf of the viator, the viatical settlement broker arranges the agreement between the viatical settlement provider and viator. Most states require such brokers to be licensed.
- The viatical settlement provider is the person that acquires the life insurance policy from the viator.
- The viatical settlement purchaser is an investor who funds a viatical settlement on behalf of the viatical settlement provider.
Most states require that all viatical settlement providers be licensed.
A key provision of a viatical settlement is that the insured must be diagnosed as terminally ill or chronically ill.
- A person who has a life expectancy of no more than 48 to 60 months is generally considered terminally ill
- A person is considered chronically ill if he or she needs long-term care assistance with at least two activities of daily living.
- A licensed health care practitioner must certify that this condition has existed for at least 90 days within the previous 12 months.
How does HIPAA impact viatical settlements?
The Health Insurance Portability and Accountability Act (HIPAA) provides an income tax exemption for funds distributed through a viatical settlement when the policy is sold to a qualified viatical settlement provider.
Some states treat them as tax-free transactions, while others do not.
List the 6 provision of the Fraudulent Viatical Settlements Act (NAIC) 2001
- requires viatical settlement brokers and providers to first obtain a state-issued _______ before engaging in any viatical settlement activity;
- _________ fraudulent practices that are prohibited in the process of transacting a viatical settlement;
- identifies minimum disclosure requirements that must be presented to consumers before a viatical settlement may be transacted;
- establishes advertising guidelines pertaining to viatical settlements;
- stipulates that if the insured dies during the rescission period, the settlement contract will be deemed to have been _____________ (and, assuming the beneficiary returns settlement funds to the viatical provider, the full original life insurance contract will be payable to the beneficiary); and
- requires that interested consumers be provided with an NAIC _________ that describes the process of viatical settlements
To help assure consumers that they will not be mistreated in viatical settlements, in 2001 the National Association of Insurance Commissioners (NAIC) adopted The Fraudulent Viatical Settlements Model Act which codifies the rules by which viatical settlements may be advertised, sold, or set up. Among its key provisions, the act
- requires viatical settlement brokers and providers to first obtain a state-issued license before engaging in any viatical settlement activity;
- defines fraudulent practices that are prohibited in the process of transacting a viatical settlement;
- identifies minimum disclosure requirements that must be presented to consumers before a viatical settlement may be transacted;
- establishes advertising guidelines pertaining to viatical settlements;
- stipulates that if the insured dies during the rescission period, the settlement contract will be deemed to have been rescinded, or cancelled (and, assuming the beneficiary returns settlement funds to the viatical provider, the full original life insurance contract will be payable to the beneficiary); and
- requires that interested consumers be provided with an NAIC brochure that describes the process of viatical settlements.
What are Fraudulent Practices?
As defined in the act, prohibited fraudulent practices (by a viatical broker or provider) include
- presenting false information or concealing material information
- removing, concealing, altering, destroying, or hiding from the Commissioner the assets or records of a licensee or other person engaged in the business of viatical settlements;
- embezzling, stealing, or misappropriating funds, premiums credits, or other property of any party to a viatical settlement; and
- recklessly entering into a viatical settlement contract by presenting false information or concealing material information about the proposed viatical settlement (recklessly means engaging in this conduct with a conscious and clearly unjustifiable disregard of the relevant facts or risks, and a gross deviation from acceptable standards of conduct).
What are the 5 Viatical Settlement Disclosures that must be disclosed no later than the time the application is signed by all parties?
The __________ __________ Settlements Act establishes the minimum standards for viatical settlement contracts.
- an explanation that there are possible ___________ to a viatical settlement
- an explanation that some or all of the proceeds may be _______
- an explanation that proceeds of the viatical settlement could be subject to the claims of _________
- an explanation that receipt of viatical settlement proceeds may screw up eligibility for _________
- an explanation that the viator has ____ calendar days to rescind after receipt of the viatical settlement proceeds.
The Fraudulent Viatical Settlements Act establishes the minimum standards for viatical settlement contracts.
- an explanation that there are possible alternatives to a viatical settlement
- an explanation that some or all of the proceeds may be taxable
- an explanation that proceeds of the viatical settlement could be subject to the claims of creditors
- an explanation that receipt of viatical settlement proceeds may screw up eligibility for Medicaid
- an explanation that the viator has 15 calendar days to rescind after receipt of the viatical settlement proceeds.
List 4 characteristics of Life Settlements (verse Viatical)
- a life settlement involves the sale of an existing permanent life insurance policy for more than its __________ but less than its ____________.
- The life settlement does not require the insured to be ________________.
- Only qualification requirement = the insured must typically be at least ____ years old.
- To avoid any chance of a (STOLI), which is illegal in many states, life settlement providers typically require that the policy being purchased be past the ______________________
Similar to a viatical settlement is the life settlement. Like a viatical settlement,
- a life settlement involves the sale of an existing permanent life insurance policy for more than its cash value but less than its death benefit.
- The life settlement does not require the insured to be terminally or chronically ill.
- Only qualification requirement = the insured must typically be at least 65 years old.
- To avoid any chance of a (STOLI), which is illegal in many states, life settlement providers typically require that the policy being purchased be past contestability period.
