Term Life Insurance (Chapter 2)

Question 1

REVIEW

Name the Potential Financial Impact of Death (6)

Answer 1

1. Loss of Income
2. Loss of Caregiver
3. Debt Repayment
4. Income Taxes
5. Estate Creation (Education funds, Legacies, Charitable Giving)
6. Business Impacts

Question 2

Life Insurance Terminology

Contingent Beneficiary

Answer 2

A contingent beneficiary, or secondary beneficiary, serves as a backup to the primary beneficiaries named on your life insurance policy.

Question 3

REVIEW

Risk Transfer

Answer 3

Finding someone else who is willing to assume the consequence of the risk.

Question 4

REVIEW

Simplify Mortality Rate

Answer 4

The Probability of dying at a specific age.

Question 5

Chapter 2

What is a Term Policy ?

Answer 5

Insurance contract that promises to pay a death benefit in exchange for a premium if the life insured dies within a fixed term of the contract.

Question 6

What are the age limits of a term policy?

Answer 6

Insurance companies stop issuing term policies around age 65 -70 depending on the contract.

Question 7

What is a Policyholder & Life Insured?

Answer 7

Policyholder is the person who purchases the life insurance contract, acquires ownership, names beneficiary & pays the premiums.

Life insured is the person whom the contract is based on. (Policyholders can also be the life insured)

Question 8

Single Term Policy

Answer 8

One Person insured with death benefit payable if the insured dies within the term of the policy

Question 9

Joint first-to-die

Answer 9

A policy where a single amount of coverage is based upon two or more lives insured. The death benefit is paid out on the first person to die.

Question 10

When is a joint first-to-die recommended?

Answer 10

When two or more people share a debt obligation.

Question 11

TRUE OR FALSE?

Joint first-to-die polices are MORE expensive than two separate life insurance policies.

Answer 11

FALSE.

A joint first-to-die life insurance policy on two lives is typically less expensive than two separate life insurance policies of the same coverage amount on each life individually.

Question 12

Joint last-to-die

Answer 12

A policy where a single amount of coverage is based upon two or more lives insured. The death benefit is paid out on the LAST person to die.

Question 13

When is a joint last-to-die appropriate?

Answer 13

When the risk (such as tax liability) does not arise until the death of the last person covered by the policy.

Question 14

TRUE OR FALSE?

Business owners are NOT allowed to use joint first-to-die or last-to-die policies

Answer 14

FALSE.

Joint policies CAN be used in buy-sell agreements.

Question 15

Explain Death Benefit

Answer 15

The amount that the insurance company will pay the beneficiary if the life insured dies while the policy is in force. It’s also known as the face amount.

Question 16

What are the 3 types of death benefits?

Answer 16

1. Level D.B
2. Increasing D.B
3. Decreasing D.B

Question 17

Level Term

Answer 17

The death benefit equals the initial face amount.

Question 18

When is a level term death benefit most appropriate ?

Answer 18

When the insurable need is not expected to change significantly over the term of the policy.

Question 19

Decreasing Term

Answer 19

Death benefit that decreases over the course of the term, while the premium remains level.

Question 20

When is a Decreasing Term most appropriate ?

Answer 20

Most often used by people who have mortgages.

Question 21

Increasing Term

Answer 21

Death benefit that increases over the course of the term along with the premiums.

Question 22

When is an Increasing Term most appropriate ?

Answer 22

When the amount at risk is expected to increase over time, perhaps due to inflation, investment returns or salary increases.

Question 23

TRUE OR FALSE?

Provinces and territories charge a premium tax ranging from 2% to 5% on life insurance premiums charged by licensed insurers.

Answer 23

TRUE

Question 24

Mortality costs, how are they calculated?

Answer 24

Multiplying the policy’s face amount by
the life insured’s probability of death.

Question 25

What are the expenses within a policy premium? (6)

Answer 25

1. Cost of selling the policy
   (Marketing, salaries & commission to agents)
2. Underwriting
3. Administration
4. Investigating Claims
5. Paying death benefits.
6. Profits sought by shareholders

Question 26

TRUE OR FALSE?

Renewable Policies are MORE expensive than non-renewable policies.

Answer 26

TRUE

Question 27

Are renewable policies more expensive? If so, why is that the case?

Answer 27

They are more expensive because the
insurance company is taking the added risk that they may have to continue coverage on the life insured after the end of the term, even if his health has declined.

Question 28

Explain Convertible Term Insurance

Answer 28

Term policy with the option of converting to some form of permanent life insurance (ex. whole life, term-100 or universal life insurance) at some future date.

Question 29

Explain the Contestability Period

Answer 29

The insurance company only has TWO YEARS after it issues the policy to void the policy if it discovers an error or misrepresentation in a material fact in the application.

Question 30

TRUE OR FALSE?

If a life insured commits suicide within two years after the policy has been issued, he WILL receive a death benefit.

Answer 30

FALSE.

The insurance company will NOT pay the death benefit if the life insured dies by suicide within a specified period of time (typically two years) after the contract was issued.

Question 31

TRUE OR FALSE?

Premiums can ONLY be based on the “nearest birthday” of attained age.

Answer 31

FALSE.

• Depending on the policy, attained age of the life insured is based on the LAST birthday, NEXT birthday, or NEAREST birthday.

Question 32

TRUE OR FALSE?

Premiums for an ORIGINAL-AGE convertible term policy are HIGHER than the premiums for an ATTAINED-AGE convertible term policy.

Answer 32

TRUE.

Because the insurance company is taking on the risk of providing lifetime coverage at a lower rate if the original-age conversion is exercised.

Question 33

When should a Policyholder choose a renewable policy?

Answer 33

If there is a possibility that the risk could extend beyond the anticipated duration.

Question 34

TRUE OR FALSE?

Loans & mortgages are level risks.

Answer 34

FALSE.

Loans & mortgages are DECREASING RISKS because their risks diminish over time.

Question 35

Name at least THREE DISADVANTAGES of Term Insurance

Answer 35

• Premiums increase as the life insured ages.
• Coverage is usually not available past
  a certain age.
• Policy is worthless at the end of the term.
• No cash value

Question 36

THREE ADVANTAGES of term insurance

Answer 36

1. Premiums are guaranteed over the term.
2. Renewable and convertible provisions can be used to extend coverage.
3. Term of coverage can be customized to meet a specific need.

Question 37

What’s a common reason people get term insurance?

Answer 37

• Cover Temporary Risk
• Limited Cashflow