Test 1 Flashcards
1035 exchanges. Define. Six things.
A tax free exchange for an existing life insurance policy, endowment contract, or annuity contract for a new one.
Life insurance can be traded for life insurance
Life insurance can be traded for endowment contracts
Life insurance can be traded for annuities
Endowment contracts can be traded for endowment contract
Endowment contracts can be traded for annuities
Annuities can be traded for annuities.
Accelerated Death Benefits
Allow part or all of the life insurance to be paid to a chronically or terminally ill policyholder before he or she dies.
What are the advantages of life insurance?
.
Automatic Premium Loan Provision
Allows you to automatically borrow from the cash value in your policy at the end of a grace period to pay your premiums.
Change-of-Plan Provision
Allows policyholder the ability to change their present policies for different contracts.
Common Accident Provision
If two or more persons are injured in the same accident the deductible applies only once. Some travel accident plans will also have a common accident provision that will pay out no more than a certain multiple if a certain number of employees are killed in a common accident.
Contestable Period
Time during which the contract can be challenged by an insurer. Except in cases of material fraud.
Contingent Beneficiaries Rights
Entitled to the proceeds if the primary beneficiary dies before the insured.
Conversion Period
.Time period in which an investor can exchange a convertible security for a common stock.
Dividend Options
participating policy
- cash
- reduced premium payment
- Accumulation of dividends
- . Apply to purchase of paid up whole life insurance
- Apply to purchase of term insurance in one year
- Convert policy to a paid-up contract
- Mature policy as an endowment
Double Indemnity Rider
.doubles the face amount of life insurance if death occurs as a result of an accident.
Entire Contract Clause
The life insurance policy and attached application constitutes the entire contract between the parties.
FREEDS
.Final expenses Readjustment fund Emergency fund Education fund Debt Special needs or Bequests
Grace Period
A period, usually 31 days, in which that policyholder has to pay an overdue premium during which the policy does not lapse.
Guaranteed Purchase Option
Gives policyholders the right to purchase additional amounts of life insurance at specified times in the future without evidence of insurability.
Incontestable Clause
The insurer cannot contest the policy after it has been in force for two years during the insured’s lifetime.
Life Insurance Company Rating Services
.Best: A++, A+, A
Fitch: AAA, AA+. AA, AA-
Moody’s: Aaa, Aa1, Aa2, Aa3
S&P: AAA, AA+, AA, AA-
Life Insurance Policy Persistency
.number of clients paying premium over number of net active clients
Life Settlement
A financial transaction in which the policyholder who no longer needs or wants to keep a life insurance policy sells the policy to a third party for more than its cash value.
Misstatement of Age Clause
If the insured’s age is misstated the amount payable is the amount premiums paid would have paid at the correct age.
Mortality Assumptions
.projection of expected death rates used by actuaries to estimate insurance premiums
Net Amount At Risk
The difference between the legal reserve and the face amount of the insurance.
Nonforfeiture Options
Cash value
Reduced paid-up insurance
Extended term insurance
Nonparticipating Policy
A policy that doesn’t pay dividends.
Ownership Clause
The policyholder possesses all contractual rights in the policy while the insured is living.
Ownership of a Life Insurance
Policyholder can:
- Name and change beneficiaries
- Surrender the policy for cash value
- Borrow the cash value
- Receive dividends
- Elect settlement options
Participating Policy
A policy that does pay dividends. Usually a mutual company.
Policy Illustrations
Can and should be used to demonstrate how a policy will react under different sets of circumstances.
3 scenarios- current, guaranteed, and mid-point
Principal Factors in Premium Calculations
- Policy lapse
- Difference between expected and actual mortality rates
- Difference between expected and actual expenses
- Return on Investments
Reinstatement Clause
Permits the owner to reinstate a lapsed policy within a given period of time, usually 3 to 5 years.
Survivorship Life Insurance
(Second to die life) - Insures two lives, usually husband and wife, pays out the death benefit on the death of the second insured. Used to pay federal estate taxes not usually incurred when the first spouse dies.
Whole Life Insurance
Cash value policy that provides lifetime protection
Term Insurance
A life insurance policy that covers a set number of years and has no savings component. Usually renewed.
Traditional Net Cost Indexes
Annual premiums for some time period are added together. Total expected dividends to be received and the cash value at the end of the period are subtracted from the total premiums to determine the net cost of life insurance.
Transfer for Value
If a policy has been transferred for a valuable consideration, only a portion of the death proceeds are exempt from income tax. The beneficiary is taxed at ordinary income rates on the death proceeds received, reduced by:
- the consideration paid for the policy
- any net premiums paid after the transfer.
Universal Life Insurance
A flexible premium policy that provides protection under a contract that unbundles the protection and savings components.
Variable Life Insurance
Fixed-Premium policy in which the death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer. Investment options chosen by the policyholder.
Variable Universal Life Insurance
Flexible premium policy in which the investor gets to choose how to invest the cash value. No guaranteed interest rate or minimum cash value.
Viatical Settlement
The sale of a life insurance policy by a terminally ill insured to another party typically investors or investor groups that hope to profit by the insured’s early death.
Waiting Period
.
Waiver-of-Premium Provision
If the insured becomes totally disabled due to bodily injury or disease before some stated age all premiums coming due during the period of disability are waived.
MEC
Modified Endowment Contract:
- Once a MEC always a MEC
- Seven Pay Test
Seven Pay Test:
When applied?
What is it?
When applied:
- To initially test all policies entered into after June 20, 1988.
- To retest all policies entered into after June 20, 1988, if the death benefit is reduced within the first seven contract years.
- To test or re-test any policy (regardless of date entered into) that undergoes a material change in future benefits after June 20, 1988
Definition - Examines he cumulative amount paid under a contract during the first seven policy years. This amount is compared to the sum of the net level premiums that would have been paid on a guaranteed seven-year pay whole life policy providing the same death benefit.
Policy surrender
Amount by which the lump sum amount received exceeds the policy owner’s investment in the contract is taxed as ordinary income.
Lump sum amount
(Investment in Contract)
= Taxable Gain
What are the characteristics of Term Life Insurance 3
- Provides temporary protection for the term of the policy
- If the insured dies with the term period, the insurance company pays the death benefit.
- If the insured survives the term period, the coverage terminates.
What are the characteristics of Cash Value Life Insurance 3
- Provides lifetime protection, so long as the policy is kept in force.
- The insurance pays the death benefit regardless of when death occurs, so long as the policy is kept in force.
- The policy accumulates cash values that can be used during the insured’s lifetime (withdraws and loans will reduce the policy’s death benefit and cash value available for use).
What are the characteristics of Renewable Term Insurance? 6
- Level Death Benefit
- Increasing Premiums, if renewed
- No cash values
- May have policy dividends
- Renewable, may be subject to medical qualifications.
- Best suited for level temporary needs.
What are the characteristics of Decreasing Term Insurance? 6
- Decreasing death benefit
- Level premiums
- No cash values
- May have policy dividends
- Best suited for decreasing needs that ultimately disappear.
What are three advantages of term insurance?
- Low initial premium
- Well suited to shorter-term, temporary needs
- Most plans can be renewed, if you are medically qualified
What are three disadvantages of term insurance?
- Premiums in future years may become prohibitively expensive.
- Insurance protection may cease before death.
- Does not build any cash values
What are the characteristics of Level Term Insurance? 6
- Level death benefit
- Level premiums for the duration of the selected term period
- Increasing premium, if renewed after the selected term period.
- No cash values
- May have policy dividends
- Best suited for level needs of a somewhat known duration.
What are the characteristics of Whole Life Insurance? 5
- Guaranteed level death benefit, so long as premiums are paid.
- Fixed, level premiums
- Guaranteed cash values
- May have policy dividends
- Best suited to satisfy the longer-term needs of policyowners who desire guarantees.
What are the four advantages of Whole Life Insurance?
- Guaranteed lifetime insurance protection, so long as the policy is kept in force
- Fixed premiums can help create the “savings habit”
- Cash values are guaranteed, so long as the policy is kept in force.
- May have policy dividends that can be used to reduce
What are the three disadvantages of Whole Life Insurance?
- No premium flexibility
- Guaranteed cash value growth may be less than could be achieved through one of the other types of cash value life insurance.
- Death benefit may not keep pace with inflation.
What are the characteristics of Universal Life Insurance?
- Premiums can be adjusted upward or downward
- Choice of level or increasing death benefit
- Cash Value growth based on stated fixed interest rate, which may vary over time, but which will never be less than a guaranteed minimum interest rate.
- Best suited to satisfy the longer-term needs of policyowners who want premium flexibility and cash accumulations that reflect current fixed interest rate returns, with a guaranteed minimum interest rate.
What are the three advantages of Universal Life Insurance?
- Lifetime Insurance Protection
- Premium and death benefit flexibility
- Cash value growth reflects current interest rates, with a minimum guarantee
What are the two disadvantages of Universal Life Insurance?
- Required premiums may increase as the insured gets older in order to maintain needed insurance protection.
- If current interest rates are low, cash value growth may be disappointing.
What are the four characteristics of Indexed Universal Life Insurance
- Premiums can be adjusted upward or downward
- Choice of level or increasing death benefit
- Cash value is credited with interest based on the performance of a stock market index, most frequently the Standard and Poor’s 500 Composite Stock Index (S&P 500 Index)
- Best suited to satisfy the longer-term needs of policyowners who want the opportunity to earn higher interest rates based on equity market performance, while retaining the other advantages of universal life, including a guaranteed minimum interest rate.
What are the three advantages of Indexed Universal Life Insurance?
- Lifetime insurance protection
- Premium and death benefit flexibility
- Cash value growth has the potential to earn higher interest rates when the equity markets are strong, while still earning a guaranteed minimum interest rate during downturns in the equity markets.
What are the two disadvantages of Indexed Universal Life Insurance?
- Lifetime insurance protection
- Premium and death benefit flexibility
- Cash value growth has the potential to earn higher interest rates when the equity markets are strong, while still earning a guaranteed minimum interest rate during downturns in the equity markets
What are the characteristics of
- Required premiums may increase as the insured gets older in other to maintain needed insurance protection.
- Cash value growth may be disappointed during a downturn in the equity markets.
What are the six characteristics of Variable Life Insurance?
- Minimum guaranteed death benefit
- Fixed, level premiums
- Policyowner selects sub-investment options.
- Cash value available depends on performance of investment options selected
- Potential for increasing death benefit, depending on performance of investment options selected.
- Best suited to satisfy the longer-term needs of policyowners who want a choice of investment options, together with fixed premiums and minimum death benefit guarantees
What are the five advantages of Variable Life Insurance?
- Guaranteed lifetime insurance protection
- Fixed premiums can help create the “savings habit”
- Policyholder can select from a variety of investment options.
- Investment flexibility may result in higher cash value accumulations and increasing death benefits, depending on actual investment performance.
- Positive investment performance may result in the death benefit keeping pace with inflation.
What are the three disadvantages of Variable Life Insurance?
- No premiums flexibility
- Cash values can decrease during times of poor market performance, possibly resulting in a loss principal.
- Policyowner assumes the investment risk.
Formula for determining Taxable Event
Premiums
Less: any extras in policy (waiver of premium, guaranteed options)
Less:Dividends paid in cash
=Total Invested
Cash Value
add: Cash value of PUA’s
add: Unpaid policy loans
=Total Gain
Gain
less: Invested
=Taxable Amount
