Unit 3 Basics of Life Insurance

Question 1

____ ownership refers to a situation where the owner of a life insurance policy is someone other than the insured.

Answer 1

Third-party ownership

Question 2

To have a policy issued on someone else’s life, the applicant must have an ____ interest in that person. This means that the person applying for the policy must be at risk of suffering a significant loss is the insured dies. The loss may be either ____ or ____.

Answer 2

Insurable interest
Emotional - based on love and affection
Economic - based on financial dependency

Question 3

Is there an insurable interest among lenders and debtors?

Answer 3

Yes - economic

Question 4

With life insurance, when is an insurable interest required?

Answer 4

At the time of applcation

Question 5

A individual’s ____ are the assets they leave behind at death

Answer 5

Estate

Question 6

____ refers to how easily an asset can be turned into cash without loss of value. Examples of liquid assets are:
- checking and savings accounts
- life insurance proceeds

Answer 6

Liquidity

Question 7

Permanent life insurance policies have a cash value component that grows over time. The life insurance cash value is called the policies ____.

Answer 7

Living benefits

Question 8

According to the principle of ____, the purpose of life insurance is to replace an individual’s economic value and the calculation is:

the amount of the individual’s annual income X the number of years until retirement

Answer 8

Human life value

Question 9

The ____ is similar to the human life value approach and is used to find the amount of insurance coverage an individual should buy. Instead of focusing on income, this approach looks at the financial situation the survivors will face if the individual dies. This approach is much more detailed than the human life value approach and it results in a more accurate number. This approach is more commonly used.

Survivor’s financial needs fall into 2 categories:
- cash needs
- ____

Answer 9

Needs approach

Income needs

Question 10

____ are those that can be met with a lump sum of money. This includes:
- final expenses - funeral/burial costs and final medical bills
- debt payoff - mortgage, credit cards, car loans, installment loans
- children’s education - fund to pay for future college
- emergency fund - unexpected expenses that can cause hardship

Answer 10

Cash needs

Question 11

____ are those created by ongoing living expenses such as food, clothing, utilities, and a mortgage. Three periods:
1. ____ - during this period the surviving children are too young to support themselves and depend on the surviving parent
2. ____ - at this point the children have grown up and become self-supporting, but the surviving spouse has not yet reached retirement age
3. ____ - now the surviving spouse is no longer earning an income

Answer 11

Income Needs
Family Dependency
Preretirement
Retirement

Question 12

Social Security pays survivor benefits during the family dependency and retirement periods. However during the preretirement period, often called the ____ period, payments are suspended.

Answer 12

Blackout Period

Question 13

The Social Security Administration provides benefits for surviving spouses with children under age ____. When the youngest child turns ____, benefits stop and do not resume until the surviving spouse turns ____.

Answer 13

16, 16, 60

Question 14

____ agreements provide for the sale of a business interest at the death or disability of an owner. They are often referred to as ____ plans.

Answer 14

Buy-sell agreements

Business continuation plans

Question 15

Can buy-sell agreements be funded with life insurance?

Answer 15

Yes

Question 16

Buy-sell agreements: Under an ____ plan, the purchaser of a deceased owner’s business interest is the business entity itself. When funded by life insurance, the business entity owns a policy on the life of each business owner. If the business is a corporation, these plans are often called ____ plans because the corporation is actually redeeming the deceased owner’s stock. The term for this plan is usually used with non-incorporated businesses such as partnerships.

Answer 16

Entity Plan

Stock-Redemption Plans

Question 17

Buy-sell agreements: Under a ____ plan, the surviving owners purchase the deceased owner’s interest in the business. When funded by life insurance, each partner (or shareholder, if the business is a corporation) owns a policy on the lives of each of the other partners. If there are more than two partners or shareholders, many more policies are needed for this type of plan vs the entity plan.

Answer 17

Cross-purchase plan

Question 18

Just as a family depends on the financial contribution of an income-earner, a business may depend on a particular employee whose contribution is key to its success. Businesses can protect themselves against the financial harm that would result from the death of such an employee with ____ coverage.

Answer 18

Key person coverage

Question 19

Rather than giving a yearly bonus to an employee in cash, companies can use the money to buy a life insurance policy for the employee. Under an ____ plan, a business pays the premiums on a life insurance policy which the employee owns. During life, the employee has full access to the policy’s living benefits, and at death the proceeds are paid to the beneficiary named by the employee.

Answer 19

Executive bonus plan

Question 20

An executive bonus plan, or ____ plan, is a nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee. The bonus is tax-deductible to the employer as a salary expense. The employee uses the bonus to pay the premiums on a life insurance poicy covering their life. The employee is the owner of the policy, and the bonus is included in the employee’s gross income. When the employee dies the beneficiary named in the policy receives the death proceeds free of income tax.

Answer 20

Section 162 plan

Question 21

Under a ____ plan, an employer agrees to pay an employee a stated amount of income beginning at retirement rather than paying the money now. This benefits the employee because the money is not taxable until the employee actually receives it. If the money were paid now, it would be included with the employee’s current earnings and probably taxed at a higher rate. After retirement, the employee may be in a lower tax bracket.

Answer 21

Deferred compensation plan

Question 22

Deferred Compensation Plan: …In return, the employee agrees to work for the employer until a specified future date - typically at retirement. The deferred compensation benefits are ____ if the employee leaves the company before then. This benefits the employer by helping to assure that a valuable employee continues to contribute to the company’s success and does not leave to work for a competitor or start a competing business of his or her own.

Answer 22

Forfeited

Question 23

Deferred Compensation Plan: …If the employee dies before retirement, the deferred compensation benefits become payable immediately to the employee’s ____. Companies often buy a life insurance policy to make sure they will have the money to pay those benefits if that happens. If the policy is ____, the cash values can be used to help pay the deferred compensation benefits to the employee if they live to retirement.

Answer 23

Surviving spouse or other beneficiary

Permanent insurance

Question 24

____ is a single contract that covers an entire group of people. Typically, the policyowner is an employer and the policy covers the employees or members of the group.

Answer 24

Group life insurance

Question 25

Does term life insurance have increasing or decreasing premiums?

Answer 25

Increasing

Question 26

Does term life insurance have living and death benefits?

Answer 26

Death benefit only

Question 27

True or false: term life insurance cannot be renewed or extended after a certain age.

Answer 27

True

Question 28

Participating VS nonparticipating life insurance policies - which may pay dividends to the policyowner?

Answer 28

Participating

Question 29

Participating VS nonparticipating life insurance policies - which has the higher premium?

Answer 29

Participating

Question 30

Participating VS nonparticipating life insurance policies - which can only be issued by stock insurers?

Answer 30

Nonparticipating

Question 31

Fixed VS variable life insurance policies - which has a guaranteed cash value?

Answer 31

Fixed

Question 32

Fixed VS variable life insurance policies - which has its value expressed in investment units?

Answer 32

Variable

Question 33

____ insurance was developed as a way for people of limited means to obtain some of the benefits of life insurance. The face amounts are usually very small - $2k or less - and are often bought simply to help pay burial expenses. A distinct characteristic of these policies is that the premiums come due weekly and are collected in person by producers who go door to door.

Answer 33

Industrial life insurance

Question 34

A variation on industrail life insurance is known as ____. These policies are somewhat larger in size, typically ranging from 10k - 25k in face value. Policyowners are encouraged to pay the premiums through an automatic bank draft (often called a MONTHLY DEBIT PLAN) or by mail, so that producers do not have to collect them personally.

Answer 34

Home service life insurance

Question 35

Three elements go into the calculation of insurance premiums:
1. ____ - the relative frequency of deaths in a specific population; death rate.
2. ____ - earnings on premium dollars between the time they are collected and the time they are paid out as claims.
3. ____ - insurer operating costs, referred to as the expense load. Adding the expense element to insurance premiums is called loading.

Answer 35

1. Mortality
2. Interest
3. Expenses

Question 36

____ = mortality - interest

Answer 36

Net premium

Question 37

____ = mortality - interest + expenses

Answer 37

Gross premium

Question 38

Gross premium is the net premium plus the expense element, referred to as the ____ premium. The gross annual premium is the amount a policyowner pays for a policy.

Answer 38

Loaded premium

Question 39

True or false: premiums will be higher if not paid annually.

Answer 39

True