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LIFE INSURANCE (OFFICIAL LLQP) > Whole Life & T-100 (Chapter 3) > Flashcards

Whole Life & T-100 (Chapter 3) Flashcards

1
Q

Life Insurance Terminology

Cash Surrender Value (CSV)

A

The amount that the insurance company will pay to the policyholder if the policyholder surrenders the contract. A portion of the CSV will be taxable when received by the policyholder.

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2
Q

Life Insurance Terminology

The difference between Death Benefit & Face Amount

A
  • The face amount is the amount of money the insurance company agreed by contract to pay to beneficiaries after an insured person dies.
  • The death benefit amount includes the face amount, but it also includes add-ons, often called riders, that the policyholder included in the original contract.
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3
Q

REVIEW

Name at least 3 TYPES of TERM Insurance

A
  1. Level
  2. Decreasing
  3. Increasing
  4. Convertible
  5. Renewable
  6. Joint first & Last to die
  7. Term 10, 20 & 30.
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4
Q

REVIEW

When is a joint last-to-die appropriate?

A

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

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5
Q

REVIEW

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

A

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.

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6
Q

Life Insurance Terminology

Adjusted Cost Basis (ACB)

A
  • The amount of money invested.
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7
Q

Life Insurance Terminology

Contingent Beneficiary

A

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

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8
Q

Life Insurance Terminology

Irrevocable Beneficiary

A
  • A person or entity designated to receive the assets in a life insurance policy.
  • Their entitlements are guaranteed, and they often must approve any changes in the policy.
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9
Q

Chapter 3

Define Whole Life insurance policy

A
  • Provides lifetime coverage for the life insured
  • Premiums remain level over the duration.
  • Builds cash value that could be withdrawn.
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10
Q

Explain Permanent Insurance

A
  • Insurance policy that provides coverage over the entire lifetime of the life insured.
  • Doesn’t expire as long as premiums are paid.
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11
Q

3 TYPES of Permanent Insurance

A
  1. Whole Life
  2. Term-100 (T-100)
  3. Universal Life (UL)
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12
Q

Term-100

A
  • Provides lifetime coverage with a maturity date at age 100.
  • Premiums are no longer payable after age 100.
  • DOES NOT have Cash Surrender Value.
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13
Q

Universal Life

A
  • Provides lifetime coverage with a investment component.
  • Savings from excess premiums can accumulate tax sheltered funds.
  • Builds cash value and it’s known for flexibility.
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14
Q

TRUE OR FALSE?

Whole life policy does not expire but requires renewal, and can be cancelled by the life insurance company when policyholder withdraws the cash value.

A

FALSE

Whole life policy does not expire, does not require renewal, and cannot be cancelled by the life insurance company, other than for non-payment of premiums.

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15
Q

TRUE OR FALSE?

In a Whole Life policy, overpayment create policy reserves which the insurance company invests to achieve even more growth.

A

TRUE

Overpayment from premiums creates a policy reserve, which the insurance company invests to achieve even more growth.

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16
Q

FILL IN THE BLANK

Premiums for whole life insurance policies are based on _________ assumptions about mortality costs, expenses and investment returns.

a) Long-term
b) Short-term

A

Premiums for whole life insurance policies are based on LONG-TERM assumptions about mortality costs, expenses and investment returns

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17
Q

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

A
  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
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18
Q

FILL IN THE BLANK

Life insurance premiums in whole life are normally quoted on__________.

a) a Monthly Basis
b) an Annual Basis
c) Quarterly Schedules
d) Permanent Polices

A

Life insurance premiums in whole life are normally quoted on an annual basis.

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19
Q

Explain the Modal Factor

A

When the policyholder opts for monthly, quarterly or semi-annual payments on a term or whole life policy, the total amount paid over the year will always be higher than the quoted annual premium.

[Ref. Table 3.1]

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20
Q

How do you calculate the Modal Factor?

A

Annual Premium x Modal Factor (Semi-Annually, Quarterly, Monthly) = Monthly Premiums

[Ref. 3.2.3.4]

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21
Q

What are the premium options for Whole Life? (3)

A
  1. Ongoing premiums
  2. Single premium
  3. Limited payment
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22
Q

Ongoing Premiums

A

Paying a fixed premium for the duration of the contract.

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23
Q

Single Premium

A
  • Paying one single lump-sum premium for life insurance coverage that will last for the entire lifetime of the life insured.
  • Also known as a “Paid-up” Policy.
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24
Q

Limited Payment T-100

A

Policy with premiums payable for a specific period of time (10 or 20 years) or to a specific age ( 65 or age100). Policy then becomes “Paid-Up”.

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25
Q

What are two death benefit options for Whole Life?

A
  1. Guaranteed Whole Life
  2. Adjustable Whole Life
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26
Q

What are the differences between Guaranteed & Adjustable Whole Life Policies?

A
  • Guaranteed whole life insurance policy offers a death benefit and premiums that are guaranteed not to change over time.
  • Adjustable Whole Life Policy offers a death benefit and premiums that the
    insurance company may adjust periodically to reflect its actual experience.
27
Q

What are surpluses and how do they occur?

A

Surplus are excess funds that insurance company may acquire from investment returns, mortality rates & administrative expenses.

28
Q

What are the differences between Participating & Non-Participating Policies?

A
  • When policyholder opts for a non-participating policy, he will NOT benefit from the dividends and surpluses from the insurance company.
  • If policyholder opts for a participating policy, he WILL benefit from the dividends and surpluses from the insurance company.
29
Q

In a whole life policy, what are the 5 dividend payment options for Participating Policies?

A
  1. Cash
  2. Premium Reduction
  3. Accumulation
  4. Paid-Up Additions (PUAs)
  5. Term Insurance
30
Q

Explain the Cash Dividend Option

A

The insurance company will pay policy dividends to the policyholder in cash,
by either cheque or direct deposit.

31
Q

Explain Premium Reduction Option

A
  • The insurance company will apply the policy dividend to reduce the premiums payable for the coming year.
  • Also known as the Premium Offset option.
32
Q

Simplify the Accumulation Option

A

The insurance company deposits the dividends into a separate accumulation account (aka “side account”), which is
invested to provide additional growth.

33
Q

TRUE OR FALSE?

The policyholder cannot withdraw the policy dividends and accumulated investment income until policy matures.

A

FALSE.

The policyholder CAN withdraw the policy dividends and accumulated investment income at any time.

34
Q

TRUE OR FALSE?

Any funds left in the accumulation account on the death of the life insured are NOT paid to the beneficiary of the policy unless a withdrawal is made.

A

FALSE.

Any funds left in the accumulation account on the death of the life insured are typically PAID to the beneficiary of the policy.

35
Q

Explain the Paid-up Addition Option

A
  • Policy dividend is used as a single premium to buy additional whole life coverage that is paid-up. (Baby Policy with it’s own Death Benefit & CSV.)
  • Coverage increases without proof of insurability.
  • The amount of coverage depends on the size of the dividend.
36
Q

Explain the Term Insurance under the Dividend Payment Option.

A
  • Policy dividend is used as a single premium to buy one-year term insurance.
  • No proof of insurability required.
  • The amount of term insurance depends on the size of the dividend.
37
Q

What are the impacts on death benefits and cash values from the dividend payment options?

A
  • Paid-up additions may increase both the CSV and the death benefit.
  • The accumulation option may increase the death benefit (unless the policyholder withdraws all of the funds in the accumulation account).
  • The term insurance option may temporarily increase the death benefit (for the duration of the
    one-year term only).
38
Q

TRUE OR FALSE?

Agents should ensure that policyholders
understand that the results shown in the dividend illustrations are guaranteed projections of the investment account.

A

FALSE

Agents should ensure that policyholders
understand that the results shown in the dividend illustration are not actual projections, and that they do NOT represent guaranteed results.

39
Q

Simplify the meaning of a Non-Forfeiture Benefit

A

Benefits that the policyholder does not forfeit, even if he stops paying the premiums.

40
Q

FILL IN THE BLANK

Non-forfeiture benefits are made possible because of the buildup of the ______ in the policy.

a) Premiums
b) Dividends
c) Cash Surrender Value
d) Tax Implications

A

Non-forfeiture benefits are made possible because of the buildup of the Cash Surrender Value in the policy.

41
Q

What are the FOUR non-forfeiture Benefits in a Whole Life Policy?

A

(Easiest way to remember is “CARE”)

  1. C - Cash Surrender Value
  2. A - Automatic Premium Loan
  3. R - Reduced Paid-up Insurance
  4. E - Extended Term insurance
42
Q

Simplify Cash Surrender Value

A

A taxable portion of the policy that the insurance company will pay to the policyholder if the policyholder surrenders the contract.

43
Q

TRUE OR FALSE?

Surrender charges usually
decrease over time and are eventually ELIMINATED entirely.

A

TRUE

[Ref 3.5.1.1]

44
Q

FILL IN THE BLANK

When a policyholder owns a life insurance policy, he can usually obtain a policy loan from the insurance company of up to _____ of the policy’s CSV.

a) 100%
b) 50%
c) 80% tax free
d) 90%

A

When a policyholder owns a life insurance policy, he can usually obtain a policy loan from the insurance company of up to 90% of the policy’s CSV.

45
Q

FILL IN THE BLANK

If the policyholder surrenders the policy, after taking out a loan, the amount he would have otherwise received as the CSV will be reduced by _______________ of the loan.

a) Tax Implications
b) Outstanding Balance
c) Adjusted Cost Basis
d) Mortality Charges

A

If the policyholder surrenders the policy, the amount he would have otherwise received as the CSV will be reduced by the outstanding balance of the loan.

46
Q

Explain the Automatic Premium Loan (APL) under the non-forfeiture options.

A

If the policyholder fails to make a scheduled premium payment, the insurance company will automatically make a loan against the CSV for the amount of the missed premium to prevent the policy from lapsing.

47
Q

What is “Reduced-Paid Up Insurance” ?

A
  • Non-forfeiture option that allows the policyholder to stop paying premiums entirely, while still keeping some life insurance coverage in place for life.
  • Policyholder uses the CSV as a single premium to buy a reduced amount of paid-up life insurance coverage.
  • Proof of insurability is not required.
48
Q

Explain “Extended Term Insurance”

A
  • Non-forfeiture option that allows the policyholder to stop paying premiums entirely while keeping the same level of coverage in place in the form of a term insurance policy instead of a permanent policy.
  • The duration of the term depends on the CSV of the whole life policy.
49
Q

Simplify Limited Payment Whole Life

A

Non-forfeiture option that provides lifelong coverage, while only requiring premiums for a specified guaranteed period of time.

(Ex. Hamish bought a 25-pay life policy on his own life when he was 45 years old. He only has to pay premiums for 25 years, at which point he will be 70 years old. However, the coverage will continue be past age 70, right up until his death.)

50
Q

FILL IN THE BLANK

Premiums for a limited payment life policy will _________ than a whole life policy.

a) Be higher
b) Be lower
c) Endow quicker
d) Expire sooner

A
  • The premiums for a limited payment life policy will be HIGHER than a whole life policy.
  • This makes up for the fact that the coverage CONTINUES after
    payments cease.
51
Q

What are some benefits of a Limited Payment Life Policy

A
  • Policyholder knows exactly when the premiums will end.
  • It eliminates longevity risk, (the risk of living longer than anticipated or longer than average.)
52
Q

What are some ADVANTAGES of Whole Life Insurance?

A
  • Premiums are guaranteed for life.
  • Coverage continues for life, regardless of the age or health of the life insured
  • Participating whole life policies may result in policy dividends.
  • A whole life policy builds up a cash surrender value (CSV)
  • A whole life policy may offer non-forfeiture benefits
  • Policyholder may be able to obtain a policy loan against the CSV of the policy
53
Q

Name some DISADVANTAGES of Whole Life Insurance

A
  • High initial cost In the early years of the policy.
  • Policyholder has little or no choice over how the policy reserve is invested.
  • For participating whole life policies, policy dividends are not guaranteed.
  • The way the policy reserve is invested / managed is not entirely transparent to the public.
54
Q

When should you recommended a Whole Life Policy?

A
  • When taxes are expected to be due upon death.
  • For future insurability. (Lifetime protection at a guaranteed price)
55
Q

Simplify T-100 Life Insurance

A

Hybrid between term insurance and permanent insurance.

56
Q

What is the duration of coverage for
T-100 ?

A
  • Provides coverage for life.
  • Some T-100 Policies mature at age 100, (death benefit paid when the life insured reaches age 100 or dies, whichever comes first).
  • Some T-100 Policies only pay the death benefit when the life insured dies, but premiums cease at age 100.
57
Q

TRUE OR FALSE?

T-100 policies accumulate CSV, provide non-forfeiture benefits, with premiums more levelled compared to whole life.

A

FALSE

T-100 policies generally do not accumulate a CSV and do not provide non-forfeiture benefits, the premiums are typically lower than those for the same amount of regular whole life insurance.

58
Q

TRUE OR FALSE?

Because T-100 provides protection for life, premiums are higher than policies with the same amount of term insurance coverage.

A

TRUE

59
Q

What is the premium schedule for most T-100 Policies?

a) LCOI (Level cost of insurance)
b) YRT (Yearly Renewable Term

A
  • Most T-100 policies guarantee that the premiums will remain level for the duration of the contract and do not provide CSV and Non-forfeiture benefits.
  • The level premium schedule for this type of T-100 policy is referred to as level cost of insurance (LCOI)
60
Q

Limited Payment T-100 (Name some Key Points)

A
  • Coverage is provided for life, but premiums are only payable for a limited number of years (ex.10 or 20 years) or until a predetermined age (ex. 65)
  • Higher premiums than T-100
  • Premiums are held in reserve to help offset the higher costs of insurance as the life insured ages
  • Policy reserve generally results
    in a (CSV)
  • Limited payment T-100 policies may also offer the option for automatic premium loans (APL)
61
Q

FILL IN THE BLANK

The death benefit of a T-100 policy is _______ for the duration of the contract.

a) fixed
b) leveled
c) endowed
d) accumulated

A

The death benefit of a T-100 policy is fixed for the duration of the contract.

62
Q

What happens at age 100 of a T-100 policy ?

A
  • Death benefit on some policies will be paid to the beneficiary when the life insured turns 100.
  • Other policies specify that the payment of premiums ceases at age 100, but coverage continues until death.
63
Q

When is a T-100 recommended?

A
  • When policyholder requires a fixed amount of insurance to cover a need that is not expected to increase prior to death.
  • When policyholder is certain that he will never want to surrender the policy
  • When policyholder has no need of the investment opportunities provided by universal life (UL) insurance.

LIFE INSURANCE (OFFICIAL LLQP) (18 decks)

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