Flashcards on Life Insurance

Assignment by the policy owner of all control and rights to a third party.

A dividend or settlement option under which the policyholder allows his/her dividends or policy proceeds to accumulate interest with the company. Although the dividends or proceeds are not generally taxable, the interest earned i

is a type of permanent insurance. Coverage last until you die, or until you reach age 100. Premiums are owed annually. A Limited Pay Whole Life policy would have the cash value grow more quickly in the beginning years of the policy.

If most Term policies (except Decreasing Term) were not renewable, no one would buy them. This option allows the insured to renew the policy for another "term" without proving good health. Of course, the insured does not have to renew, it is at his option. Annual Renewable Term (ART) is a good example. It must be renewed every year. The rate goes up as the insured gets older, but no proof of good health is required. However, most Term policies are renewable only up to a certain age, usually age 60 or 65, depending on the company.

Variable Life has no guaranteed rate of return since its performance is tied to an underlying 'separate account', which is very similar to a mutual fund. However, variable life does have a minimum guaranteed death benefit, which will never be less than the amount of coverage initially purchased. A securities license is required

Whole Life and Term. Limited Pay Life policies, such as LP65 and 20-Pay Life, are variations of Whole Life (sometimes called Straight Life or Ordinary Life): the premium-paying period has been shortened, but the policy still does not mature until age 100.

If this question had not mentioned cash accumulation, the answer would have been Term. However, Term has no cash value, so the answer is Whole Life, which is the most inexpensive type of permanent insurance and is required to have a cash value after the third policy year. Although Limited Pay Life is a type of Whole Life, it is incorrect since it is usually quite expensive due to the shortened pay-in period. Annuities have no cash value except those monies the annuitant paid in. Since there is no death benefit, no protection is offered.

You can simply remember this truism: The shorter the premium-paying period, the more expensive the premiums and the faster the cash value builds. Since all the policies mentioned are forms of Whole Life, reaching their maturity at age 100, the only thing different is the premium-paying period. A 20-Pay Life requires that all the premiums be paid within 20 years from the day it is purchased. A Straight (or Ordinary) Whole Life policy requires the premiums to be paid to age 100. If Tom is now 30, the assumption is that he would have to pay premium to age 100, or 70 years. Obviously, 20-Pay Life, which would require the premiums to be paid in over three times as fast, would be much more expensive and would also build cash value much faster.

Variable Life has a fixed premium and a minimum guaranteed death benefit, but since it allows customers to self-direct their cash value into several non-guaranteed sub-accounts, it is considered to be a securities product which requires the producer to have both a state life insurance license and a federal securities license. Although Universal Life (also known as 'Interest-Sensitive' Whole Life) is not considered to be a security, it does offer 'current' rates of return, flexible premiums and adjustable death benefits. If you combine the two products, you have Variable/Universal Life, which offers the best features of both contracts.

An immediate annuity has no accumulation period. For example, if Aunt Mary died and left you 1 million dollars, you could buy an immediate annuity and start to receive monthly payments right away for as long as you may live. On a deferred annuity, you would pay money in now, but take it out later, perhaps at retirement. Immediate annuities are often used to fund state lottery payouts.

The protection portion of a Universal Life insurance policy is actually Term insurance. As a result, the cost of protection goes up gradually as the insured ages, which means that over a period of time, more of the premium paid will be allocated to the cost of mortality and less will be allocated to the cash value account. The flexible premium feature of a UL policy allows the insured to skip premiums as long as there is adequate cash value available to pay for the cost of insurance protection.

When an Annuity policy is in the Pay-Out period, it will pay the annuitant back all the monies the annuitant paid in, plus interest, over his lifetime. The principal amount is guaranteed and will be paid out as long as the annuitant lives. The amount paid is based upon the annuitant's expected life span, sex, and the annuity pay-out option selected. Annuity benefit payments to the annuitant are usually paid out monthly. Insurance companies offer Annuities to the beneficiaries of insureds who have died, enabling these beneficiaries to reinvest the policy proceeds with a high degree of safety and the guarantee of lifetime income.

Adjustable Whole Life insurance is sold to persons who have fluctuating incomes, such as stock brokers or real estate agents. It allows the insured to adjust the amount of the death benefit, the amount of the premium or even the type of coverage as their needs change. Increases in the death benefit may require the insured to pass a physical exam.

Variable Annuities are considered to be securities, since the insurer invests the customer's premiums in an underlying 'separate account', which is very similar to a mutual fund. Most mutual funds invest in common stock, which may keep up with the rate of inflation over a period of time, although rates of return may not be guaranteed.

Life insurance proceeds create an estate. Annuities are designed to liquidate an estate over a period of time with a high degree of safety. They are the opposite of Life insurance, in that you do not have to be in good health to buy one and they pay you as long as you live. All annuities are for the lifetime of the annuitant; they do not have a death benefit. You must have a life insurance license to sell Fixed Annuities, which have a guaranteed minimum rate of return. To sell Variable Annuities, you need both a life insurance license and a FINRA (NASD) securities licenses. Variable Annuities are backed by stocks. Interest, paid by insurance companies on Annuities, accumulates on a tax-deferred basis and is not taxable until the money is withdrawn.

The Insuring Clause states that coverage is provided in accordance with the terms of the policy. It includes the insurer's promise to pay covered claims and is located on the first page of the policy.

is a type of Health (also known as Disability) insurance that may be added to a Life policy for an additional premium. If the policy owner becomes totally disabled for a period of at least 6 months, the insurer will waive future premiums due until the policy owner recovers.

A Child Term Rider is the rider you would purchase to add Term coverage for a child to your existing Whole Life policy.

By adding the Payor Benefit Rider on a policy Grandma owns that covers the life of the child, the premium will be waived in the event of Grandma's death or total disability, keeping the grandchild's policy in force, until the grandchild reaches the age of majority. At the age of majority the policy becomes the responsibility of the grandchild.

The Other Insured Rider may be added to your Whole Life insurance policy at any time in order to provide Term Life coverage for a relative, such as a new spouse or child. Of course, the 'other' person would have to pass a physical exam and your premium would increase. This rider is often used to provide family coverage.

1) Cash; 2) Fixed Period (proceeds, plus interest, are all paid out over a fixed period of time, the client chooses the time period); 3) Fixed Amount (the beneficiary elects to receive a specific dollar amount monthly, for as long as the money lasts); 4) Interest (the proceeds are left with the company to accumulate additional interest), and 5) Life Annuity (paid as long as the Beneficiary/Annuitant lives).

A policy loan may be requested by the insured anytime there is a cash value present. Some companies do require that you leave a certain minimum amount in your cash value, so you cannot borrow it all. The maximum interest rate on policy loans varies by state law. However, your company may not charge an interest rate higher than the one stated in its policy initially. Loans do not have to be paid back while the insured is alive, since all loans plus overdue interest on them will be subtracted from policy proceeds in the event that the insured dies with a loan outstanding. Insurance companies may defer granting policy loans for up to 6 months, although they seldom do.

There are only three non-forfeiture options: Cash Surrender, Reduced Paid-Up, and the automatic option, Extended Term. Their purpose is to protect the insured's accumulated cash value in case the Whole Life policy lapses. A client has 60 days from the policy's premium due date to select the option she prefers. If none is selected, the company will give the client the automatic option, Extended Term. Here, the face amount of the new policy is the same as on the initial policy. The accumulated cash value is used internally by the company to pay the premium for a new Term policy at the insured's attained age. The policy term is however long that amount of money will buy. There is no cash value, and at the expiration of the term the policy expires and the insured has no further coverage. If the client selects the Reduced Paid-Up option, the company then uses all of the accumulated cash values to buy the client internally a new Whole Life policy paid up to age 100. It would have an immediate cash value, but no further premiums would ever be due. The face amount would be more than the accumulated cash value, but less than the original face amount of the initial policy, so it is called Reduced Paid-Up. Cash value would continue to accumulate, and at maturity (age 100) the cash value would equal the face amount. No physical exam is required. Of course, if the client takes Cash Surrender, there is no further coverage.

The Payor Provision (sometimes called Payor Waiver of Premium) is an optional provision (or rider) often added to a policy insuring the life of a minor. The adult (usually the parent) may become sick or disabled and become incapable of paying the premium. This rider will then pay the premium on behalf of the sick or disabled payor. However, it is exactly like the Waiver of Premium Rider you would see on your own Life insurance policy in that both riders have a 6-month "waiting period" before premiums are retroactively paid. Both riders cost extra and will automatically drop off at age 60 or 65 at which time the premium would be reduced. The extra premium for these riders must be shown separately from the premium charged for the Life insurance. None of the extra premium charge goes toward cash-value accumulation.

the insured specific option dates in the future to buy additional insurance, up to the original policy face amount, regardless of health at the insured's current age.

Most companies will offer the right to apply for Reinstatement up to 5 years after a policy has lapsed. Although the client may have the right to apply, the company does not have to take him. He must prove continued good health, pay back premiums plus interest, and any loans taken plus interest. The company has nothing to lose by offering Reinstatement. The client's only reasons to apply for Reinstatement, rather than applying for a new policy, are that, if accepted, his Reinstated policy would have his Original age and perhaps a lower interest rate on policy loans than a new policy may have.

Normally, it is the applicant who makes the offer to buy and it is the underwriter who accepts the risk when they issue the policy. However, when the underwriter makes a counteroffer, it is now up to the applicant to either accept it or reject it. Underwriters make counteroffers either in the form of 'rated' policies or by issuing a policy with an exclusion attached, such as for dangerous hobbies, occupations or health conditions.

The Fair Credit Reporting Act is a federal law that is designed to protect individuals who are being investigated by Consumer Reporting Agencies or Credit Bureaus. The law requires pre-notification of any possible investigation and post-notification if any adverse underwriting action is taken by the company as a result of the information received from a credit bureau. An applicant for insurance also has the right to request a copy of the credit report that the company obtained. However, this report may not be obtained directly from the insurance company, but only from the credit bureau that made the report. Remember, pre-notification must be IN WRITING, and when the applicant signs an application, this disclosure by the company that it may order an investigative type report is usually located right above the applicant's signature line.

You can assign (or transfer) your Life insurance policy to anyone you want, as long as that person has an insurable interest in you. For example, if you have a terminal illness, you can sell your policy to an investor for cash (known as a 'viatical settlement'). You would then assign the ownership of your policy to the investor, who would now have an economic insurable interest in you. As the new owner of your policy, the investor would then name themselves as beneficiary, so when you die, the proceeds would go to them. On Life insurance, insurable interest must exist at the time of application, but not necessarily at the time of loss. For example, you buy a policy to cover your spouse, naming yourself as beneficiary. If you get divorced, the policy is still valid, even though you no longer have an insurable interest in your ex-spouse. Further, a beneficiary need not have an insurable interest in order to collect proceeds. Remember, you can name any one you want as beneficiary.

The Consideration Clause states, "In consideration of the premium paid and the statements and answers contained herein, I hereby apply for Life Insurance with .......". The Incontestability Clause states that the insurance company may not contest a claim for any reason after the policy has been in force for two consecutive years. The Subrogation Clause has to do with Liability insurance and the Co-Insurance Clause has to do with Major Medical (Health) insurance.

Tax qualified retirement plans receive special tax treatment from the IRS. However, a Split Dollar plan, where an employer helps a valued employee buy Whole Life insurance by splitting the cost, is considered to be a non-qualified plan, meaning that no special tax treatment applies.

When a business partner dies, his share of the business often is left to his surviving spouse, who may know little about the business. The surviving business partner now has a new partner, one who may be more of a liability than an asset. To solve this problem, partners often enter into "Buy-sell Agreements" funded by individual Life insurance policies. For example, Mr. Adams and Ms. Brock are partners (see figure that follows). They value their business interests at $50,000 each. Each buys a $50,000 Life insurance policy on the other, and they name themselves as beneficiaries. Their spouses mutually agree that if either partner dies, the spouse of the deceased will sell that partner's interest in the business to the survivor in return for the $50,000 in Life insurance. Mr. Adams dies. His Life insurance proceeds go to his beneficiary, Ms. Brock. Ms. Brock uses the money to buy that portion of the business that is now owned by Mrs. Adams, who has previously agreed to sell it to Ms. Brock for $50,000. Ms. Brock then becomes the sole owner and Mrs. Adams is paid off. Buy-sell agreements should be drafted by lawyers, not insurance producers! Adams & Brock Co. ownership: Mr. Adams 50% Ms. Brock 50% Insurance policies owned by: Adams on Brock $50,000 Brock on Adams $50,000 Adams dies, ownership now: Mrs. Adams 50% Ms. Brock 50% Insurance proceeds: To Ms. Brock, as beneficiary of policy on Mr. Adams $50,000 Ms. Brock buys out Mrs. Adams, ownership now: Ms. Brock 100% Recipient of Ms. Brock's insurance funds: Mrs. Adams $50,000

Participating Life insurance policies sold by mutual insurers often pay dividends, although they may not be guaranteed. If a dividend is declared, the policy owner may choose from several dividend options. Although cash dividends received are not taxable, if the policy owner elects to leave the dividend with the insurer to earn interest, the interest paid on the dividend is taxable as ordinary income.

Although you may not be the insured, you can still be the policy owner. If you buy a policy on your minor child, you own the policy and your child is the insured. You control the cash values and may designate the beneficiary. This is called the Ownership provision. At a certain age, say your child's age 25, you may assign your ownership of the policy to your child, giving up all rights to the policy. This is called an Absolute Assignment.

ONLY II Representations are the answers given by the applicant on the application for insurance. They are the truth to the best of the applicant's knowledge. In Life insurance, a misrepresentation can void the coverage during the first 2 years of the policy under the terms of the Incontestability Clause IF it is "material." Lying about your middle name would be immaterial, but lying about your health is material. Warranties are never required of an applicant. By definition, however, a warranty is a sworn statement of truth.

Accidental Death Benefit (ADB, or Double Indemnity) is a rider that may be attached to any Life insurance policy by paying an extra charge. It pays double only in the event of accidental death. Death must occur within 90 days of the accident, or it is termed to be natural causes and the company will only pay single indemnity. As with most riders, the ADB rider automatically drops off of most policies by age 60 or 65, since the chance of accidental death has increased dramatically. Of course, the extra premium charged for the rider also drops off.

Neither The premium paid for any annuity is the amount the annuitant agrees to pay in, either as a lump sum at purchase or over a period of time. Since Annuities are not Life insurance, and there is no Death benefit, the company does not care about the annuitant's health, occupation or dangerous hobbies. None of those figure into the premium paid. The premium for a $10,000 Annuity is $10,000. If the annuitants are buying a Joint and Survivor Annuity, which pays them until the death of the last survivor, the pay-out would be based upon the ages and expected life spans of the annuitants and on their sexes, since women still live longer than men.

An Annuity will pay the annuitant as long as they live. The funds are paid out to the living policyholder, not the beneficiary. Most Annuities do not have a beneficiary, except during the Pay-In period. Remember, on a Straight Life or Pure Life annuity, the company pays you as long as you live, but if you die, the company keeps the money.

Long-term Disability Remember, with the Accelerated Death Benefit (also known as the Living Benefits Rider), the insured gets an advance of the face amount in the event of a terminal illness. This money must be used for the illness. So, of the choices, long-term Disability makes the least sense.

Automatic Premium Loan (APL) is a rider that may be attached to Whole Life policies, but never to Term policies. It must be elected by the policyholder, even though it is usually free. The purpose of the rider is to keep the policy in force if the insured forgets to pay the premium. The policy, with this rider attached, would automatically borrow from itself to pay the overdue premium, therefore avoiding lapse. Of course, the policy would have to have a cash value before such a "loan" could be taken. Also, all loans must be subtracted from policy proceeds (plus interest on the loan) in the event of the insured's death, so benefits will be reduced. Whole Life policies are required to have a cash value no later than the end of the 3rd full year.

Insured's personal or business credit Collateral Assignments, in which the insured pledges his policy to the bank as collateral for a bank loan, are very common. When the loan is paid off, the Collateral Assignment drops off. A Collateral Assignment assures the bank that if the insured dies with the loan outstanding, the bank will be paid.

It applies to consumer reports ordered in relation to credit, insurance or employment If adverse action is taken as a result of a report, the customer must be informed of the source of the report If adverse action is taken as a result of a report, the customer must be informed of the specific reason for such action Under the Fair Credit Reporting Act, when adverse action (such as rejection of insurance) is taken, the applicant must be informed of the specific reason and the source of the consumer (or credit) report. Although the applicant can obtain a copy of the report from the credit reporting agency, neither the producer nor the insurer has to give the applicant a copy of the report.

Only I There are two types of assignment - Absolute and Collateral. An Absolute assignment is made when the parent, who bought a Life insurance policy on a minor child years ago, elects to "assign" all interests in the policy to the child, who is now old enough to pay his own premium. Under the terms of a Collateral assignment, the insured's policy may be assigned to a bank or other financial institution as collateral for a loan. When the insured pays off the loan, the Collateral assignment is removed. Of course, in order for either type of assignment to be valid, it would have to be on file at the insurance company's home office, otherwise how would the company know about it?

ONLY I Remember, all Annuities are for life. This one also has a 10-year Period Certain, which means that if the annuitant dies after five years, someone else will get the remaining five years. Had she died after the tenth year, no one would get anything, since the insurance company would be entitled to keep the funds. However, if she lives for 50 more years, the insurance company is obligated to continue payments the entire time.

I ONLY Most Level Term policies are renewable, because if they were not, no one would buy them. The best example is 10-year Level Term. Here the company simply uses an "average rate" over the 10-year period, so it would have been cheaper for the client to buy Annual Renewal Term (ART) for the first four years of the contract and more expensive to buy ART after the fifth year of the contract. Renewals of Term Insurance are permitted without proof of good health and are always at the insured's current (attained) age. However, Term policies are only renewable up to a certain age, usually age 60 or 65. After that point, the insurance company does not want to renew your coverage since the chance of death has greatly increased. In the 10-year Level Term example above, the insured is going to get a huge rate jump in the eleventh year, since the renewal will be offered using the average rate for the next 10 years. This is why the lapse ratio on Term insurance is so high. Remember, most Level Term is both renewable and convertible, but it is not required to be. Read the policy language to be sure that it is.

II ONLY The Incontestability Clause covers a two-year period during which the insurance company may "contest" a Life insurance claim based upon material misrepresentations contained in the application. Even if the policy purchased is Annual Renewable Term (ART), the Incontestability Clause only covers the first 2 years the policy is continuously in force. The clause does not repeat upon renewal. It does repeat upon reinstatement, however. The purpose of this clause is to protect the insurance company during the first 2 years of the policy from those who lie. Thereafter, it protects insureds, who no longer have to worry about misrepresentation voiding their coverage.

The Face Amount Although the premium remains the same each year on Decreasing Term insurance, the face amount decreases, usually in a straight line each year. So, if you bought a 20-year Decreasing Term policy, after 10 years your face amount would be reduced by half. However, since the premium remains the same, you could say the price of your insurance had doubled! Decreasing Term has no cash value. It is usually convertible, but not renewable.

The Fair Credit Reporting Act is a federal law, that is designed to protect applicants from unfair investigative reporting. It requires that an investigative reporting agency have the applicant's written consent prior to ordering a report (pre-notification) and it also requires that in the event adverse underwriting action is taken based on the information found in this report, the applicant has the right to obtain a copy of the report from the reporting agency involved (post-notification).

Social Security is a type of social insurance. Social Security actually covers Old Age (retirement), Survivors Benefits, Health Insurance (Medicare), and Disability Income insurance. There is a lump-sum death benefit, but it is only $255.00. Since Social Security benefits are tied to the Consumer Price Index, the amounts of monthly benefits will usually go up over a period of time.

The question asks what type of policy has a guaranteed cash value, so right of the bat you know it can't be Term, since Term has no cash value. It also can't be Variable Life, since in Variable Life the cash value goes into the separate account, which acts like a mutual fund and invests in the stock market, and there is no guarantee in the stock market. So you are left to choose between Universal Life and Straight Whole Life. In a Universal Life policy the face amount (death benefit option A) is made up of Term insurance. The cash value in Universal Life has a current rate that is guaranteed for 1 year only. It also has a minimum guaranteed interest rate (around 4%). The only way the cash value is going to pay out is if the insured has selected, and paid extra, for death benefit option B. So that leaves you with, Straight Whole Life. In Straight Whole Life the premium is fixed, based upon your original age, gender, health, hobbies and occupation when you purchased the policy. The premium never changes. Straight means that the premium is payable from the original age until death or age 100, whichever happens first. The premium goes into the insurance company's general account, which has a minimum guaranteed interest rate (4%). So as the insured you know exactly what the cash value will be at each specific age when you purchase Straight Whole Life.

Remember, Universal Life is tied to interest rates. If interest rates where to drop dramatically, the insured may be asked to pay in more in premiums.

B. Interest Option Don't be tricked by this question. Just because the wife wants to get money monthly, don't pick the wrong answer. The key to this question is that the husband wants his policy face amount to be paid to his kids after the death of his wife. She can get some monthly income in the meanwhile. The only payout option that preserves the face amount of the policy until some point in the future is to choose the interest option. The interest on the face amount is paid out monthly to the wife, and the interest is taxable. When she dies, the kids will get the face amount of the father's policy. Anytime you choose fixed period or fixed amount you begin liquidating the policy's face amount right away, which is not what the client wanted in this question.

C. Mode of Payment Provision The more often an insured pays the premium, the more expensive it is because the insurer will charge service fees for handling the premium payment. How often the insured pays the premium is found in the Mode of Payment section of the policy.

Internal Revenue Code 403b describes the TSA (Tax Sheltered Annuity) that is available for public school employees, including teachers. It is a type of qualified plan.

C. Distributions must begin at age 65 1/2 On a Traditional IRA, distributions must begin by no later than April 1st of the year after you turn 70 1/2. If you don't begin distribution you will be subject to an IRS penalty of 50% of the required minimum distribution amount.

C. When the cash value is used to pay the premium, a loan is created On a Universal Life policy, so long as the premium associated with death benefit Option A, the Term Insurance side of the equation pays the full face amount. Anytime the insured would like to debit the cash value to pay the premium, they may, this is not a loan. There are two death benefit options, A and B. If the cash value grows too quickly, the policy becomes a MEC (Modified Endowment Contract), which is a tax category created by the IRS, where the insurance policy loses its tax benefits.

B$3,000 The USA PATRIOT Act requires that a currency transaction report be filed with FinCEN for each wire financial transaction over $3,000. If the question did not specifically mention "wire transaction", the best answer in that case would have been $10,000.