Chapter 2
Excess interest
refers to the difference between the interest rate guaranteed by the insurance contract and the actual interest rate paid on the proceeds by the insurance company
Children's term
allows children of insureds (natural adopted or stepchildren) to be added to coverage fr a limited period of time for a specific amount.
both the fixed-period and fixed amount settlement options
both guarantee that the principal and interest will be fully paid out
Trusts
commonly established for minors, or to create a scholorship fund
Conversion/ Change of plan
converts the term policy to a cash value permanent policy
Grace Period
the period of time after the premium due date that the policyowner has to pay the premium before the policy lapses (30-31 days) To protect the policyholder against an unintentional lapse of policy
Riders
written modifications attached to a policy that provide benefits not found in the original policy. Some can cause DB to go up or down
Accessing Cash Value:
*Automatic Premium Loan *Cash Loan *Fixed Interest Rate *Partial Surrender *Variable Interest Rate *Withdrawal
Settlement Options:
*Cash *Life Income *Interest Only *Fixed Period *Fixed Amount
Policy Loans, Withdrawals and Partial Surrenders
*Cash Loans- available in cash value policies *Automatic Premium Loans- prevent unintentional policy lapse due to nonpayment of premium *Withdrawals and partial surrenders- available in Universal Life; a charge may apply
Policy Premiums:
*Expense Charge *Flexible Premium *Level Premium *Loading *Mode *Mortality
Life income
-Straight Life *Income to beneficiary based upon life expectancy *Guaranteed for life *Payments stop upon death of beneficiary
Policyowner
-has the responsibility of paying the policy premiums, and is also the person who must have an insurable interest in the insured at the time of application for the insurance.
Cash Payment
lump sum option that states the death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums
irrivocable
may NOT be changed with out the written consent of the beneficiary
Revocable
may change at anytime with out the consent or knowledge of the beneficiary
Joint and Survivor
payment to two or more annuitants and if one dies, the other still gets payments
Accidental Death and Dismemberment INCREASE AD&D
pays the principal (face amount)
Options
policy owners have decisions to make about how the cash value in the policy should be invested, the choices are categorized as NONFORFETURE OPTIONS DIVIDEND OPTIONS and SETTLEMENT OPTIONS
Common Disaster Claus when added to a policy:
provides that if the insured and the primary Beneficiary dies in a common disaster, it is presumed that the primary beneficiary died first, so the proceeds will be paid to either the contingent beneficiary or to the insured estate, if no contingent beneficiary is designated. Most insurers specify a certain time period of time 14-30 days
Methods of changing the beneficiary
recording or filing method OR endorsement method- the policy owner is requires to send the request for change with the contract to the home office of the insurer
Premium Determination
*3 key factors for life insurance: mortality, interest, and expense *Mode- the more frequently premium is paid, the higher the premium
Guaranteed insurability rider
*Allows insured to purchase additional amounts of insurance without proving insurability at specified events *The insured may purchase additional coverage at the attained age *It usually expires at the insured's age 40
Life Policy Provisions:
*Assignment *Conversion/Change of Plan *Entire Contract *Free Look (right to examine) *Grace Period *Incontestability *Insuring Clause *Misstatement of Age *Modifications *Ownership *Payment of Premium *Reinstatement *Exclusions
Classes
A class of beneficiary is using a designation such as"my children"
Effect nonpayment
A policy may be terminated because of nonpayment of premiums. This is known as a lapsed policy. after 30-31 days
Insuring Agreement/Clause
A promise to pay/ legal contract
Installments for a fixed amount option has no life contingencies
A specific amount of benefits will be paid until funds are exhausted whether or not the annuitant is living.
Entire Contract
Provision stipulates that the policy and a copy of the application, along with any riders or amendments, constitues the entire contract.
Pure life annuity settlement option-
Pure Life provides payments for as long as the annuitant is alive
The insured pays $1,200 annually for her life insurance premium. This year she has accumulate $175 worth of dividends, which she applies to her next premium, thus reducing it to $1,025 What dividend option has the insured chosen?
Reduction of premium
Waiver of monthly deductions
Rider pays all monthly deductions while the insured is disabled, after a 6-month waiting period.
Provisions state the rights and obligations under the contract;
Riders modify provisions, and options specify ways to distribute policy proceeds.
Disability Riders
Some provide benefits in the event of the insured disability
Your client is planning to retire. She has $100,000 in a retirement annuity, and now wants to select the benefit option that will pay the largest monthly amount for as long as she lives. What would you reccomend?
Straight Life- the annuity payments cease at death. However, because there are no other guarantees that might incur additional charges, this option provides the highest monthly benefits for an individual annuitant.
In a fixed annuity, what is true regarding the guaranteed interest rate on the investment?
The annuitant will recieve the higher of either the guaranteed minimum rate or current rate
Equity Indexed Annuity
The annuity that has a guaranteed minimum interest rate and allows the annuitant to invest money in an index (i.e.: S&P 500). The investments grow as the index grows.
Assignment
Transfer of ownership rights
Because of an injury, an insured has been unable to work for 7 month. He wasn't able to pay his life insurance policy premium, yet the policy remained in force. The policy includes
Waiver of premium rider
Exclusions "WASH"
War Aviation Suicide Hazardous occupation or hobby
WASH
War aviation suicide hobbies
Common Disaster clause
When insured and primary die at the same time, it is assumed that the primary died first
Incontestability
can incontest within 2 years
Waiver Premium
rider waves the premium for the policy if the insured becomes totally disabled. Coverage remains in force until the insured is able to return to work. If never able to return to work, the premiums will continue to be waivedby the insurance company. most insures impose a 6mo waiting period
Single Life
single beneficiary income for rest of his/her life
succession
the beneficiary designation provides for levels of priority or choice.
Principal amount
the face value of the policy; the original amount invested before the earnings
An agent selling variable annuities must be registered with
FINRA
A spouse receives $5,000 a month until the principal and interest on her husbands life insurance policy have been paid out. Which settlement option did this beneficiary choose?
Fixed amount
What feature allows an insurance policy to remain in force for a specific number of days beyond the premium due date?
Grace period provision 30-31 days
Life with Period Certain
Guaranteed income for annuitants lifetime; and if the annuitant dies before the period certain has expired, the policy pays the beneficiary in periodic installments until the end of the designated period
Ownership
Has exclusive rights only
Premium Payment Mode
How often the premium is paid; monthly, quarterly, semi-annual, annually
Estates
If no beneficiary is named, policy proceeds go to the insureds estate
Misstatement of age or gender
If the age and/or gender of the insured have been misstated in a policy, all benefits under the policy will be provided based upon the insured's correct age and/or gender according to the premium scale in effect at the time the policy was issued. An insurer can refund any overpaid premiums if the amount of premium paid was greater than should have been paid. The insurer can reduce the face amount in cases where the amount of premium paid was less than that which should have been paid. For example, if the premium amount paid for the policy was 50% less than what should have been paid, then the death benefit will be reduced by 50%. There is no time limit for discovery, and this provision never cancels or voids a policy. The incontestability clause does not apply. Age and/or gender are not considered material to the policy issuance.
What term refers to the transfer of some or all of the ownership rights of a life insurance policy from one individual to another?
Assignment
Dividend Options:
CRAP-O *Cash options * reduced prem, *Accumulate at Int. *Paid-up Additions *One Year Term
Dividend Options
CRAP-O Cash options, reduced prem, Accumulate at Int., Paid-up Additions, One Year Term NOT TAXABLE,
interset rate
Can either be FIXED INTEREST or VARIABLE. Fixed interest rate is usually a set percentage every year, will not change during the policy period VARIABLE INTEREST RATE; will fluctuate based on changes in an underlying interest rate
Nonforfeiture Options
Cash surrender value Extended term Reduced paid-up insurance
Automatic Premium Loans
Commonly added to policies with cash value at no extra charge This type of loans prevents the unintentional lapse of the policy due to nonpayment of premium At the end of the grace period, a loan is automatically taken from the cash value to pay the policy premium If the insured dies, the insurer will subtract the loan plus interest from the proceeds Normal policy loans can be deferred for up to 6 months; loan request for payment of premium must be honored immediately
Fixed annuities provide all-
Minimum guaranteed rate of interest, future income payments, equal monthly payments for life
Accidental death rider DECREASE
NOT TAXABLE, early payout death claim, death must occur within 90 days of an accident
When a death claim is submitted, the insurer discovered that the insured understated her age on the application for a policy. What action will the insurer take?
Pay a reduced death benefit based on the insureds age
In order to reinstate a life insurance policy the insured must do all of the following;
Pay back premiums pay any interest due on back premiums Repay any outstanding loans and interest
payor benefit ;ife/ disability (juvenile insurance)
Payor benefit - primarily used w/ juvenile policies (any life insurance written on the life of a minor)
Absolute Assignment
Permanent- involves transferring ALL Rights of ownership to another person or entity
Guaranteed Insurability
- Allows insured to purchase additional coverage every 3 years - rider usually expires at age 40
Suicide Provision
- This is designed to protect the insurance carrier. - A two-year period of time in which the policy's death benefit will not be paid if the insured commits suicide.
What is true about the mandatory free look period in a life insurance policy?
It begins when the policy is DELIVERED
Under what circumstance will the contingent beneficiary receive the death benefit
If the primary beneficiary dies before the insured
A life insurance policy clause that prevents an insurance company from denying payment of a death claim after a specified period of time is known as the
Incontestability clause
Collateral Assignment
Involves a transfer of PARTIAL RIGHTS to another person
Policy Loan and withdrawals
Policy loan- is found only in policies that contain cash value. The policy owner is entitled to borrow an amount equal to the available cash value. the insurer must provide 30 days written notice to the policyowner that the policy is going to lapse. Insurance companies may defer a policy for up to 6mo unless the reason for the loan is to pay the policy premium. WHOLE LIFE
A characteristic of a revocable beneficiary designation
Policy owner can change beneficiary anytime without consent of beneficiary
Settlement Options
The five ways that the proceeds of a policy can be paid upon maturity. (1) Cash (2) Interest Only (3) Fixed Period (4) Fixed Amount (5) Life Income CLIFF DEATH HAS OCCURED,
When a fixed annuity owner pays a monthly annuity to the insurance company, where is the money placed?
The insurance company's general account
Right to Examine (free Look)
This provision allows the policyowners 10 days from the receipt to look over the policyand if dissatisfied for any reason, return it for a full refund of premium. The FREE LOOK period starts when the policyowner recieves the policy
Nonforfeiture options
Three options available by law to policyowners that enable them to recover a policy's cash-value upon surrender of that policy. (1) Cash (2) Reduced Paid-Up Insurance (3) Extended Term Insurance
Level or flexible
Universal & Adjustable. Most insurance policies have a LEVEL PREMIUM which means the premium remains the same throughout the duration of the contract. FLEXIBLE PREMIUM- allow the policyowner to increase or decrease the premium during the policy period
withdrawals or partial surrenders
Withdrawals or partial surrenders of policy cash value can be made from universal life policies. UNIVERTSAL LIFE>a charge>limits>Interst taxable
Required Provisions:
*Assignment-absolute or collateral *Entire Contract- policy(with riders and amendments) and copy of the application *Grace Period- time period after the premium is due during which the policy will not lapse *Incontestability- insurer cannot contest misstatements on the application after a time period *Insuring Clause- basic agreement between the insure and the *Misstatement of age or gender- death benefit will be adjusted according to the correct age and gender at policy issue *Ownership: policyowner's rights *Reinstatement- a policy can be restored within a specified period of time with proof of insurability *Right to Examine (free look)- policy can be returned for a full refund of premium within a specified time period
A couple receives a set amount of income from their annuity. When the wife dies, the husband no longer receives annuity payments. What type of annuity did the couple buy?
Joint Life- pays benefits to two or more annuitants, but stops upon the death of the first
Reinstatment
allows a lapsed policy a9after 30-31 days) to be put back in force if reinstated within a specified maximum time limit after the policy has lapsed. *Within 3 years *provide proof of insurability * pay all back premiums plus interest *repay outstanding loans plus interst
Beneficiaries:
*Individuals, classes, estates, minors, trusts *Primary vs. Contingent *Revocable vs. Irrevocable *Common Disaster Clause *Uniform Simultaneous Death Law
Policy Options:
*Nonforfeiture *Dividend *Settlement
Nonforfeiture options:
*Reduced paid-up *Extended Term *Cash
all information about a customer must be used in determining annuity suitability:
*Tax status, financial experience, annual income
Beneficiaries
*Designations- individuals (including minors), classes, estates, trusts * Succession- the levels of priority. Each level in the succession is only eligible if the beneficiary in the level above has died: -Primary: first claim to the policy proceeds -Contingent: next claim after primary * Policyowner's right to change a beneficiary: -Revocable: can be changed at any time -Irrevocable: can only be changed with the beneficiary's consent *Common Disaster Clause- protects the rights of contingent beneficiaries; if the insured and the primary beneficiary died at approximately the same time, it is assumed that the primary beneficiary died first