Life & Health Insurance Ch. 3

An insured has a $100,000 policy and the Viatical Agreement is $60,000. Upon the insured's death, the new owner could profit up to $____________, less any business expenses, and any premiums paid up to the time of claim.

$40,000

In a traditional whole life policy, the net amount at risk is the_________ _________ minus the ________ __________.

-face value -cash value

Term insurance is considered _________ _________ and provides a _________ _________ __________.

-pure insurance -pure death benefit

If the policyowner has a limited budget to pay premiums, but needs a significant amount of protection, _________ insurance can provide these benefits for a lower premium than __________ insurance based on the same face amount.

-term -whole life

Unlike _________ insurance, a _________ _______ policy cannot be convertible or renewable.

-term -whole life

This rider provides a benefit in addition to the base of the policy. The rider pays 100% of the amount of the rider, known as the principal sum, upon accidental death. If the insured suffers an accidental dismemberment loss, such as loss of a limb or eyesight, the rider pays 50% of the rider amount, known as the capital sum. Double dismemberment benefits (loss of 2 limbs or total eyesight) are provided at 100% of the rider. Benefits of the rider are only payable if the loss is accidental and occurs within 90 days of the accident. This rider typically expires at age 65 or whenever the principal sum has been paid.

Accidental Death & Dismemberment

In the event of a claim, the policy normally pays double or triple the face amount only if the insured's death was a result of an accident (may be called multiple indemnity rider, paying multiple times the face amount). The benefit is payable only if death occurs before a specific age and within 90 days of the accident. It does not add any additional values to the base policy. It may be added to any type of individual life policy. Among other exclusions, death due to sickness is excluded. This rider typically expires at age 65.

Accidental Death Benefit (Double or Triple Indemnity)

The policy cash accumulation is split between the insurer's General Account and Separate Account. *Characteristic of Variable Whole Life

Accounts

The insured can increase or decrease the face amount of the policy. Any increase in the face amount will require evidence of insurability. *Characteristic of Universal Life policy

Adjustable face amount

The simplest form of term life insurance is for one year. The death benefit remains level and the premiums increase yearly as the policy renews up to a specified age. While it is very inexpensive initially compared to other types of life insurance, over time it can become cost prohibitive. The death benefit is paid by the insurer if the insured dies while the policy is in force. *Type of term insurance policy

Annually Renewable Term

Provides level term coverage on the life of all of the insured's children. This rider is usually offered at one premium rate and will cover newborns after 14 days of life and adopted children who can be added to the coverage without increasing the premium. The children have coverage to a specified age (21 to 25) and are usually given the option to convert to a permanent policy without evidence of insurability.

Child Rider

The right to convert the existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract. The premium can be based upon either attained age or original (issue) age. The premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond. If the conversion is based on the issue or original age, back premiums plus interest will be required to be paid at the time of conversion. *Type of special feature of a term insurance policy

Convertible

Pays the face amount of the policy and provides a level death benefit. As the cash value increases, the company's risk decreases. If the cash value increases to the point where it equals the death benefit, the death benefit will automatically become the greater of the cash value or face amount of insurance. This minimum separation between the cash value and the death benefit is called the "risk corridor." This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early. *Available in a Universal Life policy

Death Benefit Option A

Pays the face amount stated in the contract which is level term, plus any cash values accumulated over the years. This provides for an increasing death benefit. *Characteristic of Universal Life policy

Death Benefit Option B

The death benefit decreases, but premiums remain level for the policy term. Often such policies are sold as mortgage protection with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies, the proceeds of the policy can be used to pay off the mortgage. The premiums paid for decreasing term are lower than the premiums payable for level term since the benefit decreases throughout the term of the policy. *Type of term insurance policy

Decreasing

_________ charges to cover administrative costs are also deducted monthly from the cash value. This is the insurance company's cost of maintaining the policy and can be impacted by the overall increasing administrative costs associated with a plan. Like mortality charges, there is a maximum guaranteed amount that can be charged. *Characteristic of Universal Life policy

Expense

Provides a combination of coverages on the spouse and children. Usually family riders are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse, and $1,000 on each child.

Family Rider

The premium is determined by the insurer and remains fixed and level throughout the contract. *Characteristic of Variable Whole Life

Fixed Premium

The _________ _________ is fixed and guaranteed and provides for a guaranteed minimum death benefit to age 100. Policy loans are available from this account. *Characteristic of Variable Whole Life

General Account (Guaranteed Values)

Allows the insured to purchase stated amounts of additional insurance every 3 years based on certain ages (specifically 25, 28, 31, 34, 37, and 40), events, or specified dates without evidence of insurability up to a maximum age, usually 40. The premiums are based on attained age. The events which will allow for the insured to obtain additional insurance in between the specified ages include marriage and the birth or adoption of a child, when the need for insurance coverage may increase. It normally limits the insured to acquiring additional amounts of the same type of coverage already in force. The insurer often limits the amount of coverage that may be added. This rider drops at age 40.

Guaranteed Insurability

The death benefit increases over the life of the policy while the premiums remain level. This type of term is normally written as a rider to provide cost of living or return of premium benefits. *Type of term insurance policy

Increasing

In exchange for the potential of higher interest crediting, these policies offer a minimum interest rate guarantee (which could be 0%) to avoid cash value decreases due to negative index performance.

Indexed Life

_________ _________ policies are a more recent evolution from traditional life insurance policies, and base interest crediting on one or more "strategies" linked to the performance of a known stock or similar index (such as S&P 500), which is not under the control of the insurance company. There is no direct investment in any stocks or indexes.

Indexed Life

_________ is credited to the cash value on a monthly basis at the current _________ rate, but will never be less than the guaranteed minimum rate established at the time the policy was issued. The current __________ rate is controlled and set by the insurance company and can be changed as often as monthly without prior notice to the policyholder. *Characteristic of Universal Life policy

Interest

_______ _______ is a whole life policy that is written to cover 2 or more lives. The death benefit is paid upon the first insured to die and the policy terminates. Premiums are based upon a joint issue age, which is obtained by an average of both insureds' ages, resulting in a lower premium than two separate policies. This policy is designed to provide income protection for the surviving spouse when both have earned income.

Joint Life (First to Die)

This whole life policy is usually written to cover 2 lives, and the death benefit is not paid until the last insured dies. Premiums are based upon a joint issue age, which is obtained by an average of both insureds' ages, resulting in a lower premium than two separate policies. This policy is often purchased to provide a lump sum benefit to pay estate taxes once the second spouse dies.

Joint Survivorship Life (Second to Die)

The death benefit remains level and the premiums remain level during the policy term. *Type of term insurance policy

Level

A _______ _______ is similar to a viatical settlement in that it is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its death benefit. There is no requirement for the insured to be terminally ill in order for a life settlement to occur, whereas, there is with a viatical settlement. A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy.

Life Settlement

Premium payments are for a specified time (20-Pay Life or 30-Pay Life) or to a specified age (Life Paid up at 65). The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. While the annual premium is higher than Straight Life, it is paid for a shorter period of time and will have a lower total premium outlay.

Limited Payment

Provides up to 100% of the policy benefits if the insured qualifies for long-term care benefits as defined in the rider, such as the inability to perform 2 out of 6 activities of daily living. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary. The amount of protection is determined at the time of policy purchase. Long-term care benefits are paid income tax free after the insured meets the qualifying requirements.

Long Term Care Rider

________ charges are deducted monthly from the policy's cash value. This is the cost of pure insurance and although it is deducted monthly, it is determined annually based on the insured's age. The increase in the __________ charge is limited to a policy maximum. The insurance protection is considered annual renewable term. *Characteristic of Universal Life policy

Mortality

Provides coverage for another person, other than a spouse or child, such as a business partner. Insurable interest must exist at the time the rider is added.

Nonfamily (Additional Insured) Rider

This is a form of whole life in which the insurance company can change the premiums or interest rate being credited to the account based on current money market rates. Interest rate changes affect the policy premiums. The policy has a guaranteed minimum death benefit, but may increase based on the growth of the cash value. If current rates increase, either the policyowner pays a reduced premium or the cash value will increase at a faster rate. If cash values increase too quickly, this could cause the policy to mature prior to age 100.

Nontraditional Whole Life (Interest/Market Sensitive)

__________ _______ ________ insurance provides insurance protection to age 100, cash value accumulation to age 100, and fixed level premium payments.

Ordinary whole life

A ________ withdrawal is a permanent deduction of the cash value and cannot be reversed. The withdrawal may also be taxable. *Characteristic of Universal Life policy

Partial

_________ withdrawals are different than loans. A loan is taken against cash value remaining in the policy. The cash value secures the loan and cannot be used for other purposes, but it remains in the policy. The loan itself neither decreases the total cash value, nor the face amount. The cash value is collateral if the loan is not paid back before the insured dies or the policy terminates and the unpaid loan balance and loan interest is deducted from a death claim or surrender. *Characteristic of Universal Life policy

Partial

If the payor (policyowner) dies or becomes disabled and is unable to make the premium payments, the insurer will waive the premium payments for a specified period of time. Because this rider is commonly added to a juvenile policy, the payor (usually a parent) typically must show evidence of insurability before the rider can be added to the policy.

Payor Benefit

_________ __________ are available from either the general account or the separate account. Typically 75 - 90% of the cash value can be borrowed. Partial surrenders are not allowed from a variable whole life policy.

Policy loans

A benefit that will renew the contract on the renewal date without evidence of insurability. The policy may be a 1- (annual), 5-, 10-, or 20-year renewable contract up to a specified age, with premiums increasing at the beginning of each renewal period. The renewal premium is based upon attained age. Renewability is important because the risk is that the insured's health may deteriorate and the insured may be unable to obtain a policy at the same rates or even at all, leaving the insured without coverage. Level term policies may offer the option of being renewable for an additional premium. *Type of special feature of a term insurance policy

Renewable

This is an increasing term insurance rider that provides additional coverage equal to the amount of premiums paid. If the insured dies within the term, the beneficiary will receive the face amount of the policy plus the benefit of the rider equaling the total amount of premiums paid.

Return of Premium

This policy is written as increasing term insurance and provides for an additional death benefit that equals a full refund of premiums if the insured is still living at the end of the term. These policies are very low-risk with respect to paying benefits and therefore charge a much higher premium than level term insurance. *Type of term insurance policy

Return of Premium Term

Upon policy assignment, the new owner will change the beneficiary designations and continue to pay premiums to keep the policy in force. When the insured dies, the owner will file a claim for the death benefit. The practice of ________ and ________ has resulted in fraudulent abuses, causing many states to outlaw _________ and ________ policies due to a lack of insurable interest.

STOLI and IOLI

The entire premium is paid in a lump sum at the time of purchase and creates immediate cash value. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. This policy has the lowest total premium outlay for the life of the policy.

Single Premium

Provides level term coverage on the life of the insured's spouse. This rider will also provide a conversion provision permitting the spouse to convert to permanent coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy.

Spouse (Other Insured) Rider

The premium is level and payable to age 100 or death of the insured, whichever comes first. The face amount remains level throughout the life of the policy. This policy has the highest total premium outlay.

Straight Life or Continuous Premium

_________and __________ transactions occur when a person (investor, producer, or broker) with no insurable interest in the life of another induces that individual to purchase a life insurance policy with the sole intent of becoming a beneficiary and profiting upon the death of the insured. The insured assigns policy ownership to the person with no insurable interest and receives a payment for an amount less than the death benefit, but greater than the policy's cash value. *Essentially, the insured is "selling" his/her mortality.

Stranger Originated Life Insurance (STOLI) and Investor Originated Life Insurance (IOLI)

The two basic types of life insurance policies.

Temporary (term) & Permanent (whole life)

________ _________ may be attached to any individual life policy to provide additional insurance protection for a fixed period of time. If the need for additional coverage is temporary, a term insurance rider is more cost effective than buying another policy.

Term Riders

_________ __________ offers temporary life insurance protection for a specified period of time. This period could be as short as 1 year, or provide coverage for a specific number of years such as 5, 10, or 20 years. It also could be purchased to provide coverage up to a specified age, such as 65. The premium is level for the duration of the stated term, which represents the average level of risk over the course of the policy.

Term insurance

These policies have a level premium and level face amount. To keep the premium rate level, the premium at younger ages exceeds the actual cost of protection. Whole life policies stretch the cost of insurance over a longer period of time in order to level out the increasing cost of insurance. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises above the premium. The cash value provides an accumulation element in the policy. Traditional policies earn a specified guaranteed rate of return.

Traditional Whole Life

_________ __________ policies give the policyowner the option to take a policy loan, but also to take a partial withdrawal from the cash value without terminating the contract.

Universal Life

_________ _________ __________ features insurance protection and a savings element (cash value) that grows on a tax-deferred basis. It is an "unbundled policy." This means the individual elements of the policy and premium—which includes the mortality risk, policy expenses, and the cash value—are credited to the account separately after the premium is paid. This type of policy has built in guarantees regarding the cost of insurance (mortality risk) and the interest rates applied to cash values.

Universal Life Insurance (UL)

All variable products are subject to SEC regulation. ________ _______ is considered a security and can only be sold by individuals with a life insurance license and a FINRA registration, specifically Series 6 or Series 7. A prospectus must be provided prior to the sale of a variable policy, and there are suitability requirements that must be met before a variable policy can be sold.

Variable Life

All variable products are subject to SEC regulation. _________ ________ _________ is considered a security and can only be sold by producers registered with FINRA and holding either a Series 6 or Series 7 registration. This securities registration is required in addition to a life insurance license. In some states, a variable contracts insurance license and state securities registration (Series 63) is also required. A prospectus must be provided prior to the sale of a variable policy and there are suitability requirements that must be met before a variable policy can be sold.

Variable Universal Life

The policyowner may take a policy loan or a partial withdrawal from the cash value without terminating the contract. A partial withdrawal is paid from the separate account. Policy loans are available based on the amount in the separate account. Typically 75-90% of the cash value can be borrowed.

Variable Universal Life (VUL)

________ _________ ________ offers the added attraction of the investment component seen in Variable Life policies through the insurer's separate account. Like Universal life, the policy provides for flexible premiums and adjustable death benefits; Options A and B are available to policyowners. The entire cash value is held in the insurer's separate account and the investment return fluctuates based on the performance of the separate account. Since all premiums are credited to a separate account, there is no guaranteed minimum death benefit; the owner bears all investment risk.

Variable Universal Life (VUL)

________ __________ __________ is a whole life policy with certain benefits that will vary based on market conditions.

Variable Whole Life

A ________ _________ is an agreement between a third party (specializing in such transactions—_______ _______ provider) and a life insurance policyowner (viator) insuring the life of an individual with a life-threatening or terminal illness, normally with a life expectancy of 2 years or less. The firm purchases the policy at 60 to 80% of the face amount, expecting to profit as the new policyowner at the time of claim. The insured is provided with tax exempt discounted value during the terminal illness, relinquishing all ownership rights to the buyer.

Viatical Settlement

A rider that waives the deduction of the monthly cost of insurance and expense charges associated with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability. Usually, the disability must occur prior to 65, and if disabled, the rider typically terminates at age 65. While the rider is in effect, only the monthly deductions are covered and no additional amount is added to the cash value other than monthly interest credits. When the rider terminates, premiums must once again be paid.

Waiver of Monthly Deduction (Cost of Insurance)

If the insured becomes totally disabled, the insurer will waive premiums for the duration of the disability or the end of the policy, whichever occurs first. To qualify for the waiver, the insured must be disabled for a waiting period of 3-6 months. The policyowner must continue to pay premiums during the waiting period, but once eligible, the waiver is retroactive to the start of the disability and the premiums will be refunded. During the disability, the insurer will credit the premiums to the policy and all benefits, such as cash value accumulation and dividend payments, will continue. Unless the insured is disabled, the _________ _____ ________ rider drops at age 65.

Waiver of Premium

_________ __________ is permanent protection that matures, or endows, at the insured's age of 100 when the cash value is scheduled to equal the face amount of the policy. If the insured is still living at age 100, the insurer will pay the face amount to the owner.

Whole life

Permanent policies provide _________ _________, which is cash accumulation in the policy that can be accessed through a policy loan or cancellation (surrender) of the policy. This is considered a living benefit in a permanent policy causing the premiums to be higher than term insurance.

cash value

As the _______ ________ increases over time, the net amount at risk decreases. This does not affect the face amount of the policy as that remains level.

cash value *Since the cash value equals the face amount at maturity, as the cash value grows, the amount of risk to the insurance company decreases.

To prevent a whole life policy from maturing prior to age 100, the insurer will add a ________ ____ __________ _________ to keep the policy from endowing. This increase is provided without evidence of insurability.

corridor of insurance protection

The ________ ________ is tied to the separate account and also varies along with the performance of the separate account. ________ ________ are recalculated annually. While the separate account values may decrease, the policy will never pay less than the guaranteed _______ _________ supported by the general account. Since there is no guaranteed return on the separate account, the owner bears all investment risk. *Characteristic of Variable Whole Life

death benefit

The ________ _________ is the death benefit payable on the policy if the insured dies before the policy ends. The death benefit may also be referred to as the limit of liability or the policy proceeds.

face amount

A portion of the premium is invested by the insurance company and held in its _________ _________. The current return on the investments is credited to the UL policy. *Characteristic of Universal Life policy

general account

A _________ ___________ interest rate applied to the policy (usually around 3-4%) means that, no matter how the investments perform, the insurance company guarantees a certain minimum return on the cash value. If the insurance company does well with its investments, the current interest rate will be credited to the cash value causing the cash value to grow at a faster rate. This policy has a general account, so the producer needs only a life insurance license to sell it. Premiums are paid into and interest is credited into the general cash value account. Expenses, loans or withdrawals, and mortality charges (cost of insurance) are deducted from the cash value account. *Characteristic of Universal Life policy

guaranteed minimum

The cash value continues to grow within the policy and will either be paid out as part of the death benefit, or when the policy _________ or ____________. This happens when the cash value in the policy equals the face amount of the policy (and the insured is still living). This is typically designed to occur when the insured reaches age 100.

matures or endows *Upon maturity or endowment, the entire face amount is paid to the owner and the policy contract ends.

If the insured wants to provide benefits to a surviving spouse, long-term or ___________ insurance might be needed.

permanent (whole life)

The low initial __________ outlay when the insured is young will increase at renewal or upon conversion, and as the insured gets older, the policy can become more expensive.

premium

A _________ must be provided prior to the sale of a variable policy and there are suitability requirements that must be met before a variable policy can be sold.

prospectus

A _________ is an added benefit attached to the policy that supplements existing coverage. A ___________ is usually added at the time the policy is purchased and may result in a small increase in premium. The cost of the ________ is usually insignificant compared to the cost of buying a separate policy for the same benefits.

rider

Coverage can be written separately or with other types of insurance, in the form of a _________, to suit individual needs. Rates charged are based upon underwriting class, the age and gender of the insured, and the length of time protection is provided. For example, rates are higher for a 10-year level term than for a 5-year level term.

rider

An amendment or _______ modifies the policy by expanding or decreasing its benefits, or excluding certain conditions from coverage, and are at the option of the insured. Policy ________ are available for an additional premium in most cases. ________ are provided for a specified period of time as stated in the policy. It is typical for a ______ to end at a specified age (such as the insured's age 65). Once a ________ drops from the policy, the additional premium will also drop. Most _______ are added at the time of policy issue. Any _______ added after the policy has been issued usually require evidence of insurability.

rider(s)

The _______ _________ is invested in equity securities as offered by the insurance company. The owner may select which subaccounts they want the premium to be invested in. Cash value in these accounts will fluctuate based on market conditions and performance of the subaccounts, which are similar to a mutual fund. The policyowner has an opportunity to achieve higher investment returns. This policy may act as a hedge against inflation, but will decrease the guaranteed minimum death benefit by the amount of the loan plus unpaid interest. *Characteristic of Variable Whole Life

separate account

A __________ premium is established by the insurer, which is the minimum amount that must be deducted from the cash value to maintain the policy to age 100, based on current interest rates, mortality and expense charges. Because mortality and expense charges are deducted from the cash value monthly, the policyowner has more flexibility with universal life premium payments. The premiums can be increased, decreased, or even skipped at the policyowner's discretion as long as there is sufficient cash value to cover these deductions. The flexible premium feature also allows the policyowner to increase premiums during working years to accumulate enough cash value to make future premium payments in later years. This is known as a vanishing premium. If the cash value becomes insufficient to pay the monthly deductions, however, the owner will be required to start paying premiums to keep the policy from lapsing. *Characteristic of Universal Life policy

target

If protection is needed to meet short-term goals, such as to provide benefits to pay for education in case the insured dies before his/her teenagers finish college, then __________ insurance will meet that need.

temporary (term)

Once the cash value has accumulated for a certain number of years (__________), the policy's owner can borrow against the policy.

typically 3 years