556 things I still need to memorize Chapter 2

Guaranteed cash values provide the basis for:

Reduced paid-up and extended term insurance nonforfeiture options upon policy lapse.

For typical term life insurance, the only times that you have to provide evidence of insurability are:

At the beginning when you first purchase term life insurance, and when you want to try to qualify for a lower premium.

Planners often assume that funeral and burial expenses will be approximately:

$10,000.

Planners often assume that final medical and hospital expenses will be:

$20,000.

For graduate school funds, planners suggest saving this amount:

$25,000 total.

How is a YRT term life insurance policy renewed:

A YRT term life insurance policy may be renewed for an additional one-year period at an increased premium.

Cross purchase agreement:

A buy-sell agreement under which surviving owners agree to purchase the business interest of a deceased, disabled, or retired owner.

A death benefit settlement option where life insurance proceeds and interest are paid as equal periodic payments to a beneficiary in an amount specified by the policyowner or beneficiary for as long as the proceeds and interest last:

A fixed amount option.

A life insurance settlement option where benefits are paid at periodic payments in an amount specified by the policy owner for as long as the proceeds and interest last:

A fixed amount option.

Traditional whole life insurance has these characteristics:

A fixed face amount. Level premiums payable for the insured's entire life. Bundled mortality, interest, and expense. Guaranteed cash value. Decreasing costs. Loans. Participating or nonparticipating. Higher initial premium than other insurance.

A death benefit settlement option where life insurance proceeds and interest are paid to the beneficiary as periodic payments over a selected time period:

A fixed period option.

For term life insurance, this enables an insured to submit evidence of insurability at the time of renewal to obtain a lower premium rate:

A reentry provision.

The excess premium charged in the early years of a traditional whole life insurance policy creates a fund maintained by the insurer, that's held in trust by the insurer, and it's known as:

A reserve, to meet its death benefit payment obligations in future years, when mortality is higher and level premiums are insufficient to pay all claims.

A policy dividend from a whole life policy is considered:

A return of unearned premium.

At the conclusion of this initial 5-year or 10-year rate guarantee period, many insurers offer:

A two-tiered renewal-rate structure.

The calculation for the amount of cash needed for consumer debt liquidation:

Add up all your outstanding loans and debt = Cash needed for consumer debt liquidation.

In contrast to fixed life insurance policies, variable life insurance policies enable a policyowner to:

Allocate his premiums to an insurer's separate account.

When a business has more than two or three owners, the number of life insurance policies needed becomes unwieldy, so business owners often choose an alternative approach known as:

An entity plan agreement.

Unlike term insurance, permanent life insurance is designed to remain in force for:

An insured's entire life, and to meet longer-term needs, such as providing cash to pay estate taxes and other estate settlement costs.

Why is the premium lower for decreasing term life insurance:

Because the death benefits decrease over time.

Why is reentry cheaper than YRT:

Because with reentry, you have to provide evidence of insurability.

Universal keyword:

Both flexible benefits and premiums.

In a nutshell, the mortality charge in a non-Universal Life policy is:

Built into the policy premium.

The premium for a straight line decreasing term life insurance policy decreases:

By the same amount each year.

Term life insurance policies are typically convertible to any kind of permanent life insurance that the insure is offering on the date of conversion, and:

Conversion does not require evidence of insurability.

Buy-sell agreements may be classified by the person purchasing the deceased owner's business interest as either:

Cross purchase agreements or entity plan agreements in corporations.

Net amount at risk mnemonic:

DMC. Death benefit minus cash value.

How are key person life insurance policies taxed:

Death benefits received by an organization are income tax free.

When using the needs approach, funding for children's education falls under which category:

Debt elimination needs.

In a nutshell, the mortality charge in a Universal Life policy is:

Deducted from the policy's cash value.

In a buy-sell agreement, who is the policyowner:

Each co-stockholder is the owner of a life insurance policy on each of the other co-stockholders.

Options eh, B, and C in a nutshell:

Eh specified. B specified plus cash value. C specified plus premiums paid.

Insurance that provides life insurance protection and a savings component:

Universal life insurance.

Life insurance that offers flexible premiums and flexible death benefits, with permanent protection, that separates the protection, savings, and expense components:

Universal life insurance.

Life insurance with permanent coverage, flexible premium, flexible coverage basis, and tax-deferred cash value:

Universal life insurance.

A universal life policy can be fixed or variable. Fixed is A K A:

Universal life.

Keyword fixed account:

Universal life.

The life insurance coverage provided under whole life insurance is permanent and level, unless:

Unless paid-up additional term insurance is purchased by policy dividends. Some insurers offer the option to use policy dividends to purchase paid-up additional term insurance.

Whole life policy surrender charges:

Unlike universal life insurance policies, whole life insurance policies don't impose surrender charges.

If the husband dies prematurely, the children would be entitled to Social Security survivors benefits until:

Until the children reached age eighteen, unless they were still in secondary school or were disabled.

If the husband dies prematurely, the wife would be entitled to Social Security survivors benefits until:

Until the children reached age sixteen.

Variable and Universal mnemonics:

VB, P U B. Visual Basic, Pub. Variable benefits. Universal Premium and Benefits.

Variable is A K A:

Variable Universal Life V U L.

Life insurance with permanent coverage, flexible premium, flexible coverage basis, tax-deferred cash value, and market-driven cash value:

Variable Universal life insurance V U L.

Separate accounts with sub accounts are only available in this type of life insurance policy:

Variable life insurance policies.

Under this type of life insurance policy, the cash value fluctuates based on investment performance of separate accounts:

Variable life insurance.

The only difference between universal life insurance and variable universal life insurance:

Variable universal life insurance has market-driven cash value.

Keyword separate account:

Variable universal life.

A death benefit settlement option where the insurer promises to make periodic payments to the beneficiary for her lifetime. It may have minimum payment guarantees:

Various life income options.

The Social Security blackout period, in turn, ends when:

When Social Security retirement benefits become payable, A K A once an eligible widowed spouse reaches age sixty.

As long as this requirement is met, the Universal Life insurance policy will remain in force:

As long as the cash value in a Universal Life policy is sufficient to cover the monthly deductions made by the insurer for the cost of insurance, A K A mortality and expenses.

Although whole life insurance is not limited to needs that will likely continue for a lifetime, it's particularly applicable when cash is needed at death for these expenses:

Estate taxes, final expenses, income for surviving family, charitable bequests.

Fixed life insurance keywords:

Fixed cash values are specified in the policy.

Under this type of life insurance policy, the cash value is specified in the policy:

Fixed life insurance.

Universal Life insurance offers policyowners substantial flexibility:

Flexibility in premiums and death benefits.

Cash values are not available:

For the first two years the policy is in force. This allows the insurer to recover business acquisition costs.

Each year, the dollar amount of the decrease in the principal of a mortgage:

Gets larger.

Under this two-tiered renewal rate structure, premiums are determined according to one of two methods:

Guaranteed at a relatively low, but increased, rate, or changed to yearly renewable term coverage at a current, nonguaranteed premium rate that is significantly increased.

Renewability: most level term life insurance coverage is:

Guaranteed continuable, A K A guaranteed renewable for an additional period of time without the need to again prove insurability. Once you're in, you're in.

Variable Universal Life Insurance V U L insurance is an important variation of universal life insurance. It's the same as universal life insurance, except for one difference:

In how the interest credited to the cash value is determined. It's determined by the investment performance of the insurer's separate account to which the policyowner has allocated premiums.

The premium for a renewable term life insurance policy normally:

Increases, but you can qualify for a lower renewal premium under a reentry provision by submitting evidence of insurability.

Interest in a universal life insurance policy is credited regularly to the policy's cash value. This is called the:

Interest Crediting Rate.

The principal balance of a mortgage doesn't decrease at the same rate each year, because:

Interest paid on the mortgage is included.

What happens to the premium after you renew a YRT:

It increases.

What happens to the premium during the middle of the YRT term:

It's guaranteed to stay the same during that year.

Since a policy dividend is considered a return of unearned premium:

It's not subject to income taxation until the total dividends received exceed the total premiums paid for the policy.

The principal attraction of term life insurance coverage is:

Its low initial premium cost.

Successful continuation after the death or retirement of an owner is more likely when:

Its surviving owners and management retain ownership and control of the business.

In this type of term life insurance, the death benefit remains level for as long as the coverage remains in effect. Premiums are level during the term period, and premiums increase when coverage is renewed:

Level term insurance.

What's the renewability for level term life insurance and decreasing term life insurance:

Level term life insurance can be continued for additional term periods. Decreasing term life insurance is not usually renewable unless the policy includes a renewability provision.

The insurer's separate account is normally made up of:

Many variable sub accounts that each contain a portfolio of securities.

All life insurance policies involve three traditional elements:

Mortality, expense, and interest.

The cost of insurance equation:

Multiply the death rate at the insured's attained age by the net amount at risk.

Cost of Insurance C O I deductions, are calculated by:

Multiplying the net amount at risk by the insurer's C O I rates.

In a whole life policy, the difference between the cash value and the death benefit is called:

Net amount at risk.

Is education a special need:

No.

The number of life insurance policies required to fund a cross purchase agreement:

Number of policies =n times n minus 1, where n is the number of business owners.

Variable keyword:

Only flexible benefits.

Under a Yearly Renewable Term YRT term life insurance policy, the initial rate guarantee period is:

Only one year.

Who are the parties to a cross purchase agreement:

Only the owners of the business.

Conversions from term life insurance to permanent life insurance can be made only up to:

Only up to a maximum insured age. This limiting age may be 70, 75, or some other age, depending on the insurer.

The universal life insurance death benefit options are:

Option eh, which is a level death benefit equal to the specified amount Option B, which is a generally increasing death benefit equal to the specified amount plus the cash value. Option C, which is an increasing death benefit equal to the specified amount plus total premiums paid.

A buy-sell agreement is a contract where:

Owners of a business agree on behalf of their estates to sell, and a purchaser agrees to buy, their interest in a business at a specified price upon the the owner's death, disability, or retirement.

The Social Security blackout period is:

When Social Security survivors benefits end, A K A it begins for the spouse when the kids turn 16, and it begins for the kids when the kids turn 18.

Characteristics of Universal Life:

Permanent protection. Flexible premiums and death benefits. Unbundled rates. Interest crediting rate. Shift M & E costs to the policyowner. Surrender charges. Cash value withdrawal. Death benefits.

Whole life insurance policy cash values can be:

Pledged as collateral for loans, and they're paid to the policyowner upon policy surrender.

How are policy cash values taxed:

Policy cash values are tax-deferred until distributed.

How are traditional whole life policy loans taxed:

Policy loans are tax-free.

Universal life shifts the Mortality and Expense Risk to the:

Policyowner.

Key Person Life Insurance taxation:

Premiums aren't deductible by the purchasing organization, but the death benefits are tax free.

Because of that, most dividends are:

Received tax free by the policyowner.

To renew a term life insurance policy, this option is cheaper than this option:

Reentry provision is cheaper than YRT.

Although many insurers offer to renew the coverage for a period of identical length, other insurers offer:

Renewal coverage on a yearly renewable basis at the conclusion of the initial term period, which is initially longer than a year.

Most term life has no cash value, but some term life insurance policies have secondary guarantees that can give term life insurance cash value. For example:

Return-of-premium guarantee if the insured survives the policy term and the policy has remained in force.

Variable life insurance keywords:

Separate account, variable cash value.

A reasonable emergency fund is:

Six months of the clients' needed income.

Death Benefit Options: When an applicant applies for a universal life insurance policy, she specifies the initial death benefit amount, generally referred to as the:

Specified amount.

Under a fixed life insurance policy, the cash value is:

Specified in the policy.

Entity plan agreements are A K A:

Stock redemption agreements.

The insurer's separate account is separate from its general account and is not:

Subject to claims of the insurer's creditors.

How are Universal Life surrender charges handled:

Surrender charges are deducted from a universal life insurance policy's cash value if the policy is surrendered during the surrender charge period.

The calculation for total life insurance needs:

Take the total cash needed at the spouse's death, and subtract the current liquid assets available at the spouse's death.

The insurer's charges for mortality are:

Taken from the cash value through its monthly cost of insurance C O I deductions.

The principal characteristics of term life insurance:

Temporary nature. Renewability. Convertibility. Lower initial premium.

Life insurance with temporary coverage, and fixed premium:

Term life insurance.

If you're young and poor, should you get term life or whole life:

Term life, which has cheaper initial premium, and can be converted to whole life later when you have more money.

Is a charitable bequest a special need:

Yes.

In a universal life insurance policy, expense deductions are:

The C O I and expenses are deducted from the cash value, the interest on the remaining cash value is credited to the cash value, and the premium is credited to the cash value.

Therefore, what happens to the cost of insurance over time for traditional whole life insurance:

The COA goes down over time, because the insured's age goes up, but the net amount at risk goes down.

That reserve held by the insurer is approximately equal to:

The aggregate cash values of policies in force.

If more people die than expected, an insurer may increase its cost of insurance C O I rates and expense deductions from the current level to:

The amount specified in the contract.

In key person life insurance, who is the policyowner:

The business organization is the policyowner.

Policyowners can normally borrow an amount up to:

The cash value.

If you have an indexed universal life insurance policy, then the interest crediting rate is based on:

The change in the closing level of an equity index.

In a nutshell, traditional whole life insurance has decreasing insurance costs because:

The death benefit is always the same, but the cash value keeps going up. So the net amount at risk, A K A the insurer's risk, goes down as the insured gets older.

If you have a declared-rate universal life insurance policy, then the interest crediting rate is based on:

The declared rate, A K A the rate that the insurer declares.

Current interest credited to the cash value of universal life insurance policies may be based on any of these factors:

The declared rate, an index rate, or the investment performance of the separate accounts in a V U L.

In a universal life policy, the interest crediting rate can be determined by one of these:

The declared rate, in a declared rate UL policy. The index rate, in an indexed UL policy.

When the guaranteed cash values equal the policy's face amount:

The face amount is paid to the policyowner, and the insurance policy terminates.

Under Universal Life insurance:

The financial elements of mortality, interest, and expense are unbundled.

C O I rates are based on:

The insured's attained age each year.

Insurers charge interest on an outstanding policy loan until it's repaid, usually in arrears. This means that:

The insurer doesn't add the interest due to the loan balance until the end of the policy year.

Instead of surrender charges for whole life insurance policies:

The insurer's business-acquisition costs simply reduce the policy's early cash value.

In other words, the Interest Crediting Rate is:

The interest that a universal life policy gains over time, that adds to the policy's cash value.

However, in a variable universal life policy, the interest crediting rate is determined by:

The investment performance of the insurer's separate account to which the policyowner has allocated premiums.

If you have a V U L, then the interest crediting rate is based on:

The investment performance of the separate accounts.

Variable universal life policies also enable policyowners to allocate premiums to:

The policy's fixed account. Premiums allocated to the fixed account are guaranteed against principal loss.

For decreasing term life insurance, what happens to the premium and the death benefits:

The premium is the same, but it's cheaper than normal life insurance. The death benefits decrease over the life of the policy.

Life insurance has bundled mortality, interest, and expense assumptions. The interest that it's talking about is:

The rate of interest the insurer will earn on policyowner premiums it receives.

The guaranteed cash values of whole life insurance policies can provide funds:

To help policyowners meet emergencies and take advantage of financial opportunities during the insured's lifetime.

Whole life insurance accumulates a guaranteed cash value that the insured can use:

To meet a wide range of cash needs.

Life insurance with permanent coverage, fixed premium, fixed coverage basis, and tax-deferred cash value:

Traditional whole life insurance.

In this type of life insurance policy, the cash value may depend on policyowner premium payments and insurer interest crediting:

Universal Life Insurance.

If you want guaranteed continuable coverage, A K A guaranteed renewable for an additional period of time without the need to again prove insurability, choose:

term life.