Ch 3 ;Types of Policies and Riders

Payor Benefit

If the payor (policyowner) dies or becomes disabled and is unable to make the premium payments, the insurer will waive the premiums payments for a specified period of time

Credit life insurance automatically names who as the beneficiary?

the creditor

A policyowner would like more coverage than the $100,000 Whole Life policy being proposed, but does not have enough discretionary income to pay a lot more money to do so. What can a producer recommend that will allow the policyowner to have the Whole Life policy, but with more total death benefit at an affordable price?

Add a term rider; The most affordable option for a policyowner who needs additional death protection at the lowest cost is to add a term rider.

Classify the following characteristics as either Universal

Adjustable face amount Mortality charge for cost of pure insurance is deducted monthly 2 death benefit options to choose from Flexible premium Partial withdrawal or surrender available Guaranteed minimum rate of return on cash value

A client wants to make sure that they can have a permanent life insurance policy several years from now when they can afford it without having to prove insurability. What feature should they make sure they have on their new term life insurance policy?

Convertibility Reason; Convertibility allows for the conversion of term to permanent without proof of insurability.

Credit Life Insurance

Credit life insurance is a special form of decreasing term. Unlike the standard decreasing term policy, credit life automatically names the creditor as the beneficiary. The policy cannot be written for more than the outstanding debt, since that is the limit of the creditor's insurable interest. Once the loan is paid, the policy ends.

The net amount at risk in an Ordinary Whole Life Insurance Policy _________ over the life of the policy.

Decreases; REASON; As the cash values build, the net amount at risk for the insurer declines since the face amount is the benefit paid out upon the death of the insured. It is a way to keep the premiums affordable as the insured ages and the risk of death increases.

Sean has a home with a mortgage. He needs life insurance to protect his family but also wants to leave them without a mortgage payment if he dies. Ideally which of the following riders should he acquire?

Decreasing Term Rider; Decreasing Term Riders are ideally suited to cover the balance of an outstanding mortgage.

What is the name of the life insurance policy that is written on the life of a minor, is owned and paid for initially by a parent, and whose face amount increases to 5 times its original amount at age 21?

Jumping Juvenile Reason; Juvenile insurance is any policy written on the life of a minor. A popular type is commonly called 'Jumping Juvenile' because it automatically increases the face amount at a given age (usually age 21 to 25) without evidence of insurability.

Single Premium

The entire cost of the policy is paid in a lump sum at the time of purchase.

A _______________ policy has a death benefit that can increase or decrease over time based on stock market performance, but with a guaranteed minimum death benefit, a choice of sub-accounts in which cash value may be allocated, and a fixed premium.

Variable Life; Only variable life, also known as variable whole life, has all of these characteristics. Variable universal life does adjust the death benefit in relation to stock market performance but does not have a guaranteed minimum death benefit. Equity indexed universal life does not permit allocation of cash value in stock-based funds.

Jacob owns a policy that pays a death benefit only if he dies within the 20-year policy period. If Jacob dies anytime that the policy is in force, his beneficiary will receive $100,000. The premium that Jacob pays for this policy will be the same throughout the 20-year policy period. Jacob owns:

A Level Term policy Reason; The question specifies a death benefit only. The death benefit is constant (level) throughout the 20-year policy period, and the premium is the same (level) throughout the policy period.

rchases a Variable Universal Life Policy with a face amount of $250,000, and chooses death benefit Option B, upon his death the amount of the benefit payable to the beneficiary would be _________ if the policy had $25,000 in cash values.

$275,000 reason; With an Option B death benefit, the beneficiary will receive the face amount plus the cash value as of the date of death.

C has a $250,000 30-year term life insurance policy with a waiver of premium rider at age 45. The base policy costs $500 and the rider $50. The rider expires at age 65. If C renews the policy beyond age 65, what is the total cost of the policy to C?

$500 reason The Waiver of Premium rider, along with its cost, drops at an age stipulated in the contract, such as age 65.

Waiver of Premium

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

the applicant/insured wants a term life insurance policy that will last for 20 years and understands that the premium can be increased to a new premium level prior to the end of the term, so the producer should show him/her a(n):

20 year non-guaranteed level premium term life insurance policy; Reason Non-guaranteed level premium has premiums that can be increased to a new premium level for the remainder of the term.

How much of a cash value policy loan will an insurer normally grant with a variable type policy?

75-90% Policy loans are available from either the general account or the separate account. Typically 75-90% of the cash value can be borrowed against.

Ordinarily, who would not be the owner of a juvenile policy from the outset?

A brother or sister Reason; Typically it is the parents or grandparents who buy juvenile policies on their children or grandchildren.

A Last-to-Die policy would be the most appropriate recommendation for which of the following?

A husband and wife concerned about paying estate taxes after they have died reason; Married couples worried about estate taxes would be best served in most cases by a Last-to-Die, or Survivorship, policy.

Life Settlement Broker

A life settlement broker, for a fee or commission, offers to negotiate life settlement contracts between an owner and providers. A life settlement broker represents only the owner and owes a fiduciary duty to the owner to act in the best interest according to the owner's instructions, regardless of the manner in which the broker is compensated.

When the death of an insured occurs within a specified period, causing the policy to pay double or triple benefits, this policy must have which of the following riders?

Accidental Death Rider REASON; Also known as the Double Indemnity Rider, the policy pays the stated multiple of the face amount should the insured die as the result of an accident.

Which type of rider pays out a capital sum in case an insured loses a limb or their eyesight?

Accidental Death and Dismemberment; The Accidental Death portion of the rider pays out a principal sum. The dismemberment part pays out a capital sum. The capital sum is paid when there is a loss of limb, eyesight, fingers, or toes.

An insured owns a whole life policy that ends at age 100 and lives to be 100 years of age. Why does the insurer pay the face value to the insured?

Because the policy endows Reason; Older Whole Life policies are structured to endow (i.e. mature) at age 100. At endowment, the cash value equals the death benefit. Policies written under the 2001 CSO Mortality tables endow at age 121.

A producer is explaining the concept of limited-pay life insurance to her client. Which of these statements is incorrect?

By paying over a shorter period of time, each of the payments will be lower reason; The basic concept of insurance premiums is that by paying less often, a person will pay less in total premium. However, in cash value policies, because the payments are funding the cash value, the actual amount per payment in a limited payment policy will be higher as the number of payments is reduced. A 10-pay policy will have higher premiums than a 20-pay policy, but the total of the 10 payments will be much less than the total of the 20 payments.

Which of the following is not a feature of term life insurance?

Cash surrender value; reason; Term life insurance has no cash value and is often referred to as providing pure protection. Compared to the same face amount of whole life insurance, term will cost less.

Variable Life

Cash value in separate account fluctuates based on market conditions Sold by individuals with a life license and securities (FINRA) registration No guaranteed minimum return on cash value Policyowner bears all investment risk Death benefit varies along with performance in separate account Fixed premium

Cost of Living

Enables the insured to purchase more insurance each year to help offset increasing insurance needs due to inflation

Term life insurance will not pay out a death claim in which of the following situations?

Death after the term expires Reason; Term life insurance will pay out a death claim if the insured dies while the policy is in force from whatever cause, except for any exclusions specifically written into the policy.

When the life insurance policy's cash value equals the face amount of the policy and the proceeds are paid to the policyowner, this is known as the policy's _________.

Endowment; Reason; When the life insurance policy's cash value equals the face amount, the policy is said to endow.

Types of Policies

Guaranteed Level Premium, Indeterminate Premium Term, Non-guaranteed Level Premium

What type of term life insurance policy has its policy premium guaranteed to remain level throughout the term of the policy?

Guaranteed level; reason; Guaranteed level premium term life insurance is a policy whose premium is guaranteed to remain level throughout the term of the policy

A _________ policy is one that is written on the life of a minor.

Juvenile Reason; A juvenile policy is a policy written on the life of a minor to pay for any funeral costs, protect future insurability, and to build up cash value.

The _________ settlement industry has increased awareness of STOLI.

Life The life settlement industry has increased awareness of these terms.

Cash Value

Money accumulated in a permanent whole life policy that is considered a living benefit which the policyowner may borrow against or receive if the policy is surrendered before the insured dies

While a Guaranteed No-lapse Rider relieves the policyowner of the responsibility of monitoring the policy's cash value what is required of him/her to make sure that the policy's no-lapse rider remains in effect?

Pay the premium in full and on time Reason; A Guaranteed No-lapse Rider relieves the policy owner of the responsibility to monitor the policy's cash value and comes with a required payment schedule, as long as the policyholder adheres to the payment schedule, the policy will not lapse.

What is the name of the rider that requires that the premium payor become totally and permanently disabled before it will pay a claim?

Payor Benefit (Waiver of Payor's Premium) Reason; A Payor Benefit (Waiver of Payor's Premium) is a rider most typically available on a juvenile insurance policy. The premium is waived if the premium payor becomes totally disabled or dies prior to the juvenile's reaching the age of majority.

The face amount of an Ordinary Whole Life Policy _________ over the life of the policy.

Remains the same Reason; The face amount is the same as the death benefit and is the amount payable to the beneficiary upon the insured's death. Over the life of the policy it remains level.

A(n)________ is an added benefit attached to a life insurance policy for which an additional premium is generally paid.

Rider; Generally, for an additional premium, a rider can be added to a life insurance policy, such as a child rider, spouse rider, or waiver of premium rider.

premium payment methods:

Single Premium,Limited Payment, Modified Premium, Level (Guaranteed) Premium,Fixed Premium, Adjustable Premium, Flexible Premium,Initial and Guaranteed Maximum Premium

All of the following regarding convertible term life insurance is true, except:

The conversion can take place at any time reason; The right to convert the existing term policy to a permanent policy without evidence of insurability is only available during the conversion period specified in the contract.

Face Amount or Limit of Liability

The death benefit amount payable or coverage provided on a life insurance policy. This is also referred to as the limit of liability.

In all cases upon the insured's death, the beneficiary receives which of the following?

The face amount of the policy

Variable Whole Life and Variable Universal Life are similar, except for:

The guaranteed death benefit Reason; Since all premiums are credited to a separate account, there is no guaranteed minimum death benefit in a Variable Universal Life policy.

Who can change the premium on a fixed premium policy?

The insurer who issued the policy Reason With Fixed Premium, the premium amount is determined by the insurance company and while they do not have to be level, they cannot be changed by the policyowner.

An insurance policy's face amount can also be called?

The limit of liability; The face amount of insurance is the stated death benefit, and is referred to as the insurer's limit of liability (the most the policy will pay in the event of the insured's death).

Guaranteed Level Premium

The policy premium is guaranteed to be level throughout the term of the policy

Fixed Premium

The premium amount is determined by the insurance company. Fixed premiums do not have to be level, but cannot be changed by the policyowner.

If a policyowner has a whole life insurance policy with a disability waiver of premium rider, when does the rider benefit start if a qualifying disability should occur?

Typically 6 months after the disability occurs Reason; The disability waiver of premium typically has a 6 month waiting period prior to the insurer actually waiving the premiums when a qualifying disability occurs. During the 6 month time period premiums are expected to be paid in order to keep the policy in force.

What is the 'waiver of premium' called on a Universal Life insurance policy?

Waiver of Cost of Insurance reason; Waiver of Cost of Insurance

Waiver of Cost of Insurance

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

Mortgage Redemption

When credit life insurance is used to protect against the unpaid balance of a mortgage, it is referred to as Mortgage Protection or Mortgage Redemption Insurance. In this case, the amount of protection decreases along with the balance of the mortgage.

Disability Income

After an initial waiting period, premiums waived and the insured receives a monthly income

Guaranteed Insurability

Allows the insured to purchase stated amounts of additional insurance every 3 years based on certain ages, events, or specified dates without evidence of insurability up to a maximum age

Rider

An added benefit attached to the policy that supplements existing coverage. A rider is usually added at the time of application and may result in a small increase in premium.

Viatical Settlemen

An agreement between a policyowner and a third-party buyer to purchase the life policy covering a person who is diagnosed as terminally ill with less than 24 months remaining life expectancy. California Insurance Laws for viatical settlements are referenced under the life settlement laws.

Return of Premium

An increasing term insurance rider that provides additional coverage equal to the amount of premiums paid

If an insured uses a life insurance policy's accelerated benefits, what does the beneficiary receive at time of claim?

Face amount less accelerated benefits less insurer's interest charges Reason; After the accelerated benefits are paid and any lost interest to the insurer is deducted, the insurer must pay the balance of the face amount to the beneficiary.

A client wants coverage for himself as well as coverage for his wife and children all under one policy at an affordable price. Which of the following would best meet the need?

Family Rider; The Family Rider covers all members of the family with Whole Life Coverage on the head (wage earner) of the family and Level Term Coverage in the form of a rider on the spouse and children.

Endow (Mature)

In a cash value policy, the date on which the contract ends. A whole life policy is expected to have cash value equal to the face amount (if no loans are taken and all premiums are paid) on the endowment date, and the policy value is paid to the owner.

Accidental Death Benefit

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

Which of the following types of term life insurance can be written as a rider to provide cost of living or return of premium benefits?

Increasing term Reason; Increasing term can be issued as a rider on a policy to provide cost of living or return of premium benefits.

Which of the following is TRUE of a term rider when attached to a permanent life policy?

It can provide additional temporary coverage on the insured or on other members of the family REASON; A term rider provides additional death benefit on the primary insured or other named insureds. At some point, the coverage becomes unaffordable, can be converted, or it expires.

What is cover on Credit Life Insurance?

Loans to cover the purchase of appliances, motor vehicles, mobile homes, farm equipment Educational loans Bank credit and revolving check loans Mortgages loans, etc.

A Life Settlement Contract is a financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for how much?

More than the cash surrender value and less than the face value; A Life Settlement Contract is a financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than the cash surrender value and less than the face value.

Which of the following Whole Life insurance policies has the lowest annual premium payment per $1,000 of coverage for a 35-year-old, all other factors being equal?

Ordinary Straight Whole Life reason; The longer the premium-paying period, the lower the annual premium. A $100,000 Ordinary Straight Whole Life Policy spreads the payments out over a longer period of time than a limited premium payment policy.

Which of the following is not a way to access the money accumulated in a traditional ordinary permanent life insurance policy?

Partial withdrawal

Accidental Death and Dismemberment

Pays the principal sum of the rider (100% of the face amount) upon accidental death or double dismemberment and the capital sum (50% of the face amount) for accidental single dismemberment

What "jumps" in a jumping juvenile policy?

The face amount jumps one time, usually to five times the amount of insurance, at age 21 or 25 Reason; A "jumping juvenile" policy will normally increase the face amount of insurance by a factor of five with no change in premium at the next anniversary after the child turns anywhere from age 21-25 (depends on the policy). Ownership of the policy also changes at that time to the child, who is now an adult.

A is the insured under a $100,000 10 year term life insurance policy with her spouse named as her beneficiary. If she dies in year 9, what will her spouse receive?

The face amount of the policy

When a whole life policy endows, what happens to the policy's cash value?

The face amount of the policy is paid to the policyowner; At endowment, because the insured has not already died, a whole life policy's cash value will equal the face amount of insurance. The policy ends and the face value is paid to the policyowner.

Initial and Guaranteed Maximum Premium

The initial premium will be guaranteed but only for the first year, then the premium may increases due to the mortality costs. A guaranteed maximum premium table must be included in the policy showing projections of future maximum premiums.

A Variable Universal Life (VUL) is a combination of:

Universal and Variable Life A Variable Universal Life (VUL) is a combination of Universal and Variable Life Policies.

Life Settlement Contract

A financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than the cash surrender value and less than the face value. A written agreement is entered between a life settlement provider and the owner of the policy. The contract establishes that compensation is paid in return for the owner's assignment of an insurance policy.

Adjustable Premium

The premium can be increased or decreased by the policyowner on an annual basis. Premiums must be paid and adjusting the premium will affect other features of the policy.

Which of the following are characteristics of universal life insurance policies?

Death benefit options, death benefit and premiums may be changed; Death benefits options are a key characteristic of all forms of universal life insurance. All UL policies permit the policyowner to make changes in both the amount and timing of premium payments, including making no payments at all, and the death benefit may be increased or decreased in accordance with the terms and provisions of the policy.

Whole Life is also known as ________ protection.

Permanent; Whole Life is designed to provide the insured protection throughout his or her life. Other types of permanent protection are Indeterminate Premium and if designed properly Adjustable Life.

Which of these best describes a disability income rider?

Pays a percentage of the death benefit as monthly income to the insured when totally disabled Reason; A disability income rider pays monthly income to a totally disabled insured. The income is a specified number of dollars per $1,000 of death benefit, which may be expressed as a percentage of the death benefit. Waiver of premium allows the insured to avoid paying premiums when totally disabled. Money paid as income under a disability income rider does not affect the death benefit in any way.

Limited Payment -

Premium payments are for a specified time (Example: 20-Pay Life or 30-Pay Life) or to a specified age (Example: 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.

Level (Guaranteed) Premium

The premium remains level for the duration of the contract.

Single Premium -

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.

Non-guaranteed Level Premium

The premium can be increased to a new premium level for the remainder of the term

Modified Premium

The premium is payable for the first few years of the policy (3-5) are lower than an ordinary whole life policy to make it more affordable.

Annually renewable term life insurance's premiums increase every:

Year; Annually renewable term life insurance premiums increase every year to reflect the increase in risk to the company.

Flexible Premium

The premium can fluctuate at the policyowner's discretion. It can be increased, decreased, or even skipped at any premium due date. Universal and Variable Universal have flexible premium.

Permanent Insurance

Policy matures or endows when cash value equals the face amount Designed to provide coverage for a lifetime Issued with a level face amount Premium builds a reserve known as cash value Premiums may be payable for life, a limited period, or as a lump sum Policy loans available

Which of the following is not a true characteristic of permanent protection Whole Life?

Premiums are flexible Reason; Flexible premiums are not a characteristic of a Whole Life Insurance Policy.

A "level term" policy means that the _________ remains the same throughout the lifetime of the policy.

Policy proceeds; Reason; The policy proceeds are also known as the death benefit or face amount of insurance. In term life, at each renewal the premium will increase based on the age of the insured. The pure cost of insurance is gross premium minus the insurer's expenses and profit and without adjustment for interest earnings on reserves.

Long-Term Care

Provides up to 100% of the policy benefits if the insured qualifies for benefits as defined in the rider, such as the inability to perform 2 out of 6 activities of daily living

With Joint Life Insurance policies, the premium is based on the:

Average age of both insureds Reason; The premium on a Joint Life Policy is calculated on the average age of both insureds.

A 22-year-old applicant for life insurance has a limited budget for premiums. Which of the following policies would provide for the highest face value, for the lowest premium amount?

Annually Renewable Term; REASON; Term insurance does not accumulate cash value. The 'pure premium' purchases the highest amount of insurance compared to the other forms of life insurance. The shortest term period offers the lowest cost per $1,000 of coverage at the outset and in the early years.

When must required disclosures be provided to a life settlement contract applicant?

At the time of the application; Reason Required disclosures must be provided to a life settlement contract applicant at the time of application.

Straight Life or Continuous Premium -

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.

Indeterminate Premium Term

The premium may fluctuate between the current charge and a maximum rate stated in the policy based on the insurer's mortality, expenses, and investment returns

Convertible

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.

Annually Renewable Term

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 initially is very inexpensive 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.

All of the following are considered specialized policies, except:

Whole Life reason; Whole Life is considered an ordinary, not a specialized, policy.

A viatical settlement is made between a purchaser of a person's life insurance policy and ____________________.

The terminally ill insured who must receive at least as much as would be available from the insurance company under any full cash surrender or living needs rider Reason; The viatical life settlement laws which have been adopted by the states are intended to protect a terminally ill person from exploitation. They must not obtain a lesser benefit than they could obtain on their own by taking a loan or cash surrender from their life insurance company or through a living needs provision or rider in their policy.

What happens if a Return of Premium Term policy is not held to the end of term?

There will be a nominal return of premiums paid, the amount will depend upon how long the policy was in-force A Return of Premium Term policy charges a higher premium than level term insurance with the additional premium providing a nonforfeiture value which will offer a nominal return of premiums paid if the policy is not held to the end of term depending upon how long the policy was in-force.

Which of the following policies offers the least guarantees?

Variable Universal Life; Variable Universal Life has no guaranteed death benefit and no guaranteed cash values.

Which of the following policies must be sold by prospectus?

Variable Whole Life Reason; Variable Whole Life is a security. It is required that the producer have a securities registration in order to sell it and the policy must be sold with a prospectus detailing all fees, charges, risks, and expenses.

Variable Whole Life has all of the following features, except:

Partial surrender are allowed Reason; Partial surrenders are not allowed from a variable whole life policy.

Renewable

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. Some term policies include a "reentry" provision, which offers the insured an opportunity to obtain a new policy at a reduced premium based on new underwriting.

A Child Rider that is added to an insured's permanent policy includes which of the following features?

All children (beyond 14 or 15 days of age) are covered, and the rider may be converted to permanent coverage at a specified age without evidence of insurability Reason; The benefit of a Child Rider is twofold. It provides basic coverage, and is convertible to a permanent policy without proof of insurability, when the child reaches the maximum age.

Level, decreasing and increasing term refer to which policy feature?

Death benefit; The words level, decreasing and increasing as they apply to term insurance describe the death benefit, rather than the premium. Term life insurance has no cash value. Term life premiums can be level or increase, then never decrease.

What does a long-term care rider do that a Living Needs (Terminal Illness) rider does not?

Provides an advance payment of the death benefit for the covered expenses of long term care a chronically ill person may incur Reason; A long-term care rider provides an advance payment of the death benefit for the covered expenses of long-term care a chronically ill person may incur.

Mary decides to convert her Term Policy to permanent protection. Which of the following statements is true regarding the conversion?

She may convert without evidence of insurability Reason; The Conversion Option of a Term Policy allows conversion to a Permanent Policy without evidence of insurability, but it is not an option that lasts forever. Typically the policyowner must do so within the first 10 years or so, and not after a specified age, such as 60.

Ordinary Whole Life The premium payments may be structured as follows:

Straight Life or Continuous Premium,Limited Payment,Single Premium

Decreasing

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.

Increasing

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 for the return of premium on a term policy over a set number of years.

Limited Payment

The premium is payable for a specified time, such as 20-pay, 30-pay or to age 65.

Term Insurance

Written for a specified time period or to a specified age Coverage may be renewable Pure insurance Death benefits may be level, decreasing, or increasing Temporary protection Coverage may be convertible