Chapter 12
Consider a $100,000 participating whole life policy with annual premiums of $1,380. If the insured died halfway through the policy year, with an outstanding cash-value loan of $5,000 and earned but unpaid dividends of $4,000, the death benefit would be $99,690, calculated as follows:
$100,000 Face Amount +4,000 Unpaid dividends +690 Premiums paid in advance (one-half year) ------------- $104,690 Subtotal -5,000 Outstanding cash-value loan ------------- $99,690 Death benefit
there are only two types of life insurance: term life insurance and cash-value life insurance.
1.Term life insurance: "Pure protection" against early death; pays benefits only if the insured dies within the time period (term) that the policy covers. 2.cash-value life insurance: Pays benefits at death and includes a savings/investment element that can provide a level of benefits to the policyholder prior to the death of the insured person. 12.2
Comparison of Premium Dollars for Cash-Value and Term Life Insurance
12.2b
Cash-Value Buildup Illustration' Guaranteed versus Current Rates
12.2c
Annual Premiums for Various Types of Policies—$100,000 Policy
12.3
Data from a variety of sources suggest the following odds on causes of death in your lifetime:
12.3a
How Insurance Policies Are Organized All insurance policies have five basic components:
12.3a
The policy owner can receive the accumulated cash-value funds in one of three ways.
12.3b
Settlement options Choices from which the policyholder can choose in how the death benefit payment will be structured.
12.3c
Buy Term Insurance and Invest the Rest
12.4 c
Signs of an Unethical Life Insurance Agent
12.4g
waiver of premium
A clause in an insurance policy that waives the policyholder's obligation to pay any further premiums should he or she become seriously ill or disabled 12.3b
life insurance policy
A contract between an insured (insurance policy holder) and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person.
needs-based approach
A superior method of calculating the amount of insurance needed that considers all of the factors that might potentially affect the level of need. 12.1c
Group term life insurance
A term life insurance policy issued to people as members of a group, typically through an employer rather than as individuals.
Nonforfeiture values
Amounts stipulated in a life insurance policy that protect the cash value, if any, in the event that the policyholder chooses not to pay or fails to pay required premiums.
Life insurance
An insurance contract helps replace lost income if premature death occurs as it promises to pay a dollar benefit to a beneficiary upon the death of the insured person.
Paying back a policy loan is important because: a. If the policyholder doesn't pay it back before death, there will be little or no benefit for the beneficiary b. Allows the policyholder to use the money to send kids to college or get a car c. Allows you to tap into the value of the policy without surrendering the policy d. All of the above
Answer is D
Settlement options can be paid out: a. As a lump sum b. As an income-specific amount c. Over an income-specific time period d. Any of the above
Answer is D
face amount
Dollar value of protection as listed in the policy and used to calculate the premium.
whole or straight life insurance
Form of cash-value life insurance that provides lifetime life insurance protection and expects the insured to pay premiums for life.
Variable-universal life insurance
Form of universal life insurance that gives the policyholder some choice in the investments made with the cash value accumulated by the policy. Also called flexible-premium variable life insurance.
Social Security survivor's benefits
Government program benefits paid to a surviving spouse and children. 12.1b
participating policies
Life insurance policies that pay dividends. 12.3a
Fair Prices for Term Life Insurance
Multiply the rate by each $1,000 of coverage and add $60 for estimated administrative fees. For example, a fair annual premium for a $50,000 policy for a 36-year-old male nonsmoker might be $101.50 ($0.83 x 50 = $41.50; $41.50 + $60 = $101.50) 12.4c
Convertible term insurance
Offers policyholders the option of exchanging a term policy for a cash-value policy without evidence of insurability. 12.2a
Final expenses
One-time expenses occurring just prior to or after a death. 12.1a
grace period
Period of time during which an overdue premium may be paid without a lapse of the policy.
guaranteed insurability
Permits the cash-value policyholder to buy additional stated amounts of cash-value life insurance at stated times in the future without evidence of insurability. 12.3b
beneficiary
Person who receives life insurance proceeds, as per the policy. 12.1b
incontestability clause
Places a time limit on the right of the insurance company to deny a claim. 12.3a
guaranteed renewable term insurance
Protects you against the possibility of becoming uninsurable.
Universal life insurance
Provides the pure protection of term insurance and the cash-value buildup of whole life insurance, along with variability in face amount rate of cash-value accumulation, premiums, and rate of return.
automatic premium loan
Provision that allows any premium not paid by the end of the grace period to be paid automatically with a policy loan if sufficient cash value or dividends have accumulated.
cash surrender value
Represents the cash value of a policy minus any surrender charges 12.3b
Insurance dividends
Surplus earnings of the insurance company when the difference between the total premium charged exceeds the cost to the company of providing insurance. 12.3a
A needs based approach to life insurance does NOT:
Take your income and multiplies it by a number to give you an amount
Michelle and Jason Bailey are in their early 30s and expecting their first child next month. Each earns about $60,000 per year. Currently, they have $50,000 life insurance policies on each of their lives with the other named as the beneficiary. They bought these policies a few years ago to pay for death-related expenses if tragedy struck. With the baby coming, they are thinking about buying $300,000 in life insurance coverage on each of their lives so the proceeds could be used to replace the income lost if one of them died. How much will Michelle and Jason each pay for this additional protection? About $25 per month About $50 per month About $100 per month About $200 per month
The answer is A. Term life insurance for people in their 30s can cost about $1 (or less) per $1,000 of coverage per year. Thus, Michelle and Jason could each easily buy this insurance for $300 each or about $25 per month—a small price to pay for the security provided. Always buy inexpensive term life insurance so that you replace the lost income needed by your dependents if you were to pass away!
Life insurance is the simplest form of insurance because it protects against only one peril—death.
The benefit the policy will pay in cash is known in advance. 12.1b
survivor's blackout period
The time frame between when a deceased person with minor children stops receiving Social Security survivor benefits and when he or she begins receiving retirement benefits. 12.1b
depicts a life insurance and an investment plan recommended by experts over an individual's life cycle.
This plan is built on two foundations: (1) systematic, regular investments, and (2) term insurance. 12.4a
The multiple-of-earnings approach estimates the amount of life insurance needed by multiplying your income by some number, such as 5, 7, or 10.
Thus, someone with an annual income of $40,000 would need $200,000 to $400,000 in life insurance. 12.1c
Limited-pay whole life insurance
Whole life insurance that allows premium payments to cease before the insured reaches the age of 100. Two common examples are 20-pay life policies, which allow premium payments to cease after 20 years, and paid-at-65 policies, which require payment of premiums until the insured turns 65.
Credit life insurance and mortgage life insurance:
a. Are not great policies
Needs based approach is better than the multiples of earnings or income approach in that:
a. It looks at how much life insurance you'll actually need b. It is based in real numbers, not just made up multiples c. It can prevent you from spending too much on insurance you don't need d. All of the above D is correct
The beneficiary in life insurance
a. The person who gets the money after someone dies
A five-year term insurance policy where the face amount and the premium stays the same each year rather than goes up with your age is
a. guaranteed renewable term insurance.
The person who controls all rights granted by a life insurance policy is called the
a. owner
Variable life insurance
allows you to choose the investments made with your cash-value accumulations and to share in any gains or losses. The face amount of your policy and the policy's cash value may rise or fall based on changes in the returns earned on the invested funds
Adjustable life insurance
allows you to modify any one of the three components of life insurance (premium, the face amount of the policy, and the rate of cash-value accumulation) with corresponding changes occurring in the other two. These changes may be made without providing new proof of insurability. 12.2b
A death benefit could include: a. Outstanding amount borrowed against the cash value of the policy b. Unpaid dividends c. Premiums d. Any of the above
answer is D
Your approach to life insurance should be to a. buy low and sell high. b. buy now and pay later. c. insure less and pay less. d. buy term and invest the rest.
answer is D
Cash value life insurance:
b. Gives you another investment vehicle you can use to borrow against
Term life insurance:
b. Pays out if you die within the term period
A parent in his early thirties has determined that he needs about $1 million in additional life insurance. What would be the best way to meet this need?
b. several level-premium term life insurance policies with differing face amounts
Credit life and mortgage life insurance are bad because:
c. The premium doesn't ever decrease and the amount of insurance you are getting is less
The type of life insurance that pays a death benefit and has aspects of an investment is
c. cash-value life insurance.
Financial planning is:
c. for everyone
Policy loans are:
d. Something you can get with a cash value life insurance policy
The owner or policyholder in life insurance is:
d. The person who took out the policy
Settlement options are:
d. Ways the policyholder can choose how the death benefit will be paid out to the beneficiary
Who of the following would be least likely to need life insurance?
d. a married certified public accountant with no children whose spouse is a dentist
The choices a life insurance policy beneficiary and/or the policyholder have concerning the form of payment of the death benefit are called
d. settlement options
How are you going to try to achieve the financial goals you set for yourself?
d. through financial planning
The type(s) of financial risk reduced via life insurance is/are
dying too soon, before you can provide for others.
lapsed policy
is one that has been terminated because of nonpayment of premiums
Modified life insurance
is whole life insurance for which the insurance company charges reduced premiums in the early years and higher premiums thereafter. The premiums are lower in early years because some of the protection during the early years is provided by term insurance. Because modified life insurance uses term insurance in the early years, it accumulates cash value extremely slowly. 12.2b
The term death benefit relates to:
life insurance
First-to-die policies cover
more than one person but pay only when the first insured dies. These policies are less costly than separate policies written on each person, but the survivor then has no coverage after the first person dies 12.3a
policies that do not pay dividends are called
nonparticipating policies. Both term and cash-value policies may pay dividends. 12.3a
Life insurance application is the
policyholder's offer to purchase a policy. It provides information and becomes part of the life insurance policy. Any errors or omissions in the application may allow the insurance company to deny a request for payment (usually within the first year) of the death benefit and instead any premiums will be refunded. 12.3a
multiple indemnity clause
provides for a doubling or tripling of the face amount if death results from certain accidents. It is most often used to double the face amount if death results from an accident. Such a clause is often included automatically as part of the policy at no extra cost.
The potentially largest component of potential financial losses from premature death is
replacement of the lost income stream.
Viatical companies
specialize in buying life insurance policies from terminally ill insureds for a percentage of the death benefit in return for being named owner and beneficiary on the policy
Suicide clause
that allows the life insurance company to deny coverage (although all premiums will be refunded) if the insured commits suicide within the first two years after the policy is issued. If the specified number of years has elapsed, the full death benefit will be paid. 12.3a
accelerated death benefits clause (or living benefit clause)
that allows the payment of a portion of the death benefit prior to death if the insured contracts a terminal illness or requires long-term medical care such as in a nursing home. 12.3b
the survivorship joint life policy,
which pays when the last person covered dies. 12.3a