Chapter 4 - Life Insurance

Three Stages of Career

1. asset accumulation 2. conservation/risk-management 3. distribution/gifting

Approaches to Determine Insurance Needs

1. human life value 2. needs 3. capitalized earnings approach

Readjustment Period

6 months - 2 years

Cash Surrender Value

Amount available to the owner when a life insurance policy is surrendered to the company. During the early policy years, the cash value is the reserve less a "surrender charge"; in later policy years, it usually equals or closely approximates the reserve value at time of surrender.

Modified Endowment Contract (MEC)

If a life insurance policy develops cash value faster than a seven-pay whole life contract, it

Whole Life Insurance

Insurance that is kept in force for a person's entire life and pays a benefit upon the person's death, whenever that may be, steady premium tax deferred growth of cash value

capitalized earnings approach

Method to determine life insurance needs that suggests the death benefits of a client's life insurance should equal an income stream sufficient to meet the family's needs without depleting the capital base

Extended Term Insurance

Nonforfeiture option providing for the cash surrender value of a policy to be used as a net single premium at the insured's attained age to purchase term insurance for the face amount of the policy, less indebtedness, for as long a period as possible, but no longer than the term of the original policy.

Reduced Paid-Up Insurance

Nonforfeiture option where cash value is used to make a single premium payment to purchase as much of the same type of insurance as possible. Face amount of the new policy would be less than the original policy but no further premium payments would be necessary. Policy can be reinstated.

Human Life Value Approach

PV of lost future earnings (p.145)

Universal Life B

Same as universal A except that death benefits vary directly with the cash values

Annual Renewable Term Insurance

Term coverage that renews annually with a level face amount without prove of insurability; premiums increase because of mortality risk

Unholy Triangle

benefit is considered a taxable gift from the owner

How can you receive premiums from a whole life insurance

cash reduced premiums accumulate at interest paid up additions one year term (5th dividend)

Variable Life

cash value invested in securities death benefit changes based on performance

Surrender Charge

fee charged to the insured when a life policy or annuity is surrendered for its cash value it's to make up for the first few premiums, which don't recoup them their money

Universal Life A

flexible premium, adjustable death benefit unbundled life insurance contract, beneficiary receives cash value or death benefit

Limited Pay Life

higher premiums, only pay for specified amount of years

7 Pay Test

if premiums paid during the first 7 years exceed the net level premium that should have been paid, it is a MEC (Modified Endowment Contract)

Universal Life Insurance

insured can adjust premiums, face value, cash value can make contributions

second-to-die life insurance

insures two or more lives and pays the death benefit upon the death of the second or last insured

Dependency Period

lasts from end of readjustment to age 18

Ordinary Life Insurance

pay premium until 100/120 or death

What is paid as premium for term insurance?

premium = risk to insurance company

Level-Premium Term Insurance

premiums stays constant; good for people who don't think they'll need it eventually

Mortality Cost

probability of death within 1 year * face value

Mortality Risk

risk of death within 1 year

Decreasing Term Insurance

same premium, but death benefit decreases

Term Insurance

shift responsibility for the term, must keep paying premiums

Group Term Insurance

term insurance with generally lower than typical premiums that is available to people within a defined group