FIN 341 Section 3 (Exam 3) {Life Insurance}

What is Option A under Universal Life Insurance?

Pays a level death benefit in the early years, then increases towards the later part of the policy's life

What is the Guaranteed Purchase Option?

Permits policyholder to purchase additional amounts of life insurance at specified times without further proof of insurability

What is the Reinstatement Clause?

Permits the owner to reinstate a lapsed policy (evidence of insurability and full payment of premiums lapsed plus interest must be paid in full)

What is the Policy Loan Provision?

Policy owner can borrow the cash value on the policy, usually at about an 8% interest rate

How are proceeds paid under the Interest Option?

Policy proceeds are retained by the insurer, and interest is periodically paid to the beneficiary

How are proceeds paid under the Fixed-Period Option?

Proceeds are paid to a beneficiary over some fixed period of time

What are some options for having a Participating policy's dividends paid out?

-Cash -Reduction of premiums -Dividend accumulations: The dividend is retained by the insurer and accumulated at interest -Paid-up Additions: The dividend is used to purchase a small amount of paid-up whole life insurance

What are some characteristics of Decreasing Term Insurance?

-Face amount gradually declines each year -Premiums level and then decrease towards the end of the policy

What are some characteristics of Variable Life Insurance?

-Fixed premium policy -Death benefit and cash values determined by underlying investments (face-value can rise or fall but never below face-value) -Cash surrender values are not guaranteed and there are no minimum guaranteed cash values.

What are some characteristics of Universal Life Insurance?

-Flexible premium policy: Can adjust premium -Policy owner determines premium -Two forms of universal life insurance death benefits: Option A and Option B -Considerable flexibility -Cash withdrawals permitted

When it comes to taxes, how are death benefits treated?

-Generally not taxable if paid as lump sum -If annuity then distribution of original death benefit not taxed but interest earnings are taxed

What are some characteristics of Yearly Renewable Term Insurance?

-Issued for one-year period -Renewable -Premiums increase with renewal -Convertible

What are some characteristics of Ordinary Life Insurance?

-Level premiums where the insured is overcharged during early years and undercharged during later years -Insured is entitled to cash surrender value upon termination of policy, or as loans during the policy life

What are some characteristics of 5-, 10-, 15-, or 20-year Term Insurance?

-Premiums paid during term are level -Premiums increase with renewal

What are some characteristics of Term Insurance?

-Renewable: Policy can be renewed without proof of insurability -Convertible: Can convert to a cash-value policy without evidence of insurability -No cash or savings element

What are some characteristics of Variable Universal Life Insurance?

-Selection of investments by policy owner -No minimum interest rate or cash value guarantees -Relatively high expense charges

What are some Exclusions and Restrictions in Life Insurance?

-War Clause -Undesirable activities or hobbies (such as skydiving) not covered

What are 5 Settlement Options?

1. Cash 2. Interest Option 3. Fixed-Period Option 4. Fixed-Amount Option 5. Life-Income Options (Annuities)

Where do the dividends in a participating policy come from?

1. Difference between expected and actual mortality experience 2. Excess interest earnings 3. Difference between expected and actual operating expenses

What are some uses of Term Insurance?

1. Helpful for those with limitations on spending for insurance 2. Provides temporary protection that can be based around existing obligations (i.e. mortgage) 3. Guarantees future insurability since it can be converted into a cash-value policy without proof of insurability

When is Ordinary Life Insurance appropriate?

1. Lifetime protection is needed 2. Additional savings are desired

What are the 4 types of Whole Life Insurance?

1. Ordinary Whole Life 2. Variable Life 3. Universal Life 4. Variable Universal Life

What are some limitations of Term Insurance?

1. Premiums eventually reach prohibitive levels as someone who needs insurance ages 2. Inappropriate if you wish to save money for a specific need, where a cash-value policy would be more useful.

What are the 2 types of Life Insurance?

1. Term Insurance 2. Cash-Value Insurance

What are the 3 types of Term Insurance?

1. Yearly renewable term 2. 5-, 10-, 15-, or 20-year term 3. Decreasing term insurance

What is Option B under Universal Life Insurance?

Provides for an increasing death benefit, however there is no guarantee the death benefit will always increase

How are proceeds paid under the Fixed-Amount Option?

A fixed amount is periodically paid to the beneficiary

What is Variable Life Insurance?

A fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer

What is Universal Life Insurance?

A flexible premium policy that provides protection under a contract that unbundles the protection and saving components

What is Ordinary Life Insurance?

A level-premium policy that provides cash values and lifetime protection to age 121

What is a participating policy?

A policy that pays dividends

What is a Class Beneficiary?

A specific person is not named but is a member of a group designated as beneficiary, such as "children of the insured". Policy proceeds divided equally among the group.

What is the Accidental Death Benefit Rider?

Doubles face amount of life insurance if death occurs as a result of an accident

When it comes to taxes, how is cash value treated?

If policy is surrendered then cash value is taxed to extent that it exceeds premiums paid over life of policy

How are proceeds paid under the Life Income with Guaranteed Total Amount Option?

If the beneficiary dies before receiving installment payments equal to the total amount of insurance placed under the option, the payments continue until the total amount paid equals the total amount of insurance

What is the Suicide Clause?

If the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid

How are proceeds paid under the Life Income with Guaranteed Period Option?

If the primary beneficiary dies before receiving the guaranteed number of years of payments, the remaining payments are paid to a contingent beneficiary

When it comes to taxes, how are premiums treated?

Individual life premiums generally not tax deductible

How are proceeds paid under the Life Income Option?

Installment payments are paid only while the beneficiary is alive and cease on the beneficiary's death

What is Nonforfeiture?

Insurers must provide a minimum nonforfeiture value to policyholders who surrender their policies

Does a beneficiary have to have an insurable interest in the policyholder?

Nope

What is Variable Universal Life Insurance?

Similar to Universal Life Insurance with two major exceptions: 1. The policyholder determines how the premiums are invested 2. The policy does not guarantee a minimum interest rate or minimum cash value

What is the major limitation of Ordinary Life Insurance?

Some people are still underinsured after the policy is purchased (For some who are on a budget, term insurance premiums usually buy far more coverage for the same price)

What is a Specific Beneficiary?

The beneficiary is specifically named and identified

Who is a Contingent Beneficiary?

The beneficiary who is entitled to the proceeds if the primary beneficiary dies before the insured

Who is a Primary Beneficiary?

The beneficiary who is first entitled to receive the policy proceeds on the insured's death

What is Reduced Paid-Up Insurance nonforfeiture?

The cash-surrender value is applied as a net single premium to purchase a reduced paid-up policy

What is the Incontestable Clause?

The insurer cannot contest the policy after it has been in force two years during the insured's lifetime

What is the Entire-Contract Clause?

The life insurance policy and attached application constitute the entire contract between the parties.

What is Extended Term Insurance Non-Forfeiture?

The net cash-surrender value is used as a net single premium to extend the full face amount of the policy into the future as term insurance for a certain number of years and days

What is a Beneficiary?

The party named in the policy to receive the policy proceeds.

What is Cash Value nonforfeiture?

The policy can be surrendered for its cash value, at which time all benefits under the policy cease

What is a Grace Period?

The policy owner has a period of 31 days to pay an overdue premium

What is an Irrevocable Beneficiary?

The policyholder cannot change the beneficiary designation without the beneficiary's consent

What is the Ownership Clause?

The policyholder possesses all contractual rights in the policy while the insured is living

What is a Revocable Beneficiary?

The policyholder reserves the right to change the beneficiary designation without the beneficiary's consent

What is a Viatical Settlement?

The sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups who hope to profit by the insured's early death

What are Settlement Options?

Ways that the policy proceeds can be paid

What is the formula for calculating the cash value amount in a Universal Life Insurance policy?

Annual Premium - Premium Expense Charges - Administrative Charges - Mortality Cost + Interest = Cash Value Account Balance

What is Whole Life Insurance?

Cash-value policy with lifetime protection

What is the purpose of Life Insurance?

Covers premature death of a family head with outstanding unfulfilled financial obligations