life insurance test 2

Per Stirpes

-there is a family with children and each child has an equal share of estate upon death of parents -if one child dies, then their share is given to their kids, and the rest of siblings have same share -if that same child dies and does not have kids of their own, siblings share increase/distributed equally ** KEY DIFFERENCE: grandchildren only get a share if child dies

life insurance contract characteristics

-utmost good faith -contract of adhesion -valued policy -conditional -unilateral -aleatory

statutory control over contract provisions

-not any exact wording required by statute -policies must contain certain standard provisions -policy form(contract) must be approved by the state insurance regulators before put into use

formation of life insurance contract

*the owner-applicant for life insurance does NOT have to be the same person as the insured; and the beneficiary can be a different person from the owner and insured as well 1) legal capacity of parties 2) mutual assent 3) consideration 4) legal purpose

Uses of Term Insurance

- temporary need for protection - permanent need for protection, but the insured temporarily cannot afford the premiums for permanent insurance -higher level of death benefit for a given level of premiums in early years of policy compared to whole life

Utmost Good Faith

A principle of insurance which states that the insurance company must be able to rely on the honesty and cooperation of the insured, and the insured must rely on the company to fulfill its obligations in good faith. -each party obligated to disclose material information

Waiver of Premium

Continuation of life insurance coverage if the insured becomes totally disabled and is unable to pay the premiums.

Joint and Last Survivor Annuity (second to die)

Covers the lives of the annuitant and another person. Payments continue until both parties die. Payments usually smaller than straight life.

Five-year Renewable Term

Fives years of insurance protection - premium increases every 5 years and based on attained age at renewal time

Liquidation Period (Payout Period)

Follows the accumulation period and refers to the period in which the funds are being paid to the annuitant -annuity does not depend on how funds accumulated -annuity benefit is s function of premiums paid, annuitant's age when liquidation begins, annuitant's gender, number of lives covered, any minimum guarantees purchased

Term Insurance

Temporary protection against financial loser due to death - pays the face amount of the policy to the beneficiary if the insured dies during the specified period, and nothing if the insured survives - premiums increase with each renewal -no cash value of dividends - 1 year, 5 years, 10 years, up to 30 - if you live a long time, they're going to expire

Primary Beneficiary

The person who is named as first to receive benefits from a policy. -insured's estate -proceeds payable in a lump sum vest immediately provided if this dude is alive when the insured dies

Legal Purpose

The purpose of the contract must be legal and not against public policy.

Longevity Risk

The risk of outliving your retirement savings

pure endowment

This type of endowment does not include a death benefit and only pays out to the insured if he or she survives the endowment period, at which point the endowment has matured and is distributed to the insured. - cash value increases with passage of time because you are investing - if you die no one gets any money

Longevity Insurance

a single premium deferred annuity which generally has a twenty year gap between when premium is paid and annuity benefits begin; typically liquidation begins at a late age like 80 or older -this deferred annuity does not refund money if annuitant dies during accumulation phase

Irrevocable Beneficiary

beneficiary cannot be changed without beneficiary's consent -divorces

Policy Loan Clause

cash-value policies usually provide for loan in amount not to exceed cash value less interest until next policy anniversary -loan may be repaid in whole or part at any time

All My Children

children of deceased child receive nothing (they are not your children, they are your grandchildren) children of living children receive nothing at your death as well

Cash Surrender Value

gross cash value reduce by surrender charges and balance of policy loan outstanding -old whole life policy canceled (no new policy) -paid to policy owner

Life Annuity Certain

guaranteed minimum number of payments, with payments continuing for the whole of the annuitant's life if he or she should live beyond the guarantee period - the longer the guarantee period, the smaller the income payments

Variable Annuity

income payments (annuity benefits) vary with the investment experience of assets that back the contract -does not have a minimum interest rate during accumulation or minimum annuity payout during liquidation -guaranteed minimum death benefit during accumulation period--> if annuitant were to die during this period

Pure Life Annuity (straight life annuity)

income payments continue as long as annuitant lives, but end at annuitant's death - no guaranteed number of payments -max income per dollar of annuity purchase price has the potential for providing the maximum income per dollar of premium if the annuitant lives beyond their life expectancy. However, if the annuitant dies before his or her life expectancy, and before the total benefit has been paid out, payments cease and there is no refund of payments to survivors. highest monthly benefits

Increasing term insurance

insurance that provides a death benefit that increases at periodic intervals over the policy's term. --Usually used to cover a BUY SELL AGREEMENT and is usually purchased as a COST OF LIVING RIDER.

Accelerated Death Benefit (living insurance)

insurer pays a fractions (below 100%) of a life insurance policy's face amount prior to the insured's death because of some specified, adverse medical condition of the insured, usually terminal illness -nothing is paid at death -most companies require life expectancy to be less than or equal to 12 months

conditional

insurer's obligation to pay a claim depends upon the performance of certain acts by insured -on condition that you're safe we will pay claims

Mutual Assent

offer and acceptance must exist before a life insurance contract is created

Unilateral Contract

only insurer makes a legally enforceable promise

temporary life annuity

payable annuity for a fixed period or until death, whichever comes first

first-to-die (joint life insurance)

pays the face amount on the first death of one of two (or more) insureds covered by the contract -premium is higher than second-to-die and higher than separate policies - used for business buyouts --> ex: pays the DB to the surviving business partner in order to buyout deceased spouses share of the business

Beneficiary Clause

permits the policy owner to have the death proceeds distributed to whomever and in whatever form he or she wishes

Convertibility

permits the policyholder to exchange the term contract for a cash value/whole life contract without evidence of insurability - either attained age method or original age method

annuitant

person who receives the periodic payment under and annuity

limited payment policy

premiums paid for a limited number of years only, after which the policy is paid-up for its full face amount -higher premium policy results in higher cash value--> higher than ordinary life with same face value -the shorter the premium-paying period, the faster the cash value grows

endowment insurance

promises to pay the face amount if the insured dies during the specified period (term of policy), or the face amount if the insured survives a specified period (until end of term) -pure endowment + term life -emphasis on savings element of life insurance - accumulated cash value + investment

Joint Life Annuity

provides a specified income for two or more persons, with the income ceasing upon the first death among the annuitants

Renewability

right to renew coverage for a limited number of additional periods of term insurance, usually of same length, without a medical examination or other evidence of insurability -maximum renewal premiums are guaranteed

Immediate Annuity

single-premium immediate annuity, first income payment is made one payment interval after the purchase date - these do not have an accumulation period -usually purchased with a large sum

Suicide Clause

states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid

Entire Contract Clause

states that the life insurance policy and attached application constitute the entire contract between the parties

Assignment Provision

the current owner can transfer ownership in life insurance policies to another person -assignee does not need an insurable interest -beneficiary can assign his interest

Ultimate mortality table

used to provide higher premium rates during reentry

Yearly Renewable Term

One year of insurance protection -Death benefit is level - Premiums increase at each renewal; determined by the death rate for the attained age of the policyholder at each renewal (hence why it increases bc ur getting older, more likely to go bye bye!!) -renewable without evidence of insurability

Whole Life / Cash Value Insurance

Permanent insurance protection (regardless of changes in health) -Pays face amount (death benefit) upon insured's death --> face value stays the same for, DB guaranteed not to decrease -prefunding for future mortality costs--> premiums going to be higher in the beginning and decrease as time goes on -cash value accumulates as a result of this prefunding--> therefore premium is not a good measure of policy's cost

sources of income during retirement

- social security: fixed monthly benefit like a defined benefit plan, but periodically there is an inflation increase -employer sponsored retirement plan > defined benefit: certain amount per month as long as you live > defined contribution: not guaranteed income, not guaranteed you will have money as long as you live - individual retirement accounts: through you, not your employer - annuities - personal investment - jobs

Uses of Whole Life Insurance

-Lifetime protection Savings - you'll owe estate taxes - don't know how long you'll need insurance - want to leave a legacy/inheritance

Extended Term Insurance

-amount of insurance same as original policy, duration shorter -has a cash surrender value until expiration (end of term)

Decreasing Term Insurance

-death benefit decreases -premium remains level

Exceptions to the Incontestable Clause

1) The beneficiary takes out a policy with the intent of murdering the insured 2) The applicant for insurance has someone else take a medical examination 3) An insurable interest does not exist at the inception of the policy

Variable Universal Life Insurance

A form of universal life insurance that allows the policyholder to make fund choices for the investment component but that has no guaranteed cash value and no guaranteed interest rate. -DB follows UL approach with option A and B

refund annuity

A guaranteed-minimum annuity that, on the annuitant's death, makes monthly payments to the beneficiary until the total price of the annuity is refunded.

Consideration Clause

A part of the insurance contract that states that both parties must give something of value for the transfer of risk, and specifies the conditions of the exchange. -application and first premium -subsequent premiums are conditions precedent for enforceable contract

Presumption of Death

A person is presumed to be dead if he/she has been missing for 7 years and there has been no communication with that person -policy must be kept in force for 7 years or the beneficiary is not entitled to the proceeds, unless it can be proven that death occurred before the policy terminated -if insured reappears after death benefit paid, then beneficiary must repay DB usually plus interest of life ins company

misstatement of age or sex

Allows the insurer to adjust the policy benefits if the insured's age or sex is misstated on the policy application. - if insured is still alive when misstatement discovered, then premiums rather than benefits are adjusted -incontestable clause not relevant

Automatic Premium Loan

Allows the insurer to borrow from the cash value to pay unpaid premium after grace period expires. It makes sure that the policy does not lapse

Life Annuity

An Annuity that provides a periodic income to the annuitant during his lifetime. -A straight Life Annuity has no beneficiary and is considered to be the most risky type of annuity. The annuitant is betting that he will live a long time, but the insurer is betting he is going to die. -Remember, annuities are the opposite of life insurance! - each annuity payment consists of a return of principal, interest earnings, and a survivorship element

Contingent Beneficiary

An alternate beneficiary designated to receive the policy proceeds in the event that the primary beneficiary dies before the insured. -if both insured and primary die in same accident and no evidence as to whom died first, proceeds payable to this dude or else goes to insured's estate

Installment refund annuity

An annuity income option that provides for the funds remaining at the annuitant's death to be paid to the beneficiary in the form of continued annuity payments. - so same concept of cash refund but instead of cash lump sum the beneficiary is just gonna keep getting the annuity money in installments

Annuity Certain

Annuity that pays a specified monthly level of income for a predetermined time period, such as ten years. The annuitant is guaranteed by the insurance company to receive those payments for the agreed upon time period. If the annuitant dies before the time period expires, the annuity payments are then made to the annuitant's designated beneficiaries. -no mortality risk -receives principal premium plus interest -if annuitant lives a very long time the payment stops

Insurable Interest

Any financial interest in life or property such that, if the life or property were lost or harmed, the insured would suffer financially -everyone has this in their own life and may make insurance benefit payable to whomever he or she wishes -applicant or policy owner must have an insurable interest in life of proposed insured but beneficiary does NOT need insurable interest -must exist at inception of policy

attained age method of conversion

CURRENT age at conversion determine the premium level for cash value policy -usually means premium is higher after conversion

Deferred Annuity

a type of annuity where the payments begin at some future date, more than one payment interval between premium payments and income (benefit) payments - have an accumulation period - tax deferral of investment earnings -can accumulate with one insurance company and then liquidate with a diff one--> do this bc you can get a higher benefit -potential surrender charges -usually paid in multiple premiums, not just one lump sum, because you are accumulating money over a period of time before you begin receiving -"early withdrawals" usually money has been in for 7 years

accumulation period

The time before an annuitant's retirement during which the annuitant is making payments or investments in an annuity. - insurance company trying to reach desired amount to provide annuity benefits - time before between first premium payment and start of the payout period (liquidation period) -usually if purchaser dies during this period, insurer is obligated to refund all or portion of the annuity cash value -deferred annuity has this -premium payments flexible

Nonforfeiture Options

Three options available by law to policyowners that enable them to recover a policy's cash-value upon surrender of that policy. (1) Cash (2) Reduced Paid-Up Insurance (3) Extended Term Insurance -not applicable to term life ins -minimum cash surrender values specified by insurance regulations -mortality table to be used, maximum interest rate, and a first year expense allowance set by law

Reentry

Type of term life required insureds to pass regular medical exam to qualify for significantly lower rates - required evidence of insurability - reentry term premiums based on a select/ultimate mortality split - reduces adverse selection related to guaranteed renewability

annuity

a contract that promises to pay the recipient a periodic payment -monthly, quarterly, annually -purpose to liquidate a principal sum of money in a systematic manner

Aleatory Contract

a contract where the values exchanged may not be equal but depend on an uncertain event -in the element of chance, one party may receive more in value than the other

Equity Indexed Annuity

a fixed, deferred annuity that allows the owner to participate in the growth of the stock market and provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term - interest rate typically is 3% - considered fixed because of a minimum return guarantee

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 -guaranteed minimum death benefit equal to the original face amount -cash value not guaranteed--> can go up or down -policyholder chooses how to invest cash value, limited choice of underlying investment

second-to-die life insurance (survivorship life insurance)

a form of life insurance that insures two or more lives and pays the death benefit upon the death of the second or last insured - lower premium than having separate policies - used for estate taxes, used frequently with husband and wife

Valued Policy

a policy that pays the face amount of insurance if a total loss occurs - not contract of indemnity

Universal Life Insurance

a whole life policy that combines term insurance and investment elements - flexibility in premium payments, adjustable DB, current interest rates - guarantees min cash value and death benefits - death benefit may be raised with evidence of insurability -policy loans available - policy owner may pay zero premiums provided cash value is sufficient to cover expense and mortality charges - NAR= death benefit - cash value -Option A and B -uses: life cycle, vary premium payments and death benefits as needed

Original Age method of Conversion

age at term policy issuance determines the premium level for cash value policy, financial adjustment required - time limit for conversion -usually a lump sum payment in order to obtain lower premium - lump sum payment at conversion is equal to guaranteed minimum cash value that would have existed if whole life policy had been purchased originally

legal capacity of parties

all parties must be legally able to enter into an agreement otherwise the contract is void or voidable -insurance company remains obligated

Grace Period Provision

allows premium to be paid up to 31 days after the due date, policy remains in effect during this period -after this period, contract continues provided cash value exists -if the insured dies during this periods, premiums due are subtracted from the death proceeds

Reduced Paid-Up Insurance

amount of insurance is reduced, duration (term) same as original policy -has a cash surrender value that increases to face amount of insurance at age 100

survivorship element

annuitants who live much longer than average receive back more than they paid in premiums plus interest. - the additional amount coming from annuitants who live a shorter than average life span

Uses of Annuities

designed to liquidate principal so they make great retirement products, can cover one or two lives and also create and accumulate funds for college education - tax deferral of investment income even when contributions are not tax deductible

Accidental Death Benefit Rider

doubles the face amount of life insurance if death occurs as a result of an accident -death generally has to occur within 90 days of injury (accident)

medically underwritten annuities

in determining premiums and/or annuity benefit, must consider the shorter life expectancy of annuitants with certain medical conditions that substantially shorten the annuitant's life expectancy (even if not terminally ill) - most annuities don't involve this though

Return of premium term insurance

is a product that returns the premiums (without interest) at the end of the term period provided the insured is still alive - pays face amount of death benefit

per capita

living children and grandchildren share equally based on head count (when one dies it increases the share others receive; when a new child, grandchild born, decreases the share others receiver ** KEY DIFFERENCE: all children and grandchildren have equal shares

Cash refund Annuity

lump sum paid to the beneficiary to the difference between the purchase price of the annuity and the sum of the installment payments made prior to the annuitant's death -so pretty much the the beneficiary is getting the rest of the money thats left in the annuity in a big ole cash lump sum ex: assume premium is $100,000, annual benefit is $8,000, annuitant died after 10 years of benefits--> refund of $20,000 to beneficiary

Incontestable Clause

prevents the life insurer from voiding contract after the passage of 2 years on the grounds of fraud, concealment, or material misrepresentation -protects insured from insurers who try to avoid paying benefits the event of a claim -cause of death does not need to be related to misrepresentation for insurer not to pay death claim

Contract of Adhesion

the insured must accept the entire contract with all of its terms and conditions - only had the option to accept or reject - ambiguities interpreted in favor of insured

Revocable Beneficiary

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

Universal Life Option A

type of universal life that pays a level death benefit -NAR decreases over time as cash value increases

Universal Life Option B

type of universal life that pays death benefit equal to states level NAR plus cash value -NAR level over time as cash value increases

Select Mortality Table

used to provide lower premium rates during reentry as long as the insured is able to provide new evidence of insurability

ordinary life insurance

whole life insurance with level premiums that are payable for the rest of your life -max death benefit per annual premium dollar outlay among whole life policies