Unit 3: Basics of Life Insurance
Which of the following terms refers to how easily an asset can turn into cash without loss of value?
Liquidity
Which of the following premiums is the mortality element minus the interest element?
Net premium
Living and death benefits, level premiums, and lifetime coverage are characteristics of which of the following classes of insurance?
Permanent life insurance
Which of the following factors does NOT have an effect on the insurance premium rates?
Producer Certificate
Gross Premium
net premium + expenses
Classes of Life Insurance Policies
- Individual vs. Group - Term vs. Permanent - Participating vs. Non-participating - Fixed vs. Variable - Industrial & Home Service
All of the following are examples of insurable interest
- Sue would like to buy a life insurance policy on her spouse - Amy would like to buy a life insurance policy on her business partner - Michael and Megan would like to buy a life insurance policy for each of their children NOT - Tom would like to buy life insurance on his best friend
Insurable Interest
- a risk of loss - must be proven before policy can be purchased - the relationship doesn't have to exist at death
All of the following are names of distinct income need periods
- family dependency - preretirement - retirement
Must Prove Insurable Interest
- have financial or emotional loss *only have to prove if owner is different than the applicant (third-party ownership) *Examples) spouse, kids, business partner, key employees - assumed you have insurable interest when purchasing policy on yourself - insurable interest must be present at the time of application only
Premium Mode
-Annual, semi-annual, quarterly, monthly -annual is the lowest
Business Uses of Life Insurance
-buy sell funding (cross purchase: surviving owner purchases deceased owner's interest in business, entity purchase: the purchaser of a deceased owner's business interest is the business entity itself.) -key person -executive bonus -deferred compensation
Determining Amount of Life Insurance Needed
-human life value (current income) -needs approach (money for specific needs
Premium Elements
-mortality: the relative frequency of deaths in a specific population; death rate. -interest: earnings on premium dollars between the time they are collected and the time they are paid out as claims -expenses: insurer operating costs, referred to as the expense load. -net premium
Personal Uses of Life Insurance
-survivor protection: the insured has the peace of mind knowing that their survivors are protected financially if the worst should happen to them. -mortgage payoff: mortgage life insurance will pay off this debt if the insured dies and assures that the living family is able to stay in their home. -estate creation: life insurance can create an estate for the is the insurer is too young to have built one by the time of death. -estate conservation: allows the heirs to an estate to enjoy and partake in the items left behind without the expense of taxes to the estate. -liquidity: how easily an asset can be turned into cash without the loss of value. -cash accumulation: can have a cash value component that can grow over time.
When the owner of a life insurance policy is not the insured, there are three parties to the contract. Which of the following is not a part to this type of contract?
Beneficiary Actual Parties: - insured - applicant - insurer
Which of the following classes of life insurance has a death benefit only, increasing premiums temporary coverage andexpires at end of the term?
Term life insurance Characteristics: - death benefit only - increasing premiums - temporary coverage; expires at the end of term - cannot be renewed after a certain age
Introduction
The primary reason for buying life insurance is to protect a family when a family member dies. It can also be used to protect a business, transfer wealth from one generation to another, provide retirement income, and serve as a source of financing.
The assets left behind after an individual's death is known as
an estate
Life insurance premiums are lowest under which premium payment mode?
annual
The preretirement period, one of the distinct income needs periods, is also known as the
blackout period
In a buy-sell agreement, the life insurance policy is written on the
business owner's life
Which of the following describes an employer that agrees to pay an employee a stated amount of income beginning at retirement rather than paying them the money now?
deferred compensation plan
All of the following are examples to buy-sell agreements EXCEPT
executive bonus plan Correct Examples: - cross purchase plan - entity plan - stock redemption plan
Which of the following types of insurance has premiums that are due weekly and are collected in person by producers who go door to door?
industrial life insurance
The number of individuals who die each year at a given age is also known as
mortality
In life insurance contracts, when must insurable interest exist?
only at the time the policy is purchased
Which of the following stated the purpose of life insurance is to replace the economic value of an individual?
the human life value principle
Which of the following is NOT a personal use of life insurance?
third party ownership Personal Uses: - estate creation - cash accumulation - mortgage payoff