Life Insurance Exam Review
Accidental Death Benefit
A provision added to a life policy for payment of additional benefits if the death is as a result of an accident within a state time period as stated on the death certificate.
Joint Life Insurance
Covers two or more persons with benefits paid at the first death. Premiums are higher because the probability of death are higher than a single insured's policy.
Ordinary Life (AKA whole life, straight life)
Insurance remains in full force until insured dies or turns age 100 when face amount is paid out
Requirements of a Whole Life Policy
Requires reserving of funds for future claims that results in a cash surrender or loan values
Face Amount
The amount of insurance coverage when the policy is issued
Grace Period
One Month following the insurance due date for payment of premium with full policy benefits. If a loss occurs, the insurance company is entitled to the missed premium.
Guarantee Issue Whole Life
Insurer issues the life policy without health questions. Death benefits are not payable for the first 2 years. If insured dies before 2 years, the insurer pays back the premiums plus interest. After 2 years, the face amount is in full force. Because of no underwriting, the premiums will be higher then a regular whole life policy
Contestable Period
For two years following the policy issue date, the insurer can challenge the policy because false information on the application. The false information must materially effect the risk. If claim is denied, the premium is refunded
Single Pay Life Policy
Insured agrees to pay a one time premium for a lifetime of coverage
Limited Pay Life Policy
Insured agrees to pay premiums for a limited number of years with coverage until death or age 100
Interest Sensitive Whole Life
Insured pays regular premiums with benefits adjusting based on investment returns, changes in morality and expenses. If interest rates or investments decline, the insured maybe required to pay more premiums or reduce the face amount.
Changes to Life Policy
No change is in effect unless the insurance company and insured agree to the changes. Only the president and secretary of the insurer can approve contract changes.
Graded Whole Life
Death benefit increases based on a schedule listed in the policy.
Modified Endowment Contract
A modified endowment contract (MEC) is a tax qualification of a life insurance policy where the policy has been funded with more money than allowed under federal laws. If the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code, the life insurance policy becomes a modified endowment contract. What is a 'Modified Endowment Contract - MEC' A modified endowment contract (MEC) is a tax qualification of a life insurance policy where the policy has been funded with more money than allowed under federal laws. If the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code, the life insurance policy becomes a modified endowment contract. Next Up Section 1035 Exchange Term Life Insurance Variable Life Insurance Policy Section 7702 BREAKING DOWN 'Modified Endowment Contract - MEC' Taxation under an MEC is similar to taxation under an annuity. Under an MEC, the death benefit payable to the beneficiary is not subject to income tax. An MEC is usually bought by individuals who are interested in a tax-sheltered, investment-rich policy, and do not intend to make pre-death policy withdrawals. A life insurance policy that becomes an MEC is no longer considered life insurance by the IRS; MECs are essentially treated like nonqualifying annuities for tax purposes. This reclassification to an MEC changes the ways in which the IRS taxes money withdrawn, and can result in penalties for a life insurance owner if the owner makes a withdrawal before the age of 59.5. Criteria for Becoming an MEC Specifically, a life insurance policy is considered an MEC by the IRS if three conditions are met. First, the policy was entered into after June 20, 1988. Second, it meets the statutory definition of a life insurance policy. Third, the policy must fail to meet the 7-pay test. Life insurance policies entered into prior to June 20, 1988, are not subject to the payment of premiums in excess of the money allowed under federal laws. However, if an older life insurance policy is renewed after this date, it is considered new and must be assessed with the 7-pay test. The 7-pay test is assessed by calculating if the total amount of premiums paid into a life insurance policy by the holder within the first seven years exceed the amount of premiums required to have the policy be considered paid up in seven years. If the premiums paid exceed the amount required, then the life insurance policy is considered an MEC. Tax Implications of an MEC Unlike traditional life insurance policies, MECs have gains taxed first on any withdrawals under LIFO accounting. Further, any withdrawal made by the policyholder prior to the age of 59.5 is assessed with a 10% tax penalty. However, the cost basis of the MEC and the withdrawal are both not subject to taxation. Finally, even MECs have death benefits that pass onto the beneficiaries tax-free. This makes MECs useful for estate planning purposes. Since the death benefit is tax-free, policy owners who do not expect any early withdrawals are not subject to additional taxes and can pass on a Read more: Modified Endowment Contract (MEC) Definition | Investopedia http://www.investopedia.com/terms/m/modified-endowment-contract.asp#ixzz4HirQNNKu Follow us: Investopedia on Facebook
Joint Life and Survivor Insurance
Covers two or more persons with benefits paid at the last insured's death. Premiums are higher because the probability of death are higher than coverage of a single insured. It is cheaper than a Joint Life policy
Universal Life Insurance (aka Adjustable Life)
Premiums are flexible with adjustable coverage. This policy is unbundled because the insurer identifies the investment earnings, cost of protection and company expenses to the insured with annual reports. If the earnings do not exceed the cost of coverage & company expenses, the cash value will decrease. When the cash value reaches $0, the coverage ends. If earnings & premiums paid exceed cost of protection & expenses, the cash value & death benefits can grow. Investments are held in the general account of the insurer.
