4 Life Insurance Premium, Proceeds and Beneficiaries

Per Capita

Per capita, which means by the head, evenly distributes benefits among the living named beneficiaries.

T is covered by an Accidental Death and Dismemberment (AD&D) policy that has an irrevocable beneficiary. What action will the insurance company take if T requests a change of beneficiary?

Request of the change will be refused

M purchased an Accidental Death and Dismemberment (AD&D) policy and named his son as beneficiary. M has the right to change the beneficiary designation at anytime. What type of beneficiary is his son?

Revocable

Changing the Beneficiary

Revocable - The policy owner may change a revocable beneficiary at any time and without the knowledge or consent of the beneficiary.

Interest

Since premiums are paid before claims are incurred; insurance companies invest the money in an effort to earn interest. This interest is a primary factor in lowering premium rates.

Which premium schedule results in the lowest cost to the policy owner?

annual

Which of the following statements is correct regarding the tax treatment of a lump sum payment paid to a life insurance policy's primary beneficiary?

All proceeds are income tax free in the year they are received

Which of these statements is incorrect regarding the federal income tax treatment of life insurance?

Entire cash surrender value is taxable

Changing the Beneficiary

Irrevocable - The policy owner may not change the beneficiary without written consent of the beneficiary. The policy owner also cannot borrow against the policies cash value.

Which settlement option pays a stated amount to an annuitant, but no residue of value to a beneficiary?

Life Income

Common death settlement options (5)

Lump-Sum Cash Option Interest Only Option Fixed Period Option Life Income Option 1035 Exchange

Three Primary Factors Used in Determining Premiums

Mortality, Interest & Expense

Per Stirpes

Per stirpes, which means by the bloodline, distributes benefits of the beneficiary who died before the insured to the beneficiaries heirs.

Which of the following best describes a contingent beneficiary?

Person designated by the insured to receive policy proceeds in the event that the primary beneficiary dies before the insured

On a life insurance policy, who is qualified to change the beneficiary designation?

Policyowner

Who can be a beneficiary?

The decision rests solely with the policy owner. Beneficiary could be individuals, businesses, trust, estates, or even charities.

Fixed Amount Option

The fixed amount installment option pays a fix specific amount installments until the proceeds are exhausted

Life Income Option

The life income option provides the recipient with an income that he or she cannot outlive. Installment payments are guaranteed for as long as the recipient lives. The amount of each installment is based on the recipients life expectancy.

Fixed Period Option

Under the fixed-period option, also called Period Certain, proceeds will be paid out in equal installments over a specified period of years.

Special Situations

Uniform simultaneous death act - Under the uniform simultaneous death act, the law will assume that the primary beneficiary died first in a comment disaster. This is done to make sure the contingent beneficiary receives the death benefit proceeds.

Lump-Sum Cash Option

Upon the death Of the insured the policy is designed to pay the proceeds in cash called a lump sum. As a rule this lump sum is not taxable as income.

Interest Only Option

With the interest only option the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient beneficiary at regular intervals. The insurer usually guarantees a certain rate of interest and will often pay interest in excess of the guaranteed rate.

Mortality

Mortality means the rate of death. Mortality tables help insurance companies predict life expectancy and probability of death for a given group.

Quarterly premium payments increase the annual cost of insurance because

interest to the insurer is decreased while the administrative costs are increased

T and S are named co-primary beneficiaries on a $500,000 Accidental Death and Dismemberment policy insuring their father. Their mother was named contingent beneficiary. Five years later, S dies of natural causes and the father is killed in a scuba accident shortly afterwards. How much of the death benefit will the mother receive?

"$0". The mother receives $0 because T is still alive and the sole primary beneficiary, while the mother is still the contingent beneficiary.

K is the insured and P is the sole beneficiary on a life insurance policy. Both are involved in a fatal accident where K dies before P. Under the Common Disaster provision, which of these statements is true?

Proceeds will be paid to K's estate if P dies within a specified time

A primary beneficiary has died before the insured in a life insurance policy. A contingent beneficiary is also named in the policy. Which of the following will occur when the insured dies?

Proceeds will go to the contingent beneficiary

J would like to maintain the right to change beneficiaries. Which beneficiary designation should be used?

Revocable

Special Situations

Spendthrift trust clause - the spendthrift trust clause prevents the beneficiaries reckless spending of beneficiaries by requiring that benefits be paid and fixed installments.

Beneficiaries

There are very few restrictions on who may be named beneficiary of a life insurance policy. A beneficiary is the person to which the policy proceeds will be paid upon the death of the insured.

The common disaster clause provides that if both the insured and the sole named beneficiary were to die in a common accident, which of the following is true?

This clause provides the payment of proceeds to the insured's estate

Death Benefit Proceeds

Also called settlement options, are the methods used to pay the death benefit to a beneficiary upon the insured's death. The policy owner may select a settlement option at the time of the policy application and may also change that option at any time during the life of the insured.

1035 Exchange

In accordance with section 1035 of the internal revenue code certain exchanges of life insurance policies and annuities may occur in a non-taxable exchange. When a cash value life insurance policy is exchange for another cash value life insurance policy or an annuity for an annuity there will be no income tax on these transactions.

Calculating Premiums

Once an insurance company determines that an applicant is insurable, they need to establish an appropriate policy premium. -the premium will be used to cover the cost and expenses to keep the policy in force

Which statement regarding the change of beneficiary provision is true?

The policyowner can change the beneficiary

Primary Beneficiary

The primary beneficiary has first claim to the policy process following the death of the insured. The policy owner my name more than one primary beneficiary as well as how the proceeds are to be divided.

Secondary Beneficiary

The second beneficiary also called a contingent beneficiary or tertiary beneficiary, has second claim in the event the primary beneficiary dies before the insured. Contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time of the insured's death.