Chapter 3

What are the features of Variable life insurance?

1. A guaranteed minimum death benefit 2. cash value increases or decreases daily- no guarantee of the cash value amount 3. policy owner may borrow from the cash value if necessary 4. premiums are fixed

What low premium and high premium in CAWL?

1. Low premium- has a provision allowing the insurer to redetermine the premium after the initial guarantee period 2. high premium- has an optional pay-up provision that allows policy owner to cease paying premiums at a certain point and have a paid up policy

What are the features of the Variable Universal Life (VUL)?

1. minimum scheduled premium issued with initially specified death benefit. 2. Policy owner may increase death benefits and cash value by paying additional premiums, within certain limits. 3. cash value is maintained separately from the rest of the insurance plan. 4. Death benefit may be level or variable. 5. owner may make partial withdrawals from cash account

What is a variable universal life (VUL)?

1.aka flexible premium variable life- it offers 2. flexible premiums, control of cash value investment, and flexible death benefits. 3. cash value can be invested in a wide variety of separate accounts (similar to mutual funds)

T/F certificate of insurance is the same as life insurance policy

False, it is not itself a life insurance policy. Group life insurance allows the insured to choose the beneficiary

What is a corridor?

If cash value gets close to face value before the policy matures, an amount of insurance, called the corridor, is added to the cash value.

What is a convertible term policy?

It means that the policy owner has the right to change it into a permanent type of life insurance without additional evidence of insurability.

What is an increasing death benefit?

The benefit equals the cash value (level term plus increasing cash value) plus the face amount (pure insurance)

What is the difference between whole life and universal life?

Unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his or her accumulated savings to help pay premiums

What is a single premium life insurance?

it is paid with a single premium at the time of writing the contract. The cash value increases quickly because the policy is fully funded.

What are the features of the Interest- Sensitive whole life policy?

1. An accumulation account that earns interest at current rates 2. a fixed surrender charge 3. a fixed death benefit and maximum premium level 4. Policy may be low- premium or high- premium 5. Unlike universal life, a CAWL policy will lapse if the premium is not paid.

Describe the two ways that a term policy is usually convertible to permanent insurance

1. Attained age: whole life is issued with premiums based on the current age of the insured. 2. Original age: whole life is issued based on the age the insured was at the time of the original contract.

What the features of the limited pay whole life insurance?

1. Fully paid early, for example paid up at 65 policy. 2. can create permanent protection in shorter time 3. has level death benefit 4. face amount is paid out income tax free 5. accumulates cash value 6. policy owner can borrow from the policy 7. Accrues dividends

In terms of coverage, the major types of life insurance are?

1. Group life insurance 2. industrial life insurance. 3. Individual, or ordinary life insurance.

What are the features of single premium whole life insurance?

1. Instantly secures a death benefit that is several times the amount of cash put it 2. Accrues dividends 3. policy owner may borrow 4. For tax purposes, treated as a modified endowment contract. 5. The younger the policy holder is at the time of issue, the longer the time for the funds to grow.

What is Joint life Insurance?

1. Insures the lives of two or more people. The policy may use any type of whole life or term plan. 2. Under a first to die joint life policy, the death benefit is paid and the contract comes to an end at the first death, and there is no further insurance protection for other persons covered by the policy.

What is Survivorship life insurance?

1. It insures the lives of two or more people 2. a second to die joint life policy provides payment only when the second insured dies 3. premiums- which can be significantly less than if the two lives were insured separately usually continue to be payable until the second death. 4. Second to die policies are very useful in estate planning- policy can pay taxes on assets that may have been sheltered at the first death by the material deduction.

What is a multiple protection policy?

1. It pays a multiple of the face amount if the insured dies within a specific period. 2. Combinations of whole life and term insurance.

What is a family protection policy?

1. It provides coverage for each member of a family at the time the policy is issued. 2. Provides coverage for the principal wage earner at 4 times the spouse's and five times the children's coverage amounts. 3. Term coverage is then provided at no additional cost for the children born or adopted after the policy is issued

What are the drawbacks of using term life insurance?

1. Premiums increase significantly in later years; 2. There may be no coverage after the term expires; 3. Actually costs more than whole life if insured lives to the end of the term; 4. No cash value.

What are the advantages of using term life insurance?

1. Provides protection against contingencies that are temporary; 2. Provides large amount of coverage for the smallest cost; 3. Suitable for those with lower incomes who need protection; 4. Protects an individual's insurability; 5. Protects borrowed funds, such as mortgage loans, educational loans, car loans; 6. Supplements cash value insurance when attached as a rider to a whole life policy; 7. Hedges against known contingencies until some other plan can take over, such as a pension.

What is an ordinary (straight ) life insurance

1. Provides protection at a level premium throughout the life of the policy. 2. is permanent, in that it never has to be renewed or converted. 3. builds up a cash value during the life of the policy. 4. Matures at age 100, meaning it is designed to accumulate the face value amount when the insured reaches age 100. 5. is flexible concerning the period over which the owner must make payments.

What are the main types of life insurance policies?

1. Term Life 2. Whole Life 3. Interest-Sentitive Life 4. Endownment 5. Combination plans and variations 6. Annuity

Why do some states regard industrial policies as undesirable for consumers?

1. The cost can be high for the value. 2. Death benefits don't necessarily cover funeral expenses. 3. Policies build little cash value. 4. Companies may not have to make annual disclosures of the policy's cash value

What is Level Term Life Insurance?

1. The premium amount increases with the age of the insured. 2. Coverage Last 10,15,20,30 years. 3. Can renew if wish to extend 4. Most companies will not sell term past the applicant's 80th birthday.

T/F you renew your term life insurance without proof of insurability

1. True, some forms of term protection allow for a renewal. 2. Generally, the premium for the policy is based on the insured person's age and health at the policy's start, and the premium remains the same (level) for the length of the term

What are the two ways of the death benefit in Variable Universal Life? Whats the difference between them?

1. Under the level benefit- owner specifies the total death benefit. 2. Under the variable benefit- owner specifies an amount of pure insurance coverage to remain constant. (offers the potential for both cash value and death benefit growth)

What are the features of universal life insurance?

1. aka flexible premium adjustable life insurance 2. Unbundling of the basic components of a life policy 3. increasing mortality charge with age 4. Accumulation of cash value and interest with payment of premiums 5. Ability to change the face value at specified intervals 6. Ability to make partial withdrawals from the cash account. (in whole life you must take a loan)

What is level death benefit

1. allows the policy owner to specify the amount of insurance. 2. Death benefit equals the cash value plus the remaining pure insurance, which decreases over the term.

What is a Family Maintenance Policy or Rider?

1. combines features of level term insurance and whole life; 2. pays a monthly benefit to the insured's survivors for a specified period after the insured's death, in addition to the face amount of the policy

What is the Seven Pay Test?

1. if aggregate premiums paid during the first seven years are greater than the total premium that would be paid for the seven year level premium contract, the contract is a MEC. 2. Funds withdrawn from an MEC are LIFO and fully taxable 3. A penalty of 10% is imposed if withdrawn before age 59.5 4. The tax treatment of any death benefit -still qualify for income tax free treatment

What is decreasing term life insurance?

1. is characterized by a declining face amount of protection over the term of coverage. 2. As face amount decreases, premium remains constant. 3. At the end of the contract, face amount is 0 4. sometimes referred to as a mortgage protection or redemption plan

What is increasing term life insurance?

1. is characterized by a face value that increases with each premium payment. 2. used with a combination policy 3. An example is a policy for a child that is issued for a certain face amount that increases by a prescribed multiple when the child attains a specified age. 4. In some policies like this, the premium is not increasing.

What is an Equity Indexed Life insurance policy?

1. it is a form of universal life that provides the opportunity for cash value accumulation plus guaranteed basic interest. 2. Interest can be focused on an outside index such as the S&P 500 3. Cap limit on losses and on growth interest

What is interest- sensitive life insurance policy?

1. it is a type of whole life policy where the cash value can increase beyond the stated guarantee if economic conditions warrant. 2. Cash value earns interest according to the variable investment results of the insurer. 3. aka Current assumption whole life insurance (CAWL)

What are the features of an endowment?

1. may be issued for specific period, such as 5 years, or up to a specific age. 2. payout if insured survives the specified period may be in installments or lump sum 3. savings features and premium levels depend on the endowment period 4. Premiums are higher than for a traditional whole life contract

What are modified endowment contract (MEC)

1. were defined in tax code to prevent endowments being used as a tax shelters. 2. It is a contract whose premiums exceed the amount that would be paid to fund a similiar policy with seven level annual premiums and is subject to more stringent tax treatment 3. Also subject to IRA-Like annuity rules (59.5 age penalty )

What is the typical maturities of the endowments?

10-20 years

Difference between attained age and original age?

Attained age means the actual age of the insured. Original age is the age of the policy.

T/F you cannot cash an endowment early

False, you can cash it early (its called surrendered) for the surrender value, which is determined by the insurance company depending on how long the policy has been in force and how much has been paid in to it

What is a group life insurance?

Group life insurance is a policy in which a single contract covers a group of people. Typically the policyowner is an employer or other entity, such as a labor union, and the policy covers employees or members of the group.

What is a certificate of insurance?

In group life insurance, the covered individuals typically receive it. It proves that a person is insured but is not itself a life insurance policy.

What is an individual, or ordinary life insurance?

Includes temporary (term) and permanent (whole) varieties written to protect individuals and paid with monthly, quarterly, semiannual or annual premiums; underwriting is on an individual basis.

What is Term Life insurance?

It provides protection from a limited number of years. It pays the face amount only if the insured's death occurs during the policy's term. Nothing is paid if death occurs after the term is over. There is no cash saving value

What are the two death benefit options in universal life insurance?

Level Death Benefit Increasing death benefit

What is whole life insurance?

Not limited in its duration, whole life insurance provides protection for an individual's entire life and accumulates a cash value.

What is an annuity?

Not strictly a form of life insurance, an annuity makes periodic payments to a live person over a fixed period

What are Endowments?

Pays the face amount if the insured dies within a specified period ( the maturity) or pays the face amount after the end of the specified period if the insured is still alive.

What is adverse selection?

People who are bad risks clinging to their insurance coverage.

What is an industrial life insurance?

Provides comparatively low coverage amounts to individuals (often less than $1000), with weekly or monthly premiums collected by an agent at the policy owner's home; often sold as burial insurance

What are combination plans and variations?

Special riders added to whole life policies or separate policy types provide additional coverage.

What is interest - sensitive life insurance?

Universal, variable, variable universal, interest- sensitive whole life, correct assumption whole life. These products are characterized by flexibility in premium amounts, payment schedules, face values, and payout amounts.

What is Deposit term life insurance?

a premium is paid (the deposit) in the first policy year, in addition to the regular term insurance premium. This deposits accumulates interest for a certain amount of years. if canceled, then the deposit plus the interest is lost.

What is an endowment?

an endowment policy pays the face amount to the beneficiary if the insured dies during a specified period or at the end of a specified period if the insured is still alive.

What is a limited payment life insurance?

emphasizes building up savings and allowing the policy owner to end premium payments at the end of a specified period, either a number of years or an attained age.

What is the Master contract?

in a group life insurance, the actual group life insurance

What is an adjustable life insurance?

it combines features of term and whole life coverage, giving holders the option to change the characteristics of their policies as their needs change over time 1. can change period of protection 2. increase/decrease the face amount 3. raise or lower the premium amount 4. change the length of the premium payment period. 5. Incorporate an interest bearing side fund

What is universal life insurance?

it is a type of flexible permanent life insurance combining the low-cost protection of term life insurance with a savings element (like whole life) which is invested to provide a cash value buildup.

What is modified life insurance policy?

it is an ordinary life insurance with premiums that are lower in the first few years of premiums and higher in subsequent years

What is Variable Life Insurance (VLI)

it is the most expensive type of cash value insurance because it allows the policy owner to allocate a portion of premium dollars to a separate account consisting of investments within the insurance company's portfolio such as stocks, bonds, equity funds, money market funds and bond funds.