General Insurance Exam 3

longevity annuity

begins paying benefits only at an advanced age, such as age 85

which statements are true? I. The annuity owner has a choice of annuity payout options. II. Most annuities are not annuitized

both are true

interest-adjusted cost method

more accurate because it considers the time value of money

blended policies

A term insurance rider can be added to a cash-value policy to increase the total death benefit but still keep the policy affordable

Pro Rata Liability Example: Company A: $300,000/$500,000 or .60x$100,000 Company B: $100,000/$500,000 or .20x$100,000 Company C: $100,000/$500,000 or .20x$100,000

Company A = $60,000 Company B = $20,000 Company C = $20,000 Total loss payment = $100,000

Savings Bank Life Insurance (SBLI)

a type of life insurance that is sold by savings banks

class beneficiary

a member of a group, e.g., children of the insured

Premiums can be paid

monthly, quarterly, semi-annually, annually

Insuring Agreement

summarizes the major promises of the insurer

Coinsurance Formula

(amount of insurance carried/amount of insurance required) x loss = amount of recovery

Nonqualified Annuity

An individual annuity purchased from a commercial insurer

An exclusion ratio is used to determine the taxable and nontaxable portions of the payments

Exclusive ratio = Investment in the contract/Expected return

Deductibles are used for all of the following EXCEPT: a.) to reduce premiums b.) to reduce loss control efforts c.) to reduce moral and attitudinal hazard d.) to eliminate small claims

b

Gerald paid $45,000 for an immediate annuity. Gerald's insurer will pay him $500 per month for as long as he lives. Gerald's life expectancy is 15 years. For tax purposes, what is Gerald's exclusion ratio for this annuity? a.) 50.0% b.) 45.0% c.) 66.7% d.) 40.0%

a.) 50% exclusion ratio = lump-sum premium / (monthly benefit x number of payment periods) = $45,000 / ($500 x 180)

Premiums are used to purchase ____________ _____ during the period prior to retirement.

accumulation units

Absolute Assignment

all ownership rights in the policy are transferred to a new owner

change of plan provision

allows policyholders to exchange their present policies for different contracts

Flexible Premium Annuity

allows the owner to vary the premium payments

Policy Loan Provision

allows the policyholder to borrow the cash value -The policyholder must pay interest on the loan to offset the loss of interest to the insurer -A policy could lapse if the policyholder does not repay a loan and the total indebtedness exceeds the available cash value -The major advantage of a policy loan is the relatively low rate of interest that is paid -The major disadvantage of a policy loan is that the policyholder is not legally required to repay the loan, and the policy might lapse if the indebtedness exceeds the available cash value

Cost of Living Rider

allows the policyholder to purchase one-year term insurance equal to the percentage change in the consumer price index with no evidence of insurability

Traditional IRA

allows workers to take a tax deduction for part or all of their IRA contributions

Individual Retirement Account (IRA)

allows workers with taxable compensation to make annual contributions to a retirement plan up to certain limits and receive favorable income-tax treatment

Most insurers offer some type of cost-of-living adjustment, which is...

an adjustment that increases the benefits annually and provides some protection against inflation.

single-premium immediate annuity

an annuity purchased with a lump sum

The annual rate of return earned on the savings component of a policy is...

an important consideration if you intend to invest over a long period of time

At retirement, the accumulation units are converted into ______________.

annuity units

In which part of an insurance contract would you find information about the property or activity to be insured? a.) conditions b.) declarations c.) insuring agreement d.) exclusions

b

current rate

based on current market conditions, and is guaranteed only for a limited period

Whole life insurance

cash value policy that provides lifetime protection - stated amt is paid to designated beneficiary when the insured dies, regardless of when the death occurs

Accumulation of cash surrender values

characteristic of ordinary life insurance policy - policyholder overpays for insurance protection during the early years, resulting in a legal reserve and the accumulation of cash values - policyholder has the right to borrow the cash value or exercise a cash surrender option

All of the following are characteristics of variable life insurance EXCEPT: a.) the policyholder selects where the cash value is invested b.) cash values are not guaranteed c.) the cash value of the death benefit vary with investment performance d.) flexible premium payments

d

All of the following are defects of the traditional net cost method EXCEPT: a.) the method may show life insurance is free b.) the method assumes that the policy will be surrendered c.) the time value of money is ignored d.) the cash value of the policy is not considered

d

All of the following are optional methods of settlement after the insured has died EXCEPT: a.) life income option b.) fixed-period option c.) cash (lump sum) d.) reduced paid-up insurance

d

Annette purchased a life annuity at age 65 and started to receive monthly payments from the insurer. Annette's monthly payments consist of all of the following EXECPT: a.) unliquidated principle of annuitants who die early b.) premium payments c.) interest earnings d.) life insurance proceeds from annuitants who live too long

d

Bill borrowed Linda's car with her permission. Both Bill and Linda have automobile liability insurance with a $100,000 bodily injury liability limit. While driving Linda's car, Bill negligently caused an accident. The accident victim was awarded $80,000 in damages. How will this claim be settled, assuming that the policy written by Linda's insurer is primary and Bill's insurance coverage is excess? a.) neither insurer is liable as duplication of insurance voids coverage b.) bill's insurer will pay the entire $80,000 claim c.) each insurer will pay $40,000 to settle the claim d.) Linda's insurer will pay the entire $80,000 claim

d

Disability income insurance uses a special type of deductible. No benefits are paid during the initial period of disability (e.g. two weeks, a month, five months, etc.). What is this type of deductible, which is expressed in time rather than in dollars, called? a.) corridor deductible b.) calendar year deductible c.) aggregate deductible d.) elimination (waiting) period

d

During the funding period, variable annuity premiums are used to purchase: a.) annuity units b.) exclusion units c.) guaranteed death benefits d.) accumulation units

d

Exclusions are found in insurance policies for all of the following reasons EXCEPT: a.) coverage may be provided under another insurance contract b.) some perils are not insurable c.) moral hazard problems would develop without certain exclusions d.) to add coverage for certain perils

d

Under which nonforfeiture option will permanent life insurance coverage be in force after the nonforfeiture option is exercised? a.) extended term insurance b.) cash value option c.) fixed-amount option d.) reduce paid-up insurance

d

Variable annuity owners pay a number of fees and expenses. One expense that is levied is forfeiture of a percentage of the account balance if the annuity is terminated in the early years. This fee is typically seven percent of the account balance in the first year, declining one percent per year for the next six years. This fee is called the: a.) administrative charge b.) mortality and expense risk charge c.) investment management charge d.) surrender charge

d

Which of the following statements is (are) true with respect to the human life value approach? I. The human life value approach considers all sources of income that the family receives. II. The human life value approach does not consider the time value of money-future cash flows are not discounted back to present value. a.) II only b.) I only c.) both I and II d.) neither I nor II

d

Which of the following statements is (are) true with respect to universal life insurance? I. Universal life insurance provides premium payment flexibility for the policyholder. II. Universal life insurance permits the policyholder to select where the cash value is invested. a.) II only b.) neither I nor II c.) both I and II d.) I only

d

from an economic perspective, "premature death" is defined as death of a family head: a.) before reaching life expectancy b.) before both parents have died c.) before reaching age 65 d.) with outstanding financial obligations

d

Coinsurance Clause (property insurance)

in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value - If the coinsurance requirement is not met at the time of the loss, the insured must share in the loss as a coinsurer

Accidental Death Benefit Rider

doubles the face amount of life insurance if death occurs as a result of an accident

Life Income Option

installment payments are paid only while the beneficiary is alive and cease on the beneficiary's death Options include: - life income with guaranteed period - life income with guaranteed total amount - joint-and-survivor income

Premature death facts:

- can cause serious financial problems for the surviving family members - the deceased's future earnings are lost forever - additional expenses are incurred, e.g., funeral expenses and estate settlement costs - some families will experience a reduction in their standard of living - noneconomic costs are incurred, e.g., grief

The policyholder can choose among several options for paying the policy proceeds (or, the beneficiary may be granted the choice) The most common options include:

- cash - interest option - fixed-period option - fixed-amount option - life income option

Policyholders have three nonforfeiture options:

- cash value - reduced paid-up insurance - extended term insurance

To calculate amt needed under human life value approach:

- estimate individual's avg annual earnings over his/her productive lifetime - deduct taxes, insurance premiums, and self-maintenance costs - using a reasonable discount rate, determine the present value of the family's share of earnings for the number of years until retirement

A full deduction is allowed in two general situations:

1. A worker who is not an active participant in an employer's retirement plan for any part of the year can make a fully deductible IRA contribution up to the annual maximum limit 2. Even if the worker is actively participating in an employer's retirement plan, the IRA contribution is fully or partially deductible if the modified adjusted gross income is below certain threshold limits

Term insurance is appropriate when:

1. The amount of income that can be spent on life insurance is limited 2. The need for protection is temporary 3. The insured wants to guarantee future insurability However, - term insurance premiums increase with age at an increasing rate and eventually reach prohibitive levels - term insurance is inappropriate if you wish to save money for a specific need

Dividends come from three main sources:

1. The difference between expected and actual mortality experience 2. Excess interest earnings 3. The difference between expected and actual operating expenses

When determining the cost of life insurance, four major factors must be considered:

1. annual premiums 2. cash values 3. dividends 4. time value of money

For Exhibit 12.3: The payee's adjustment age reflects increases in longevity. To find the adjusted age, increases or decreased the adjusted age as that time as follows:

1987-91: +3 1992-98: +2 1999-2006: +1 2007-13: 0 2014-20: -1 2021-28: -2 2029+: -3

Indexed Universal Life Insurance

A variation of universal life insurance with certain key characteristics - there is a minimum interest rate guarantee - additional interest is credited to the policy based on the investment gains of a specific stock market index - a formula determines the amount of enhanced (additional) interest credited to the policy which is usually capped

Exclusion ratio example: - Ben, age 65, purchased an immediate annuity for $108,000 that pays a lifetime monthly income of $1,000 - Based on the IRS actuarial table, he has a life expectance of 20 years - Expected return is 20 x 12 x $1,000 = $240,000

The exclusion ratio = $108,000/$240,000 = 0.45 - Each year, he receives $5,400 tax free and $6,600 which is taxable

Collateral Assignment

The policyowner temporarily assigns a life insurance policy to a creditor as collateral for a loan, but only certain rights are transferred to the creditor

One life insurance policy provision permits the policyholder to pledge certain rights in the life insurance policy to secure a loan. This provision is called a(n): a.) collateral assignment b.) absolute assignment c.) policy loan provision d.) entire contract clause

a

The first step in shopping for life insurance is to: a.) determine whether you need life insurance b.) shop around for a low-cost policy c.) decide what type of insurance is best for you d.) estimate the amount of life insurance you should purchase

a

To which of the following distributions from a traditional Individual Retirement Account (IRA) before age 59 1/2 does the 10 percent penalty tax apply? a.) a distribution on the form of a lump-sum payment b.) a distribution resulting from the death of the IRA owner c.) a distribution used to pay qualified higher education expenses d.) a distribution resulting from the disability of the IRA owner

a

Which of the following statements is (are) true with respect to life insurance policy loans? I. Interest must be paid on life insurance policy loans. II. If a policy loan has not been repaid when the insured dies, the outstanding loan balance is deducted from the proceeds paid to the beneficiary. a.) both I and II b.) II only c.) neither I nor II d.) I only

a

Which of the following statements is (are) true with respect to the Roth IRA? I. Roth IRA contributions are tax deductible. II. Roth IRA contributions accumulate income tax free and qualified distributions are not taxable if certain requirements are met. a.) II only b.) both I and II c.) neither I nor II d.) I only

a

Which of the following statements is (are) true with respect to the tax treatment of life insurance? I. A beneficiary who receives life insurance proceeds in a lump-sum does not have to pay income tax on the life insurance proceeds. II. Premiums paid by an individual for a life insurance policy on her own life are a tax-deductible expense. a.) I only b.) neither I nor II c.) II only d.) both I and II

a

Which of the following statements is (are) true with respect to the traditional net cost method of determining the cost per thousand of cash value life insurance? I. The traditional net cost per thousand per year can be a negative number. II. The traditional net cost method ignores interest that could have been earned on the premiums by investing them elsewhere. a.) both I and II b.) neither I nor II c.) I only d.) II only

a

Traditional IRAs can be established at...

a bank, mutual fund, stock brokerage firm, or insurer

fixed indexed annuity

a 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

Qualified Longevity Annuity Contract (QLAC)

a deferred income annuity contract in which a lump sum premium is paid today to provide lifetime income at some future date, typically 2 to 40 years in the future

Multi-Year Guaranteed Annuity (MYGA)

a deferred income annuity that allows you to invest in a lump sum for a specific period at a fixed rate of interest, typically 3 to 10 years

Life Settlement

a financial transaction by which a policyholder who no longer needs or wants to keep a life insurance policy sells the policy to a third party for more than its cash value

Fixed-Amount Option

a fixed amount is periodically paid to the beneficiary

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 - premium is level - entire reserve is held in separate account and is invested in common stocks or other investments - cash-surrender values are not guaranteed and there are no minimum guaranteed cash values

Universal Life Insurance

a flexible premium policy that provides lifetime protection - after first premium, policyholder decides the amt and frequency of payments - premiums, less explicit expense charges, are credited to a cash-value account, also called an accumulation fund - policies typically have a monthly deduction for administrative expenses - policies have considerable flexibility

Stranger Owned Life Insurance (STOLI)

a large policy acquired by a group of investors with the specific intention of selling the policy in the secondary life insurance market and ultimately making a substantial profit when the insured dies - the sale of life insurance in the secondary life insurance market is a problem for many life insurers bc of this

Ordinary life insurance

a level-premium policy that accumulates cash values and provides lifetime protection to age 121

current assumption whole life insurance

a nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience

annuity

a periodic payment that continues for a fixed period or for the duration of a designated life or lives - provides protection against the risk of living too long, often called excessive longevity

Joint Life Insurance

a policy written on the lives of two or more people and is payable at the time of death of the first person to die

Return of premium term insurance

a product that returns the premiums at the end of the term period provided the insurance is still in force

Deductible

a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable

Rider

a provision that amends or changes the original policy - e.g., a waiver-of-premium rider on a life insurance policy - some benefits can be added to a life insurance policy by adding a rider

Elimination (waiting) period

a stated period of time at the beginning of a loss during which no insurance benefits are paid - e.g., disability income contracts that replace part of a disabled worker's earnings typically have elimination periods of 30, 60, or 90 days, or longer periods

Calendar-year deductible

a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts

Modified Life Policy

a whole life policy in which premiums are lower for the first three to five years and higher thereafter - one advantage is that applicants can purchase permanent insurance immediately even though they cannot afford the higher premiums for a regular whole life policy

Endorsement

a written provision that adds to, deletes from, or modifies the provisions in the original contract - e.g., an earthquake endorsement to a homeowners policy

Which of the following statements is (are) true regarding life insurance policyholder dividends? I. Life insurance policies that pay dividends to policyholders are called participating policies. II. Life insurance policyholder dividends are guaranteed. a.) neither I nor II b.) I only c.) II only d.) both I and II

b

contribution by equal shares provision

each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid

pro rata liability provision

each insurer's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property

Contingent Beneficiary

entitled to the proceeds if the primary beneficiary dies before the insured

Fundamental purpose of coinsurance (property insurance):

equity in rating: - a property owner wishing to insure for a total loss would pay an inequitable premium if other property owners only insure for partial losses - if the coinsurance requirement is met, the insured receives a rate discount, and the policy owner who is underinsured is penalized through application of the coinsurance formula

Home Service Life Insurance

evolved from Industrial life insurance, a type of insurance in which the policies are sold in small amounts and an agent of the company collects the premiums at the insured's home

Some insurers have a __________________ value at the end of the index period.

guaranteed minimum

First name insured

has certain additional rights and responsibilities that do not apply to other named insureds

Total fees and expenses in most variable annuities are __________ (high/low).

high

waiver-of-premium provision

if the insured becomes totally disabled, all premiums coming due during the period of disability are waived

Misstatement of Age or Sex Clause

if the insured's age or sex is misstated, the amount payable is the amount that the premiums paid would have purchased at the correct age and sex

coordination of benefits provision

in group health insurance is designed to prevent overinsurance and the duplication of benefits if one person is covered under more than one group health insurance plan

Insurers use different _________________ to credit excess interest to the annuity.

indexing methods

second-to-die life insurance

insures two or more lives and pays the death benefit upon the death of the second or last insured - insurance is usually whole life, but can be term - this form of life insurance is widely used in estate planning

An IRA rollover

is a tax-free distribution of cash or other property from one retirement plan, which is deposited into another retirement plan

Cash Refund Option

is similar to an installment refund option, but pays the beneficiary a lump sum

specific beneficiary

is specifically identified

Liquidation Period (Payout Period)

is the period in which funds are paid out, or annuitized

Ordinary life policy is appropriate when

lifetime protection is needed and can be used to save money - major limitation is that some people are still underinsured after the policy is purchased

Some insurers have a __________________ on the interest rate credited to your annuity

maximum cap rate

Annuities can be attractive to investors who have made __________________ to other tax-advantage plans.

maximum contributions

aggregate deductible

means that all losses that occur during a specified time period, usually a year, are accumulated to satisfy the deductible amount

Surrender Cost Index

measures the cost of life insurance if you surrender the policy at the end of some time period, such as 10 or 20 years, and takes compound interest into account

Net Payment Cost Index

measures the relative cost of a policy if death occurs at the end of some specified time period, such as 10 or 20 years, and assumes you will not surrender the policy

Irrevocable Beneficiary

one that cannot be changed without the beneficiary's consent

Some insurers now make available riders that allow annuitants to make a ____________.

partial cash withdrawal

Participating policy vs. nonparticipating policy

participating: if policy pays dividends nonparticipating: if policy does not pay dividends

bonus annuity

pays a higher interest rate initially

Life Annuity with Period Certain

pays a life income to the annuitant with a certain number of guaranteed payments for a set number of years

life annuity with guaranteed payments

pays a life income to the annuitant with a certain number of guaranteed payments for the rest of the buyer's life in return for a lump sum or series premiums

Variable Annuity

pays a lifetime income, but the income payments vary depending on common stock prices

Joint-and-Survivor Annuity

pays benefits based on the lives of two or more annuitants. - The annuity income is paid until the last annuitant dies

Immediate Annuity

pays periodic income payments that are guaranteed and fixed in amount - the first payment is due one payment interval from the date of purchase

endowment insurance

pays the face amount of insurance if the insured dies within a specified period. If the insured is still alive at the end of the period, the face amount is paid to the policyholder - accounts for less than one percent of the life insurance in force

Reinstatement Provision

permits the owner to reinstate a lapsed policy

Guaranteed Purchase (Insurability) Option

permits the policyholder to purchase additional amounts of life insurance at specified times in the future without evidence of insurability - advance purchase privilege allows the policyholder to increase the amt of insurance on the occurrence of some event, such as a birth

Accumulation period prior to retirement

premiums are credited with interest

purpose of other-insurance provisions

prevent profiting from insurance and violation of the principle of indemnity

Under a term insurance policy

protection is temporary; protection expires at the end of the policy period, unless renewed

guaranteed death benefit

protects the principal against loss due to market declines

Longevity annuities

provide protection against the risk of depleting your financial assets at an advanced age

life annuity (no refund) option

provides a life income to the annuitant only while the annuitant remains alive

Family Rider

provides additional life insurance at reduced amounts on family members to some stated age

Deferred Annuity

provides income payments at some future date

Group Life Insurance

provides life insurance on a group of people in a single master contract

Single Premium Whole Life Policy

provides lifetime protection with a single premium

Conditions

provisions in the policy that qualify or place limitations on the insurer's promise to perform - If policy conditions are not met, insurer can refuse to pay claim

single premium deferred annuity

purchased with a lump sum, but income is deferred until some future date

reentry term insurance policy

renewal premiums are based on select (lower) mortality rates if the insured can periodically demonstrate acceptable evidence of insurability (i.e., good health)

The Life Insurance Policy Illustration Model Act

requires insurers to present certain information to applicants for life insurance - goal is to reduce misunderstanding of policy values by policyholders, and reduce deceptive sales practices by agents - a narrative summary describes the basic characteristics of the policy - a numeric summary shows the premium outlay, value of the accumulation account, cash surrender values, and death benefit - the act also prohibits certain sales practices and requires the insurer to provide an annual report

Coinsurance Clause (health insurance)

requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible

Developing a sound life insurance involves a series of steps which are not necessarily sequential

some people find it useful to seek the assistance of a professional agent or financial planner

Declarations

statements that provide information about the particular property or activity to be insured - usually on first page of policy - in property insurance, contains name of insured, location of property, period of protection, amt of insurance, premium and deductible information

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

Incontestable Clause

states that the insurer cannot contest the policy after it has been in force two years during the insured's lifetime - protects the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued - the insurer has two years to detect fraud - the insurer can contest a claim after the incontestable period in limited circumstances

Entire Contract Clause

states that the life insurance policy and attached application constitute the entire contract between the parties - prevents the insurer from making amendments without the policyholder's knowledge

Typically, if the annuitant dies before retirement...

the amount paid to the beneficiary will be the higher of two amounts: - the amount invested in the contract or - the value of the account at the time of death

Linton Yield

the average annual rate of return on a cash-value policy if it is held for a specified number of years - current information is not readily available to consumers, so this method has limited use

traditional net cost method

the cash value and expected dividends are subtracted from annual premiums to obtain a net cost per year figure - this method does not consider the time value of money - showed the insurance to be free (to have negative cost)

The cost of a life insurance policy is...

the difference between what you pay and what you get back

Primary Beneficiary

the first entitled to receive the policy proceeds on the insured's death

cash or guaranteed installment option

the funds can be withdrawn in a lump sum or in installments

Joint Annuity

the income payments terminate when the death of the first covered person dies

limited-payment life insurance

the insured has lifetime protection, and premiums are level, but they are paid only for a certain period - most common limited-payment policies are for 10, 20, 25, or 30 years

straight deductible

the insured must pay a certain number of dollars of loss before the insurer is required to make a payment - e.g., an auto insurance deductible

guaranteed rate

the minimum interest rate that will be credited to the fixed annuity

Beneficiary

the party named in the policy to receive the policy proceeds

Participation Rate

the percentage of the working-age population in the labor force (that is, the percentage that is either employed or looking for work)

Named Insured

the person or persons named in the declarations section of the policy

Annuitant

the person who receives the payments from the annuity

Ownership Clause

the policy owner possesses all contractual rights in the policy while the insured is living - rights include naming beneficiaries and surrendering the policy for its cash value - the policyholder can designate a new owner by filing an appropriate form

Fixed-Period Option

the policy proceeds are paid to a beneficiary over some fixed period of time

Revocable Beneficiary

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

attained-age method

the premium charged for the new policy is based on the insured's attained age at the time of conversion

original-age method

the premium charged for the new policy is based on the insured's original age when the term insurance was first purchased

primary and excess insurance provision

the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted

Viatical Settlement

the sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups, who hope to profit by the insured's early death

Purpose of Variable Annuity

to provide an inflation hedge by maintaining the real purchasing power of the payments

Some agents may engage in deceptive practices and recommend policies that maximize commissions

to reduce the possibility of receiving bad advice or being sold the wrong policy, work with a professionally qualified agent: - Chartered Life Underwriter (CLU) - Chartered Financial Consultant (ChFC) - Certified Financial Planner (CFP)

Actuaries

use special mortality tables to calculate annuity premiums because annuitants tend to be healthy individuals

IRA contributions can be invested in a ___________ of investments

variety

Vanishing premium life

was sold in the past based on sales illustrations that indicated a policy would become paid up if non-guaranteed interest rate projections were achieved - The NAIC developed a model law stating that an insurer shall not use the terms "vanish" or "vanishing premium" to imply that a policy becomes paid up

Most term policies are convertible

which means the policy can be exchanged for a cash-value policy without evidence of insurability

Distributions from traditional IRAs are treated as ordinary income

- Any nondeductible contributions are received income-tax free - A formula is used to compute the taxable and nontaxable portions of each distribution

Many states have adopted part or all of the coordination of benefits provisions developed by the NAIC, which include a number of rules, including:

- Coverage as an employee is usually primary to coverage as a dependent - For dependents in families where the parents are married or are not separated, the plan of the parent whose birthday occurs first during the year is primary

The major types of exclusions in insurance contracts:

- Excluded perils, e.g., flood, intentional act - Excluded losses, e.g., a professional liability loss is excluded in the homeowners policy - Excluded property, e.g., pets are not covered as personal property in homeowners policy

Two basic forms of an insuring agreement in property insurance:

- Named perils coverage: where only those perils specifically named in policy are covered - Open-perils (special coverage): where all losses are covered except those losses specifically excluded

Two general categories of life insurance policies:

- Term insurance: provides temporary protection - Cash-value life insurance: has savings component and builds cash values *many variations of both types available today*

Roth IRA characteristics:

- The annual contributions to a Roth IRA are not tax deductible - The investment income accumulates income-tax free - Qualified distributions are not taxable under certain conditions - Contributions can be made after age 70.5 - Roth IRAs have generous income limits - A traditional IRA can be converted to a Roth IRA

Two approaches can be used to estimate the amt of life insurance to own:

- The human life value approach: amt needed depends on insured's human life value, which is the present value of the family's share of the deceased breadwinner's future earnings - Needs approach: amt needed depends on the financial needs that must be met if the family head should die

Traditional IRA characteristics:

- The investment income accumulates income-tax free on a tax-deferred basis - Distributions are taxed as ordinary income - The participant must have earned income during the year, and must be under age 70.5 - For 2018, the maximum annual contribution is $5,500 or 100 percent of taxable compensation, whichever is less - A full deduction for IRA contributions is allowed under certain circumstances

Two basic types of IRAs are:

- Traditional IRA - Roth IRA

Calculation under needs approach should consider

- an estate clearance fund - income needed for a one- or two-year readjustment period - income needed for the dependency period, until the youngest child reaches age 18 - life income to the surviving spouse, including income during and after the blackout period - special needs, e.g., funds for college education and emergencies - retirement needs

- the policy must be reinstated within a certain period - although it may require a large outlay of cash, it may be cheaper to reinstate a lapsed policy than to purchase a new policy To reinstate a lapsed policy, the following requirements must be met:

- evidence of insurability is required - all overdue premiums plus interest are paid - any policy loans are repaid or reinstated - the policy was not surrendered for its cash value

Limitations of Universal Life's flexibility include:

- insurers advertise misleading rates of return - cash-value and premium-payment projections can be misleading and invalid - insurers can increase the mortality charge - a policy may lapse b/c some policyholders do not have a firm commitment to pay premiums

Settlement options allow for periodic payments to the family, restoring their financial security. Disadvantages include:

- interest rates offered by insurers may be lower than rates offered elsewhere - the settlement agreement may be inflexible and restrictive - life income options have limited usefulness at younger ages

Variable annuities contain the following fees and expenses:

- investment management charge - administrative charge - mortality and expense risk charge - surrender charge

Nonqualified Annuity characteristics:

- it does not meet IRS code requirements - it does not qualify for most income tax benefits - premiums are not income-tax deductible - investment income is tax deferred - the net cost of annuity payments is recovered income-tax free over the payment period, but the amt that exceeds the net cost is taxable as ordinary income

Most families own an insufficient amount of life insurance

- less than half of consumers aged 25-64 own life insurance policies - the avg amt of coverage for U.S. adults in 2013 was $167,000, down $30,000 from 2004 - consumers believe life insurance is expensive. They procrastinate, and have difficulty in making correct decisions ab the purchase of life insurance

two forms of current assumption whole life products:

- low-premium products, with a low initial premium and a redetermination provision that allows the insurer to recalculate the premium after the initial guaranteed period expires - high-premium products, with a provision that allows the policyholder to discontinue paying premiums after a certain time period

In universal life insurance, the protection and savings components are separated

- most policies have a target premium, but the policyholder is not obligated to pay it - a monthly mortality charge is deducted form the cash-value account for the cost of the insurance protection - insurers typically deduct 5-10 percent of each premium for expenses - interest earnings credited to the cash-value account depend on the interest rate

The U.S. lags behind many foreign countries. Some reasons include:

- obesity - sedentary life style

Types of whole insurance include:

- ordinary life - limited-payment life - endowment insurance - variable life - universal life - variable universal life - current assumption whole life - indeterminate-premium whole life

Characteristics of ordinary life insurance:

- premiums are level throughout the premium-paying period - the excess premiums paid during the early years are used to supplement the inadequate premiums paid during the later years of the policy - the insurer's legal reserve is a liability that must be offset by sufficient financial assets - the net amount at risk is the difference between the legal and the face amt of insurance

Most term policies are renewable for additional periods

- premiums increase at each renewal - to minimize adverse selection, many insurers have an age limitation beyond which renewal is not allowed

Some variable annuities pay enhanced death benefits

- some contracts guarantee the principal - some contracts periodically adjust the value of the account to lock in investment gains through a rising-floor death benefit, a stepped-up benefit, or an enhanced earning benefit

Longevity annuities are low-cost annuities because there are no cash values or death benefits in the policy.

- some insurers offer optional features that provide death benefits, inflation protection, or the option of starting payments sooner.

Life insurance contracts do not contain many exclusions

- suicide excluded for two years - insurers might insert a war clause to exclude payment if the insured dies as a direct result of war - some policies contain aviation exclusions and exclusions for certain hobbies

A federal estate tax is payable if the decedent's taxable estate exceeds certain limits

- tentative tax on the taxable estate is calculated - the tentative tax is reduced or eliminated by a tax credit called a unified credit - the gross estate includes property you own, one-half of the value of property owned jointly with your spouse, life insurance death proceeds in which you have ownership interest - the gross estate may be reduced by certain deductions, such as a marital deduction, in determining the taxable estate

MYGA characteristics:

- the MYGA is similar to a certificate of deposit (CD) at a bank - most insurers allow the withdrawal of interest as it is earned without paying a surrender penalty - if you withdrawal more than 10 percent of your account balance, you may be charged an early surrender penalty fee - there is a Market Value Adjustment (MVA) that may increase or decrease the penalties for excess withdrawals or early surrender of the annuity

Life insurance policy proceeds can also be paid to a trustee, such as the trust department of a commercial bank. The use of a trust may be desirable if:

- the amt of insurance is substantial - flexibility and discretion in the amt and timing of payments are needed - beneficiaries are minor children or mentally or physically challenged adults who cannot manage their own financial affairs

QLAC characteristics:

- the income paid is specified in advance and depends on the annuitant's age, gender, and size of premium - a QLAC is purchased with before-tax savings in a qualified retirement plan, such as an IRA or 401(k) - a QLAC is exempt from the required minimum distribution (RMD) rules

Proceeds from a life insurance policy are included in gross estate of the insured for federal estate-tax purposes if:

- the insured has any ownership interest - they are payable to the estate

Life insurance proceeds paid in a lump sum to a designated beneficiary are generally received income-tax free

- the interest component of periodic payments is taxable as ordinary income - premiums are generally not deductible - dividends are not taxable, but interest on dividends retained is taxable - if a policy is surrendered for its cash value, any gain is taxable as ordinary income

The proceeds may be removed from the gross estate if the policyholder makes an absolute assignment of the policy to someone else

- the policyholder must make the assignment more than three years before death

Opportunity cost of purchasing life insurance may be too high for many families

- the purchase of life insurance reduces the amt of discretionary income available for other needs - many families are in debt and have little savings - after payment of high priority expenses, such as a mortgage, food and utilities, many families have only a limited amt of income to purchase life insurance

Insurers will not knowingly issue a policy used for STOLI purposes

- the sale is viewed as a wagering transaction - there is material misrepresentation or fraud regarding the true purpose of buying the policy - investors may be taking advantage of elderly people

interest-adjusted cost indices can be used to compare policies across insurers

- there is a wide variation in costs indices across insurers - it pays to shop around! - most consumers use premiums as a basis for comparison, but agents will supply cost indices

purpose of coinsurance in health insurance

- to reduce premiums and prevent over utilization of policy benefits

Facts about types of life insurance:

- yearly renewable term insurance is issued for a one-year period - term insurance can also be issued for five more years - under a decreasing term insurance policy, the face value gradually declines each year

The IRA can be set up as either

-An individual retirement account -An individual retirement annuity

Advantages to longevity annuities include:

-Benefits kick in when other financial assets are likely to be exhausted -They are generally less expensive than traditional immediate annuities -They can be purchased with an inflation hedge

Universal life provides considerable flexibility

-Cash withdrawals are permitted -Policies receive favorable tax treatment

purpose of deductible

-Eliminate small claims that are expensive to handle and process -Reduce premiums paid by the insured -Reduce moral hazard and attitudinal (morale) hazard

Annuity payments consist of three sources:

-Premium payments -Interest earnings -Unliquidated principal of annuitants who die early

Policyholders have several ways to take dividends:

-Take the cash -Reduce the next premium coming due -Let the dividends accumulate at interest and withdraw later -Apply toward the purchase of paid-up whole life insurance under the paid-up additions option -Apply toward the purchase of term insurance -Convert the policy to a paid-up contract -Mature a policy as an endowment

Disadvantages to longevity annuities include:

-Your heirs will lose money if you die during the deferral period -Once purchased, your funds are locked up -The risk of not receiving amts equal to the purchase price may make the product unappealing

Contribution by Equal Shares Example: Company A: - Amt of insurance: $100,000 - Contribution by Equal Shares: $50,000 - Total paid = $50,000 Company B: - Amt of insurance: $200,000 - Contribution by Equal Shares: $50,000 - Total paid = $50,000 Company C: - Amt of insurance: $300,000 - Contribution by Equal Shares: $50,000 - Total paid = $50,000

Amount of loss = $150,000

paid-up policy at age 65 or 70

Another from of limited payment life insurance where a policy is "paid up" when no additional premiums are required; it matures when the face amount is paid as death claim or endowment

Taxpayers with incomes that exceed the phase-out limits can contribute to a __________________.

Nondeductible IRA

Policies contain variety of miscellaneous provisions

e.g., cancellation, subrogation, grace period, misstatement of age

Two forms of Universal Life Insurance

Option A pays a level death benefit during the early years, and the death benefit increases in later years to meet the corridor test required by the Internal Revenue Code Option B provides for an increasing death benefit which is equal to a constant net amount at risk plus the accumulated cash value

Additional Life Insurance Benefits

Other benefits can be added by adding a rider - most riders require payment of additional premium

Installment Refund Option

Pays a life income to the annuitant. If the annuitant dies before receiving total income payments equal to the purchase price of the annuity, the payments continue to the beneficiary until they equal the purchase price.

Some perils are not commercially insurable

e.g., catastrophic losses due to war

nonforfeiture value (cash surrender value)

The payment to a withdrawing policyholder - a policyholder has the right to the policy's accumulated cash value; all states have standard nonforfeiture laws

Moral hazard problems

e.g., coverage of money limited to $200 in homeowners policy

Fundamental purpose of an annuity

To provide lifetime income that cannot be outlived -Protects against the loss of income due to excessive longevity and the exhaustion of savings that results

Distributions from a traditional IRA before age 59.5 are considered an early withdrawal, and subject to a 10 percent tax penalty unless certain conditions apply.

e.g., death or disability

The yearly rate of return method is based on a formula:

[(amt available in the policy at the end of the policy year + assumed price of the protection component)/(amt available in the policy at the beginning of the policy year)] -1 *information needed for the calculation is readily available to consumers*

All of the following life insurance policies develop a cash value EXCEPT: a.) term life insurance b.) whole life insurance c.) universal life insurance d.) variable life insurance

a

Bob and Tonya are supporting their children, ages 4 and 2. Bob's father is also financially dependent upon Bob and Tonya. This type of family is called a(n): a.) sandwiched family b.) traditional family c.) single-parent family d.) blended family

a

Elaine was diagnosed with a terminal illness. Her doctor said that her only chance of survival is an experimental treatment. The treatment is expensive and is not covered by Elaine's health insurance. Which life insurance policy provision will permit Elaine to use the life insurance proceeds before she dies to pay for her medical care? a.) accelerated death benefits rider b.) guaranteed purchase option c.) cost of living rider d.) accidental death benefit rider

a

accelerated death benefits rider

allows insureds who are terminally ill to collect part or all of their life insurance benefits before they die

Variable Universal Life Insurance

an important variation of whole life insurance -Most are sold as investments or tax shelters -The policy owner decides how the premiums are invested -The policy does not guarantee a minimum interest rate or minimum cash value -These policies have relatively high expense charges, including front-end loads for sales commissions, back-end surrender charges, and investment management fees - the policyholder bears substantial investment risk

Automatic Premium Loan Provision

an overdue premium is automatically borrowed from the cash value after the grace period expires - the automatic premium premium loan prevents the policy from lapsing b/c of nonpayment of premiums - it may be overused and exhaust the cash value - proceeds will be reduced if the premium loans are not repaid by the time of death

Roth IRA

another type of IRA that provides substantial tax advantages

Preferred risk policies

are sold at lower rates to individuals whose mortality experience is expected to be lower than average (e.g., a non-smoker)

All of the following are nonforfeiture options EXCEPT: a.) reduce paid-up insurance b.) paid-up additions c.) cash value d.) extended term insurance

b

In determining the taxable estate, all of the following may be deducted from the gross estate of the deceased EXCEPT: a.) probate costs b.) interest income c.) charitable bequests d.) funeral costs

b

Lynn, age 32, would like to purchase permanent life insurance. She is concerned that premiums may become a burden after she retires. Given her coverage preferences, which of the following life insurance policies is the best policy for Lynn to purchase? a.) endowment life insurance b.) limited-payment whole life insurance c.) ordinary whole life insurance d.) renewable term insurance

b

Marcus is analyzing a life insurance policy. He calculated the future value of the premiums that he would pay over 20 years, then he subtracted the future value of the expected policyholder dividends over 20 years. Next, he converted the resulting value to an annual cash outflow while taking into consideration the time value of money. Finally, he divided the annual outflow by the number of thousands of dollars of coverage to arrive at a cost per thousand. Marcus calculated the: a.) traditional net cost per thousand per year b.) net payment cost per thousand per year c.) yearly rate of return using Belth's method d.) Linton yield

b

One life insurance policy provision specifies that the insurer cannot deny payment to the beneficiary because of concealment or misrepresentation if the life insurance policy has been in force for two years during the insured's lifetime. This provision is the: a.) entire contract clause b.) incontestable clause c.) ownership clause d.) assignment clause

b

One type of life insurance is a nonparticipating whole life policy in which cash values are based on the insurer's present mortality, investment, and expense experience. An accumulation account is used to reflect the cash value of the policy, and a fixed death benefit and maximum premium level are stated at the time the policy is issued. This type of life insurance is called: a.) modified life insurance b.) current assumption whole life c.) universal life insurance d.) variable life insurance

b

Some insurers offer a fixed, deferred annuity that allows the annuity owner to participate in the growth of the stock market and also provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term. Such an annuity is called a(n): a.) installment refund annuity b.) equity-indexed annuity c.) variable annuity d.) life income with guaranteed payments annuity

b

Some term insurance policies permit the policyholder to exchange the policy for a cash value policy without having to demonstrate insurability. Such term insurance policies are described as: a.) ordinary b.) convertible c.) renewable d.) decreasing

b

Under the needs approach of determining the amount of life insurance to purchase, one consideration is providing income to the surviving spouse and children during the one- or two-year period following the breadwinner's death. This period is called the: a.) accumulation period b.) readjustment period c.) dependency period d.) blackout period

b

Which of the following statements is (are) true regarding annuities? I. Insurers pool the risk of excessive longevity when offering life annuities. II. An annuity can provide a lifetime income that cannot be outlived. a.) I only b.) both I and II c.) neither I nor II d.) II only

b

All of the following factors must be considered in determining the interest-adjusted cost of cash value life insurance EXCEPT: a.) premium payments b.) time c.) stockholder dividends d.) case values

c

Coverage not needed by typical insureds

e.g., homeowners policy does not cover aircraft

Attitudinal hazard problems

e.g., individuals are forced to bear losses that result from their own carelessness

coverage is provided by other contracts

e.g., use of auto excluded on homeowners policy

All of the following statements about traditional IRAs are true EXCEPT: a.) distributions from traditional IRAs funded exclusively with pre-tax dollars are taxed as ordinary income b.) even if an individual is covered by an employer-sponsored pension plan, his or her traditional IRA contribution may be tax deductible if his or her modified adjusted gross income is below a specified level c.) traditional IRA contributions are always tax deductible d.) a participant must have taxable income during the year in order to make a traditional IRA contribution

c

Bob and Jasmine Davis are a married couple who are both 67 years old. Bob and Jasmine purchased an annuity covering both of their lives. The settlement option will provide payments until Bob and Jasmine are both deceased. The settlement option Bob and Jasmine selected is a(n): a.) cash refund option b.) installment refund option c.) joint-and-survivor annuity option d.) life income with guaranteed payments option

c

Eric purchased a cash value life insurance policy six years ago. He forgot to pay the premium that was due last week. Eric's coverage is still in force because of which life insurance policy provision? a.) incontestable clause b.) entire contract clause c.) grace period provision d.) reinstatement provision

c

The gross estate can be reduced by a number of deductions before estate taxes are assessed. One deduction is the value of property that is passed to the surviving spouse. This property is taxed later when the surviving spouse dies. This deduction is called: a.) estate tax credit b.) probate deduction c.) marital deduction d.) unified credit

c

Which of the following is a measure of the rate of return on the savings portion of a cash value life insurance policy? a.) surrender cost index b.) net payment cost index c.) Linton yield d.) traditional net cost

c

Which of the following statements is (are) true about the insuring agreement? I. The insuring agreement provides a description of the property or activity to be insured. II. The insuring agreement can be written on an "open-perils" basis or on a "named-perils" basis. a.) I only b.) neither I nor II c.) II only d.) both I and II

c

Which of the following statements is (are) true regarding insurance coverage? I. A policy may cover other parties even though they are not specifically named. II. Additional insureds may be added using an endorsement. a.) I only b.) II only c.) both I and II d.) neither I nor II

c

Which of the following statements is (are) true with respect to endorsements and riders? I. Endorsements and riders are used to amend provisions of insurance contracts. II. If the endorsement or rider conflicts with terms in the underlying contract, the endorsement or rider takes precedence unless it conflicts with the law. a.) I only b.) II only c.) both I and II d.) neither I nor II

c

Extraordinary hazards are present

e.g., using the automobile for a taxi

In which section of an insurance contract will you find provisions that qualify or place limitations on the insurer's promise to perform? a.) definitions b.) insuring agreement c.) exclusions d.) conditions

d

Len would like to purchase life insurance. Just before he left to see his agent, Marcy, his wife, said, "Be sure to consider participating coverage." A participating policy is a policy that: a.) allows premiums to be paid quarterly or monthly b.) has a case value c.) permits the proceeds to be paid in a manner other than lump-sum d.) pays policyholder dividends

d

Sheila would like to purchase a cash value life insurance policy. She is concerned, however, that if she becomes disabled she will be unable to pay the premiums as they come due. What provision can Sheila add to her policy to address this concern? a.) accelerated death benefits rider b.) reinstatement provision c.) guaranteed purchase option d.) waiver-of-premium rider

d

Janice insured a building valued at $200,000 for $150,000 under a property insurance policy that included an 80 percent coinsurance provision. If a $32,000 insured loss occurs, how much will Janice collect from her insurer, assuming no deductible? a.) $32,000 b.) nothing c.) $25,000 d.) $30,000

d.) $30,000 = (actual amt of coverage / amt that should have been carried) x amt of loss = [$150,000/($200,000 x 80%)] x $32,000

Dale and his wife Jenny are legally separated. The couple owns a vacation cabin. Dale purchased a $25,000 property insurance policy on the cabin. Unaware that Dale had purchased this coverage, Jenny purchased a $50,000 property insurance policy on the cabin. While both policies were in force, a $12,000 covered property loss occurred. The insurers agreed to settle the claim on a pro rata basis. What is each insurer's liability? a.) Dale's insurer pays $12,000 and Jenny's insurer pays nothing b.) Dale's insurer pays nothing and Jenny's insurer pays $12,000 c.) Dale's insurer pays $3,000 and Jenny's insurer pays $9,000 d.) Dale's insurer pays $4,000 and Jenny's insurer pays $8,000

d.) Dale: $4,000; Jenny: $8,000 pro rata basis: assigning an amt to each person according to their share of the whole so, Dale: $25,000/$75,000 = 1/3 1/3 x $12,000 = $4,000 Jenny: $50,000/$75,000 = 2/3 2/3 x $12,000 = $8,000

Grace period of a life insurance policy

during which the policyholder has a period of 31 days (or more) to pay an overdue premium - purpose of the grace period is to prevent the policy from lapsing