Kentucky Health and Life insurance test - part 1
What factors determine annuity premiums?
Annuitant's age and sex, assumed interest rate, income amount and payment guarantee, and lastly, loading for company expenses
What is a refund life annuity?
Refund Life Annuity The main difference between the refund and the life annuity is that a refund annuity guarantees that an amt at least equal to the purchase price of the contract will be paid.
Who would buy term insurance?
Someone who needs max coverage at min cost?
What is renewable term also known as?
Step rate premium
What is a joint life policy?
A joint life policy may pay the face amount upon the first death among the persons covered by the policy or upon the last death among the persons covered by the policy.
What is an Annuity?
An annuity converts a sum of money into a series of period payments that can be guaranteed to last a lifetime and sometimes longer. Said another way, annuities exist to distribute a lifetime of income or to accumulate a sum of money, if necessary.
What is a permanent + term policy called?
Combination or blended product
What does last in first out (LIFO) in regards to MEC mean?
Money distributed from the policy is considered to come first from earnings (excess of cash value over cost basis) and is taxed as ordinary income. Only after the earnings have been taken out can the policyowner's cost basis be recovered tax free
What is step rate premium or renewable term?
Need to know 3 things: No proof of insurability At attained age Limited time Keep this in mind about both convertible and renewable privileges: They are not automatically a part of every term policy. They must be specifically included in the contract--that is, the original policy
For limited-pay life insurance, how long do I pay the premium?
Pay up to the age you specify
There are many varieties of life insurance policies, but all can be placed into one of the FOUR basic types. What are they?
Permanent, term, industrial and group
What is a family plan policy?
Some companies offer contracts that provide coverage on each of the family members at the time the policy is issued. These combination policies, or family plans, provide coverage on the principal breadwinner 4x the amount of the spouse and 5 times the amount of each child. Normally the breadwinner is permanent while the dependents are term insurance.
What is survivor life insurance?
Survivor life insurance, or second-to-die insurance, covers two lives and guarantees payment only when the second insured dies. Premiums are usually payable until the second death. (Crafted to pay federal taxes)
What is the person called who receives monthly payments from an annuity?
The annuitant
What is the annuity period?
The annuity period begins when the accumulated funds starts to make payments to the annuitant
Define a Single Premium Whole Life (SPWL) policy.
The most extreme version of a limited-pay policy is one that can be paid for with only one premium. For this reason, it is called a single premium policy.
For limited-pay life insurance, how long am I covered?
The whole of your life (up to age 100
What does it mean for life insurance to be a unilateral contract?
This means that only one party to the contract--in this case, the insurance company--is required to perform its obligations under the contract. The policy owner can discontinue paying premiums if he so chooses. But if the premiums are in fact paid, the insurance company must meet its obligations under the contract.
What is the chief function of life insurance?
To create an estate, that is a sum of money.
What is a flexible premium annuity?
With a flexible premium annuity, the purchaser has the option to vary the amt of each premium payment. There is, however, a disadvantage of a flexible premium annuity. The actual amount of the annuity benefit cannot be determined in advance because there is no way to determine in advance the amount of each premium that will be paid, or, indeed, how much will be paid in total for the annuity. The purchaser of a flexible premium annuity must therefore wait until the final premium payment has been made to determine the exact amount of the annuity benefit. Benefits can be projected, of course, based on assumptions about premium payments.
True or false: In term insurance, premiums always stay the same.
true, except for with annual renewable term.
What is a contract of utmost good faith?
utmost good faith: the parties have an affirmative duty to each other to disclose all material facts relating to the contract.
What is variable life insurance?
"INVESTMENT" OR "SEPARATE ACCOUNT": is a securities-based whole life insurance product. Agents selling variable life must be registered with National Association of Securities Dealers (NASD). This registration may be obtained by taking and passing the NASD Series 6 exam. In addition, an agent needs a valid life license and, in many states, a state-issued variable life or variable products license.
What are the two major tax advantages of life insurance?
1. The earnings on the cash value accumulate tax free unless and until withdrawn. 2. with certain exceptions, the proceeds paid at the insured's death pass income tax free to the beneficiary.
What two adjustments are made to the cash value account of a universal life policy, usually on a monthly basis?
1. a charge against the account to pay the cost of the desired insurance coverage. 2. A credit to the cash value account of interest at the current rate. See book for more details.
What age do insurance company statistics assume everyone has died by?
100
What is a load when thought of as a part of universal life?
A load is a charge that is deducted from each premium after the first-year premium to cover sales and administrative expenses. The remainder of the premium goes into a cash value account.
What is a family maintenance policy?
A mix of permanent and level term policy rider. A family maintenance policy provides income for a stated number of years from the date of death of the insured, provided the insured dies before a predetermined time.
What is a permanent policy?
A permanent policy is one with some type of cash value accumulation. Permanent (ordinary whole life) lasts as long as you live
What are the two options concerning death benefits under a universal life policy?
A. provided a level death benefit "level death benefit option" B. provides an increasing death benefit "increased death benefit"
What is a first-to-die joint life policy stipulate?
According to a first-to-die joint life policy, the contract comes to an end at the first death, and there is no further insurance protection for the other person or persons covered by the policy.
What plan is an intermediate between whole and universal life?
Adjustable life
Why is it called adjustable life?
Adjustable life is so named because policies of this type may be adjusted by the policyowner, within certain limits.
With a MEC, if the policyowner is younger than age _______ and is not disabled, these taxable distributions are considered to be premature and are subject to a 10% penalty tax in addition to the regular income tax
Age 59.5
What was the Tax Reform Act of 1984?
Any policy issued after January 1, 1985, that endows before age 95 will not qualify as life insurance. That would mean the policy's cash value accumulation and its death benefit would be taxed
What is attained age/original age when it comes to convertible life insurance?
Attained age (current age)--99.9% of ppl choose this b/c they don't have to pay anything back! Original age--age at the time policy was bought and MUST pay back premiums and interest
What does F.A. mean?
F.A= face amount=cash value
What does temporary annuity certain mean?
If the insured outlives the period of payments stipulated in the temporary annuity certain contract, payments stop at the end of the period
What is aleatory?
Giving a little for a lot. It means that equal value is not given by both parties to the contract.
What are the two types of annuities?
Immediate and deferred.
What is a level premium annuity?
Level premium = fixed - Amount stays the same but frequency may change. Under this arrangement. The premiums are paid in periodic installments over the years before the date of which the annuity income begins
What kind of settlement options come with life annuity?
Life Annuity--No Refund A life annuity, or straight life annuity, provides for a periodic income to be paid to the annuitant for as long as he lives. The payments cease upon the annuitant's death. There is not a guarantee as to minimum benefits with a life annuity
What is life insurance?
Life insurance is a means of spreading among many persons the financial loss resulting from an individual's death so that the cost for each individual is small.
What is the modern system of life insurance based on?
Life insurance is based on the statistical probabilities of death in a large population of insureds. The key to this system is predicting ahead of time the average number of people who will die each year at each age.
For a single premium life insurance policy, how long am I covered?
Life up to 100 years
Does a jumping juvenile policy require evidence of insurability at age 21?
No.
To encourage public school systems and tax-exempt charitable, educational, and religious organizations to set aside funds for their employees' retirements,__________-___________ _________________ plans may be set up and the contributions excluded from the current taxable income of the employees
Tax-sheltered annuity plans (TSA)
What is term insurance?
Term insurance is designed to provide life insurance protection for a limited time.
What is term life insurance?
Term life insurance does not build any cash value accumulation and only death benefits are paid. Term life ONLY valid for length of term
What is an accumulation period in regards to an annuity?
The accumulation period is the time where the principal earns interest and grows year by year.
What is an advantage of a single premium whole life policy?
The advantage offered by a single premium policy is that the policyowner will pay less for the policy than if the premiums stretched out over several years.
When a breadwinner dies, a family could be in four different life stages. To properly determine the life insurance protection they will need, what is the first stage?
The family dependency period. The surviving spouse will have children to support during this time, which means the family's income needs will be greatest during this period.
What is a family income policy?
The family income policy (or family income rider) provides an income to be paid on the death of the family breadwinner. It begins paying out once a breadwinner dies, but in installments.
In whole life insurance, the amount of pure insurance protection the insurance company must provide does what as the cash value in the policy accumulates?
The pure insurance protection decreases.
The final period for determining the life insurance protection needed is called what?
The retirement period
What is a risk corridor?
The risk corridor is the minimum separation determined by the rules of the IRS.
True or False: an annuity can be setup so that a survivor is on a monthly budget.
True.
True or false, life insurance is a type of property.
True.
True or false: a limited pay life insurance policy accumulates cash values at a faster rate than does whole life insurance policies.
True.
True or false: the larger number of people and deaths recorded, the more reliably one can predict how many will die at a specific age in the entire population of insureds of that age.
True.
What does a life annuity with period certain entail?
Under a life annuity with period certain, income installments must be paid for the # of years guaranteed in the contract. The annuitant's beneficiary receives income payments until the remainder of the guaranteed (certain) period has elapsed
What is Universal Life Insurance? (study this in the book as it is too big of a subject to understand with notecards).
Universal life is a flexible premium, adjustable death benefit life insurance contract that accumulates cash value at current rates of interest.
What is interim term?
When a person wants immediate protection, but does not want an immediately permanent policy, they are able to buy interim term, which will convert usually no later than 11 months.
What is a decreasing term policy?
With a decreasing term policy, the amount of insurance protection is reduced each year from the date of the issue. (premium is the same, death benefit decreases) (usually people buy to cover their mortgage).
How does a joint life and survivorship (or last survivor) annuity work?
With a joint life/survivorship (or last survivor) annuity, there are more than one (usually two) annuitants, and both receive payments until one of them dies. The second annuitant then receives continuing payments under the annuity contract. However, with another type of annuity, the joint life annuity (without the survivorship language), no mention is made of survivorship or last survivor. Only the word joint is used. This indicates that a joint life annuity, if one of the two annuitants dies, the other does not continue to receive the payments
Is it possible to have a variable life policy for 25 years and then cash it in?
Yes.
TAMRA (Technical and Misc Revenue Act of 1988) defined modified endowment contract (MEC) is what?
any policy funded more rapidly than 7-life pay. Once a policy contract fails to satisfy the 7-pay test, it is considered to be a MEC from then on. This would include all single life premium policies.
What two types of deferred annuities are there?
fixed and variable.
What is insurance?
insurance is a means for spreading the result of financial loss among many persons so the cost to any one person is small.
Is there a guaranteed cash value?
no.
What is a jumping juvenile policy?
normally purchased by a parent for a child 15 y/o and under. At the time the child turns 21, however the face amount automatically jumps 5 times greater than the original face amount with no increase in premium and no evidence of insurability required.
For a single premium life insurance policy, How long do I pay?
only once for $ of policy
(mortality risk + operating expense risk + investment risk = what?
surplus or loss.
In whole life insurance, as the policyowner continues to pay the premiums, what happens?
the cash value in the policy accumulates year by year.
What is assessment?
the system of paying losses by requiring a contribution from each family covered by the plan.
What is a waiver?
the voluntary relinquishment of a known legal right
What should you think when see the word variable on the exam?
variable = investment (see notes for explanation)
Is there a guaranteed death benefit for variable life insurance?
yes.
What is a back-end sales load?
A back-end sales load usually takes the form of service charges for withdrawals from the policy, for policy surrenders, and for coverage changes (usually in forms of service or surrender charges, Ex: $100 goes in, 5% goes out)
What is a deferred annuity?
A contract is a deferred annuity if income payments are to begin at some further point in the future, perhaps as much as several years from the date of the purchase Can also be a single premium contract or single premium deferred annuity. Most of the time, deferred annuity premiums are paid in annual, semiannual, quarterly, or monthly installments over a period of years.
What is a contract?
A contract is a legal agreement between two or more parties promising a certain performance in exchange for a valuable consideration.
What is an immediate annuity?
A contract is an immediate annuity if income payments to the annuitant are to begin one payout interval (e.g., one month or one year) after purchase of the annuity) Must be paid for with a single premium. Even with an immediate annuity, payments do not begin on the very next day after the contract is purchased, Instead, payments begin after one full payment period from the date of purchase has elapsed.
What is a fixed annuity?
A fixed annuity specifies a fixed, guaranteed minimum rate of interest that will be paid on the principle amt invested in the annuity. Under this arrangement, the contract owner knows exactly the minimum return that will be earned during the accumulation period. The insurer simply invests each premium in its general investment account and credits the current interest to the annuity's cash value but never less than the minimum guaranteed.
What is estoppel?
A legal prohibition which stops a person from making a particular statement of claim because of something he has said or done before (or waived)
What is a partial withdrawal?
A partial withdrawal is another means of obtaining funds from the cash value account. Recall that under a universal life insurance contract the cost of insurance is deducted from the cash value account. When the cash value account reaches $0, coverage under the contract expires. However there is a grace period, usually 30 or 60 days. HWQ: When cash value acct becomes insufficient due to premium has not been paid, the POLICY GOES INTO GRACE PERIOD
For those who want lifetime insurance protection, but do not like the thought of paying premiums their entire life, what option do they have?
A policy to fit their needs is called the limited-pay life insurance policy
What is a single premium annuity?
A single premium annuity is an annuity purchased by a single lump-sum payment. The annuity itself is a contract between the company and the annuitant. For a single premium, the company promises to pay the annuitant an amount each period.
What is a variable annuity?
A variable annuity offers a variable, nonguaranteed rate of interest that offers the potential, not a promise, to act as a hedge against inflation.
What is a variable universal life poilcy?
A variable universal life policy incorporates the flexiblity of universal life, the investment features of variable life, and the tax advantages of all life insurance products. LIke universal life, it offers flexible premium payments, an adjustable death benefit, and may offer two death benefit options. Like variable like, cash values are held in a separate account and the investment performance of that account can affect the amount of the death benefit. And like variable life, agents selling it must be NASD registered.
What happens when an annuitant dies before even one premium payment has been made?
Although company policy varies greatly as to what amount is paid to the annuitant's beneficiary or other heirs, most companies refund at least the amount the purchase has paid for the contract at that point. Some may include interest on that amount
What certain characteristics must an insurance contract have to be enforceably legal?
CLOC - Competent parties, Legal purpose, Offer and acceptance, and consideration
What is Convertible Term insurance?
Can convert from term-to-permanent, NOT permanent-to-term--EVER! Can convert from term to permanent w/out having to prove insurability
Insurance contracts are said to be contracts of adhesion. Define it.
Contracts of adhesion are somewhat one sides (like adhesive tape). the provisions of the contract are prepared by one party, the insurer.
What are you able to adjust in the policy provisions of an adjustable life policy?
Face amount of the policy (usually with evidence of insurability), amount, frequency or both of premium payments, and period of insurance protection.
True or false: annuities primary purpose is to offer protection from dying too soon
False. Annuities primary purpose is to protect against living too long.
True or false: a contract owner only sets up one person for the annuities.
False. He sets up one annuitant, but also names a beneficiary who would receive the payable benefits if the annuitant died.
True or false: there is no time limit to convert a term life policy to a permanent life policy
False. Usually a company specifies how long you have to convert.
True or false: you can convert a permanent policy to a term policy within 10 years of original purchase date.
False. You cannot convert permanent to term. Only term to permanent.
What is a fixed payout in regards to fixed annuities?
Fixed Payout: For a fixed annuity, the cash value accumulation at the beginning of the annuity period is simply annuitized. The accumulation is converted into a stream of periodic payments
What is an indeterminate premium policy?
Indeterminate Premium Policies offer a low current premium at the beginning of the policy period, usually for 2 years. After that period, the premium can be adjusted to reflect the insurance company's experience w/regard to investment return, mortality, and expenses. This adjustment could result in a lower premium. It could also result in a higher premium, although it may not be increased above a stated maximum Indeterminate = cannot determine premium
What does offer and acceptance mean in a contract?
Offer and Acceptance means that contracts involve two parties: one party who makes an offer and another party who accepts the offer. In insurance, the applicant makes the offer.
What does it mean for a annuity contract owner to have non-forfeiture options?
The contract holder may have several nonforfeiture options, or the rights to the cash value accumulating up to the point the premiums stopped. An annuity contract owner who stops making premium payments during the accumulation period does not lose the value accumulated in the annuity to that point.
What is a needs approach when determining the amount of life insurance needed?
The needs approach looks at what the needs of a family or business would be should the breadwinner or owner die.
What's different about a limited-pay life insurance policy from a whole life policy?
The only difference is the policy owner can pay the premiums for a specified number of years or to a previously specified age and then stop. The insurance protection continues for the remainder of the insured's life
What's the con of a Single Premium Whole Life policy?
The person insured by a single premium policy could die shortly after the single premium was paid, thus making the cost of insurance coverage much higher than it might have been had premiums been scheduled over a period of many years. Although this could be considered a disadvantage to the policy owner, such a circumstance would be favorable to the insurance company
What does a whole life insurance policy mean?
The whole life insurance policy gets its name because it requires an insured policyowner to pay the premiums on this policy for his entire life. Pay premiums your whole life=coverage your whole life
What is the primary purpose of an annuity?
To distribute an estate.
What is a level term policy?
With a level term policy, the amount of insurance protection remains constant for the period of years stipulated in the policy--that is, for the entire term of the policy. The face amount remains the same and the premiums remain the same.
