Life Insurance Flash Cards

All employer-paid premiums for amounts of group life insurance over $__________ are reported as taxable income to the employee.

$50,000

To qualify for a tax-free accelerated death benefit, the insured must be given a prognosis of how many months or less life expectancy?

24

In order for a worker to be qualified for all of the benefits available from Social Security how many credits must be earned?

40 Credits

Personal Contract

A "personal contract" follows the person who owns the contract, and may not be assigned to another owner without prior approval of the insurance company. Most insurance contracts are "personal". Life insurance is NOT a personal contract. Once issued, ownership of a life policy may be transferred or assigned to another person without insurable interest simply by giving advance notice to the insurance company.

contract of adhesion

A Contract of Adhesion is one that is prepared by one party and presented to the other party on a take it or leave it basis.

Family Income

A Family Income policy combines whole life insurance with a Decreasing Term rider. The length of the rider is based on the number of years until the youngest child is no longer a dependent, such as age 21. If the insured dies while the rider is in force, the death benefit of the rider is paid in equal monthly installments (including interest) for the remaining number of years the rider would have been in effect. This benefit is in addition to the face amount of the whole life policy. If the insured is still living at the end of the decreasing term, the rider drops and the premium decreases.

Family Maintenance Policy

A Family Maintenance policy combines whole life insurance with a Level Term rider. If the insured dies while the rider is in force, the death benefit of the rider is paid in equal monthly installments (including interest) for the full number of years for which the rider was issued. This benefit is in addition to the face amount of the whole life policy. If the insured is still living at the end of the level term, the rider drops and the premium decreases.

Family Plan (Family Protection Plan)

A Family Plan, or Protection Plan, provides a base policy of whole life insurance on the primary insured and the spouse and children are covered by level term riders. The spouse's coverage is written to a specified age, such as 65, and is usually convertible to a whole life policy any time prior to expiration without proof of insurability. The children are covered by a single level term insurance rider with one premium covering all of the children under age 18 who meet underwriting guidelines. Newborn or adopted children will automatically be covered once they are 15 days old without an additional premium as long as the insurer is notified in writing. The children's coverage is also convertible to a whole life policy at a specified age (up to age 25) without proof of insurability.

Long-Term Care (LTC) Rider

A Long-Term Care rider will permit the owner of the policy to use all or a substantial portion of the annuity cash accumulation value to pay for the expenses of LTC under the same requirements to trigger and pay benefits as a traditional LTC policy.

Split-Dollar Plans

A Split-Dollar Plan is not a tax-qualified plan, but it does provide a benefit for the employee's family upon the death of an employee. Upon an employee's termination of employment, the policy may be purchased from the employer at the full cost basis of the policy. This is a plan which insures the employee's life with premiums split between an employee and the employer. At the death of the employee, the full death benefit, less the collateral interest of the employer, is paid to the employee's beneficiary. A certain period of time must elapse before an employee is entitled to any of the cash value.

Beneficiary Designations

A beneficiary designation may be selected at the time of application. A change of beneficiary will take effect on the date the request was signed by the owner, whether or not the insured is alive at the time the insurer actually receives the notice.

Inspection Report

is a general report of the applicant's finances, character, morals, work, hobbies, and other habits. This is sometimes referred to as a Consumer Investigative Report. This can be completed by the insurer or a third-party provider. The applicant must be made aware of any information gathering and has rights provided under the FCRA.

A Supplemental Executive Retirement Plan (SERP)

is a nonqualified deferred compensation plan that allows employers to provide additional retirement income to key, highly compensated employees beyond the benefits of traditional retirement plans.

Agent's Report

is a personal statement submitted by the producer to the insurer regarding the applicant's financial condition, any personal knowledge of the applicant, etc. This information remains confidential between the producer and the insurer, and it does not become part of the entire contract.

Temporary Insurance Agreement

is a receipt that provides immediate coverage during the underwriting period (rather than a specified number of days) until a policy is issued or the application is declined.

The Life Insurance Net Payment Cost Index

is also used to compare similar policies, however this index shows the cost based on the death benefit payable after a surrender period of 10 or 20 years rather than the cash surrender value.

Unilateral contract

is one in which one party makes an express engagement or promise of performance, without receiving in return an express engagement or promise of performance.

Replacing insurer

is the insurer that issues a new policy which is a replacement of an existing policy or annuity contract. Replacement does not apply to: Credit life insurance Group life insurance or annuities Conversion of an existing policy Proposed life insurance that is to replace life insurance issued by the same insurer

Existing insurer

is the insurer whose policy is or will be changed or terminated through a replacement.

Attending Physician Statement (APS)

is used in cases in which the individual application and/or medical reports reveal conditions of which more information is required. The applicant's treating physician will complete this as part of the applicant's medical history. An applicant must sign a written release to enable a release of the APS. The insurer pays for this.

The Life Insurance Surrender Cost Index

is used to compare the cost of similar policies based on determining the guaranteed cash surrender value, if any, available at the end of the 10th and 20th policy years.

Fiduciary funds

must be maintained in a trust account at a bank or depository in California.

Tort Law

pertains to injuries suffered by one party as a result of another party's actions or negligence in the absence of a contract. A tort is a civil wrong other than a crime or a breach of contract. Liability insurance is concerned with torts. An individual committing a tort is referred to as a "tortfeasor."

The MIB, Inc.(Medical Information Bureau) Report

primarily used to collect adverse medical information about an applicant's health (supported by insurance companies) and act as an information exchange. MIB is a member-owned corporation that operates on a not-for-profit basis in the United States and Canada. MIB's Underwriting Services are used exclusively by MIB's member life and health insurance companies to assess an individual's risk and eligibility during the underwriting of life, health, disability income, critical illness, and long-term care insurance policies. These services "alert" underwriters to fraud, errors, omissions or misrepresentations made on insurance applications. In addition, MIB may help lower the cost of life and health insurance for consumers. MIB's coded reports represent general medical information and other conditions (typically hazardous hobbies and adverse driving records) affecting the insurability of the applicant. If the coded reports are inconsistent with the information provided by the applicant, underwriters are required to conduct a further investigation to obtain more information about the reported medical histories or conditions prior to making an underwriting decision. Because the MIB information is general, the MIB cannot solely be used to decline an applicant for insurance.

Department of Motor Vehicle (DMV)

report may be requested to provide information regarding the applicant's driving history.

Life insurance illustrations

should be presented to be understandable and not misleading. An illustration is a document that shows the cash accumulation in a life policy over a minimum of 20 years on both a "guaranteed" (maximum cost of insurance, minimum interest credits) and a "nonguaranteed" (current cost of insurance and interest credits assumptions) basis. Known as a "Basic Illustration." Policy illustration requirements apply to all group and individual life insurance policies, except: Variable life insurance Individual and group annuity contracts Credit life insurance Life insurance policies with no illustrated death benefits on any individual exceeding $10,000

Cash Values

A cash value policy may experience increases in the cash value annually. Part is from the premium and part is from any interest or gains. The interest or gains are not taxable at the time they are credited to the policy. Any earnings in the cash value are allowed to grow on a tax-deferred basis until one of the following events occurs: The policy is surrendered The policy is transferred for value (e.g. sold or assigned) The policy ceases to meet the IRS definition of a life insurance contract If the policyowner does sell, surrender, or withdraw funds from the policy, the difference between what is received and what had been paid in is taxed as ordinary income. This is the Cost Recovery Rule. When withdrawing cash from a cash value life insurance policy, the amount of withdrawals up to the policy's cost basis will be tax free. This is referred to as First In, First Out, or FIFO. The cost basis is the amount of premiums paid into the policy less any dividends or withdrawals previously taken. Any withdrawals in excess of the cost basis will be taxed as ordinary income. Upon surrendering a cash value life insurance policy, any gains will be subject to federal, and possibly state, income tax. The gain on the surrender of a cash value policy is the difference between the gross cash value paid out, plus any loans outstanding, and the cost basis in the policy. If the policy matures, the cash value will be paid as a lump sum. As with other distributions made while the insured is alive, the sum in excess of the cost basis is taxable as ordinary income.

Participating Policy

A class of policy marketed by a mutually owned company. The word participating means a dividend may be paid to the policyowner when it is declared by the board of directors. The company is not required to issue only participating policies, but only participating policies will be eligible for dividends. Participating policy dividends are treated as a refund of premium for tax purposes initially. However, once all premiums have been recovered, any further dividends are taxable.

Misrepresentation

A false statement in the application that can render the contract void, if material to acceptance of the risk.

Life Settlement Contract

A financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than the cash surrender value and less than the face value. A written agreement is entered between a life settlement provider and the owner of the policy. The contract establishes that compensation is paid in return for the owner's assignment of an insurance policy. A Life Settlement Contract is a financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than the cash surrender value and less than the face value.

Misstatement of Age

A group policy must contain a provision allowing for the adjustment of premium or amount of insurance payable in the event of a misstatement of the age of an employee. A death claim payable for an insured whose age was misstated will be adjusted in relation to the misrepresentation, but does not affect the benefit payable for any other insured.

elements of a legal contract

A legal contract must include 4 necessary elements: Competent Parties Legal Purpose Agreement (Offer and Acceptance) Consideration

Estoppel

A legal doctrine that prevents the denial of a fact, if the fact was admitted to be true by a previous action. Waiver and estoppel are related concepts. For example, if an insurer waives its right to enforce a cancellation provision for nonpayment of premium by a certain date, the doctrine of estoppel means that other insureds have the right to expect that waiver if they should miss payment deadline.

What must an insurance producer have in order to market variable annuities?

A licensed life agent also needs a securities license to be able to transact variable life or annuity contracts. Each of the other answer choices is an accurate statement but does not answer the question appropriately.

Annuities and Medi-Cal Eligibility

A life agent who offers for sale, or sells any financial product based on its treatment under the Medi-Cal program must provide, in writing, a disclosure entitled "Notice Regarding Standards For Medi-Cal Eligibility". This notice is a brief description of the Medi-Cal eligibility rules. It is to be clearly separate from any other document, and signed by the prospective purchaser, that person's spouse and legal representative, if any. An annuity may not be sold to a senior if: The senior's purpose in purchasing the annuity is to affect Medi-Cal eligibility and either of the following are true:The purchaser's assets are equal to or less than the community spouse resource allowance established annually by the State Department of Health Services pursuant to the Medi-Cal Act.The senior would otherwise qualify for Medi-Cal. The senior's purpose in purchasing the annuity is to affect Medi-Cal eligibility and, after the purchase of the annuity, the senior or the senior's spouse would not qualify for Medi-Cal. Any broker or agent who violates the prohibition against selling annuities to qualify a senior for Medi-Cal is liable for an administrative penalty of $1,000 for the first violation and $5,000 up to $50,000 for subsequent violations and possible suspension of the agent or broker license by the Commissioner.

Permanent Whole Life insurance

A life insurance policy that remains in force to age 100 or beyond. The premium is always higher than that on a term policy at issuance when the amount of coverage and underwriting factors are equal. This policy provides for living benefits for the policyowner or insured by way of its cash values. It also has many options available to the policyowner.

Broker Licensing

A life insurance producer licensed as a life agent for at least 1 year or as a licensed nonresident producer meets the licensing requirements and is permitted to operate as a Life Settlement Broker by notifying the Commissioner and paying the life settlement broker license fee. Individuals who have not been licensed life agents for at least 1 year who intend to transact life settlements must first complete at least 15 hours of education on life settlement transactions, complete and submit an application and pay the life settlement broker license fee. A person licensed to act as a viatical settlement broker or provider is qualified for licensure as a broker or provider. A Life Settlement Broker license is not required for a licensed attorney, certified public accountant, or accredited financial planner who represents the owner and whose compensation is not paid directly or indirectly by the life settlement provider. The Commissioner has the power to suspend or revoke a Life Settlement Broker license for cause after the appropriate hearing procedure. A licensee that intends to discontinue transacting life settlements must notify the commissioner and surrender their license.

Life Settlement Broker

A life settlement broker, for a fee or commission, offers to negotiate life settlement contracts between an owner and providers. A life settlement broker represents only the owner and owes a fiduciary duty to the owner to act in the best interest according to the owner's instructions, regardless of the manner in which the broker is compensated.

There are several types of life insurance products available to insureds. Which type of policy should an insured obtain if he or she does not want to continue making premium payments after a set number of years?

A limited-pay life insurance policy is one where the insured will pay premiums over a set number of years, but the coverage will continue until the death of the insured. These payments typically are broken down over 10, 15, or 20 years, depending on the carrier.

Material Misrepresentation

A material misrepresentation means the insurer would not have issued coverage, or the policyowner would not have accepted the policy, if the correct information had been communicated. A material misrepresentation may permit the injured party to rescind the policy from the time the misrepresentation was made.

Survivor Benefits

A monthly Survivor Benefit is payable to eligible dependents of a currently or fully insured deceased worker. A surviving spouse with a dependent child is entitled to monthly income until the youngest child reaches age 16 (or a disable child reaches age 22). Once the youngest child reaches age 16, the surviving spouse's benefits stop. An unmarried surviving spouse may start receiving retirement benefits at age 60. The blackout period is the time between when the youngest child reaches age 16 and the spouse is eligible for retirement benefits at age 60. Surviving children of a deceased worker are eligible for benefits and covered to age 18 or 19 if still enrolled in high school. Beginning at age 62, surviving parents are also eligible for monthly survivors benefits if being at least one half supported by the deceased worker.

Non-qualified Annuity

A non-qualified annuity is funded with after-tax dollars, meaning taxes on the money were paid before it goes into the annuity. Upon distribution, only the earnings are taxable as ordinary income. Most individual annuities are nonqualified. Exam questions will be about nonqualified annuities unless specifically stated concerning qualified annuities.

Partial Withdrawals

A partial withdrawal of cash value is permitted in a Universal or a Variable Universal Life policy. A partial withdrawal is considered a partial surrender of the policy. A partial surrender is actually paid from the policy value and reduces both the amount of the death benefit and the amount of cash value in the policy. Any amount withdrawn in excess of the premium is subject to taxation. There may be a surrender or withdrawal charge associated with the withdrawal. The insurer may limit the number of withdrawals that can be made annually or the amount of the withdrawal by specifying minimums and maximums.

Dividends

A participating policy's dividend consists of the amount of premium that is returned to the policyowner if the insurance company achieves lower mortality and expense costs than expected. Dividends are paid out of the insurer's surplus for that year. The dividends are not taxable since dividends are considered a return of unearned premium. When dividends: Are left on deposit with the insurance company, interest earned on dividends is taxable as ordinary income in the year earned Received exceed the total premium paid for the life insurance policy, the excess dividends are then considered taxable income

Applicant

A person applying to be insured under an insurance contract. The applicant, owner, and insured may be the same or up to three different persons.

Agreement (Offer and Acceptance)

A person makes the offer by submitting an application for insurance. Acceptance takes the form of the issued policy or binder, which is the insurer's promise to pay.

Policy Loan Provisions

A policy loan may be made in a cash value policy once there is sufficient cash value to borrow against. A cash value policy must have some cash value not later than the end of the third policy year. A loan against the cash value does not necessarily reduce the cash value in a policy. The cash value is used as collateral against a loan. Interest will be charged annually, and if unpaid will be added to the balance of the unpaid loan. Interest charged may be fixed or variable. The insurer may defer granting a loan for up to 6 months unless the loan is intended to repay any premium, such as an automatic premium loan. Failing to repay a loan or interest will not void the policy until the total amount of the outstanding loan and unpaid interest equals or exceeds the policy's total cash surrender value. Any outstanding loans along with any interest due will be deducted from the face amount at time of claim or from the cash values upon surrender. Policy loans do not automatically reduce the death benefit in a policy. If an outstanding loan exists at the time of death, the amount of the loan will then reduce the benefit paid to the beneficiary.

Nonparticipating Policy

A policy marketed by a stock insurer. A stock insurer is a company under the control of the stockholders who would receive a share of any profits in the form of a corporate dividend, as opposed to a policy dividend. Stock dividends are treated as ordinary income for tax purposes. A policyholder does not have to be a stockholder.

Third-Party Ownership

A policy owned by a person other than the insured.

Variable Policy

A policy that uses a separate account for the cash value accumulation. The separate account includes subaccounts which are similar in nature to mutual funds, and a securities and life insurance license are required to sell this policy. The policyowner takes on the investment risk of the policy. The policy's overall death benefit can increase along with the cash values with positive investment performance coming from the separate accounts selected; however, there is no guarantee of return and down markets can cause significant loss of policy value.

valued contract

A policy which pays a pre-determined amount when a claim is made.

Qualified Annuity

A qualified annuity is funded with pre-tax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. The entire distribution from a qualified annuity (contributions and earnings) is subject to ordinary income taxes. Qualified annuities may be used to hold qualified retirement plans such as IRAs or Tax Sheltered Annuities. Contributions are limited by the IRS under these types of plans.

Waiver of Cost of Insurance

A rider that waives the deduction of the monthly cost of insurance and expense charges associated with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability. The disability must occur prior to 65, and if disabled, the rider typically terminates at age 65. While the rider is in effect, only the monthly deductions are covered and no additional amount is added to cash value other than monthly interest credits. When the rider terminates, premiums must once again be paid.

Materiality

A statement is material if its disclosure or lack of disclosure would change the insurer's decision to issue a policy for the same premium. Materiality is not determined by the event but rather by the facts that a party failed to communicate (or miscommunicated) and is judged by the importance or relevance to the contract and the influence of the facts on the party to whom the communication is owed.

While life insurance may accumulate money that a person could use in retirement, none promise the same long term benefit of a non-qualified annuity, which is _________.

A stream of income the annuitant cannot outlive

Trial Application

A trial application is one submitted without a premium. The policy would not take effect until the policy is issued by the insurer, delivered by the agent and the premium is paid.

Pre-need Plan

A type of coverage with a small face amount ($50,000 or less), typically purchased to pay the burial expenses of the insured.

Violation and Penalties

A violation occurs if an agent or insurer recommends the replacement or conservation of an existing policy by use of materially inaccurate presentation or comparison of an existing contract's premiums, benefits, dividends, and values. This is also known as "twisting" and is a misdemeanor. It is also a violation to recommend that an insured 65 years of age or older purchase an "unnecessary replacement annuity." An unnecessary replacement annuity means the sale of an annuity to replace an existing annuity that results in a surrender charge for the annuity that is being replaced and does not confer a substantial financial benefit over the life of the contract to the purchaser so that a person would reasonably believe the purchase is unnecessary. An agent who violates any replacement regulations is liable for an administrative penalty of no less than $1,000 for the first violation. For subsequent violations, the penalty is no less than $5,000 and no more than $50,000 per violation. An insurer who violates any replacement regulations is liable for an administrative penalty of $10,000 for the first violation and for subsequent violations no less than $30,000 and no more than $300,000 per violation.

Warranties

A warranty is either express or implied. An express warranty is a statement stipulated in the policy relating to the insured risk that is considered fact. Every express warranty made at or before the execution of a policy must be contained in the policy itself and signed by the insured. A warranty may relate to the past, present, or future. A statement in a policy showing an intent to do something which materially affects a risk is a warranty or promise made by the insured in the contract, such as "the insured will maintain an anti-theft device." Failure to comply with a warranty breaches the contract. A violation of a material warranty allows the other party to rescind the contract.

Parol Evidence Rule

A written contract may not be altered without the written consent of both parties.

Application

A written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the primary source of information used for underwriting purposes.

Accelerated Death Benefit Riders

Accelerated Death Benefits provide for an early payment of a portion of the face amount prior to death. This rider provides tax free access to policy benefits based on an insured qualifying as terminally ill or chronically ill. A person is considered terminally ill when a physician has certified that person has a condition which would is expected to result in death within 24 months. A person is considered chronically ill if a licensed health care professional has determined within the last 12 months that person is unable to perform at least 2 activities of daily living for at least 90 days without substantial assistance. Accelerated benefits can be received as a lump sum or in periodic payments provided for a certain period only. Accelerated death benefits do not have to be repaid if the insured's health improves but the amount received reduces the remaining death benefit.. There are two riders that provide Accelerated Death Benefits: Living Needs Accelerated Benefit Rider - Allows the early payment of a portion of the face amount before death should the insured become terminally ill with less than 24 months to live. This rider is not designed to provide services to the insured. Long-Term Care Rider - Provides up to 100% of the policy benefits if the insured qualifies for long term care benefits based on being chronically ill as defined in the rider. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary. The amount of protection is determined at the time of policy purchase. Long term care benefits are paid income tax free after the insured meets the qualifying requirements. Specific California long-term care training is required for life-only agents when selling a rider or policy that requires services to the chronically ill as a condition prior to providing payments. Effect on the Death Benefit After the accelerated benefits are paid and any lost interest to the insurer is deducted, the insurer must pay the balance of the face amount to the beneficiary. Exclusions and Restrictions The accelerated death benefit cannot contain exclusions or restrictions that are not also exclusions or restrictions in the policy. Typical exclusions apply to suicide, intentional self-inflicted injury, war, or engaging in illegal occupations or activities.

Gross Premium

Additional charges (loading) are added to the net premium rate to enable an insurer to meet all costs under the contract, such as operating expenses, commissions, medical examination costs, etc.

Adjustable life insurance policies differ from other life insurance policies in what way?

Adjustable life insurance policies do not require the insured to purchase additional coverage or cancel when they have a life change.

competent parties

All parties to a contract.(i.e., Insurer and Insured must have legal capacity to enter into a contract). Parties to a contract must have the legal capacity to enter into a contract. Parties are assumed to be competent unless they are any of the following: Minors - For purposes of insurance, a minor is a person under age 16. Mentally incompetent Under the influence of drugs or alcohol

Guaranteed Insurability

Allows the insured to purchase stated amounts of additional insurance every 3 years based on certain ages (specifically 25, 28, 31, 34, 37, and 40), events, or specified dates without evidence of insurability up to a maximum age, usually 40. The premiums are based on attained age. The events which will allow for the insured to obtain additional insurance in between the specified ages include marriage and the birth or adoption of a child, when the need for insurance coverage may increase. It normally limits the insured to acquire additional amounts of the same type of coverage already in force. The insurer often limits the amount of coverage that may be added. This rider drops at age 40.

Rider

An added benefit attached to the policy that supplements existing coverage. A rider is usually added at the time of application and may result in a small increase in premium.

Tyler is a newly married 33-year-old who is talking to an agent about purchasing a life insurance policy for him and his wife. Tyler is nervous to commit to a policy as he is young and unsure of how much he can afford to pay in premiums in case of a job or life change. What type of policy may Tyler's agent suggest to help ease Tyler's fear of committing to a policy for life?

An adjustable life insurance policy.

Viatical Settlement

An agreement between a policyowner and a third-party buyer to purchase the life policy covering a person who is diagnosed as terminally ill with less than 24 months remaining life expectancy. California Insurance Laws for viatical settlements are referenced under the life settlement laws.

Indemnity Contract

An agreement to pay on behalf of another party under specified circumstances, such as when a loss occurs. Under the principle of indemnity, insurance will only restore the insured to the same financial condition that existed before the loss. The insured cannot profit from the loss.

Life Insurance Policy Riders

An amendment or rider modifies the policy by expanding its benefits, and are at the option of the insured. Policy riders are available for an additional premium in most cases. Riders are provided for a specified period of time as stated in the policy. It is typical for a rider to end at a specified age (such as the insured's age 65). Once a rider drops from the policy, the additional premium will also drop. Most riders are added at the time of policy issue. Any riders added after the policy has been issued usually require evidence of insurability.

A contract that is designed to accumulate value over time with the intent to distribute the funds over the lifetime of an individual is called _________.

An annuity

Corporate-Owned Annuities

An annuity contract owned by a non-natural person is not treated as an annuity for federal income tax purposes so the contract's gains are currently taxed as opposed to being tax deferred. In short, there are no tax benefits when an annuity is owned by a corporation.

Nonforfeiture Provisions

An annuity owner will not lose the value accumulated up to the point where they stopped paying into the contract. Nonforfeiture provisions give the owner the rights to the accumulation in the contract. The owner has the right to surrender the contract during the accumulation period. Remember, these provisions only apply to deferred annuities since immediate annuities do not have an accumulation period.

Indexed (or Equity Indexed) Annuity

An annuity product with interest rates that are linked to the positive performance of a related index, such as the Standard & Poor's 500 Index. The contract owner enjoys safety of principal and some guaranteed minimum returns. The safety of principal and previously locked-in interest is backed by the insurer's general account. The minimum guarantee can be as low as 0% reflecting that the policy will not be adversely affected by negative stock market index performance. These contracts typically have a fixed account from which funds are transferred into the index selected. They also tend to have higher surrender charges and longer surrender charge periods.

Nonmedical Application

An application used when a policy requested does not require a medical examination for underwriting. Health questions on the application are asked by the producer and are the only medical information required initially. On the basis of answers provided in a nonmedical application, the underwriter may order additional medical testing, such as collection of blood and urine, EKG, physician exam, etc., prior to accepting the proposed insured.

Exclusions for War, Military, and Aviation Risks

An employer group policy may provide for the exclusion or limitation of coverage for losses arising from conditions relating to war, military service, or aviation exposures

Viatical /Life Settlements

An individual selling an owned insurance policy to a third party for less than the death benefit but more than the cash values in order to obtain funds when no other sources are readily available. A Life Settlement is similar to a viatical settlement in that it is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its death benefit. There is no requirement for the insured to be terminally ill in order for a life settlement to occur. A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy. Note: If your state has particular Viatical or Life Settlement licensing and solicitation laws, they will be addressed in the state law chapter.

Cost of Living Rider

An inherent risk in a fixed annuity is the loss of purchasing power due to inflation. A Cost of Living rider will increase the annuity payments according to changes in the Consumer Price Index (CPI).

Group Insurance Plan

An insurance plan normally owned by an employer, creditor or association, under which coverage is provided for the employees, debtors, or members. Group insurance generally provides protection for an employee's named beneficiary, typically a spouse if married. The coverage may be changed only in the Master policy. The coverage is normally written on a renewable term basis providing no cash value or living benefits as found in individual cash value policies. The amount of coverage can be limited to a fixed dollar amount such as $50,000 or a multiple of earnings (for example, 2 times annual salary). Some group plans allow for the purchase of additional coverage which may be partially or fully underwritten. Upon retirement, group coverage can be converted to an individual permanent life insurance plan without having to prove insurability.

Domestic Partners

An insurer may require the insured to verify the domestic partnership status by providing a copy of a valid Declaration of Domestic Partnership filed with the Secretary of State, an equivalent document issued by a local agency of this state, another state, or a local agency of another state under which the partnership was created. The policy may also require that the insured notify the insurer upon the termination of the domestic partnership. However, this will be required only if the policy requires the insured to notify insurer of marital status verification, such as marriage or divorce.

Alien Insurer

An insurer organized under the laws of any jurisdiction outside the United States, whether or not it is admitted to do business in this state.

Representations

An oral or written statement made at the time of application or before issuance of the policy that is believed to be true to the best of the knowledge of the applicant. A representation may only be altered or withdrawn BEFORE the policy is issued. A representation cannot qualify an express provision in a contract of insurance; but it may qualify an implied warranty. A representation is false when the facts fail to correspond with its assertions or stipulations

Margaret is 23 years of age and new to the workforce. She was approached by her human resources department to purchase life insurance. Margaret thought at her age she would just get a basic policy and wanted to pay the lowest amount possible for coverage. She also, however, knew that she would want to up her coverage as she got older. What would be a good option for Margaret?

Annual renewable term

Insurance Aspects of an Annuity

Annuities are insurance products based on a mortality table. If a life settlement option is chosen, the insurance company guarantees to provide an income benefit payment as long as the annuitant lives (for example, life only or joint and survivor). Actuarial assumptions based on the law of large numbers allow this to occur. Those who live a shorter life span than expected allow the insurance company to have the reserves in place to be able to pay out guaranteed lifetime income benefit payments to those who live well beyond life expectancy.

the following tax-free exchange of life insurance and annuities are not permitted ____________.

Annuity to life insurance

Fraud and False Statements

Any person who knowingly presents false or fraudulent information on an insurance application or claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in a state prison.

Replacement

Any transaction in which new life insurance or an annuity is to be purchased and it is known that the existing contract will be: Lapsed, forfeited, surrendered, or terminated Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values Amended to reduce the benefit or term in which the coverage would remain in force Reissued with a reduction in cash value Pledged as collateral or subjected to borrowing for amounts in the aggregate exceeding 25% of the loan value set forth in the policy

Accelerated or Living Benefit Rider

As in life insurance, this rider permits the policyowner to withdraw funds without a surrender charge prior to annuitization in the event of the annuitant's terminal illness diagnosis. Death must be expected within 2 years. Some terminal illness riders also permit withdrawals due to permanent total disability.

When may an employer deduct the premiums it pays for an employee's life insurance benefit?

As long as the business does not derive a direct benefit from the policy

Variable Annuity General Account vs. Separate Account

As mentioned previously, fixed annuity products require premiums to be invested in the insurer's general account. The general account consists of safe investments that allow the insurer to guarantee a minimum rate of return. Variable annuities require the insurer to maintain a separate account. Performance of the separate account is based on the underlying investments in the stock market and are not guaranteed. Variable annuities are regulated by the SEC and State insurance departments. Annuity payments and cash values fluctuate according to the investment experience of the separate account the contract owner has designated. Payments are based on "units" rather than dollars. While not guaranteed, variable annuities may act as a hedge against inflation. This protects against the purchasing power risk of a fixed payment annuity by providing income that trends toward keeping pace with inflation. The contract owner bears the investment risk and receives the return earned on invested assets, less any charges assessed by the insurer and investment managers. There is no guaranteed return. The premium paid during the accumulation period is invested in separate account; the underlying investment in the separate account is similar to a mutual fund. The investment return varies according to the separate account selected based on the assumed interest rate (AIR). If the actual return is lower than the AIR, the monthly annuity payment will be reduced. If the actual return is equal to the AIR, the monthly annuity payment will remain the same as the previous month. If the actual return is greater than the AIR, the monthly annuity payment will increase from the previous month. Both an insurance license and a securities license (FINRA) are required. This annuity is considered a security, and therefore, must comply with the Federal Securities and Exchange Commission (SEC) rules as well as the state insurance laws. A prospective buyer of a variable annuity must be provided with a document called a prospectus. The prospectus gives detailed information on the separate account available in the annuity. This information provides the contract owner the opportunity to make a better decision based on the historical performance of the separate account. The prospectus must be provided at or before the time of the sale. The premium payments made during the accumulation period may be flexible in amount and frequency limited only to the contract's provisions. Premiums purchase accumulation units of the separate account. These are similar to shares of a mutual fund. Upon annuitization, accumulation units are converted into annuity units. The number of annuity units liquidated remains level, but the unit value fluctuates, based upon the performance of the separate account.

Group Insurance Market

As previously discussed, ordinary individual insurance is issued on individual people using individual policies normally with an evidence of insurability requirement. The policyowner pays the premium with the cost and rating computed on an insured's life. The underwriter will consider age, gender, weight, health and tobacco use as this information applies to the prospective insured. The grace period is typically 60 days for all forms of insurance, including term and whole life. Group life insures a group of people under a single contract. The purpose of group life is to underwrite the combined risk of a group of individuals as a single policy. On the one hand, it serves the needs of individuals that may have trouble qualifying for coverage. Additionally, it allows the insurer to write a bulk amount of insurance at an appropriate rate. The group sponsor benefits both from the standpoint of employee retention, but also because costs are lowered because the sponsor takes on some of the tasks of marketing and administration.

Assignment

Assignment is the transfer of ownership. There are two types of assignments: The first is an absolute assignment. The original owner, the assignor, will name a new owner, the assignee, of the policy. Since a new owner is named, this is considered a permanent assignment. The full amount of the policy is assigned and this is referred to as a transfer of ownership. STOLI arrangements and Life Settlements are both effected through absolute assignments. The second type is a collateral assignment which does not cause a permanent change in ownership. However, the rights of the owner will be subject to the assignment. A collateral assignment is typically used when an insurance policy is used as collateral for a loan. This is a temporary assignment until the debt is paid in full. In this case, the assignor is the original owner and the assignee is the creditor. This assignment takes precedence over any beneficiary designation. It can reduce the dollar amount of the beneficiary's claim at the time of the insured's death because the assignee has a priority claim against the policy and must be paid first. No assignment of the policy will be binding on the insurer unless it is in writing and received at the insurer's home office. The insurer is not responsible for determining the validity of the assignment.

Universal life insurance is different from whole life in a couple areas. One important difference potential insureds should be aware of is that with universal life, the cash value from investments grows at what rate?

At a variable rate that is adjusted monthly. One of the benefits of having universal life is the option of having the cash made as investments grow at a variable rate. Each month the rate can be adjusted due to market changes to make the most out of the investment.

Required Disclosures

At the time of the application, it must be disclosed to a life settlement contract applicant that: There are possible alternatives to life settlements, including accelerated benefits options that may be offered by the life insurer. Some or all of the proceeds of a life settlement may be taxable and the policyowner should seek advice from a qualified tax professional. The proceeds from a life settlement could be subject to the claims of creditors. Entering into a life settlement contract may cause other rights or benefits, including conversion rights and waiver of premium benefits to be forfeited. A change in ownership of the settled policy could limit the insured's ability to purchase insurance in the future on the insured's life because there is a limit to how much coverage insurers will issue on one life. The owner has a right to rescind a life settlement contract within 30 days of the date it is executed by all parties and the owner has received all required disclosures, or 15 days from receipt by the owner of the proceeds of the settlement, whichever is sooner. Proceeds will be sent to the owner within 3 business days after the provider has received acknowledgment that ownership of the policy has been transferred and the beneficiary has been designated in accordance with the terms of the life settlement contract. The funds will be available to the owner and the transmitter of the funds on a specified date.

Insurable Interest

Before the process of underwriting begins, the underwriter will make the final determination as to whether insurable interest exists. In California, every person has an insurable interest in the life and health of: Himself/herself Any person on whom he/she depends wholly or in part for education or support Any person under a legal obligation to him for the payment of money or respecting property or services, of which death or illness might delay or prevent the performance Any person upon whose life any estate or interest vested in him or her depends Underwriting is the process of selection, classification and rating, determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged. The purpose of underwriting is to prevent adverse selection. The sources of underwriting include the application, medical exams, an Attending Physician's Statement, the Medical Information Bureau (MIB) Report, an inspection report, agent's report, DMV records, and a hazardous activity questionnaire.

Replacement Coverage

Benefits provided by a succeeding carrier. Every policy containing a life insurance benefit must contain a reasonable extension of benefits upon discontinuance of the policy with respect to employees who become totally disabled while insured under the policy and who continue to be totally disabled at the date of discontinuance of the policy. Every policy containing a life insurance benefit which does not contain a disability benefit provision must include a reasonable extension of benefits upon discontinuance of the policy if it provides the totally disabled employee the same rights of conversion to an individual life insurance policy that the employee would have had if employment had terminated on the same date. The extension of benefits may be terminated if the employee or dependent is no longer totally disabled or at such time as a succeeding carrier may elect to provide replacement coverage to that employee or dependent without limitation as to the disabling condition.

Utmost Good Faith

Both parties bargain in good faith in forming the contract, and rely upon the statements and promises of each other.

Conditional Contract

Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy's terms and conditions.

Required Signatures

Both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the application are true. If the applicant is a minor, a guardian must sign the application.

Dependents

California law also permits insurers to offer an employee's "spouse and all children from birth until age 26" to be covered for up to 100% of the employee's basic coverage amount. Disabled children who are not capable of self-support may continue to be covered beyond the limiting age as long as their disability is due to mental or physical handicap and chiefly dependent upon the employee for support and continuous maintenance. Proof of the child's incapacity and dependency must be furnished to the insurer within 31 days of the child's attainment of the limiting age. Subsequent proof may be required by the insurer, but not more frequently than annually after the 2-year period following the child's attainment of the limiting age. The decision of whether to offer this dependent coverage rests with the employer, and must be offered to 100% of eligible employees. This optional coverage may be paid for by the employer, the employee, or both.

Issues Relating to AIDS and HIV Testing

California law established standards that prevent insurers from unfairly discriminating against individuals of the same class when it comes to testing for the presence of HIV, AIDS, and AIDS-related conditions (ARC). Life insurance applications cannot contain questions about prior HIV testing unless the question is limited to prior testing for the purpose of obtaining insurance. Geographic location or personal information such as occupation, marital status, relationship of insured to beneficiary or known or suspected homosexuality or bisexuality cannot be used to require an HIV test. A current and prior HIV positive test result (two positive blood tests) may be the basis of a decline for life insurance. All tests require informed consent and the results must remain confidential in accordance with privacy protection provisions. Applicants for life insurance must be given a disclosure that they will be tested for HIV/AIDS and have the opportunity to name a health care professional with whom a positive test result may be shared. If no healthcare professional is named, they must be urged to seek counseling. The insurer must pay for the cost of the testing. Negligent disclosure of HIV results to a third party which identifies an individual may result in a civil penalty of up to $1,000.

Dividend Options Available

Cash - The policyowner receives the declared dividends in the form of a check on or after each policy anniversary. Premium Reduction - Dividends are applied toward the next premium due. The same could be accomplished if the policyowner received the dividends in cash and remitted the full premium. If the declared dividends equal or exceed the premium, the policyowner will not have to pay premiums for the next year. Accumulate at Interest - The dividends are retained by the insurer and the interest rate paid the policyowner is compounded annually. Paid-up Additions - Purchases single premium, additional permanent benefits at the insured's attained age. The additional insurance is paid out in addition to the face amount if the insured dies. While the insured is living, it generates cash value and dividends as if the paid-up additional benefit was part of the original policy. 1-Year Term - Purchases a single premium, 1-year term benefit. Premiums are calculated at the insured's attained age; also referred to as the fifth dividend option. Paid-up Option - Pays off the policy more quickly than scheduled. If the company's overall performance declines, premiums may have to be resumed.

The master policy for a group life plan goes to the employer. What does a participating employee receive?

Certificate of Insurance

Changes (Modifications)

Changes or modifications must be in writing, signed by an executive officer of the insurer, approved by the policyowner and made part of the entire contract. A producer cannot alter, change, modify, or waive any policy provision.

In a group life insurance plan, the employee has control over which of the following?

Choice of Beneficiary

contract law

Contract Law pertains to the formation and enforcement of contracts.

Standard Provisions-Individual Policies Only

Contractual policy provisions explain what the contract consists of, what duties and responsibilities the parties to the contract have, how the policy works, and basically spells out the agreement between the policyowner and the insurance company. Provisions and clauses, unlike riders, are included in the contract for no additional charge.

Generally, the ________ is the amount of premiums paid into the policy less any dividends or withdrawals previously taken.

Cost basis

Credit Life Insurance

Credit life insurance is a special form of decreasing term. Unlike the standard decreasing term policy, credit life automatically names the creditor as the beneficiary. The policy cannot be written for more than the outstanding debt, since that is the limit of the creditor's insurable interest. Once the loan is paid, the policy ends. Credit life is usually sold on a group basis to a creditor, such as a bank, finance company or a company selling high-priced items on the installment plan. The policy generally pays the outstanding balance of the debt at the time of the borrower's death, subject to policy maximums. Debts covered in this way include: Personal loans Loans to cover the purchase of appliances, motor vehicles, mobile homes, farm equipment Educational loans Bank credit and revolving check loans Mortgages loans, etc.

Credit Life Insurance (Individual and Group)

Credit life insurance is typically issued in the form of a group term life policy, and covers only the outstanding obligation of the insured debtor. The premium is either paid for by the debtor or the creditor. Although the purchase of credit life insurance is usually optional, it could be a standard requirement of the lender for all borrowers in order to qualify for a loan. If this is true, a debtor cannot be required to purchase the insurance from a specific agent or insurance company. When paid for by the debtor, the coverage tends to be single premium decreasing term, with the cost of the policy added to the amount borrowed. The borrower is free to obtain coverage from any admitted insurer. The creditor will be the irrevocable beneficiary, and in the event of the insured's death, the proceeds must be used to extinguish the debt. If the debt or policy is cancelled early, unearned premium must be refunded.

Death Benefit Proceeds

Death benefit proceeds from a group life insurance plan to an employee's named beneficiary are received income tax free.

Richard is 58 years of age and is looking for a new life insurance policy. Richard's future plans are to retire in 3 years and downsize his house to better suit his needs as his children are all out of house. What type of policy may Richard be interested in purchasing?

Decreasing term insurance

What type of annuity is designed to start benefit payments many years from now and subjects the owner to investment risk?

Deferred Variable

Deferred Annuity Characteristics

Deferred annuities are normally purchased to defer taxes on any contract earnings. They are ideal for accumulating a retirement fund. During the accumulation period, only the contract owner can sign the request for surrender of a deferred annuity. During the early part of the accumulation period, the insurer normally assesses a surrender charge.

Dividends

Dividends represent the favorable experience of the insurer and result from excess investment earnings, favorable mortality, and expense savings. Dividends are available on participating policies issued by mutual insurers. They are paid annually, if declared, and cannot be guaranteed. Since dividends essentially are a return of excess premiums paid, they are not taxable as income until all of the premiums paid in have been recovered. Should the total accumulation of dividends exceed the total premiums paid, the excess amount is taxable as ordinary income. Interest earned on dividends left to accumulate is taxable as ordinary income. The policyowner decides which dividend option is in effect and can change the election at any time. If dividends are designated for any option other than cash and all current accumulations are withdrawn, the option will begin again at the next declared dividend.

Fixed (Guaranteed) Annuity

During the accumulation period, the insurer guarantees a minimum fixed interest rate. The fixed amount purchasing power decreases as the cost of living increases. The actual rate of interest created at any one time is based on the earnings rate of the insurer's general account and the insurer bears any investment risk. A life-only insurance license is required in order to sell fixed annuities in California. Some fixed annuities offer a base interest rate plus a bonus interest rate which becomes the current rate credited into the annuity. The current rate is set by the insurance company at the time the contract is issued and is guaranteed for a specific time period.

Estate Taxation

During the accumulation phase, if the contract owner dies, the value of the annuity is included in the owner's estate for valuation. If the annuitant dies during the annuity or payout phase, the remaining value in the account will be added to the deceased annuitant's estate for valuation. However, if the annuitant was receiving income from a pure life or straight life annuity, the company keeps the balance and nothing is included in the annuitant's estate for valuation.

Contributory

Employees will be required to pay up to 100% of the premium payments, and at least 75% of all eligible employees must participate.

Business Uses of Annuities

Employer Sponsored Qualified Retirement Plans Annuities are usually purchased by individuals. They may also be purchased as part of a structured corporate pension plan referred to as a Group Annuity. A Group Annuity is a contract between the insurer and the employer and is set up for eligible employees. Each employee receives a certificate. This is a defined benefit plan under IRS rules. Corporations may use annuities to provide pensions for employees, funding nonqualified deferred compensation plans or qualified retirement plans, and even to structure payments from liability settlements, known as structured settlements. Corporate owned annuities lose the tax-deferral aspect of the policy and interest or gains are taxable as income in the year earned.

Noncontributory

Employer pays the entire premium and 100% of the eligible employees must be covered. The percentage participation requirements are used to reduce adverse selection.

When a group insurance plan is identified as contributory, it means all of the following, EXCEPT ______________.

Employers must enroll 100% of eligible employees

Which type of life insurance policy is typically less expensive than a variable policy? This type of life insurance policy also offers the benefit of higher security against a decline in stock market values.

Equity-indexed universal life policy

Duties of Existing Insurer

Every existing life insurer that undertakes a conservation will: Furnish the policyowner with a policy or contract summary for the existing insurance or annuity within 20 days from written communication of the replacing insurer. Maintain evidence of policy summaries, contract summaries, or ledger statements used in any conservation for at least 3 years.

Every insurer and life agent offering for sale individual life insurance policies, or individual annuity contracts that are issued for delivery to senior citizens in California with the use of non-preprinted illustrations of non-guaranteed values must disclose on those illustrations, or on an attached cover sheet, all of the following, except:

Every insurer and life agent offering for sale individual life insurance policies, or individual annuity contracts that are issued for delivery to senior citizens in California with the use of non-preprinted illustrations of non-guaranteed values must disclose on those illustrations, or on an attached cover sheet, all of the following: 'This is an illustration only. An illustration is not intended to predict actual performance. Interest rates, dividends, or values that are set forth in the illustration are not guaranteed, except for those items clearly labeled as guaranteed.'

California Senior Market and Policy Illustrations

Every insurer and life agent offering for sale individual life insurance policies, or individual annuity contracts that are issued for delivery to senior citizens in California with the use of non-preprinted illustrations of non-guaranteed values must disclose on those illustrations, or on an attached cover sheet, the following statement: "This is an illustration only. An illustration is not intended to predict actual performance. Interest rates, dividends, or values that are set forth in the illustration are not guaranteed, except for those items clearly labeled as guaranteed." All preprinted illustrations containing non-guaranteed values must show the columns of any guaranteed values in bold print.

California Senior Market and Policy Illustrations

Every insurer and life agent offering for sale individual life insurance policies, or individual annuity contracts that are issued for delivery to senior citizens in California with the use of non-preprinted illustrations of non-guaranteed values must disclose on those illustrations, or on an attached cover sheet, the following statement: "This is an illustration only. An illustration is not intended to predict actual performance. Interest rates, dividends, or values that are set forth in the illustration are not guaranteed, except for those items clearly labeled as guaranteed." All preprinted illustrations containing non-guaranteed values must show the columns of any guaranteed values in bold print.

Free Look and Cancellation (Right of Rescission)

Every policy of individual life insurance and annuities (other than variable contracts) that is issued for delivery in California must contain a notice regarding return of the policy for cancellation of 10-30 days after its receipt by the owner. By delivering or mailing the policy during the cancellation period, the owner voids the policy from the beginning, and the parties will be in the same position as if no policy had been issued. All premiums and any policy fee paid for the policy must be refunded to the owner within 30 days from the date that the insurer is notified of the cancellation. This section does not apply to policies issued in connection with a credit transaction, contractual policy change, or conversion privilege. The return of variable life insurance contracts and modified guaranteed contracts during the cancellation period entitles the owner to a refund of account value and policy fee paid for the policy within 30 days from the date the insurer is notified of cancellation. The minimum free look period is 10 days for persons under age 60. The free look period begins when the policyowner signs an Acknowledgement of Delivery Receipt. If a replacement policy is involved, the free look period must be increased to at least 20 days.

Net Premium

Excludes the expense component and takes into account interest and mortality factors only. The process of calculating this rate requires: The age and sex/gender of the insured and the benefits to be provided The mortality rate to be used and the rate of interest assumed

Exclusions

Exclusions are conditions stipulated in the contract for which the insurer will not provide coverage. The insurer cannot add or alter any of the exclusions after the policy has been issued.

Concealment

Failure to communicate known information. Concealment of material information, whether intentional or unintentional, on the part of an applicant or insured, permits the insurer to void the contract from the time the concealment was made.

Annuities may be funded with either a lump sum or a ______ premium basis.

Flexible

Premiums

For individuals, premiums are considered a personal expense and are not deductible. They are paid with after-tax dollars. This establishes a cost basis in the policy for tax purposes.

Fraudulent Life Settlements

Fraudulent life settlements include acts or omissions committed by a person, including: Presenting or preparing false material information, or concealing material information, with respect to: life settlement solicitations, applications, underwriting, premiums, claims, and change of ownership. Entering into stranger-originated life insurance (STOLI) Employing any device to defraud in the business of life settlements

Fully Insured

Fully insured status requires an individual to have earned 40 quarters or credits, which is approximately 10 years of employment. A fully insured worker has permanent coverage under Social Security and cannot lose this status. Benefits that may be received under fully insured status are: Retirement income at age 62 or older Spousal retirement at age 62 or older Widows and widowers can begin receiving Social Security benefits at age 60 Disability and survivor's income benefits Premium-free Medicare Part A

Funding

Funding is provided by both employee and employer through Federal Insurance Contributions Act (FICA) withholding. The employer withholds the employee's contribution and pays it along with the employer's portion. Self-employed individuals pay an amount equal to the total of an employer and employee payment. Based on one's taxable income and number of years in the workforce, each covered employee earns credits toward fully insured status and entitlement to Social Security benefits. The credits are based on annual income and allow a worker to accumulate up to four credits, or quarters of coverage, per year. Once eligible, the amount of monthly Social Security benefits is calculated according to a basic formula which determines each covered worker's Primary Insurance Amount (PIA).

Actuarial Department

Gathers and interprets statistical information used in rate making. An actuary determines the probability of loss and sets premium rates.

Which of the following best defines the 'Cost Recovery Rule'?

Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender

Characteristics of Group Insurance Plans

Group insurance is a contract between the sponsor and the insurance company. In a group insurance plan, the Insurer issues a Master Policy to the Plan Sponsor and each participant receives a Certificate of Insurance covering the participant and (if offered) his/her spouse and dependents. Participants in the plan do not have personal control of the policy or policy changes as with an individual policy. Group life insurance is available to employee groups as small as two persons, and the Insurance Code defines a number of specific groups that are eligible for group life insurance, such as elementary and secondary school teachers, employees of the state colleges and universities, and members of the National Guard. These larger groups must have at least 25 members.

Group Risk Selection

Group life insurance is normally less costly than individual insurance because the insurer's expense of underwriting is minimized. In group life insurance, underwriting is not typically looking at the insurability characteristics of any one member of the group.

Premiums Paid by the Employer and the Employee

Group term life premiums paid by an employer are tax deductible to the business as an ordinary and necessary business expense. Any employee paid premiums are not eligible for a tax deduction. Employer paid premiums in connection with group life insurance do not constitute taxable income to the employee unless the death benefit paid for by the employer exceeds $50,000. All employer paid premiums for amounts above $50,000 are reported as taxable income to the employee.

Tamara was tight with money one month due to unforeseen bills. She was worried she would not be able to pay her life insurance premium that month and risk coverage being cancelled. Tamara could use the interest gained on the policy to pay this premium due if she had what type of life insurance?

If Tamara had universal life insurance, she would be able to take from the interest accrued on her policy and use that money to pay the premium due. Universal life insurance is also appealing to policyholders because they can amend their savings plans, premiums, and death benefits if any life changes occur.

Taxation (MEC)

If a contract is deemed to be a MEC, then any funds that are distributed are subject to a "last-in, first-out" (LIFO) tax treatment, rather than the normal "first-in, first-out" tax treatment. Taxable distributions include partial withdrawals, cash value surrenders and policy loans (including automatic premium loans).

Suitability and Taxation

If a life agent offers to sell any life insurance or annuity product to a senior, the agent must advise in writing that the sale of any asset used to fund the purchase of the insurance product may have tax consequences, early withdrawal penalties, or other costs assessed as a result of the sale. The agent may recommend the individual consult independent legal or financial advice before selling assets prior to the purchase of any life or annuity products.

Reinstatement Provision

If a policy has lapsed unintentionally due to nonpayment, it can be reinstated by the owner. The reinstatement time period is typically 3 years from lapse. In order to reinstate, the insured must provide evidence of insurability and the owner must pay all back premiums from the date of lapse plus interest. Reinstatements are designed to put a policy back in force as if the lapse never occurred.Upon reinstatement, a new incontestability period takes effect.

Policy Loans

If a policyowner takes out a loan against the cash value of a life insurance policy, the amount of the loan is not currently taxable. This is true even if the loan is larger than the amount of the premiums paid in. The loan is not taxed as long as the policy is in force. If the policy lapses with a loan outstanding, the excess over cost basis becomes taxable as ordinary income. The interest paid on a permanent life insurance policy loan is not tax-deductible.

Cost Comparison Indexes

If an agent or insurer makes a presentation comparing the cost of life insurance which does not recognize the time value of money, the agent must present the Life Insurance Surrender Cost Index and the Life Insurance Net Payment Cost Index.

Conversion Period Coverage

If an employee under a group policy becomes entitled under the terms of the policy to have an individual policy issued without evidence of insurability (as long as an application is submitted with the initial premium) and is not given notice of this right within 15 days prior to the 31-day expiration period, the employee must be given an additional period to exercise this right. The additional period will expire 25 days after the notice, but will not extend beyond 60 days after the 31-day period provided in the policy.

Suicide exclusion

If suicide is committed within the first 2 years the policy is in force, the insurer's liability is limited to a refund of premium. If the insured's death is a result of suicide after the first 2 years, then the insurer pays the full face amount (death benefit) of the policy.

Misstatement of Age or Gender

If the age and/or gender of the insured have been misstated in a policy, all benefits under the policy will be provided based upon the insured's correct age and/or gender according to the premium scale in effect at the time the policy was issued. An insurer can refund any overpaid premiums if the amount of premium paid was greater than should have been paid. The insurer can reduce the face amount in cases where the amount of premium paid was less than that which should have been paid. For example, if the premium amount paid for the policy was 50% less than what should have been paid, then the death benefit will be reduced by 50%. There is no time limit for discovery, and this provision never cancels or voids a policy. The incontestability clause does not apply. Age and/or gender are not considered material to the policy issuance.

Penalties (MEC)

If the contract is a MEC, all cash value transactions are SUBJECT TO TAXATION and penalty. Funds are subject to a 10% penalty on gains withdrawn prior to age 59½. This is considered a premature distribution. Distributions made on or after 59½ and distributions paid out due to death or disability are not subject to the penalty.

Waiver of Premium

If the insured becomes totally disabled, the insurer will waive premiums for the duration of the disability or the end of the policy, whichever occurs first. To qualify for the waiver, the insured must be disabled for a waiting period of 3-6 months. The policyowner must continue to pay premiums during the waiting period, but once eligible, the waiver is retroactive to the start of the disability and the premiums will be refunded. During the disability, the insurer will credit the premiums to the policy and all benefits, such as cash value accumulation and dividend payments, will continue. Unless the insured is disabled, the Waiver of Premium rider drops at age 65.

Suicide Clause

If the insured commits suicide within 2 years from the issue date, the insurer's liability is limited to a refund of premium. If the insured commits suicide after the suicide clause has expired, the insurer must pay out the death benefit to the named beneficiary. The intent of this clause is to discourage individuals from purchasing an insurance policy while contemplating suicide.

Payor Benefit (Waiver of Payor's Premium)

If the payor (policyowner) dies or becomes disabled and is unable to make the premium payments, the insurer will waive the premiums payments for a specified period of time. Because this rider is commonly added to a juvenile policy, the payor (usually a parent) typically must show evidence of insurability before the rider can be added to the policy.

Under what circumstance would a policy loan in a life insurance policy be taxable?

If the policy lapses or is surrendered, any loan amount in excess of cost basis is taxable

Immediate and Deferred Annuities

Immediate Annuity - The immediate annuity does not have an accumulation period and is used to generate immediate income within a year of the issue date. Deferred Annuity - A deferred annuity will pay periodic benefits starting at some specified time in the future; benefits begin more than 1 year from the issue date.

Liquidity

Immediate funds available upon death to pay creditors, taxes and final expenses, as well as cash values available for policy loans, withdrawals, and full surrenders.

Blanket Life Insurance

In California, a life insurer may issue blanket life insurance policies for a term not exceeding 1 year with premium rates less than the usual rates for such insurance as approved by the Commissioner. These policies may be renewed. Permitted blanket life insurance must conform to the following conditions: The policy is issued to a newspaper, farm paper, magazine, or other periodical publication (these are considered the policyholders). The policy insures independent contractors, such as newspaper carriers, dealers, distributors, wholesalers, or other personnel engaged in the sale, distribution, collection, or other activities pertaining to the marketing and delivery of such publications. The policy is written for the benefit of the persons insured, not the policyholder. An individual (or guardian of a minor) can submit a written statement requesting not to be covered. If the number of persons filing such statements exceeds 10% of a specified category, coverage will not be issued or renewed.

Endow (Mature)

In a cash value policy, the date on which the contract ends. A whole life policy is expected to have cash value equal to the face amount (if no loans are taken and all premiums are paid) on the endowment date, and the policy value is paid to the owner. At endowment, because the insured has not already died, a whole life policy's cash value will equal the face amount of insurance. The policy ends and the face value is paid to the policyowner.

Death Benefits

In addition to providing a guaranteed income benefit payout for life, an annuity also has another guarantee if the annuitant dies prior to annuitizing the contract. In this case, the policy has a named beneficiary, just like a life insurance policy, whereby the insurer pays out an amount equal to the premiums paid or the account value, whichever is greater.

Taxation of Annuities Exclusion Ratio

In general, the way in which taxation of annuities is computed is referred to as the exclusion ratio. The IRS has tables and formulas to determine which part of the income benefit payment is tax-free return of premium and which part is taxable. A withdrawal or partial surrender is any amount distributed from the annuity that is not part of the annuitization process. Distributions are taxed on a last-in, first-out basis (LIFO). That means for income tax purposes the first money out of the annuity will be gains, not principal, and will be taxed as ordinary income when withdrawn from the contract. Additionally, withdrawals made prior to the annuitant's age 59½ are generally subject to a 10% early withdrawal penalty. The basic formula for computing the exclusion ratio is "Cost Basis" divided by "Expected Return" equals the percentage of each payment that will be excluded from taxation. Annuity distributions from a variable annuity are treated in a slightly different manner. Because the monthly payment can go up or down depending on separate account performance, the amount of future annuity payments can also go up or down. The IRS rules assume that there will be no change in payments over the lifetime of the annuitant. Once the exclusion amount is determined, it does not change. If actual monthly payments go down the taxable portion will be lower, and if payments go up, the taxable portion will be higher.

Accidental Death Benefit (Double or Triple Indemnity)

In the event of a claim, the policy normally pays double or triple the face amount only if the insured's death was a result of an accident (may be called multiple indemnity rider, paying multiple times the face amount). The benefit is payable only if death occurs before a specific age and within 90 days of the accident. It does not add any additional values to the base policy. It may be added to any type of individual life policy. Among other exclusions, death due to sickness is excluded. This rider typically expires at age 65.

Disability Income Benefit

In the event of total disability and after an initial waiting period (such as 6 months), premiums are waived and the insured is paid a monthly income. The monthly disability income benefit is typically limited to a percentage of the face value (for example, $10 per month for each $1,000 of face amount). The benefit paid from the rider does not reduce the death benefits paid out upon death.

California Senior Citizen Requirements

In this section, a senior citizen is defined as an individual who is 60 years of age or older on the date of purchase of the policy. Persons who are 60 years of age or older must be given a 30-day free look period. This allows additional time to seek the counsel of others to assist in the decision to keep or cancel the new policy. Every individual life insurance and annuity contract delivered or issued for delivery to a senior citizen in California must include a notice in 12-point bold print that the policy may be returned within 30 days after receipt of the policy by the owner for a full refund by returning it to the insurance company or agent who sold the policy. The notice must include a statement that if returned after 30 days, cancellation may result in a substantial penalty (surrender charge) if applicable.

Free Look and Cancellation

In this section, a senior citizen is defined as an individual who is 60 years of age or older on the date of purchase of the policy. Persons who are 60 years of age or older must be given a 30-day free look period. This allows additional time to seek the counsel of others to assist in the decision to keep or cancel the new policy. Every individual life insurance and annuity contract delivered or issued for delivery to a senior citizen in California must include a notice in 12-point bold print that the policy may be returned within 30 days after receipt of the policy by the owner for a full refund by returning it to the insurance company or agent who sold the policy. The notice must include that if returned after 30 days, cancellation may result in a substantial penalty, known as a surrender charge, unless those penalties or charges do not apply. During the 30 day cancellation period, the premium for variable annuities may be invested only in fixed-income investments and money—market funds, unless the owner specifically directs that the premium be invested in the mutual funds underlying the variable contract. If the policyowner has not directed that the premium be invested in mutual funds, cancellation will void the policy from the beginning and all premiums will be refunded within 30 days. If the owner has directed that the premium be invested in mutual funds, cancellation entitles the owner to a refund of the account value within 30 days. Disclosures of the investment requirement/option and return of premium/fees in case of cancellation must be in 12-point bold print and displayed on the policy cover page. If the insurer fails to refund all the premiums paid in a timely manner during the 30-day free look period, the applicant is entitled to receive interest on the unreturned premium from the date the insurer the returned contract.

Death benefits paid from an employee group life insurance plan to an employee's named beneficiary are received __________.

Income tax free

Mary and John are a newly married couple who are meeting with an agent to purchase a life insurance policy. The couple wants to pay a low premium for now because they are young with no dependents. Mary and John, however, plan to one day have children and want a policy whose coverage will grow as their lives change. What policy may Mary and John's agent suggest for their needs?

Increasing term insurance

Policies Linked to Indexes

Index-linked life insurance policies offer the potential for increasing death benefits that are linked to the Consumer Price Index. These policies provide benefits that automatically increase to keep pace with inflation and are designed to avoid being underinsured.

Indexed Universal Life (Equity Indexed)

Indexed Universal Life (IUL) policies are a more recent evolution from traditional UL policies, and base interest crediting on one or more "strategies" linked to the performance of a known stock or similar index (such as S&P 500), which is not under the control of the insurance company. There is no direct investment in any stocks or indexes. In exchange for the potential of higher interest crediting, these policies offer a minimum interest rate guarantee (which could be 0%) to avoid cash value decreases due to negative index performance. IUL policies also offer a "fixed rate" option, which is not affected by changes in the index performance. The insurer controls and sets the fixed rate

Individual Insurance Plan

Individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve an estate or provide a living benefit for the terminally ill. Unlike group insurance, which usually terminate upon separation of service or the employer choosing to discontinue the plan, individually owned policies leave the decision of continuing the policy to the policyowner.

Substandard Risks (Higher Risk Exposure)

Individuals who are not acceptable at standard rates because of poor health, bad habits, or occupational hazards. Individuals in this category are issued "rated policies" as follows: Graded (Lien) Plan - A graded death benefit usually provides 50% of the face amount to start and increases to the full face amount over 1-2 years. The substandard premium does not change. This is generally used with senior life insurance plans to provide minimal benefits without a medical examination. Rated-up Age - The premium for a "rated-up" policy is that of a standard risk, but for an insured 5 to 10 or more years older than the actual age of the proposed insured. Flat Rate - A flat additional premium may be assessed on a temporary (1 to 5 years) or permanent basis. Tabular Rate - A surcharge is calculated by adding 25% of the base rate to the standard premium for each "Table" number based on the condition causing the substandard rating. There are 10 standard tables used.

Standard Risks

Individuals who have the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table. Individuals in this category have an average life expectancy.

Preferred Risks

Individuals who meet certain requirements and qualify for lower premiums because of ideal health, height and weight. Individuals in this category have a longer than average life expectancy.

legal purpose

Insurance may not be issued for an illegal activity or an act contrary to public policy. Every insured must have an insurable interest.

Attained Age

Insured's age at any point in time typically used at renewal or conversion.

Issue (Original) Age

Insured's age on the policy issue date.

Interest

Interest earnings are also used in calculating premium. Insurance premiums are paid in advance and insurance companies invest these premiums and assume a certain rate of interest will be earned. Interest earnings reduce the amount of premium needed to fund the future liability of the policy death benefit.

Section 1035 Exchanges

Internal Revenue Code Section 1035 allows for the exchange of existing insurance policies into another without incurring any tax liability on the interest and/or investment gains in the current contract. These tax-free exchanges, known as 1035 exchanges, can be useful if another insurance policy has features and benefits that are preferred or are superior to those found in an existing contract. One of the benefits of a 1035 exchange is that the cost basis of the original policy will be transferred to the new policy in addition to any cash value. Policyowners must be aware that surrender charges might still apply on the existing contract, and a new surrender charge period may start after the exchange on the newly acquired policy. Further, the new insurance contract may have higher fees and charges than the old one which will reduce the returns or increase costs for such things as policy loans. Types of exchanges the IRS will allow on a tax-free basis are from: Life insurance to life insurance Life insurance to an annuity Annuity to an annuity Life insurance or annuity to long-term care But NEVER an annuity to life insurance A 1035 exchange will only take place after the newly applied for policy has been issued and accepted. Once the free-look period has elapsed, the new insurer will request cancellation of the old policy and transfer of the cash value.

One of the purposes of a buy-sell agreement is?

It acknowledges the commitments of the partners to each other and to their heirs to assure the continuation of the business in the event one of them dies unexpectedly

Traditional whole life policies are a type of insurance policy that will provide coverage only under what circumstance?

It is for the entire life of the insured

Group Selection Criteria

It is important to compare the selection criteria for individual vs. group insurance. Group insurance is issued based on the characteristics of the group as a whole instead of each individual. Having one uninsurable individual in the group will not cause a declination. Group insurance underwriting will be discussed in greater detail in an upcoming chapter.

Joint Life (First to Die)

Joint Life is a whole life policy that is written to cover 2 or more lives. The death benefit is paid upon the first insured to die and the policy terminates. Premiums are based upon a joint issue age which is obtained by an average of both insureds' ages resulting in a lower premium than two separate policies. This policy is designed to provide income protection for the surviving spouse when both have earned income.

Juvenile Insurance

Juvenile insurance is any policy written on the life of a minor. A common form of juvenile insurance is a "Jumping Juvenile" policy. This policy provides an automatic increase in the face amount at a given age (usually age 21 or 25) without evidence of insurability. The premium remains level for the life of the policy, and the usual increase in the face amount is 5 times the issue amount.

Key Person (Key Employee)

Key persons are employees whose contributions have a significant impact on the revenue and profitability of the company, especially in small businesses. A key employee is an employee who contributes substantially to the success of a company. They are typically: Part of the management team More highly paid Respected by customers, creditors, suppliers, and vendors Directly responsible for sales, production, or service The life insurance proceeds from a key person life insurance policy provides the necessary funds to recruit, hire, and train a replacement employee, restore lost profits, and reassure customers that the business operations will continue. Either term or permanent coverage can be used to fund the plan. The policy is owned by the employer, and may be retained by the employer or assigned to the employee upon termination of employment.

Individual Annuity with Lifetime Income

Life Income (Pure or Straight Life) - Annuity is payable for as long as the annuitant lives, and upon death all payments cease. This option provides the highest monthly income than any of the other options. Life Income Period Certain - Annuity is payable for life, or for a specified period of time, whichever is longer. If the annuitant lives beyond the stated period, benefits continue for life of the annuitant. If the annuitant dies prior to the end of the period certain a beneficiary receives the balance of the payments for the remaining time period. Life Income with Refund (Installment or Cash Refund) - Annuity is payable for the lifetime of annuitant. Upon death, if an annuitant has not received an amount equal to the total of all payments made into the annuity (not the growth), the balance is refunded to the beneficiary as a lump sum, cash refund, or in installments, sometimes referred to as the installment refund.

Joint Annuity with Lifetime Income

Life Income Joint & Survivor - Annuity is payable to 2 annuitants (in one check) while both are living. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or reduced to 2/3 or 1/2 for the survivor's income until the survivor dies. Depending on which option is selected, these options may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor. Joint Life - Annuity is payable to 2 or more named annuitants while both are living. Upon the death of the first annuitant, the benefits stop.

Which Payment Option pays an income for the life of the annuitant or for a specified period, whichever is longest?

Life Income with Period Certain

Life Policy Settlement Options

Life insurance benefits are paid in a lump sum, unless another mode of settlement has been selected. A settlement option directs the insurance company how to pay out the death benefits. Settlement Options are used in place of receiving a lump sum death benefit or living benefit at the time of maturity. The choice of a settlement option may be made by the policyowner if the insured is living or by the beneficiary if the insured is not living and if no option has been previously selected. It is important to note that if the owner has selected a settlement option, a beneficiary cannot change that option. Principal payments of the death benefit made after an insured's death are not taxable as income. However, any interest received from a settlement option distribution is taxed as ordinary income. Benefits paid in a lump sum are income tax free.

Cash Accumulation

Life insurance other than term may develop cash value over time, which may later be borrowed or withdrawn prior to the death of the insured.

Estate Creation

Life insurance proceeds provide financial assets to create an immediate estate the insured can pass on to survivors.

Term Insurance Plan

Lowest of initial premium outlay and designed for someone with a large insurance need, but with limited cash flow. This coverage is often referred to as temporary, as it is usually written to cover a short time period. This policy does not build cash values and the benefit will remain level, increase, or decrease depending on the type of policy. It is typically used to cover mortgages, short term obligations, or for younger couples.

The annuity product which features fixed interest rate guarantees, combined with an interest rate adjustment factor that can cause the surrender value to fluctuate in response to market conditions, is known as:

Market Value Adjustment

Mutual insurance company

Members are provided insurance by the company. It is owned by policyholders not stockholders.

Premium Payment Mode

Mode is the frequency of payment. Premium payments are made either monthly, quarterly, semiannually, or annually. Payment modes other than annual may result in higher premiums to offset the lost interest earnings and increased administration costs. For this reason, an annual mode results in the lowest premium outlay while monthly premiums result in the highest. The more frequently premiums are paid, the more expensive the mode of payment.

Cash Value

Money accumulated in a permanent whole life policy that is considered a living benefit which the policyowner may borrow against or receive if the policy is surrendered before the insured dies.

If an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit?

Monthly

Mortality Cost Formula

Mortality Cost is figured using the following formula: Mortality Cost - Interest (investment return) = Net Premium (pure rate) Net Premium (pure rate) + Loading (insurer expenses) = Gross Premium

Mortality

Mortality Tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a Mortality Table, a life insurer can determine the average life expectancy for each age group, based on the year of birth. The mortality rate is taken from the Mortality Table that shows life expectancy and the death rate per 1,000 people living in the United States. This table allows the insurer to rate policies using the law of large numbers, so accurate mortality predictions are extremely important. The higher the age group, the higher the mortality rate—translating to a higher premium. The Mortality Table also show that males have a higher mortality rate than females. Based on this statistic, males will pay a higher rate than females.

status clause exclusion

No coverage for individuals with military status since these individuals are provided coverage through the government.

Hazardous Hobbies or Avocation exclusion

No coverage if death is related to a hazardous hobby as stated in the policy, such as sky diving or hot air ballooning.

Hazardous Occupation exclusion

No coverage if death is related to a hazardous occupation as stated in the policy, such as stunt drivers or auto racers.

Results Clause (War Clause) exclusion

No coverage if death is the result of war declared or undeclared. If death occurs during the period of war, only the premiums are refunded.

For an individually purchased life insurance policy, the premiums are considered a __________.

Nondeductible personal expense

Any employee-paid group life insurance premiums are __________.

Not tax-deductible

Annuity Payments

Once a contract is annuitized, the insurance company takes ownership of funds in the account. In return, the annuitant is entitled to a guaranteed income stream based on the terms of annuitization. Depending on the option chosen, the annuitant may be able to name a beneficiary to receive any remaining benefits available upon the annuitant's death. Annuity income is based on annuity tables which are similar to mortality tables used for life insurance. Other factors that determine the income include the accumulation amount, interest rate return, age and gender of the annuitant, and the payment option selected. The available payment options include:

Beneficiary

One or more "parties" named in the policy to receive the policy's benefits if the insured dies while the contract is in force. The beneficiary cannot be the insured, but can be the owner/applicant.

Unilateral Contract

Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract.

H owns a nonqualified variable annuity that has a separate account invested in the stock market. If H withdraws funds from the annuity, the earnings on the withdrawal will be taxed as:

Ordinary income

Ordinary Whole Life

Ordinary whole life insurance provides insurance protection to age 100, cash value accumulation to age 100, and fixed level premium payments. The premium payments may be structured as follows: Straight Life or Continuous Premium - The premium is level and payable to age 100 or death of the insured, whichever comes first. The face amount remains level throughout the life of the policy. This policy has the highest total premium outlay. Limited Payment - Premium payments are for a specified time (Example: 20-Pay Life or 30-Pay Life) or to a specified age (Example: Life Paid up at 65). The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. While the annual premium is higher than Straight Life, it is paid for a shorter period of time and will have a lower total premium outlay. Single Premium - The entire premium is paid in a lump sum at the time of purchase and creates immediate cash value. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. This policy has the lowest total premium outlay for the life of the policy.

Fixed Amount

Payments are for a specified dollar amount paid monthly until the benefits, along with interest, are exhausted. In this example, the interest will extend the time period in which the benefits are paid. Only the interest portion of the benefit is taxable.

Fixed Period

Payments are guaranteed for a specified period of time (such as 10 or 20 years) after which payments will cease. The proceeds and interest are used to make the payments. The interest will increase the amount of each payment, and the interest is taxable.

A flexible premium deferred annuity permits all of the following, EXCEPT ______________.

Payments to the annuitant beginning within one month of the issuance of the contract

Period Certain Annuity

Period Certain - Annuity benefit payments are received for a specified period of time. If the annuitant dies with time remaining on the period certain, the named beneficiary receives the balance of the payments. An annuity guaranteed to pay out for a specific number of years (such as a typical, state lottery prize) is called a fixed period.

Information Required

Personal - Includes name, address, driver's license number, Social Security number, income, employment, tobacco use, number of dependents, etc. Ownership - Establishes who will actually own the policy and be responsible for paying the premiums. Product - The policy, riders, and options for which application is being made. Beneficiary - Who will receive the benefit and the payout order (primary vs. contingent). Business Coverage - Used only if the policy is being purchased for business uses. Premium - How premiums will be paid (direct bill, electronic transfer, etc.) and how often they will be paid (annually, quarterly, etc.) Existing Coverage - Any insurance policies already covering the proposed insured. Limited Temporary Life Insurance Eligibility - Determines if the proposed insured is eligible for coverage until the policy is issued. If not, no policy will be issued and any payment made will be refunded. Nonmedical Questions - Information regarding foreign travel, high risk occupations, and hazardous hobbies. It also determines if the applicant has already applied for coverage, been rejected for coverage, or applied for bankruptcy.

Policy Loan Rate Provisions

Policy loans with fixed rates can have a maximum fixed interest rate of 8%. For policy loans with adjustable (variable) interest rates, the maximum rate is based upon Moody's corporate bond yield average and is stated in the policy. The policy loan amount cannot exceed the available cash surrender value.

Interest-sensitive whole life insurance is appropriate life insurance coverage for which group of individuals?

Potential insureds requiring permanent insurance and desire a fixed premium. Interest-sensitive whole life insurance is most desirable for those insureds who need coverage for a lifetime, starting as early as an infant. A big selling factor for this coverage is that the premium will not change despite health changes over the course of the policy.

Earned vs. Unearned Premium

Premiums are earned for each day the policy is in force. Premiums paid in advance are considered unearned premiums until coverage has been provided, and the insurer has "earned" the right to retain the premium.

The cost basis of a life insurance policy is __________.

Premiums paid less dividends or withdrawals

Extended Term

Present cash value is used to buy a single premium term policy of the same face amount for as long a period as it will buy, expressed as a combination of years and days. This option provides the largest death benefit and is sometimes referred to as the Automatic (or Default) Option if no other option has been selected. The policy will expire prior to age 100.

Reduced Paid-Up

Present cash value is used to buy a single premium, permanent paid-up policy of a reduced face amount. This option provides the longest period of coverage provided by a nonforfeiture option. Coverage, although reduced in face value, will continue to age 100.

Modified Endowment Contracts (MECs)

Prior to 1988, individuals could place large sums of money into a cash value policy (typically in a lump sum) and the cash would grow tax deferred until the insured died at which point a death benefit paid income tax free. Or if they needed cash, they could take a tax free lifetime loan. These policies were used to avoid paying taxes. Under current law, if a policy is funded too quickly it will be classified as a Modified Endowment Contract (MEC). MEC rules impose stiff penalties to eliminate the use of life insurance as a short term savings vehicle.

Producer Responsibilities

Producers are the initial point of contact for most insurance transactions. Transacting insurance can involve any of four different phases in the sale of products: solicitation, negotiation, execution of a contract, and handling matters subsequent to a contract.

Pure risk

Protected by insurance

A primary purpose of key person life insurance is to?

Provide the business with money to recruit and train a replacement employee

Family Rider

Provides a combination of coverage on the spouse and children. Usually family riders are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse and $1,000 on each child.

Additional Insured Rider

Provides coverage for another person, other than a spouse or child, such as a business partner. Insurable interest must exist at the time the rider is added.

Child Rider

Provides level term coverage on the life of all of the insured's children. This rider is usually offered at one premium rate and will cover newborns after 14 days of life and adopted children who can be added to the coverage without increasing the premium. The children have coverage to a specified age (21 to 25) and are usually given the option to convert to a permanent policy without evidence of insurability. Children born after the rider is issued are covered automatically after 14 or 15 days, depending on the insurer, at no additional premium.

Spouse (Other Insured) Rider

Provides level term coverage on the life of the insured's spouse. This rider will also provide a conversion provision allowing the spouse to convert to permanent coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured covered under the main policy.

Estate Conservation

Provides money to pay any estate taxes or loans which must be satisfied upon the death of the insured, preserving the insured's estate.

Conditional Receipt

Provides that coverage is effective as of the date of application or date of completed medical exam (if required), whichever is later, as long as the insurer would have issued the policy as standard or better. This receipt provides conditional coverage even if the underwriting process has not been completed. If an applicant is a substandard risk, there is no conditional coverage.

Survivor Protection

Providing funds for surviving spouses and dependents.

Qualified Retirement Plans

Qualified pension and profit-sharing plans were created by Congress to help employees accumulate assets for retirement and provide tax advantages for contributions made by employers. While there are generally no specific limitations on the types of assets that may be purchased to fund these plans, there are limitations on the types of benefits which may be included in a qualified plan. Specifically, there is restriction on the amount of life insurance that can be held in a qualified plan. The restriction is referred to as the "incidental benefits" limitation and the IRS has developed standards, or rules, to determine the allowable limits. Generally, life insurance will be considered "incidental" to a qualified plan if no more than 50% of the contributions are used to pay insurance premiums, and the insurance amount is not more than 100 times the expected monthly benefit amount.

Admitted vs. Non-admitted

Refers to whether or not an insurer is approved or authorized to write business in this State.

Types of Social Security Benefits

Retirement - At Full Retirement Age, a retired worker is eligible to receive monthly income equal to his/her PIA. The Full Retirement Age (FRA) varies based on year of birth but is up to age 67. Covered workers may begin receiving retirement benefits as early as age 62, however benefits will be permanently reduced. Delaying benefits beyond FRA will increase future benefits. Social Security retirement benefits may be modified each year for Cost-Of-Living Adjustments. Retirement benefits are also payable to qualified dependents of a covered or deceased worker. Death Benefits - A one-time lump sum payment of $255 may be made after the taxpayer's death. This death benefit is only payable to a surviving spouse or minor children. Disability Income Benefits - Pays monthly disability income benefits to a qualified worker once they become eligible based on the Social Security definition of a disability. The individual must be unable to perform the duties of ANY occupation for 5 months before applying for benefits. This waiting period is not retroactive. Once approved, benefits will be payable in the 6th month until the injured worker qualifies for retirement bene

Personal Uses - Individual Annuities

Retirement Income - The funds accumulated inside an annuity can be used to fund all or part of a consumer's retirement income. The accumulated funds can be used to purchase a settlement option that can provide for a lifetime income stream or an income stream that can end prior to the annuitant's death. The income received will be tax-free as far as the portion of the payment is counted as a return of premium while the balance would be taxable as ordinary income. If premiums were deductible then the entire income received would be subject to tax. The only exception is if the income comes from a Roth IRA annuity whereby the income stream would be tax-free under certain qualifying situations. Lump Sum Structured Settlements - Lump sum payments from lawsuits, lottery winnings, or an inheritance can be used to purchase a structured settlement in the form of an annuity. The annuity can then be used to provide guaranteed lifetime income to the annuitant.

Stranger Originated Life Insurance (STOLI)

STOLI transactions occur when a person with no insurable interest in the life of another induces that person to purchase a life insurance policy with the sole intent of becoming the beneficiary and profiting upon the death of the insured. The insured assigns the policy ownership to the investor and receives a payment for an amount less than the death benefit but greater than the policy's cash value. Essentially, the insured is "selling" his/her mortality. Upon policy assignment, the purchaser will continue to pay premiums to keep the policy in force. Upon death of the insured, the purchaser/beneficiary files a claim for the death benefit. STOLI has been prohibited by law in California since 2010 due to the absence of legitimate insurable interest at the time of policy issue. The California DOI has issued a Senior Advisory on STOLI transactions.

Sara was researching life insurance policies to see which was best to fit her needs. She was interested in a premium that would not change over time but also wanted to avoid the hassle of having to search for a new policy each year. What type of policy would fit Sara's needs?

Sara's needs would be met with a level premium term life insurance policy. Sara could purchase this policy to cover a set number of years with one policy—five, ten, fifteen years, and so on. Sara also could enjoy the benefit of the premium remaining the same each year her policy is in force and save herself from premium increases each term.

If Charlotte wishes to cash out her annuity at age 58 after having it for over 20 years, what should she know about prior to doing it?

She will face income tax consequences and tax penalties

Tax-Deferred Growth

Since an annuity is an insurance contract, the accumulation value grows tax deferred. Deferred annuities allow for the naming of a beneficiary to receive any policy values if the annuitant dies prior to annuitizing. Withdrawals prior to age 59½ are subject to income tax and generally a 10% tax penalty as well. Systematic withdrawals are allowed as a way to access the policies values without having to elect a settlement option.

Premium Payment Options

Single Premium - A lump sum payment is made into an annuity. Periodic Premium - Continuous premiums paid into the contract. The most common example of a periodic premium is a flexible premium. Flexible Premium - Flexible contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum dollar amount they will accept.

If an annuity is purchased in December and monthly benefits begin in January of the following year, what type of annuity is it?

Single Premium Immediate Annuity

Social vs. Private Insurance

Social insurance is designed to provide basic benefits that an insured can build upon. It is not designed to replace private insurance, but to supplement it. Contributions to private insurance plans are voluntary, whereas participation in Social insurance plans are mandatory in most cases.

Solicitation

Soliciting insurance can be done through traditional forms such as advertising in local print media, on radio or television, or through direct mail. Seeking opportunities to conduct sales appointments with potential clients is also considered solicitation. Many producers also obtain referrals from new and existing clients, who lend credibility to the producer and his/her products and services. Contacting these referrals is solicitation, and is also protected by other laws which may require prior approval to contact.

An insurer considers all of the following when determining the fixed annuity payments, except:

Stock market value

If a lump sum from a lawsuit, a lottery winning, or inheritance, is used to purchase a guaranteed lifetime income. It is referred to as a ___________.

Structured settlement

As adopted into California law, the NAIC's '2010 Model Suitability in Annuity Transactions Model Regulations' require all producers to document that an annuity sold to a senior is:

Suitable for that person's needs and objectives

To encourage annuity holders to leave funds in the policy until retirement, insurance companies can assess a(n) __________ for withdrawals.

Surrender charge

Tax-Sheltered Annuities (TSAs)

Tax-Sheltered Annuities (TSA) are qualified annuity plans benefitting employees of public schools under the Internal Revenue Code Section 403(b), as well as other nonprofit organizations qualified under Section 501(c)(3). Employees of nonprofit organizations may have an arrangement with the employer where the employer agrees with each participating employee to reduce the employee's pay by a specified amount and invest it in a retirement fund or contract for the employee. Employees do not make direct payments to the retirement fund. These accounts are owned by the employee and are nonforfeitable and will be paid upon death, retirement, or termination of the employee. Contributions are pre-tax and interest earned grows tax deferred.

Taxation of Annuities Individual Annuities

Tax-qualified annuities are funded with pre-tax dollars. They're also fully taxable at ordinary income rates when money is withdrawn because the premiums paid and subsequent premiums do not establish a cost basis. Non-qualified annuities are funded with after-tax dollars. The premium paid for the non-qualified annuity, along with any subsequent premiums, establishes the cost basis for the non-qualified annuity. In simple terms, the cost basis equals the total amount paid for the annuity. The basis is the starting point for establishing gains in the contract at the time of distribution or surrender. Any interest or other gains during the accumulation phase of the annuity are tax-deferred. If the policy is cashed out for a lump-sum, then any amount received in excess of the cost basis is taxable as ordinary income. If the policy is annuitized then the original investment is returned in equal tax-free installments over the life expectancy of the annuitant. This portion of each payment is not taxed since they are simply a return of principal while the balance of monies received in annuity payments is the taxable gain or earnings. This is taxed at ordinary income tax rates even if the gains come from the investment separate accounts found within a variable annuity. Once the entire cost basis has been distributed to the annuitant, the remainder of payments during the annuitant's lifetime will be fully taxable as income.

Term Insurance

Term insurance is considered pure insurance and provides a pure death benefit. Term insurance does not offer any cash value benefits. For this reason, term insurance policies are less expensive in the early years as compared to permanent forms of insurance. Term insurance offers temporary life insurance protection for a specified period of time. This period could be as short as 1 year, or provide coverage for a specific number of years such as 5, 10, 20 years. It also could be purchased to provide coverage up to a specified age, such as 65. The premium is level for the duration of the stated term, which represents the average level of risk over the course of the policy. All term insurance policies expire at either a specified age (Term to 65) or after a specified period of time (10-year term). The face amount is paid out to the named beneficiary only if the insured dies during the specified term of the policy. The low, initial premium outlay when the insured is young will increase at renewal or upon conversion, and as the insured gets older, the policy becomes more expensive. Coverage can be written separately or with other types of insurance (as a rider) to suit individual needs. Rates charged are based upon underwriting class, the age and gender of the insured and upon the length of time protection is provided; rates are higher for a 10-year level term than for a 5-year level term.

Uses of Term Insurance & Special Features

Term insurance might be used to cover loans, or business or personal obligations. The insured may purchase large amounts to cover a specific liability or need at the least amount of premium. Renewable - A benefit that will renew the contract on the renewal date without evidence of insurability. The policy may be a 1- (annual), 5-, 10-, or 20-year renewable contract up to a specified age, with premiums increasing at the beginning of each renewal period. The renewal premium is based upon attained age. Renewability is important because the risk is that the insured's health may deteriorate and the insured may be unable to obtain a policy at the same rates or even at all, leaving the insured without coverage. Some term policies include a "reentry" provision, which offers the insured an opportunity to obtain a new policy at a reduced premium based on new underwriting. Convertible - The right to convert the existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract. The premium can be based upon either attained age or original (issue) age. The premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond. If the conversion is based on the issue or original age, back premiums plus interest will be required to be paid at the time of conversion. There is usually a premium increase associated with adding these special features to a policy. A renewable and convertible term policy will cost more than a level term policy.

Ralph obtained a very basic life insurance policy from his local agent. His policy will expire on a set date, and his benefits from the policy are determined at the date he purchased coverage. What type of life insurance policy did Ralph purchase?

Term life

Term Riders

Term riders may be attached to any individual life policy to provide additional insurance protection for a fixed period of time. If the need for additional coverage is temporary, a term insurance rider is more cost effective than buying another policy.

Rescission

Termination of a contract from the beginning (as if it never existed). Canceling the policy back to the inception of the contract results in a refund of premiums since the contract is not valid. The insurer has the right to rescind a policy due to material concealment (INTENTIONAL OR UNINTENTIONAL), material misrepresentation, or material breach of warranty.

What is "fixed" in a fixed annuity?

The "fixed" portion of a fixed annuity is the interest crediting rate, which may change at the discretion of the insurance company, but not less than the guaranteed minimum. A fixed annuity also promises a fixed payment to the annuitant when the contract is annuitized.

Common Disaster Clause

The Common Disaster Clause provides that if an insured and primary beneficiary die as a result of the same event, the primary beneficiary must survive the insured by a specific period of time (usually 90 days) or the insurance company will assume the insured died last (the primary beneficiary died first). This provision is designed to pay the benefits to either the contingent beneficiary or the insured/policyowner's estate if no contingent beneficiary has been designated. For example, let's say Mr. and Mrs. Smith each had an insurance policy naming each other as the primary beneficiary of their respective policies, and their children from previous marriages as the contingent beneficiaries. If Mr. and Mrs. Smith were both killed in a car accident at the same time, each insurer would assume that the beneficiary predeceased the insured, in order to protect the interest of the contingent beneficiary.

Pre-Meeting (Scope of Appointment) Notice

The Insurance Code requires producers who meet with prospective clients age 65 and older in their homes for the purpose of transacting life insurance, annuities, or disability insurance products to provide a written notice of the first meeting at least 24 hours in advance. The notice includes information about the products that will be discussed, and the insurance license numbers of those attending the meeting. The notice also explains that they may have any other persons—family members or advisers of their choosing—at the meeting, and that they have the right to terminate the meeting at any time. The notice may be delivered in person, by mail, fax, or email. Producers must retain a copy of notices in their files for a minimum of 5 years. Established clients may be given the notice at the time of an appointment.

Owner's Rights (Ownership Provision)

The Policyowner retains all rights in the policy. Unless the insured is also the policyowner, the insured does not have rights. The policyowner has the right to name or change revocable beneficiaries, borrow against the cash values or access living values, surrender the policy, receive dividends and select among the dividend options made available, assign the policy on a collateral basis or an absolute basis, or convert term insurance to permanent insurance. It is also the owner's responsibility to make the premium payments.

Spendthrift Trust Clause

The Spendthrift Clause denies the beneficiary the right to assign his/her interest in the policy proceeds. The purpose is to prevent creditors of the insured and/or the beneficiary from claiming any benefits payable to the beneficiary before they are actually received. This clause does not protect the beneficiary if the benefits are payable in a lump sum, only when the proceeds are held by the insurance company under a settlement option. Spendthrift laws and policy provisions protect the death benefit from the claims of creditors of the deceased insured, the policyowner, and those creditors of any named beneficiary to whom the death benefit becomes payable. When death benefit principal is left with the insurance company, spendthrift laws prevent creditors from attacking that money, too.

Expenses

The amount charged to cover each policy's share of expenses of operation (salaries, commission, premium taxes, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency.

In which of the following circumstances is an annuity's tax-deferral benefit lost?

The annuity is owned by a corporation

The Annuity Distribution Period (Pay-Out)

The annuity period begins once the policyowner elects to convert a deferred annuity into an income benefit payment. The settlement option selected can provide a temporary or lifetime payment. If a lifetime benefit is selected, it is an irrevocable election. The cash values go towards paying for the income benefit.

Insurance Premiums

The basic concept of insurance premiums is that by paying less often, a person will pay less in total premium. However, in cash value policies, because the payments are funding the cash value, the actual amount per payment in a limited payment policy will be higher as the number of payments is reduced. A 10-pay policy will have higher premiums than a 20-pay policy, but the total of the 10 payments will be much less than the total of the 20 payments.

Consideration Clause

The consideration clause specifies the amount and frequency of premium paid by the owner as something of value provided in exchange for the company's promise to pay (the insuring clause).

Contingent or Secondary Beneficiary

The contingent beneficiary receives the death benefit only if there is no primary beneficiary alive following the death of the insured. In other words, the benefit is payable to the contingent beneficiary only if the primary beneficiary predeceases the insured A contingent beneficiary has no interest in the policy proceeds if there is a surviving primary beneficiary. Contingent and primary beneficiaries do not share the death benefit. Only an irrevocable primary beneficiary has the right to interfere with certain of the owner's rights in a life insurance policy.

Extension of Benefits

The continuation of coverage under a particular benefit provided under a policy following discontinuance with respect to an employee or dependent who is totally disabled on the date of discontinuance.

Cost of Living (COL)

The cost of living rider enables the insured to purchase more insurance each year to help offset increasing insurance needs due to inflation. The amount that can be purchased is based on increases in the cost of living index. This additional coverage is usually available at low rates and evidence of insurability need not be provided for such increases.

Effective Date

The date when insurance coverage begins.

Expiration Date

The date when insurance coverage ends.

Face Amount or Limit of Liability

The death benefit amount payable or coverage provided on a life insurance policy. This is also referred to as the limit of liability.

Decreasing

The death benefit decreases, but premiums remain level for the policy term. Often such policies are sold as mortgage protection with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies, the proceeds of the policy can be used to pay off the mortgage. The premiums paid for decreasing term are lower than the premiums payable for level term since the benefit decreases throughout the term of the policy.

Increasing

The death benefit increases over the life of the policy while the premiums remain level. This type of term is normally written as a rider for the return of premium on a term policy over a set number of years.

Interest Only

The death benefit proceeds may be left with the insurer while interest payments are paid at least annually. The principal amount does not decrease, and the interest generated is taxed as ordinary income when paid to the beneficiary. This method of providing income is known as capital conservation. The principal (capital) is left with the insurer at interest, conserving the capital. When this option is selected, the owner or beneficiary must direct the insurer as to when the principal will be paid as a benefit.

Level (Types of Policies)

The death benefit remains level during the policy term. The policy proceeds are also known as the death benefit or face amount of insurance. In term life, at each renewal the premium will increase based on the age of the insured. The pure cost of insurance is gross premium minus the insurer's expenses and profit and without adjustment for interest earnings on reserves.The policy proceeds are also known as the death benefit or face amount of insurance. In term life, at each renewal the premium will increase based on the age of the insured. The pure cost of insurance is gross premium minus the insurer's expenses and profit and without adjustment for interest earnings on reserves.

Death Benefit Proceeds (Claims)

The death benefit, or face amount, of the policy is generally not considered taxable income when paid as a lump sum to a named beneficiary. If a settlement option is used instead of a lump sum payment, any interest or earnings component of each payment would be taxable as ordinary income.

Single Premium

The entire cost of the policy is paid in a lump sum at the time of purchase.

aleatory contract

The exchange of value is unequal. Insured's premium payment is less than the potential benefit to be received in the event of a loss. The insurer's payment in the event of a loss may be much greater, or much less (e.g., $0 in the event a loss doesn't occur), than the insured's premium payment.

Aviation exclusion

The exclusion does not apply to fare-paying passengers on regularly scheduled commercial flights. This exclusion applies most specifically to student pilots or those with a newly issued pilot's license with a limited number of hours of flying experience.

Loss Exposure

The extent to which one may be affected by a peril.

Grace Period Provision

The grace period is the time period provided after the premium due date before a policy lapses. If the insured dies during this period, the death benefit is payable minus any premiums or loans due. The grace period in California is 60 days. Coverage continues during the grace period, but if the premium is not paid, the policy lapses at the end of the grace period.

Beneficiary

The individual or person named in the contract to potentially receive benefits if the owner and/or annuitant die prior to annuitization or if the settlement option selected offers any residual benefit after the annuitant's death.

owner

The individual who controls the contract and is responsible for making payments into the contract as well as having all of the contractual rights in the policy is the owner.

Policyowner

The individual who has ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily.

Insured

The individual whose life is covered under the policy. The insured's death results in the payment of the policy proceeds.

Annuitant

The individual whose life the contract is based upon. Upon a lifetime annuitization, payments will be made to the annuitant according to the annuitant's age, gender, settlement option selected, and dollar amount used to fund the income benefit payments.

Initial and Guaranteed Maximum Premium

The initial premium will be guaranteed but only for the first year, then the premium may increases due to the mortality costs. A guaranteed maximum premium table must be included in the policy showing projections of future maximum premiums.

What will happen if an insured decides he or she no longer would like to make payments on a traditional whole life policy and ask the carrier to cancel the policy?

The insured would collect part of the premium already paid to the carrier. Traditional whole life policies contain a cash surrender clause that would let the insured cancel coverage. The insured would be able to recover from the carrier a portion of the premium he or she previously paid on the policy.

Insurer (Principal)

The insurer is the source of the authority in which the producer/agent must abide.

Facility of Payment

The insurer may pay to a relative or anyone it deems entitled to the benefits in the absence of a designated beneficiary.

contract of indemnity

The insurer must restore the insured to the same financial position they were in before the loss occurred.

Individual Selection Criteria

The insurer uses information collected by the field underwriter and other sources to determine the insurability of an individual. It is ultimately the home office underwriter's responsibility to determine if an individual meets the underwriting requirements of the insurer.

Insuring Clause

The insuring agreement is the basic promise to pay the benefit described in the policy when a claim is proved. In life insurance, a true certified copy of the death certificate is valid proof of death. The insuring clause is found on the first page, or declaration page, of the policy and is considered the most important clause in the policy. It identifies the parties to the contract and the perils or conditions in which it will pay. The insuring clause is the insurance company's promise to pay the policy's death benefit to the named beneficiary, after receiving due proof of death of the insured, as long as the insured died while the policy was in force. The declaration page is the title or first page of the policy. It provides all the basic information the policyowner needs to know: The insuring clause The name and address of the insurance company Information about the issuing agent The named insured Amount of insurance Amount and frequency (mode) of premium payment Effective date of coverage The declarations page is not proof of insurance.

Currently Insured

The minimum requirement for workers under age 24 to obtain a currently insured status for disability benefits is to earn at least 6 quarter credits in the last 3 years (13-quarter period). Beginning at age 24, additional credits are required, based on the worker's age at the time of disability, to obtain currently insured status.

Policy Reserves

The net premiums paid plus additional interest earned must be set aside for future claims and possible contract obligations. A Reserve is the actuarial amount needed to cover potential liabilities to policyholders, such as cash surrender and nonforfeiture values

Surrenders

The owner of a cash value policy may surrender the entire policy. This action will cancel the insurance coverage. The policyowner is entitled to receive the cash surrender value in the policy. Surrender periods must be disclosed in the policy and can last up to 10-20 years. A surrender charge schedule describes in dollar amounts or percentages the amount of the surrender charge in any year. The surrender period is the time the owner must wait before funds can be withdrawn without a penalty. The difference between the cash value and the cash surrender value is the surrender charge. This provides a means for the insurer to recapture the upfront expenses involved in issuing the policy.

Accelerated Death Benefits

The payment of an accelerated death benefit is tax free to a recipient if the benefit payment is qualified. To be a qualified benefit, the benefit must meet the following conditions: A physician must give a prognosis of 24 months or less life expectancy for the named insured. The amount of the benefit must at least be equal to the balance of the face amount remaining after payment of the accelerated benefit. The total amount of the payout cannot be less than 100% of the original face amount. The insurer provides a monthly report for the insured showing the amount paid and the amount of benefit remaining in the life insurance policy.

Accumulation (Pay-In) Period

The period of time from the first deposit to the start of the annuity payout is considered the accumulation period, during which taxes are deferred. Accumulation periods are only found within deferred annuities, not immediate annuities.

If a life insurance policy becomes a MEC, what was the cause?

The policy failed the 7-pay test

Fixed Policy

The policy has a fixed amount of coverage, benefits, and premium. Without riders, future inflationary trends will cause the purchasing power of the policy's benefits to be reduced.

Guaranteed Level Premium

The policy premium is guaranteed to be level throughout the term of the policy

Revocable Beneficiary

The policyowner may change a revocable beneficiary at any time. This beneficiary does not have a vested interest in the policy. Most named beneficiaries are revocable and have no rights.

Irrevocable Beneficiary

The policyowner may not change an irrevocable beneficiary unless the beneficiary dies or provides written consent for the change. If an irrevocable beneficiary is named, the owner may not make changes to the policy that affect the coverage or benefits without consent of the beneficiary. These changes include assigning the policy, canceling or surrendering the policy, or taking a policy loan. An irrevocable beneficiary has a vested interest in the policy benefits.

Fixed Premium

The premium amount is determined by the insurance company. Fixed premiums do not have to be level, but cannot be changed by the policyowner.

Adjustable Premium

The premium can be increased or decreased by the policyowner on an annual basis. Premiums must be paid and adjusting the premium will affect other features of the policy.

Non-guaranteed Level Premium

The premium can be increased to a new premium level for the remainder of the term

Flexible Premium

The premium can fluctuate at the policyowner's discretion. It can be increased, decreased, or even skipped at any premium due date. Universal and Variable Universal have flexible premium.

Limited Payment

The premium is payable for a specified time, such as 20-pay, 30-pay or to age 65.

Modified Premium

The premium is payable for the first few years of the policy (3-5) are lower than an ordinary whole life policy to make it more affordable. With Modified Premium, the premium payable for the first few years of the policy (3-5) are lower than an ordinary whole life policy in order to make it more affordable.

Indeterminate Premium Term

The premium may fluctuate between the current charge and a maximum rate stated in the policy based on the insurer's mortality, expenses, and investment returns

Level (Guaranteed) Premium

The premium remains level for the duration of the contract.

Primary Beneficiary

The primary beneficiary is the first in line to receive the death benefit upon the death of the insured. There may be multiple primary or contingent beneficiaries named. When naming multiple beneficiaries, it is important to indicate each beneficiary's share of the proceeds (either by percentages totaling 100% or in dollar amounts equal to the full death benefit amount) unless they are to share in the proceeds equally.

Consequences of Incomplete Applications

The producer's primary underwriting role is to make sure the application provides proper information for the insurer. The underwriter will return an incomplete application to the producer for completion by the applicant. If a policy is issued with questions unanswered, it is assumed the information is not material to the issuance and the insurer waives the right to challenge a claim based on the incomplete application.

Insurable Interest

The relationship that must exist between the applicant and insured, at the time of application and policy issuance, in order for the contract to be valid. An individual has an insurable interest in his or her own self. Insurable interest also exists if a financial or economic loss by the owner results in the event that the insured dies. Examples of insurable interest include a policy taken out on a family member, business partner, or debtor of the policyowner.

Underwriting

The selection of risk is the primary function of the underwriter. The underwriter must protect the insurer against adverse selection by selecting risks that fall into the normal range of expected losses. When evaluating a risk, an underwriter examines: The nature of the risk What hazards are present What outside factors might affect the risk What past losses have occurred Limits are placed on both preselection and post-selection activities to prevent discrimination and to ensure fair treatment of insurance applicants and policyholders. Required disclosures, information practices, privacy requirements, unfair trade practices and other prohibitions are outlined in state law to protect insurance applicants.

Annually Renewable Term Insurance

The simplest form of term life insurance is for one year. The death benefit remains level and the premiums increase yearly as the policy renews up to a specified age. While it initially is very inexpensive compared to other types of life insurance, over time it can become cost prohibitive. The death benefit is paid by the insurer if the insured dies while the policy is in force. Evidence of insurability is not required upon renewal. As long as the premium continues to be paid, the policy will renew until the expiration date and the premiums will increase based on attained age.

Family Policies

The special needs of families with young children can be addressed with "Family Income" or "Family Maintenance" policies. Both type of policies begin with a base policy of whole life insurance usually written on the parent with the largest income and greatest risk of death. This provides insurance protection to the insured's age 100. To this base policy, a term insurance rider is attached that is designed to provide a monthly income to the survivor if the insured dies during the specified term. This greatly increases the total insurance amount without affecting the cash accumulation feature of the base policy. Each of these policies only provides insurance protection on one parent. A third policy, the Family Protection Plan, provides insurance protection on the entire family.

Eligibility and Selection of Coverage

The sponsor may set the terms and determine which classes of employees qualify, such as full-time vs. part-time employee. The plan cannot discriminate, so all members of the eligible class of employees must be eligible for predetermined benefits based on a single formula. California law requires that the basic coverage amount must be predetermined by the employer and not be subject to individual employee choice (employees may be offered optional additional coverage). The most common methods of determining group insurance benefits are: Flat benefit (all employees receive the same insurance amounts) Based on a percentage of income (employees receive 100%, 150%, or 200% of their annual base wage, subject to imputed income) Based on one's position in the company (the employer may establish different benefits for specific classes of employees, but may not discriminate between employees in the same class) The sponsor can elect to discontinue the plan, and the insurance company can increase the rates it charges. To be eligible for a group plan, the group must be a natural group, meaning it was formed for a purpose other than for procuring or reducing the cost of insurance. Group plans must also have a grace period of 60 days. Group insurance is usually written as annual renewable term.

Tertiary Beneficiary

The tertiary beneficiary receives policy proceeds if both the primary and the contingent beneficiaries predecease the insured. If there is no surviving named beneficiary at the time of the insured's death, the proceeds are payable to the policyowner if living or to the insured's estate.

Life Insurance Transfer for Value Rule

The transfer-for-value rule was passed by Congress to discourage business transfers of ownership between parties looking to take advantage of the tax free status of life insurance death benefits. If a life insurance policy is transferred to a new owner in return for any kind of material consideration, the transfer-for-value rule may result in the death benefit being partially or fully taxable at the time it is paid. The rule states that the amount of the death benefit that exceeds the value of consideration and any additional premium paid will be taxed as ordinary income.

Group Underwriting

The underwriter's greatest concern when underwriting a group plan is adverse selection. To help protect against preexisting conditions and immediate claims, group plans have a probationary period set by the group sponsor. This is a waiting period between when an individual joins the group they can enroll in the group plan. As long as the individual enrolls during their initial eligibility period (usually the first 30 days of employment), coverage is guaranteed and evidence of insurability is not required. Individuals who do not enroll during the initial enrollment period are considered late enrollees and may be required to provide proof of insurability or be forced to wait until the next annual open enrollment period. Open enrollment periods are offered on an annual basis which allows individuals to enroll without evidence of insurability or to make changes. An individual can make changes at any time if they have a change in status, such as adding an eligible dependent or change in employment status, such as going from full- to part-time employment. The cost of the plan is determined by the average age, size, industrial classification (nature of the work involved), experience rating (the group's claims) and the personnel turnover history of the group. These factors are more important than the actual overall health of the group.

Incontestability

The validity of the policy cannot be contested, except for nonpayment of premiums, after it has been in force for 2 years. However, each new insured added after the group policy is issued is subject to his/her own 2-year period of contestability based on enrollment application information

Group Conversion

There is a conversion period of 31 days in which the employee may, upon termination of eligibility and without evidence of insurability, convert his/her group life insurance benefit to an individual permanent policy. The premium will be at a higher than normal rate to include the insurer's guaranteed convertible surcharge because the majority of all conversions involve persons that would otherwise be uninsurable. Premiums will also be higher because the conversion policy will be issued at the attained (current) age of the insured and the policy will build cash values. The conversion period is also a grace period. In the event a terminated or ineligible employee dies during the conversion period, whether they were going to elect individual coverage or not, a death claim will be paid by the group policy, less the premium due for the benefit.

Nonforfeiture Options (Guaranteed Values)

These options are required in policies that accumulate cash values and protect the policyowner against total loss of benefits if the policy should lapse due to nonpayment of premium or is intentionally cancelled. Three nonforfeiture options add flexibility to a cash value policy. Cash surrender, reduced paid-up, and extended term are all nonforfeiture options.

If an annuity policyowner stops putting money into their periodic or flexible premium annuity what happens to the policy values?

They are protected by the nonforfeiture provision

Buy-Sell Agreement

This agreement contractually establishes the intent to purchase, at a predetermined value, the assets of a business if one of the contract participants (such as a business partner) predecease the others. It may be used with a sole proprietorship, a partnership, or with stockholders of a closed corporation. Some of the advantages of having such an agreement: It is legally enforceable The value of the business is previously agreed upon It is an immediate and automatic method of transferring the deceased's interest Some disadvantages of NOT having an agreement: Income to surviving family members stops Surviving business owners may suffer a loss of income Asset reduction due to forced liquidation The estate transfer may be delayed due to forced business liquidation Shares of ownership transfer to surviving relatives Any type of life insurance may be used to provide funds for the Buy-Sell Agreement. Premiums are not deductible, and policy proceeds are received income tax-free.

Needs Analysis Approach

This approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and factors the following steps into arriving at the proper amount of coverage needed: Calculate all financial needs caused by an immediate death, including debts, medical bills, and final expenses Provide lifetime income to the spouse Pay off a mortgage or other debt Provide funds for children's education An Emergency Reserve Fund may be part of the calculation to provide for unexpected emergencies the family might encounter immediately after the death of the insured Subtracts any assets available to fund financial needs after death (such as retirement plan assets, other insurance, liquid investments, separate savings)

Human Life Value

This approach is a measure of the projected future earnings and services of a person at risk in the event of a premature death. The objective is to provide the proper amount of coverage as determined by the value of the individual to his/her dependents using the following factors: The individual's age and gender The individual's occupation The individual's annual wage The individual's planned retirement age Inflation

Class or Classification beneficiary designation

This designation is used in instances where each beneficiary is not directly identified by name. The wording of the class designation must be specific and carefully worded to remove any doubt of the owner's intentions. For example, "any children of this marriage" or "the insured's spouse" may be classified as beneficiaries. This could cause complications if the insured has step children or has been married more than once. Class designations of beneficiaries are intended to provide benefits to a number of unnamed persons but can be problematic when there is insufficient understanding about who is being named as a beneficiary. "All of my children" does not clearly identify which children are included (the children of a former marriage, the current marriage, or both). Likewise, "My minor children" disregards the fact that children will eventually become adults, and can unintentionally exclude a child as a result.

Individual/Named beneficiary designation

This designation is very specific. An individual is specified by name as the beneficiary, such as Mary Doe (wife) or John Doe (husband). This prevents probate proceedings.

Market-Value Adjustment (Adjusted) Annuity

This is an annuity product that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the surrender value to fluctuate in response to market conditions. Upon withdrawal, the MVA will add or deduct an amount from the annuity or the withdrawal amount. If the interest rates on which the MVA is based are higher than when the annuity was purchased, the MVA will likely be negative, meaning an additional amount may be deducted from either the annuity or the withdrawal amount. If the interest rates on which the MVA is based are lower than when the annuity was purchased, the MVA will likely be positive, meaning money may be added to either the annuity or to the withdrawal amount.

Nonqualified Deferred Compensation

This is an incentive plan in which an employer promises to pay highly compensated employees the full value of their voluntary salary deferral at a defined future point in time. Income taxes are deferred until the employee takes possession of the incentive funds. The employer is both the policyowner and the beneficiary. If the employee dies before retirement, the life insurance benefit is paid to the employer tax free, who in turn pays the employee's heirs, who will pay income tax. If the employee lives to retirement, the policy may be surrendered to pay the deferred compensation.

Declined

This is not a rating classification, but a decision that the risk is one for which the insurer refuses to issue insurance. In this case, the applicant is deemed uninsurable. Being declined by one insurance company does not mean a person will be declined by all other insurance companies.

Life Income Option

This option allows the insurer to use the death benefit to purchase an annuity on behalf of the beneficiary. As with other settlement options, any interest paid is taxed as ordinary income.

Return of Premium Term

This policy provides for a full refund of premiums if the insured is still living at the end of the term. These policies charge a higher premium than level term insurance. The additional premium paid for this benefit provides a nonforfeiture value which will offer a nominal return of premiums paid if the policy is not held to the end of term. The return of premium rider is an increasing term policy which allows the insurer to pay out the policy's death benefit plus the cumulative premiums paid.

Mode of Premium Payment Provisions

This provision addresses the frequency of premium payments (monthly, quarterly, semiannually or annually), and to whom the premiums are payable. The more frequent the payment, the greater the cost. The policyowner has the right to change the premium mode.

Entire Contract Clause

This provision describes the parts of the life insurance contract. The entire contract consists of the policy, riders (endorsements), amendments, and a copy of the application. All statements made in the application are, in the absence of fraud, deemed to be representations and not warranties. All parts to the contract must be attached and in writing. Nothing can be incorporated by reference.

Automatic Premium Loans (APL)

This provision must be elected by the policyowner and can be cancelled at any time. It enables the insurer to automatically borrow against the cash value to cover a premium payment to prevent the contract from lapsing unintentionally. APL is available on cash value policies only and does not require an additional premium. It becomes effective at the end of a grace period. The APL loan is treated the same as all other loans. If the APL is used to pay premiums, interest on the loan accumulates on an annual basis.

Guaranteed No-lapse Rider

This rider is attached to a universal life insurance policy and ensures the policy will not lapse if the cash value is reduced to zero. It relieves the policy owner of responsibility to monitor cash value and comes with a required payment schedule, effectively hybridizing the universal policy with whole life insurance. As long as the policyholder adheres to the payment schedule, the policy will not lapse.

Accidental Death and Dismemberment

This rider provides a benefit in addition to the base of the policy. The rider pays 100% of the amount of the rider, known as the principal sum, upon accidental death. If the insured suffers an accidental dismemberment loss, such as loss of a limb or eyesight, the rider pays 50% of the rider amount, known as the capital sum. Double dismemberment benefits (loss of 2 limbs or total eyesight) are provided at 100% of the rider. Benefits of the rider are only payable if the loss is accidental and occurs within 90 days of the accident. This rider typically expires at age 65 or whenever the principal sum has been paid.

Return of Premium

This rider uses Increasing Term insurance to provide coverage equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount of the policy plus the benefit of the rider equaling the total amount of premiums paid.

Joint Survivorship Life (Last to Die)

This whole life policy is written to cover 2 or more lives, and the death benefit is not paid until the last insured dies. Premiums are based upon a joint issue age which is obtained by an average of both insureds' ages resulting in a lower premium than two separate policies. This policy is often purchased to provide a lump sum benefit to pay estate taxes once the second spouse dies.

By what means is a transfer for value made?

Through an absolute assignment

When the owner and annuitant is the same person, a spouse beneficiary is permitted what choice under the Internal Revenue Code if the annuitant dies prior to annuitizing the contract?

To adopt the annuity as his/her own and become the annuitant or to name another annuitant

Tax Penalty

To discourage the use of annuities as short-term tax shelters, a 10% penalty tax is levied against any premature withdrawals prior to 59½ years of age. This discourages withdrawals. The tax penalty does not apply if premature distributions occur due to the death or disability of the contract owner.

Charities

To help fund favorite charitable organizations upon the insured's death, new or existing policies may be donated to charities.

Entity Plan

Under this plan, a business entity enters into an agreement in which it is obligated to purchase the deceased person's interest. The entity typically buys life insurance policies on each of the partners. The entity would then name itself as the beneficiary of each policy. The death benefit of the policy would be equal to the predetermined purchase price as stated in the buy-sell agreement. Upon death of one or more of the partners, the entity would use the death proceeds to purchase that partner's interest. For example, if ABC Enterprises is worth $300,000 and each shareholder is an equal owner of the company, then the company would buy three $100,000 life insurance policies, one on the life of each owner. The policies would be owned by the company. The company would be named as the beneficiary. At the death of one of the partners, the company would have the funds necessary to buy the deceased's interest in the company.

Universal Life (Flexible Premium Adjustable Life Insurance)

Universal Life Insurance (UL) features insurance protection and a savings element (cash value) that grows on a tax-deferred basis. UL is an "unbundled policy." This means the individual elements of the policy and premium—which includes the mortality risk, policy expenses, and the cash value—are credited to the account separately after the premium is paid. Universal life has built in guarantees regarding the cost of insurance (mortality risk) and the interest rates applied to cash values. The features of a UL policy include: Adjustable Face Amount - The insured can increase or decrease the face amount of the policy. Any increase in the face amount will require evidence of insurability. Mortality charges are deducted monthly from the policy's cash value The mortality charge is the cost of pure insurance and although it is deducted monthly, it is determined annually based on the insured's age. The increase in the mortality charge is limited to a policy maximum. The insurance protection is considered annual renewable term. Expense charges to cover administrative costs are also deducted monthly from the cash value. This is the insurance company's cost of maintaining the policy and can be impacted by the overall increasing administrative costs associated with a plan. Like mortality charges, there is a maximum guaranteed amount that can be charged. Interest is credited to the cash value on a monthly basis at the current interest rate, but will never be less than the guaranteed minimum rate established at the time the policy was issued. The current interest rate is controlled and set by the insurance company and can be changed as often as monthly without prior notice to the policyowner. Flexible Premium - A target premium is established by the insurer, which is the minimum amount that must be deducted from the cash value to maintain the policy to age 100, based on current interest rates, mortality and expense charges. Because mortality and expense charges are deducted from the cash value monthly, the policyowner has more flexibility with universal life premium payments. The premiums can be increased, decreased, or even skipped at the policyowner's discretion as long as there is sufficient cash value to cover these deductions. If the cash value becomes insufficient to pay the monthly deductions, however, the owner will be required to start paying premiums to keep the policy from lapsing. Death Benefit Options Universal Life allows a policyowner to choose from two death benefit options, Option A or Option B. Option A - Pays the face amount of the policy and provides a level death benefit. As the cash value increases, the company's risk decreases. If the cash value increases to the point it equals the death benefit, the death benefit will automatically become the greater of the cash value or face amount of insurance. This minimum separation between the cash value and the death benefit is called the "risk corridor." This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early. Option B - Pays the face amount stated in the contract which is level term, plus any cash values accumulated over the years. This provides for an increasing death benefit. The mortality charge for Option B is greater than Option A. Individuals purchasing Option A will benefit from larger cash value accumulations while individuals purchasing Option B will benefit from greater death benefits. Guaranteed Universal Life A Guaranteed Universal Life policy is also referred to as "Universal Life with a No-Lapse Guarantee". This product provides the guarantee of term insurance for life. As long as the minimum required premiums are paid, the policy is guaranteed not to lapse. There is minimal cash value growth, but if the owner uses the cash value to cover the premium, or misses a premium payment, the "no-lapse guarantee" is removed from the policy.

Flexible Policy

Universal and Variable Universal Life policies offer the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies have the potential to provide greater cash accumulation than whole life policies.

Rating Applicants

Upon receipt of information such as the application, medical exam, blood and urine test results, etc., underwriters analyze the information and determine if the applicant is an acceptable risk. If acceptable, underwriters then determine the classification to be used in the calculation of the premium.

Cash Surrender

Upon surrendering the policy back to the insurer, the policy owner will receive the cash surrender value stated in the policy less any outstanding loans and accrued interest. Any amount that exceeds the premiums paid into the policy will be taxable as ordinary income. The insured no longer has insurance coverage if this option is selected.

Cross Purchase Plan

Used when the partners of a business purchase life insurance on each other. At the death of one of the partners, policy proceeds are used to purchase that person's interest in the business from his/her heirs. Each partner owns insurance on each of the other partners. For example, if there are 3 partners in a company valued at $300,000, then each would have a $100,000 interest in the company. Each partner would purchase a policy on the other partners, providing for a total of 6 policies (3 x 2 = 6). Each policy would be valued at $50,000 (6 x $50,000 =$300,000).

During the accumulation phase of a(n) ____________ annuity, premium dollars buy more accumulation units.

Variable

Generally, which of the following Annuities is not designed to guarantee the principal value of the policy in stable interest rate environments?

Variable

Variable Universal Life (VUL)

Variable Universal Life (VUL) offers the added attraction of the investment component seen in Variable Life policies through the insurer's Separate Account. Like Universal life, the policy provides for flexible premiums and adjustable death benefits. Options A and B are available to policyowners. The entire cash value is held in the insurer's separate account and the investment return fluctuates based on the performance of the separate account. Since all premiums are credited to a separate account, there is no guaranteed minimum death benefit. Since there is no guaranteed return on the separate account, the owner bears all investment risk. The policyowner may take a policy loan or a partial withdrawal from the cash value without terminating the contract. A partial withdrawal is paid from the separate account. Policy loans are available based on the amount in the separate account. Typically 75 - 90% of the cash value can be borrowed. All variable products are subject to SEC regulation. Variable Life is considered a security and can only be sold by individuals with a life insurance license and a FINRA securities registration, Series 6 or 7 and a Series 63. A prospectus must be provided prior to the sale of a variable policy and there are suitability requirements that must be met before a variable policy can be sold. Since Variable Universal life does not have a general account, the cash values will fluctuate based on the performance of the separate account.

Which type of life insurance policy has the key advantage of being able to take premium dollars and invest it in multiple types of investment options?

Variable life insurance

Variable Life

Variable whole life is a whole life policy with certain benefits that will vary based on market conditions. Variable life characteristics include: A Fixed Premium - The premium is determined by the insurer and remains fixed and level throughout the contract. Accounts The policy cash accumulation is split between the insurer's General and Separate Accounts. General Account (guaranteed values) The general account provides a fixed rate of interest and the cash value in the general account provides for a guaranteed minimum death benefit to age 100. Policy loans are available from the general account but will decrease the guaranteed death benefit by the amount of the loan plus unpaid interest. Separate Account (nonguaranteed values) The separate account is invested in debt or equity securities as offered by the insurance company. The owner may select which subaccounts they want the premium to be invested in. Cash value in the separate account will fluctuate based on market conditions and performance of the subaccounts, which are similar to a mutual fund. The policyowner has an opportunity to achieve higher investment returns. This policy may act as a hedge against inflation but will decrease the guaranteed death benefit by the amount of the loan plus unpaid interest. There is no guaranteed minimum return on the cash value in the separate account and the policy may lose both cash value and death benefit if there are market losses. The death benefit is tied to the separate account and also varies along with the performance of the separate account. Death benefits are recalculated annually. While the separate account values may decrease, the policy will never pay less than the guaranteed death benefit supported by the general account. Since there is no guaranteed return on the separate account, the owner bears all investment risk. All variable products are subject to SEC regulation. Variable Life is considered a security and can only be sold by individuals with a life insurance license and a FINRA securities registration, Series 6 or 7 and Series 63. A prospectus must be provided prior to the sale of a variable policy and there are suitability requirements that must be met before a variable policy can be sold. Policy loans are available from either the general account or the separate account. Typically 75 - 90% of the cash value can be borrowed. Partial surrenders are not allowed from a variable whole life policy.

7-Pay Test (MEC)

When a contract does not pass the 7-pay test, it will be deemed a MEC. The 7-pay test is a limitation on the total amount that can be paid into a policy in the first 7 years. It compares premiums paid for the policy during the first 7 years with the net level premiums that would have been paid on a 7-pay whole life policy providing the same death benefit. As long as the policy premium guidelines are met, the policy will avoid being deemed a modified endowment contract. If a policyowner pays premiums in excess of the guidelines, the excess premium can be refunded by the insurer within 60 days after the end of the contract year. Since a single premium life insurance policy clearly does not pass the 7-pay test, it will automatically be deemed a MEC. The other types of policies that could be classified as MECs are flexible premium policies such as Universal and Variable universal life. The flexible premium feature allows the owner to pay premiums on their own schedule. Once a policy is classified as a MEC, it will maintain that classification for the life of the policy. The overfunding cannot be undone in future years.

Surrender Charges

When a contract is fully surrendered, any surrender charges will lessen the contract payout. This is also referred to as a back-end load. Surrender charges diminish over a stated number of years, set by the insurer, until they disappear.

Third-Party Ownership

When a policy is owned by a person other than the insured, it is known as a third-party ownership. The three parties involved in a third-party ownership are the policyowner, insured, and insurer. Examples of third-party ownership policies are: A husband owns a policy on a wife A parent owns a policy on one of his/her children A business owns a policy on a key employee A business partner owns a policy on another business partner

Estate Taxes and Considerations

When an individual life insurance policy is owned by the insured, the value of the death benefit may be included in the insured's estate, either intentionally or by default. The policyowner may name the estate as a beneficiary. These values will be added to the amount in the estate and potentially be subject to federal estate taxes.

Assumptions and Calculations

When calculating premium rates, life insurers assume that all: Premiums are paid annually in advance of the period of coverage Premiums will be invested and earn interest Claims will be paid on the last day of the year

Mortgage Redemption

When credit life insurance is used to protect against the unpaid balance of a mortgage, it is referred to as Mortgage Protection or Mortgage Redemption Insurance. In this case, the amount of protection decreases along with the balance of the mortgage.

Duties of Replacing Insurers

When replacement is involved, the insurer must: Require the agent submit a Notice Regarding Application and a list of all existing policies or contracts, including the names of the insurers and policy numbers with the application Send to the existing life insurer within 3 working days of the date the application is received a written communication advising of the replacement or proposed replacement (this includes the identification information and a policy summary, contract summary, or a ledger statement containing policy data on the proposed life insurance or annuity) Maintain evidence of the Notice Regarding Replacement, the policy or contract summary, any ledger statements used, and a replacement register for at least 3 years Provide in its policy or a separate written notice that the applicant has a right to an unconditional refund of all premiums paid within 30 days from the date of policy delivery

Distribution at Death

When the annuitant dies during the accumulation phase of the annuity the beneficiary receiving the death benefit must pay income tax on any gain embedded in the policy at ordinary income tax rates.

Changes in the Application

Whenever an answer to a question needs to be corrected, the applicant or producer makes the correction and the applicant initials the change, or the producer can complete a new application.

Permanent Insurance - Traditional Whole Life

While term insurance is designed to provide protection for a specified time period, permanent insurance is designed to provide coverage for an entire lifetime. Whole life is permanent protection that matures at the insured's age 100, and the cash value will equal the face amount (when no loans or withdrawals are taken, and all premiums are paid on time). Insurers assume that the insured will not live to age 100. If the insured is still living at age 100, however, the insurer pays the face amount to owner. Policies written in more recent years may mature at age 121. In a traditional whole life policy, the net amount at risk is the face value minus the cash value. As the cash value accumulates over time, the net amount at risk decreases. This does not affect the face amount of the policy as that remains level. Since the cash value equals the face amount at maturity, as the cash value grows, the amount of risk to the insurance company decreases. Traditional whole life policies have a level premium and level face amount. The premium at younger ages exceeds the actual cost of protection. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises above the premium. Traditional policies earn a guaranteed rate of return. Once the cash value has accumulated for a certain number of years the owner can borrow against the policy. Unlike term insurance, a whole life policy cannot be convertible or renewable.

Lien Plan

With the lien plan, initially, only the premium would be refunded in case of death. The death benefit increases over time with the full face amount eventually payable. This is generally used with Senior Life Insurance plans to provide minimal benefits without a medical examination.

Incontestability Clause

Within the first 2 years of a policy, the insurer may contest a claim and void the contract upon proof of a material misstatement or fraud. A material misstatement is one in which the insurer would not have issued the policy had they known the true information. Except for nonpayment of premiums, the policy will be incontestable after it has been in force for typically 2 years from the policy issue date, even in cases of fraud. Incontestability means that the insurance company cannot use the statements in the original application for insurance as a reason to avoid paying a death claim. The policy becomes incontestable after 2 years in most states.

Waiver

a document that shows a person voluntarily gives up a right, claim or privilege

Medical Examinations

are conducted by physicians or nurses who provide results of an examination and information regarding the applicant's present health. Examinations are usually requested by the insurer after determining if the amount of coverage, age of applicant or his/her health history warrant the examination. They are commonly requested due to the higher amounts of insurance applied for coupled with the high degree of cardiovascular concerns, high cholesterol and enzyme levels, as well as the prevalence of the HIV virus. Additional medical testing may include a simple physical exam, a stress test on a treadmill, or even an electrocardiogram (EKG).Medical exams are at the insurer's expense. The results of the Medical Examination is the only report that might be copied and made part of the policy.

Property and Casualty brokers

employ a natural person licensed as a solicitor to transact insurance

Uniform Simultaneous Death Act

has been adopted by all states and provides that when the insured and primary beneficiary die as the result of the same event and the order of death cannot be determined, it is assumed the insured died last, protecting their secondary beneficiary or heirs.

Conservation

includes any attempt by the existing insurer or agent to deter a policyowner from the replacement of existing life insurance or an annuity. This does not include late payment reminders or reinstatement offers.