Risk and Insurance Final Exam
Fixed annuity income payments can be paid immediately, or at a future date, what are the 2 options?
1. immediate annuity 2. deferred annuity
As for the definition of disability, what are the 2 characteristics of "own" occupation?
1. insured is considered disabled if he/she is unable to perform every major duty of won occupation 2. most generous and expensive definition of disability
As for the definition of disability, what are the 2 characteristics of "any" occupation?
1. insured is considered disabled is he.she is unable to perform the duties of any occupation for what he/she has "education, training, and experience" 2. takes into consideration prior occupation and earnings
What are the 2 disadvantages of settlement payments?
1. interest rates offered by insurers may be lower than rates offered elsewhere 2. the settlement agreement may be inflexible and restrictive
What are 4 common forms of individual coverages?
1. major medical insurance 2. health savings accounts 3. long-term care insurance 4. disability-income insurance
What are the 4 ways group insurance differs from individual insurance?
1. many people are covered under one contract; a master contract is formed between the group and insurer 2. coverage costs less than comparable insurance purchased individually 3. individual evidence of insurability is not required 4. experience rating is used
What are the 4 characteristics of variable universal life insurance?
1. most are sold as investments or tax shelters 2. the policyowner decides how the premiums are to be invested 3. the policy does not guarantee a minimum investment rate or minimum cash value 4. these policies have relatively high expense changes, including front-end loads for sales commission, back-end surrender charges, and investment management fees
The fixed annuity owner has a choice of annuity settlement offers, what are the 8 options?
1. most deferred annuities are not annuitized 2. under the cash option, the funds can be withdrawn in a lump sum or in installments 3. life annuity (no refund) option 4. life annuity with guaranteed payments 5. installment refund option 6. cash refund option 7. joint-and-survivor annuity 8. inflation-indexed annuity option
What are the 4 types of whole life insurance?
1. ordinary life 2. variable life 3. universal life 4. variable universal life
An HSA Investment account in a qualified plan receives favorable tax treatment, what are the 2 characteristics?
1. participants pay premiums with before-tax dollars 2. investment earnings accumulate tax-free
Who are individual medical expense plans purchased by? (3)
1. people who are not employed 2. retired workers 3. college students
Most term policies are renewable for additional periods, what are the 2 characteristics?
1. premium increase at each renewal 2. to minimize adverse selection, many insurers have an age limitation beyond which renewal is not allowed
What are the characteristics of the "waiver of premium" clause?
1. premium is waived while receiving disability benefits 2. serves as an "extra" disability benefit equal to the cost of the DI premium
What are the 3 factors to calculate the capital retention approach?
1. prepare a personal balance sheet 2. determine the amount of income-producing capital 3. determine the amount of additional capital needed to meet the family needs
What are 3 characteristics of the incontestable clause?
1. protects the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued 2. the insurer has two years to detect fraud 3. the insurer can contest a claim after the incontestable period in limited circumstances
What are the four characteristics of group term life insurance?
1. provides low-cost protection to employees 2. coverage is yearly renewable term 3. amount of coverage can be based on the worker's earnings, position, or it can be a flat amount for all 4. coverage usually ends when the employee leaves the company (cannot convert to an individual cash value policy)
Of the provisions of the Affordable Care Act, what are 4 provisions that apply to health insurers?
1. retention of coverage until age 26 2. lifetime limits and annual limits prohibited 3. preexisting condition limitations prohibited 4. guaranteed access to health insurance
What are 2 characteristics of the ownership clause?
1. rights include naming beneficiaries and surrendering the policy for its cash value 2. the policyholder can designate a new owner by filing an appropriate form
What are the 2 types of deferred annuities?
1. single-premium deferred annuity 2. flexible-premium annuity
Life insurance contracts do not contain many exclusions, what are 3 of them?
1. suicide excluded for two years 2. insurers might insert war clause to exclude payment if the insured ides as a direct result of war 3. some policies contain aviation exclusions
Life insurance policies can be classified in 2 general categories, what are they?
1. term insurance 2. cash-value life insurance
What are the downfalls of term life insurance? (2)
1. term insurance premiums increase with age at an increasing rate and eventually reach prohibitive levels 2. term insurance is inappropriate if you wish to save money for a specific need
What are the 3 times in which term insurance is appropriate?
1. the amount of income that can be spent on life insurance is limited 2. the need for protection is temporary 3. the insured wants to guarantee future insurability
What are the 3 characteristics of Roth IRA?
1. the annual contributions to a Roth IRA are not tax deductible 2. the investment income accumulates income tax free 3. qualified distributions are not taxable under certain conditions
How much are income payments limited to your gross earnings?
60%-80%
Annuities and Individual Retirement Accounts
Annuities and Individual Retirement Accounts
Employee Benefit: Group Life and Health Insurance
Employee Benefit: Group Life and Health Insurance
When did the full law become effective?
January 1, 2015
Life Insurance
Life Insurance
Life Insurance Contractual Provisions
Life Insurance Contractual Provisions
True/ False: Another characteristic of ordinary life insurance is the accumulation of cash surrender values
True
True/False: A benefit trigger must be met to receive benefits. Either, the insured is unable to perform a certain number of activities of daily living (ADLs), or the insured needs substantial supervision to be protected against threats to health and safety because of a severe cognitive impairment
True
True/False: A life insurance policy is freely assignable to another party
True
True/False: Beginning in 2014, the Act expands Medicaid (for participating states) to include adults with incomes up to 138 percent of the federal poverty level
True
True/False: Beginning in 2015 (delayed from 2014), employers with 50 or more full time equivalent employees must provide healthcare or pay a $2,000 penalty on all employees working 30 hours or more
True
True/False: Distributions from a traditional IRA before age 59.5 are considered premature, and subject to a 10% tax penalty unless condition apply, e.g., death or disability
True
True/False: During the eligibility period, the employee can sign up for coverage without furnishing evidence of insurability (no questions asked)
True
True/False: Each plan has annual out-of-pocket limits that limit the amount insureds must pay in the form of deductibles, coinsurance, copayments, etc.
True
True/False: In ordinary life insurance, premiums are level throughout the premium-paying period
True
True/False: The financial impact of total disability on present savings, assets, and ability to earn an income can be devastating
True
True/False: The policy owner can choose among several option for paying the policy proceeds or the beneficiary may be granted the choice
True
True/False: most term policies are renewable for additional periods
True
All states have standard nonforfeiture laws. What are the rights of the policy owner?
a policy owner has a right to the policy's accumulated cash value
What amount and when is whole life insurance paid?
a stated amount is paid to a designated beneficiary when the insured dies, regardless of when the death occurs
What is a health savings account?
a tax exempt account established exclusively for the purpose of paying qualified medical expenses
What is industrial life insurance?
a type of life insurance in which the policies are sold in small amounts and an agent of the company collected the premiums at the insured's home (not as common now)
What is an elimination period?
a waiting period during which time benefits are not paid
What does this reduce?
adverse section against the insurer
What is the cost of living adjustment?
after disability benefits begin, the benefit increases each year based on the rise in the CPI (consumer price index) or other inflation measure
What is an absolute assignment?
all ownership rights in the policy are transferred to a new owner
What is a spousal IRA?
allows a spouse who is not in the paid labor force or a low-earning spouse to make a fully deductible contribution to a traditional IRA
Included in additional life insurance benefits, what is the accelerated death benefit rider?
allows insureds who are termianly ill to collect part or all of their insurance benefits before they die
What is a flexible-premium annuity?
allows the owner to vary the premium payments
What is a policy loan provision?
allows the policy owner of borrow the cash value
What is a traditional IRA?
allows worker to take a tax deduction for part or all of their IRA contributions
What is an individual retirement account (IRA)?
allows workers with taxable compensation to make annual contributions to a retirement plan up to certain limits and receive favorable income-tax treatment
What does the new law create?
an Affordable Insurance Exchange
What is a calendar-year deductible?
an aggregate deductible that has to be satisfied only once during the calendar year
What is variable universal life insurance?
an important variation of whole life insurance
What is an automatic premium loan provision?
an overdue premium is automatically borrowed from the cash value after the grace period expires
What is a Roth IRA?
another type of IRA that provides substantial tax advantages
What is the current rate?
based on current market conditions, and is guaranteed only for a limited period
What is premature death?
can be defined as the death of a family head with outstanding unfulfilled financial obligations
What is a joint-and-survivor annuity?
pays benefits based on the lives of two or more annuitants. The annuity income is paid until the last annuitant dies
What is a variable annuity?
pays lifetime income, but the income payments vary depending on common stock prices
What is credit life?
pays off a loan if the borrower dies; the bank or lending institution is the beneficiary
What is a fixed annuity?
pays periodic income payments that are guaranteed and fixed in amount
What is group medical expense insurance?
pays the cost of hospital care, physicians' and surgeons' fees, and related medical expenses
What is the reinstatement period?
permits the owner to reinstate a lapsed policy
Included in additional life insurance benefits, what is the guaranteed purchase option?
permits the policy owner to purchase additional amounts of life insurance at specified times in the future without evidence of insurability
What does the new law provide?
premium credits to eligible individuals to make coverage more affordable
What happens during the accumulation period prior to retirement?
premiums are credited with interest
What is the capital retention approach?
preserves the capital needed to provide income to the family
What does the entire-contract clause prevent?
prevents the insurer from making amendments without the policyholder's knowledge
Under a term insurance policy, protection is temporary. What are the characteristics?
protection expires at the end of the policy period, unless renewed
What is partial/residual disability benefit?
protection for either the partial inability to work or perhaps the ability to work, but a reduction of income
What is a guaranteed death benefit?
protects the principal against loss due to market declines
What is a life annuity (no refund) option?
provides a life income to the annuitant only while the annuitant remains alive
What is a deferred annuity?
provides income payments at some future date
What is disability-income insurance?
provides income payments when the insured is unable to work because of sickness or injury
What is group life insurance?
provides life insurance on a group of people in a single master contract
What is an inflation-indexed annuity option?
provides periodic payments that are adjusted for inflation
What is term insurance?
provides temporary protection
What is the purpose of coinsurance provision?
purpose is to reduce premiums and prevent overutilization of policy benefits
What is a coinsurance provision?
requires the insured to pay a certain percentage (typically 20-25%) of eligible medical expenses in excess of the deductible
What is the major limitation of ordinary life insurance?
some people are still underinsured after the policy is purchased
What is a specific beneficiary?
specifically identified
What is the suicide clause?
states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid
What is the incontestable clause?
states that the insurer cannot contest the policy after it has been in force two years during the insured's lifetime
What is the entire-contract clause?
states that the life insurance policy and attached application constitute the entire contract between the parties
How are plans estabished?
stop-loss insurance whereby a commercial insurer will pay claims that exceed a certain limit
What did the Supreme Court rule?
that a state cannot be covered into expanding its Medicaid program under the act
What is the needs approach?
the amount needed depends on the financial needs that must be met if the family head should die
What is the human life value approach?
the amount needed depends on the insured's human life value, which is the present value of the family's share of the deceased breadwinner's future earnings
What is the reduced paid-up insurance option?
the cash surrender value is applied as a net single premium to purchase a reduced paid-up policy (reduce value built still whole life)
What is self insurance?
the employer pays part or all of the cost providing health insurance to the employees
What is a decreasing term insurance policy?
the face value gradually declines each year
What is a primary beneficiary?
the first entitled to receive the policy
What is the guaranteed rate?
the minimum interest rate that will be credited to the fixed annuity
What is the extended term insurance option?
the net cash surrender value is used as a net single premium to extend the full face amount of the policy into the future as term insurance (longer term at same value but ends before death)
What is a beneficiary?
the party named in the policy to receive the policy proceeds
What is a nonforfeiture value or cash surrender value?
the payment to a withdrawing policy owner
What is the participation rate?
the percent of increase in the stock index that is credited to the contract
What is a liquidation period?
the period in which funds are paid out, or annuitized
What is an annuitant?
the person who receives the payment
What is a convertible policy?
the policy can be exchanged for a cash-value policy without evidence on insurability
What does the ownership clause do?
the policy owner possesses all contractual rights in the policy while the insured is living
What is a collateral assignment?
the policy owner temporarily assigns a life insurance policy to a creditor as collateral for a loan
What is the attained-age method?
the premium charged for the new policy is based on the insured's attained age at the time of conversion
What is the original-age method?
the premium charged for the new policy is based on the insured's original age when the term insurance was first purchased
What is the fixed period option?
the proceeds are paid to a beneficiary over some fixed period of time
What is the interest option?
the proceeds are retained by the insurer, and interest is periodically paid to the beneficiary
What does an annuity protect against?
the risk of excessive longevity
What happens to accumulation units at retirement?
they are converted into annuity units - the number of annuity units remains constant during the liquidation period, but the value of each unit changes with common stock prices
How is the elimination period determined?
time deductible - satisfaction of the elimination period is required before any benefits are received - the typical elimination period is 1-6 months - the shorter the elimination period, the higher the premium
How long does a term to age 65 policy provide protection for?
to age 65, at which time the policy expires
What is the fundamental purpose of an annuity?
to provide a lifetime income that cannot be outlived
What is the purpose of a variable annuity?
to provide an inflation hedge by maintaining the real purchasing power of the payments
What are premiums used for?
used to purchase accumulation units during the period prior to retirement - the value of an accumulation unit depends on common stock prices at the time of purchase
When is an ordinary life policy appropriate?
when lifetime protection is needed
How long do you have to reinstate a policy from when it lapses?
you can reinstate a policy within 3-5 years of when it lapses
What are the 3 common benefit options?
1. "Waiver of premium" clause 2. Partial/residual disability 3. Cost of living adjustment (COLA)
As for the definition of disability, what are the 2 characteristics of "own/any" occupation?
1. "own" occupation for a period of time, then "any" occupation definition 2. premium is between "own" and "any" occupation definition
What are the 4 characteristics of Blue Cross and Blue Shield plans?
1. Blue Cross plans cover hospital expenses 2. Blue Shield plans cover physicians' and surgeons' fees 3. Most plans include both BC and BS 4. In most states, plans operate as non-profit organizations (some have converted to for-profit states to raise capital)
What are the 2 basic types of IRA's?
1. Traditional IRA 2. Roth IRA
What are the 3 main forms of long-term care insurance?
1. a facility-only policy 2. a home health care policy 3. a comprehensive policy
What are 2 characteristics of universal life insurance?
1. after the first premium, the policyholder decides the amount and frequency of payments 2. most policies have a target premium, but the policyowner is not obligated to pay it
An equity-indexed annuity is a fixed deferred annuity that does 2 things, what are they?
1. allows the owner to participate in the growth of the stock market 2. provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term
What are the 6 things to consider in the calculation of the needs approach?
1. an estate clearance fund, cash needed for burial expenses, uninsured medical bills, and taxes 2. income needed for the readjustment period, a 1-2 year period in which the family adjusts to its new living standard 3. income needed for the depending period until the youngest child reaches age 18 4. life income to the surviving spouse, including income during and after the blackout period 5. special needs. e.g., funds for college education and emergencies 6. retirement needs
When can premiums be paid? (4)
1. annually 2. semiannually 3. quarterly 4. monthly
Employees must meet certain participation requirements, what are they? (4)
1. be a full time employee 2. satisfy a probationary period 3. apply for coverage during the eligibility period 4. be actively at work when the coverage begins
What were the 2 characteristics of the individual mandate of Obamacare?
1. beginning in 2015, most citizens and legal residents must have qualifying health insurance or pay a financial penalty 2. the new law also provides premium tax credits for eligible individuals
Cost (premium) is a function of what? (3)
1. benefit duration 2. elimination period 3. disability
What are major medical insurance plan characterized by? (7)
1. broad coverage of reasonable medical expenses 2. unlimited maximums 3. a deductible (typically a calendar year) 4. a coinsurance provision 5. the insured's total out-of-pocket spending is limited by the stop-loss limit after which the insurer pays 100% of eligible expenses 6. plans may have interval limits for some types of expenses 7. some plans have incorporated elements of managed care
What are the 5 most common settlement options?
1. cash 2. interest option 3. fixed period option 4. fixed amount option 5. life income option
Policy owners have 3 nonforteiture options, what are they?
1. cash value (just take the cash value and spend how you want) 2. reduced paid-up insurance option 3. extended term insurance option
Group medical expense insurance is available through what 4 ways?
1. commercial insurers 2. Blue Cross and Blue Shield Plans 3. Self-insured employer plans 4. Managed care organizations
What are the 3 things to consider in determining the amount needed under the human life value approach?
1. estimate the individual's average annual earnings over his or her productive lifetime 2. deduct taxes, insurance premiums, and self-maintenance costs 3. using a reasonable discount rate, determine the present value of the family's share of earnings for the number of years until retirement
To reinstate a lapsed policy, what are the 4 requirements that must be met?
1. evidence of insurability is required 2. all overdue premiums plus interest are paid 3. any policy loans are required or reinstated 4. the policy was not surrendered for its cash value
What are the 3 major types of annuities sold today?
1. fixed annuity 2. variable annuity 3. equity-indexed annuity
What do employee benefits include? (4)
1. group life, medical and dental insurance 2. paid holidays, vacations, medical leave 3. educational assistance, employee discounts 4. employer contributions to Social Security and Medicare
What are the 6 characteristics of a health savings account?
1. the beneficiary must be covered under a high deductible health plan to cover catastrophic medical bills 2. the account holder can withdraw money from the HAS tax-free medical costs 3. contributions and annual out-of-pocket expenses are subject to maximum limits 4. an HSA investment account in a qualified plan receives favorable tax treatment 5. proponents argue that HSAs can help keep health care costs down because consumers will be more sensitive to costs, will avoid unnecessary services, and will shop around 6. critics argue that HSAs will encourage insureds to forgo preventative care
Applicants have a choice of 4 benefit categories, what are they?
1. the bronze plan covers 60 percent of the benefit costs 2. the silver plan covers 70 percent of the benefit costs 3. the gold plan covers 80 percent of the benefit costs 4. the platinum plan covers 90 percent of the benefit costs
Due to premature death, what are the 4 costs that could be experienced?
1. the deceased's future earnings are lost forever 2. additional expenses are incurred; e.g. funeral expense, uninsured medical bills, and estate settlement costs 3. some families will experience a reduction in their standard of living 4. noneconomic costs are incurred, e.g. grief
Dividends come from three main sources, what are they?
1. the difference between expected and actual mortality experience 2. excess interest earnings 3. the difference between expected and actual operating expenses
What are the underwriting principles that group insurers observe? (6)
1. the group should not be formed for the sole purpose of obtaining insurance 2. there should be a flow of persons through the group 3. benefits should be automatically determined by a formula 4. a minimum percentage of eligible employees must participate 5. individual members should not pay the entire cost 6. the plan should be easy to administer
What are the 3 approaches that can be used to estimate the amount of life insurance to own?
1. the human life value approach 2. the needs approach 3. the capital retention approach
What are the 3 factors that make the purchase of life insurance financially justified?
1. the insured has earned income and others are dependent on those earnings for financial support 2. the insured performs services for the family that would need to be replaced upon the insured's death (e.g. childcare, cooking, family logistics) 3. resulting expenses are incurred; e.g., funeral
What are the 4 characteristics of a traditional IRA?
1. the investment income accumulates income tax free on a tax deferred basis 2. distributions are taxed as ordinary income 3. the participant must have earned income during the year, and must be under age 70.5 4. for 2017, the maximum annual contribution is $5,500 or 100% of earned compensation, whichever is less
What are the 2 characteristics of a reinstatement provision?
1. the policy must be reinstated within a certain period 2. although it may require a large outlay of cash, it may be cheaper to reinstate a lapsed policy than to purchase a new policy
What are the characteristics of variable life insurance? (3)
1. the premium is level 2. the entire reserve is held in a separate account and is invested in common stocks or other investments 3. cash surrender values are not guaranteed
The policy owner has two options, what are they?
1. the right to borrow the cash value 2. exercise a cash surrender option
A full deduction for IRA contributions is allowed if what 2 characteristics are present?
1. the worker is not an active participant in an employer's retirement plan 2. time workers' modified adjusted gross income is below certain thresholds
How long does benefit duration last?
10 years, 20 years, to age 65 - the longer the benefit the higher the premium
How many employees does it exclude?
30
Health Care Reform; Individual Health Insurance Coverages
Health Care Reform; Individual Health Insurance Coverages
What is the Patient Protection and Affordable Care Act commonly referred to as?
Obamacare
True/ False: An individual annuity purchased from a commercial insurer is a nonqualified annuity
True
What mus be met to receive benefits?
a benefit trigger
What is whole life insurance?
a cash value policy that provides lifetime protection
What is a single-premium deferred annuity?
a deferred annuity purchases with a lump sum
What is the fixed amount option?
a fixed amount is periodically paid to the beneficiary until the principal and interest are exhausted
What is an equity-indexed annuity?
a fixed, deferred annuity
What is variable life insurance?
a fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer
What is universal life insurance?
a flexible premium policy that provides lifetime protection
What is ordinary life insurance?
a level-premium policy that provides lifetime protection
What is a class beneficiary?
a member of a group, e.g. children of the insured
How long is yearly-renewable term insurance issued for?
a one-year period
What is an annuity?
a periodic payment that continues for a fixed period or for the duration of a designated life or lives
Investment income is tax___________________
deferred
What is major medical insurance?
designed to pay a high proportion of the covered expenses of a catastrophic illness or injury
Included in additional life insurance benefits, what is the accidental death benefit rider?
doubles the face amount of life insurance if death occurs as a result of an accident
A life insurance policy contains a grace period. What is a grace period?
during which the policy holder has a period of 31 days to pay an overdue premium
What are employee benefits?
employer-sponsored benefits, other than wages, which enhance the economic security of individuals and families and are part;y or fully paid for by employers
What does the Act require insurers to cover?
essential health benefits
What is the primary distinguishing feature of a universal life policy?
flexible premium
What is the first form that most of us have?
group life insurance
What is cash-value life insurance?
has a savings component and builds cash value
Included in additional life insurance benefits, what is waiver-of-premium provision?
if the insured becomes totally disabled, all premiums coming due during the period of disability are waived
What happens under the reinstatement of age or sex change?
if the insured's age or sex is misstated, the amount payable is the amount that the premiums paid would have purchased at the correct age and sex
If a policy pays dividends, what is it?
participating policy
What is long-term care insurance?
pays a daily or monthly benfit for medical or custodial
What is an installment refund option?
pays a life income to the annuitant - after the annuitant's death, payments continue to a beneficiary until they equal the purchase price
What is a life annuity with guaranteed payments?
pays a life income to the annuitant with a certain number of guaranteed payments or as long as you live
What is the life income option?
installment payments are paid only while the beneficiary is alive and cease on the beneficiary's death (you cannot outline these payments)
What is a cash refund option?
is similar, but pays the beneficiary a lump sum (write check for remaining balance)
What are the primary distinguishing features of a variable life policy?
its investment options
What does the premium loan provision do?
keeps policy from unintentionally lapsing
Will governors expand their Medicaid programs?
many state governors have indicated they will not expand their Medicaid programs because of funding concerns
What is a revocable beneficiary?
means that the policy owner reserves the right to change the beneficiary designation without the beneficiary's consent
What are Blue Cross and Blue Shield Plans?
medical expense plans that cover hospital expenses, physician and surgeon fees, ancillary charges, and other medical expenses
Are premiums income-tax deductible?
no
If a policy does not pay dividends what is it?
nonparticipating policy
What is an irrevocable beneficiary?
one that cannot be changed without the beneficiary's consent
What is an immediate annuity?
one where the first payment is due on payment interval from the date of purchase
