Chapter 4: Premiums, Proceeds, and Beneficiaries

Mortality

means the rate of death. mortality tables help insurance companies predict life expectancy and the probability of death for a given group.

Per Capita

Which means by the head, evenly distributes benefits among the living named beneficiaries

Which of these statements is INCORRECT regarding the federal income tax treatment of life insurance? a. premiums are normally not tax deductible b. cash dividends are normally not taxed c. entire cash surrender value is taxable d. proceeds are received tax-free if here is a named beneficiary

c. entire cash surrender value is taxable explanation: the interest gained is taxable

Interest

since premiums are paid before claims incurred; insurance companies invest the money in an effort to earn interest. -this interest is a primary factor in lowering premium rates

1035 Exchange

-In accordance with section 1035 of the Internal Revenue Code, certain exchanges of life insurance policies and annuities may occur in a nontaxable exchange. -When a cash value life insurance policy is exchanged for another cash value life insurance policy or an annuity for an annuity there will be no income tax on these transactions.

Changing of the beneficiary: Irrevocable

The policy owner may not change the beneficiary without written consent of the beneficiary -the policy owner also cannot borrow against the policy's cash value

C is trying to determine whether to convert her convertible term life policy to whole life insurance using her original age or attained age. What factor would affect her decision the most? a. the cost b. the nonforfeiture options c. the contestable period d. the assignment of ownership

a. the cost

What percent of personal life insurance premium is usually deductible for federal income tax purposes? a. 100% b. 75% c. 50% d. 0%

d. 0%

Expense

Insurance companies have operating expenses. These expenses are factored into the premium rates -this is also known as the loading charge

Death Benefit Proceed aka settlement options

Methods used to pay the death benefit to a beneficiary upon the insured's death -the policy owner may select a settlement option at the time of the policy application and may also change that option at any time during the life of the insured -once selected by policyowner, cannot be changed by beneficiary

Interest Only Option

With the interest only option the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient beneficiary at regular intervals -the insurer usually guarantees a certain rate of interest and will often pay interest in excess of the guaranteed rate

Which of the following best describes a contingent beneficiary? a. person designated by the insured to receive policy proceeds in the event that the primary beneficiary dies before the insured b. person designated by the primary beneficiary's executor receive policyproceeds c. person designated by the state to receive policy proceeds in the event that the primary beneficiary dies d. person designated by the insurance company to receive policy proceeds in the event that the primary beneficiary dies

a.person designated by the insured to receive policy proceeds in the event that the primary beneficiary dies before the insured

Which of the following statements is CORRECT regarding the tax treatment of a lump-sum payment paid to a life insurance policy's primary beneficiary? a. the proceeds which exceed the amount paid in premiums are taxable b. the proceeds are taxable only if the beneficiary's tax bracket has changed from the payout c. all proceeds are considered taxable income in the year they are received d. all proceeds are income tax free in the year they are recieved

d. all proceeds are income tax free in the year they are received

Uniform Simultaneous Death Act

the law will assume that the primary beneficiary died first in a common disaster -this is done to make sure the contingent beneficiary receives the death benefit proceeds

Fixed-Amount Option

-pays a fixed specific amount in installments until the proceeds are exhausted

Spendthrift Trust Clause

Prevents the beneficiaries reckless spending of benefits . by requiring that the benefits be paid in fixed installments

Life-Income Option

Provides the recipient with an income that he or she cannot outlive -installment payments are guaranteed for as long as the recipient lives -the amount of each installment is based on the recipient's life expectancy

Beneficiaries

Who can be one? -there are very few restrictions on who may be named a beneficiary of a life insurance policy. The decision rests solely with the Policy Owner. -A beneficiary is the person to which the policy proceeds will be paid upon the death of the insured. -Could be individuals, businesses, truss, estates, or even charities.

Which statement is true regarding a minor beneficiary? a. normally the death proceeds are required to be held in trust until the beneficiary reaches the age of 21 b. normally a guardian is required to be appointed in the Beneficiary clause of the contract c. the minor must pay the debts of the insured's estate before receiving any of the proceeds d. the minor is entitled to receive the death proceeds immediately

b. normally a guardian is required to be appointed in the Beneficiary clause of the contract

Changing of the beneficiary : Revocable

the policy owner may change a revocable beneficiary at any time without the knowledge or consent of the beneficiary

Lump-sum cash option

upon the death of the insured the policy is designed to pay the proceeds in cash called a lump sum -as a rule this lump sum is not taxable as income

Primary Beneficiaries

-has first claim to the policy proceeds following the death of the insured -policy owner may name more than one primary beneficiary as well as how the proceeds are to be divided

3 Primary factors used in determining premiums

-mortality -interest -expense

Per stirpes

-which means by the bloodline distributes benefits of the beneficiary who died before the insured to the beneficiaries heirs.

K has life insurance policy where her husband is beneficiary and her daughter is contingent beneficiary. Under the common Disaster clause, if K and her husband are both killed in an automobile accident, where would the death proceeds be directed? a. daughter b. husbands estate c. Ks estate d. trust fund

a. daughter

Which settlement option pays a stated amount to an annuitant, but no residual value to a beneficiary? a. interest only b. fixed period c. fixed amount d. life income

d. life income explanation: life income settlement option pays a specified amount to the annuitant with no residual value payable to a beneficiary

The Common Disaster clause provides that if both the insured and the sole named beneficiary were to die in a common accident, which of the following is true? a. this clause provides the payment of proceeds to the insured's estate b. this clause provides the payment of proceeds to the beneficiaries estate c. the estate taxes in the insured's estate may be reduced d. the estate taxes in the beneficiary's estate may be reduced

a. this clause provides the payment of proceeds to the insured's estate

Fixed-Period Option

-aka Period Certain, proceeds will be paid out in equal installments over a specified period of years

Secondary Beneficiary

-aka the contingent beneficiary or tertiary beneficiary has second claim in the even the primary beneficiary dies before the insured. -contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time of the insured's death

A primary beneficiary has died before the insured in a life insurance policy. A contingent beneficiary is also named in the policy. Which of the following will occur when the insured dies? a. proceeds will go to the primary beneficiary's estate b. probate will decide who receives proceeds c. proceeds will go to the contingent beneficiary d. proceeds will go to the insured's estate

c. proceeds will go to the contingent beneficiary

M purchased an Accidental Death and Dismemberment (AD&D) policy and named his son as beneficiary. M has the right to change the beneficiary designation at anytime. What type of beneficiary is his son? a. tertiary b. irrevocable c. revocable d.contingent

c. revocable

Which premium schedule results in the lowest cost to the policy owner? a. semi-annual b. monthly c. quarterly d. annual

d. annual

Calculating Premiums

Once an insurance company determines that an applicant is insurable, they need to establish an appropriate policy premium. -the premium will be used to cover the cost and expenses to keep the policy in force

Which type of life insurance beneficiary requires his/her consent when a change of beneficiary is attempted by the policyowner? a. irrevocable beneficiary b. tertiary beneficiary c. primary beneficiary d.revocable beneficiary

a. irrevocable beneficiary