FI 444 Exam 2

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capitilization of earnings method - life insurance needed after tax

(income - taxes - after tax - personal consumption) / (1. risk free rate(discount rate) / 1. inflation rate) to find personal consumption do (after tax income * given personal consumption)

dividend options

1. cash 2. reduced premium 3. accumulate at interest 4. paid up dividend additions 5. one year term

Facts relevant in selecting the proper life insurance

1. client profile 2. client goals and objectives 3. survivors needs 4. estate liquidity 5. risk tolerance 6. existing insurance 7. amount of insurance needed

Single premium deferred annuities/ flexible premium deferred annuities - fixed - disadvantages

1. contract may fail to remain competitive 2. may have to Surender penalty

Types of life insurance - term life insurance - limitations

1. cost prohibitive at older ages - increased premiums based on age -immpractical for old people 2. no savings feature (is found in ordinary whole life policy) 3. No lifetime coverage

Facts relevant in selecting the proper life insurance - estate liquidity, factors that shrink an estate after death

1. decedent's debt 2. probate costs 3. administrative costs 4. federal and estate taxes 5. inheritance tax

advantages of variable annuities

1. diversification 2. guaranteed death benefit 3. riders that protect from downside loss 4. can dollar cost average

advantages of single premium immediate annuitys

1. ensure lifetime of income 2. protect the principal from creditors 3. can include a COLA 4. allows the remaining portfolio to accept higher risk 5. tax is predictable 6. investment risk is transferred to insurance

standard provisions of insurance policies

1. entire contract clause 2. owners rights 3. beneficiary designations 4. grace period 5. suicide clause 6. policy loans 7. reinstatement clause 8. incontestability clause 9. misstatement of age clause

determining life insurance - human life value method - calculation

1. find annual earnings - annual tax by income X tax rate 2. find personal consumption (after tax income X consumption) by (annual earnings - taxes) X consumption % 3. find family share of earnings by income - (income tax +personal consumption) 4. calculate remaining work life expectancy by retirement age - current age 5. FV = 0 PMT = FSE interest rate = ((1.discount rate / 1.inflation rate)-1) N=RWLE find PV

types of life insurance - whole life insurance advantages

1. fixed premiums 2. tax deferred accumulation (no income tax on cash value of policy 3. Lifetime coverage

Types of life insurance - universal life insurance limitations

1. flexible premium - if you miss a premium payment the next one increases 2. fewer guarantees - the value of the policy can go to zero if the right amount of premiums are not paid

Types of life insurance - Universal life insurance advantages

1. flexible premium 2. flexible death benefit 3. current assumptions - is often higher then whole life policy

The next steps of finding life insurance needed

1. identifying goals 2. identify resources 3. identify economic assumptions 4. considering insurability

Types of life insurance -whole life insurance limitations

1. inflexible premiums (premiums are always the same 2. gradual cash value growth (cash value is small at the beginning of the policy) 3. surrender charges 0 insurer can be charged for canceling whole life policy

section 1035 exchange rule

1. life insurance can be changed for another life insurance contract or for an endowment annuity or long term care insurance if the policy is on the life of the same person 2. endowment contracts can be switched when the beginning date for regular payments payments is no later than the original beginning date for regular payments 3. can trade annuity contracts for another one 4.can trade qualified long term care contracts for another

Types of life insurance - term life insurance - advantages

1. maximum coverage per premium dollar 2. meets temporary need for coverage 3. protects insurability - can get a large amount of coverage with limited

disadvantages of single premium immediate annuities

1. most benefits are fixed and do not account for inflation 2. can be more expensive then life only annuities 3. principal not available for emergencies 4. if the insured dies too early they cannot get back their original investment

how important is it for an individual to have life insurance based on their profile? - a person who is married but does not have kids?

1. must see how much extra resources an individual has to help avoid causing a financial hardship to the surviving spouse 2. is the spouse self-supporting enough to maintain satisfactory standard of living (maker her own income) 3. if the spouse needs money, how long will she need it for (how long until they begin to receive social security and other income benefits)

the common goals of life insurance

1. pay off debt 2. replace income 3. Fund college education needs 4. Final expenses (funeral costs, etc.)

disadvantage of annuities

1. tax penalties for early withdrawals 2. bad liquidity 3. fees for managing 4. no long term capital rates.

Variable universal life

A combination of the features of variable life insurance and universal life insurance under the same contract. Benefits are variable based on the value of equity investments, and premiums and benefits are adjustable at the option of the policyholder.

Non-participating policy

A life insurance policy that is not eligible to receive policy dividends.

Facts relevant in selecting the proper life insurance - existing insurance

If the client currently relies on their employer to cover insurance then it would be wise to consider getting an individual policy that is more permanent but can be expensive

Term life insurance

Insurance that provides financial protection from losses resulting from a death during a definite period, or term. (example, 10 year term, 1 million dollar policy), once that term is over then it can either be ruined or expired

Why get a variable life insurance policy and risk?

Policy holders risk giving up a guaranteed stated cash value in exchange for the possibility of enhanced death benefits and cash values

Facts relevant in selecting the proper life insurance - client goals

What specific sums does the client want to leave to a family member or charity?

dividend options - one year term option

a policy owner can elect to have the annual dividend buy one year term insurance - allows for a small dividend to buy a much larger amount of death benefit protection

Single premium deferred annuities/ flexible premium deferred annuities - fixed - advantages

allows the individual to receive a better fixed return than managing fixed investments in a CD 2.accelerates savings growth due to being tax defered 3. taxed at lower ordinary rates 4.no min floor

Universal life insurance carateristics - flexible premium payments

allows the policy owner to determine when and in what amounts of premium payments to make, can be stopped temporarily and then resumed later

universal life insurance option A

also known as the level death benefit option - pays a level death benefit based on the net amount at risk - here the net amount at risk is the difference between the cash value and the death benefit - when the NAR decreases the cash value increase

tax implications of MEC

any withdrawals from the policy are taxed as ordinary income at a 10% early withdrawal penalty if accessed before 59.5 - but the death benefit remains income tax free

Single premium deferred annuities/ flexible premium deferred annuities

based on the accumulation of funds more than one year rather than immediate payment benefits come in 3 types 1. fixed annuities 2. variable annuities 3. indexed

Facts relevant in selecting the proper life insurance - investment Risk tolerance - if the client has low-to-moderate risk tolerance

client should get either whole (permanent) or universal life insurance

What has in the client profile has a direct affect on determining the cost of life insurance?

clients health

Modified endowment contracts

contract becomes classified as a MEC if the policy owner deposits the equivalent of more than total net annual premium payments at any time during the first seven years - becomes this policy if it fails the seven-pay tests and becomes subject to special taxes and penalties - once a policy qualifies as a MEC it cannot be changed

Joint life policies

covers two or more people can be either first-to-die policies(survivorship polices) or second to die policies

variable annuities

created on the theory that equity market will outperform inflation and fixed interest rates over time - each payment goes into account similar to a mutual fund

Annuities

created to address individuals outliving their money

how to calculate net amount at risk

death benefit - cash value

whole life insurance - variable life insurance

designed to combine the protection and savings functions of traditional life insurance with the growth potential of mutual fund type investments - the cash value is not guaranteed and invested in a separate account - has fixed premiums but cash value relies on the contracts earnings - has a guarentee that the death benefit will never be less than initial face amount - premiums are higher than a normal whole life

whole life insurance - graded premium life

designed to ease people into whole life premiums - premiums begin low in the first year then increase each year for the first five to seven years, at this point it remains level for the life of the insured (level premium becomes similar to traditional whole life policy that could be purchased a year or two before the ultimate premium is reached)

disadvantages of universal life insurance

do to the premiums being flexible, the policy holder runs the risk of the policy lasting by having premium payments be under the cash surrender value and unable to pay thee deposit for additional premium

standard provisions of insurance policies - reinstatement clause

follows the grace period clause - provides that once the policy has lasted, the owner may reinstate it by paying back premiums or reinstating any policy loans that existed at the time of lapse with proof of insurability satisfactory to the company

term life insurance - decreasing term life insurance

form of term life insurance that the premium remains level but the amount of the death benefit decreases - typically 15 or 30 year policies - can be tied to mortgages but are uncommon

Universal life insurance

gives policy owners the ability to adjust premium, death benefit, and cash value to meet their financial goals - does not have a structured premium requirement -

The next steps of finding life insurance needed - identifying goals

goals can include 1. providing liquidity at death for the estate 2. establishing an income fund for the dependents 3. establishing an education fund 4. accounting for final expenses 5. providing an adequate emergency fund

variable annuities - guaranteed minimum income benefit

guarantees a minimum income to the annuity owner

guaranteed min withdrawal benefit

guarantees that their will be a return on principle or protected systematic withdrawals over a specific time period

Single premium deferred annuities/ flexible premium deferred annuities - fixed

has a fixed payment with a guaranteed fixed interest rate minimum and pays an excess current rate based on market conditions - has annual fees and the ability to make withdrawals with a 10% penalty fee

Why is it good to have term life insurance?

helps to give a higher pay out for a lower premium then whole or permanent life insurance

The next steps of finding life insurance needed - identifying resources

identify the clients available resources to find if the client has adequate cash flow to afford life insurance - by looking at financial statements it can be found how much insurance is needed to pay off debt

policy loan example

if someone borrows 1000 at 8% for a year and interest due is charged in arrears, it will be 80$ at the end of the year.

Modified endowment contract example

if the annual premium is 2,000 dollars on a insurance policy then deposits in year 3 cannot exceed $6,000

standard provisions of insurance policies - misstatement of age clause

if the insured turns out to be older or younger than indicated on the application the benefit will be adjust to provide the amount the premium would have provided at the correct age

Facts relevant in selecting the proper life insurance - client profile

includes age, income, marital status, health, savings, and investment levels

capitilization of earnings method - initial general life insurance needs calculation

income/ risk free rate

qualified longevity annuity contracts

insurance option that ensures retirees have a stream of regular income othoughout their advanced years

whole life insurance

insurance that provides a guaranteed death benefit for the life of the insured that requires payments made until death or policy maturity

Facts relevant in selecting the proper life insurance - estate liquidity, what kind of insurance is best to deal with this?

is insurance needed to provide estate liquidity at death? - there are multiple factors that must be paid in cash that can shrink inheritance and someones estate - because this is such a long term need permanent insurance is the preferred needed

participating policy

life insurance that provides policy dividends; also called a par policy

registered index-linked annuities

like EIAs use a index/call option creeping strategy to determine cash value of the annuity

The next steps of finding life insurance needed - consider insurability

make sure that clients take physical exam for insurance while they are still health to avoid risk of not being approved for life insurance

how important is it for an individual to have life insurance based on their profile? - a person who is single without dependents

may not need insurance if they have enough recourses to pay their final expenses ( including debts, last illness expense, funeral expenses, and probate costs

Universal life insurance carateristics - unbundled sstructure

means the contract is broken down into coronets so that the policy owner knows exactly where premium dollars age going. helps to determine the interest rate on the policies cash value

how important is it for an individual to have life insurance based on their profile? - a person who has people who are economically dependent on them (kids, spouse)

need life insurance to help the dependents

equity indexed annuities

offer growth potential of the stock market with downside protection of a guaranteed annuity - have charactoristics of both fixed and variable annuities - have both fixed guaranteed minimum interest rate and an interest rate tied to an market index - more expensive than index inuities

dividend options - reduced premium

on the policy anniversary the premium will be reduced by the dividend paid

dividend options - cash

paid to the owner in cash by a direct deposit or check

Join life policy - first to die policy

pays one of the two covered people - if it is between two spouses and one dies then the benefit goes to the survivor - helps to cover the risk of 2 people on one contract - is more expensive than the cost of insuring one person but less expensive then 2 polcies

Join life policy - second to die

pays when the last person covered dies - useful in estate tax planing when the unlimited marital deduction has been used - generally lower than the cost of two separate policies - useful when one insured is highly rated and older

Term life insurance - level term

policies premiums are guaranteed to stay the same for a period of time ranging from 5 to 30 years - the longer the guarantee time for the premium, the higher the premium costs

Universal life insurance carateristics -adjustable death benefits

policy owners can increase or decrease the face amount of the policy according to their changing needs

whole life insurance - modified whole life

policy preceded by a period of term insurance - premiums begin low and similar to traditional term life insurance but then increase to be similar to traditional whole life insurance

deferred income annuity

provide an income stream that begins at an advanced age and continues throughout the individuals life

Annually renewable term insurance

provides death protection for one year at a time that can be renewed each year with the payment of the premiums due - premiums begin low and slowly begin to increase with age - policy are normally renewable until age 70

universal life insurance option B

provides for an increasing death benefit which is equal to a constant net amount at risk plus the accumulated cash value - the net amount at risk remains level throughout the term - monthly mortality cost increase with age and requires greater funding then option A

single premium immediate annuity

provides guarantee income for the life of the annuitant through monthly payments

standard provisions of insurance policies - policy loans interest rate

rate can be fixed or variable, normally it is used on a variable rate

Capitialization of earnings method

requires purchase of sufficient life insurance to provide the future need entirely from the investment income without liquidation of the capital - preserves the capital

dividend options - accumulate at interest

similar to a savings account - insurance holds the dividend in a separate account an pays a current rate of interest on the accumulated dividends

determining life insurance needs - multiple of salary method

simplest method - want "six eight or ten times salary" rule - younger clients wants higher multiplier than older

what is always a MEC?

single premium life policies

dividend options - paid up additions

small amount of insurance is purchased that has a cash value equal to the dividend without any medical or other underwriting required

standard provisions of insurance policies - grace period

states that premiums received within 30 or 31 days after the due date are treated as through received on time, if premiums are not received in that time frame the policy will lapse

standard provisions of insurance policies - entire contract clause

states that the policy and the attached application constitutes the entire contract - changes to the contract must be made in writing and signed by an officer of the company

1035 exchange

switching to a different life insurance policy when a different cash value coverage is needed without triggering a taxable event - can only be used in certain situations

guaranteed renewable

the insured has the right to renew the policy to the age specified in the policy - company does not have the right to change the. premium unless their is a change in policy class - company can't raise rates or discriminate

Facts relevant in selecting the proper life insurance - amount of insurance needed - if need a large amount

they should get term insurance because it is less expensive with higher returns as permanent insurance (whole life) can be expensive, giving less returns and leaves a risk exposure

Facts relevant in selecting the proper life insurance -investment risk tolerance - if the client has moderate to high risk tolerance

they should get variable life insurance or variable universal life insurance because they provide returns that fluctuate according to the performance of underlying sub accounts

Facts relevant in selecting the proper life insurance - personal risk management Risk tolerance - if the client has a moderate to high personal risk management

they want term insurance because they would be willing to assume the risk of being unable to pay increased future premiums

The next steps of finding life insurance needed - identify economic assumptions

to find how much is needed must look at 1. inflation rate 2. and what after-tax rate of return must be determined - must be conservative when making assumptions to avoid risking insolvency

The primary purpose of life insurance

to provide funds to others in the event of the insureds death

standard provisions of insurance policies - policy loans

two types of policy loans can be made against cash value policy 1. stand policy loans and 2. APLs - allows policy owner to borrow the entire cash value of a policy, - an amount that is equal to the interest due on the next policy anniversary

guarantee lifetime withdrawal benefit

used by 70% of annuity buyers - guarantees the right to withdrawal up to a specified percentage each year for life

determine life insurance needs - human life value method

using projected future earnings as the basis for measuring life insurance investment needs - projects income throughout remaining life work expectancy, a discount rate adjusted for inflation using risk free rate, and determine the present value of the persons future earnings

Facts relevant in selecting the proper life insurance - survivors needs

what do they need for 1. an education fund and required amount 2. what level of income is wanted for dependents 3. what retirement income fund do they want for spouse? 4. what is the right amount for postmodern emergency expenses?

whole life insurance - limited pay life insurance policies

whole life insurance policies with a shorter premium-paying premium - premiums can cease at a point while the death benefit continues for life - has higher premiums than traditional whole life products

whole life insurance - single premium whole life

whole life insurance policy with a lump sum payment and no further required premiums

can a policy become a MEC after the first 7 years?

yes, if there is any change on the policy, addition of riders, or increase of coverage the 7 year time limit restarts


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