FINP Exam #2
What are the general rates at which life insurance underwriters categorize you in?
1. Preferred: above average health, lower premiums 2. Standard: average health, standard premiums 3. Table Rated: Below average health, higher premiums
What are the different types of Life Insurance?
1. Term Insurance 2. Universal Life Insurance 3. Whole Life Insurance
Who are the parties in a life insurance contract?
1. The Insured (the individual whose life is covered by the life insurance policy) 2. The Owner (the personal who can exercise the economic right in the policy, and typically pays the premiums on the life insurance policy) 3. The Beneficiary (the person entitled to receive the death benefit)
What are the different approaches for calculating life insurance needs?
1. The human-life value approach 2. The needs approach 3. The capitalized-earning approach
What are the common riders on a life insurance contract?
1. Waiver of Premium Rider (Premium waived if policy owner becomes totally disabled before a specified age) 2. double indemnity rider (doubles the death benefit if death is due to accident) 3. Guaranteed insurability option (GIO, or guaranteed purchase options, GPO) rider (gives the policy owner the right to purchase specified amounts of additional insurance at specified dates without evidence of insurability) 4. Long-Term Care Rider (Provides lifetime benefits for long-term care if the insured is unable to preform a specified number ( usually 2 or 3) of activities of daily living.
What is the average amount of coverage provided by insurance companies for disability insurance?
60 to 70% of their gross incoem
What are the most common nonforfeiture options?
- Cash Surrender Value (insured receives the accumulated cash value when terminating the life insurance policy, Surrender charges may be imposed). - Reduced Paid-Up Insurance (Receives the cash value in the form of a paid-up policy with a smaller face amount) - Extended Term Insurance (Policy owner receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy)
Why would someone need to purchase life insurance?
- Changes as a person moves through the life cycle (Income replacement, financial support for dependents) - Estate Preservation (Medical expenses prior to death, Disposal and ceremonial expense, Probate expenses (liquidity)).
Life Insurance underwriting requirements may include?
- Copies of the applicants medical records from their doctors - An oral swab to check for tobacco or drug use, or the presence of HIV - A paramedical exam - An insurance blood profile (IBP) - a urine specimen - an EKG or electrocardiogram to check basic heart health - A full medical exam by a physician
What are important policy considerations when it comes to disability insurance?
- Coverage must be for sickness and/or accident. - Amount of Coverage - Term (Payments are made to 65 or lifetime of the insured) - Definition of Disability - Elimination Period (180 days is common) - Taxability of Benefits
What are the limitations to term life insurance?
- Exponentailly increasing premiums for older entry or renewal (the mortailtiy cost of the premium increases each year). - Most term polices are lapsed without collection by the insured. - There is no savings component - A term policy may not meet permanent insurance needs.
How is life insurance used during the Conservation/Risk Management phase of the life cycle?
- Fund buy-sell agreements between the owners of the business when one of the owners dies - Provide liquidity for the estate of the business owner so that taxes and administration expenses can be paid without reducing the family inheritance.
What are some of the financial needs that are typically considered when calculating life insurance amount under the needs approach?
- Payment of final expenses, medical care, and adjustment period expenses - Eliminating debt - Funding specific goals, such as education for children - Income needs of the surviving spouse and the family - Retirement needs of the surviving spouse
What can the insured adjust on a universal life insurance policy?
- Premiums - Face Value - Cash Value
How is life insurance used during the Accumulation phase of the life cycle?
- Provide an income stream for the family if the bread winner dies - Pay off existing debts (such as outstanding mortgages, car loan, and personal loans) - Fund financial objectives (such as education for children) - Provide a retirement income for the surviving spouse.
What is a second to die and first to die polices?
- Second to die policies are often used in estate planning to provide liquidity at the death of the second spouse since this is typically when estate taxes for the couple will be due. It names two insureds and pays the death benefit only when the second insured dies - First to die covers two individuals, but the death benefit is paid upon the death of the first individual. They are sometimes used to provide funding to pay off mortgage at the death of the spouse, to establish a fund for children's educational costs when one spouse dies early, or to provide a supplemental pool of capital for the surviving spouse to receive additional retirement income.
How long are the benefits typically for short term and long term disability insurance?
- Short Term (range from one to two years) - Long Term (Benefits begin after short term disability, Policy terms can range: 2, 5, 10 year, or Benefits may continue until normal retirement age or death.)
What are the different policy types of life insurance?
- Term - Whole Life - Variable - Universal - Variable Universal
What are the different ways to measure the need for life insurance?
- The Human Life Value Approach - The Needs Approach the Capitalized Earnings Approach
What are the conditions that deem someone totally disabled and would allow there policy to automatically presume total disability?
- loss of sight in both eyes - loss of hearing in both ears - loss of the use of both hands - loss of use of both feet - loss of the use of one foot and one hand
What is the life-cycle model of financial planning?
1. Asset Accumulation Phase 2. Conservation/ Risk Management Phase 3. Distribution/ Gifting Phase
What are the five options regarding how the dividends will be received or utilized with life insurance?
1. Cash 2. Paid-up additions (increases the death benefit on the policy, accumulate at interest) 3. Increased cash value 4. Reduced premiums 5. One-year term insurance (5th dividend)
What are the three sources of disability insurance benefits?
1. Government (Social Security and Workers Comp) 2. Employers (Sick Leave, Short term Disability and Long Term Disability) 3. Individuals (Personal Policy)
What are the two tests to determine whether a life insurance contract meets the definition of a MEC?
1. Guideline Premium and Corridor Test ( calls for the policy to be tested using actuarial principles and specifies that the premiums can represent non more than a limited portion of the death benefit. 2. The 7 pay test (states that if the cumulative premium payments made on the policy are in excess of the net level premium for the policy during the first seven years (or following a material change to he policy), the life insurance insurance contract will be deemed a MEC.)
What are the different settlement options for the beneficiary for life insurance?
1. Lump Sum Payment 2. Interest Only (allows the beneficiary to keep the death benefit on deposit with the insurance company and receive periodic payments of interest on the policy proceeds) 3. Annuity Payments (Fixed Amount, Life income, Fixed Period, Life Income with period certain, joint and last survivor income)
What are the three basic elements affecting the cost of any life insurance policy?
1. Mortality 2. Expenses 3. Interest
What does Option A of a universal life policy offer?
A flexible premium, adjustable death benefit unbundled life insurance contract. The beneficiary receives the cash value or death benefit. it provides a level death benefit. Meaning that as the cash value accumulation in the policy increases, the amount of death benefit protection decreases since the cash value self-funds a portion of the death benefit.
What is group term insurance?
A popular employee fringe benefit covering eligible employees under one master contract (issued without evidence of insurability). Death benefit fr each employee may be a flat amount or a multiple of salary. Premiums paid by the employer are deductible by the employer. Although employer-paid premiums are an economic benefit to the employee, the first $50,000 of death benefit amount paid for by the employer is tax free to the employee. Premiums for death benefit amount in excess of %50,000 aid for by the employer are taxable to the employees based on the Table 1 rate, reduced by amounts paid by the employee.
What are some of the factors that affect whether a company will issue a life insurance policy and how much it will cost?
Age, Height and weight, gender, general state of health, lifestyle, medical history, financial status, hobbies, driving record, and tobacco use.
What is Group life insurance?
Allows employee to accumulate savings for retirement through cash value of policy. Group whole life insurance is not widely offered by employers. Premiums paid by the employer are taxable income to the employee.
What are Life Insurance Policy Replacements?
An existing life insurance policy is replaced by a newly-issued policy Advantages: - A different type of policy may be needed to changes in the insured needs or financial situation (i.e change from term to permanent for from variable to whole life) - Newer Policies with enhanced features may be available Disadvantages: - Higher premiums due to increased age - High first-year expenses must be paid again, and nonforfeiture values and dividends may be reduced for a period of time. - Will be subject to a new contestability period and suicide exclusion.
What is the cost of living adjustment (COLA) rider in disability insurance?
Benefits increase based on changes in the consumer price index (CPI)
What can the whole life insurance cash value be used for?
Cash value may be used for loan or may be received id the policy is surrendered. If the policy is surrendered, then the insured receives the cash surrender value. The cash surrender value is the cash value less cash surrender charges. Cash values usually have a minimum guaranteed rate of interest. Whole life policies may be participating (receive dividends from insurer) or non-participating (do not receive dividend from insurer)
What is Level-Premium Term Insurance?
Charges a fixed premium each year over a specific period of years (often 5, 10, 15, 20), so the premium does not increase during that period. When a level-term insurance policy is purchased, the premiums paid by the owner will be larger than the premiums on an annual renewable term policy in the earlier years, but will be less in the later years.
What is the "any occupation" definition of disability?
Considered disabled if insured cannot perform the duties of "any occupation" for which educated, experiences, of trained. Now required to use "modified any occupation" Less Expensive Premiums
What is the "own occupation" definition of disability?
Considered disabled if insured cannot perform the duties of his "Own Occupation" More Expensive, ideals for specialized, high paying fields
True or False: Generally, people accumulate death throughout their lives?
False
True or False: Universal life insurance Option A provides for increasing death benefits?
False
What is the reinstatement provisions in a life insurance contract?
If a life insurance policy lapses due to non-payment of premium and expiration of the grace period, the policy may permit reinstatement provided that the requirement specified in the policy are satisfied. The policy will specify that reinstatement without evidence of insurability is available for a short time after expiration of the grace period (usually 31 days), after which evidence of insurability will be required.
What is the social security Rider on a disability insurance contract?
If the insured qualifies for social security disability income, the disability payments from the insurance company are reduced by the amount paid by social security.
What is a policy dividends?
If the life insurance contract is a "participating policy," the policy owner may be entitled to receive dividends. Policy dividends are a non-guaranteed "return of premium" calculated annually based on favorable loss experience, investment performance (in the insurance company's general account), and/ or expenses. Dividends on a life insurance policy are treated as a nontaxable return of part of the owner's premium payment.
What is the capitalized earnings approach?
It is a modification of the human life approach. The modifications include: No need to determine the work life expectancy and the investment returns on the life insurance are presumed to be at the long-term riskless rate. This is a very efficient method to determine the approximate amount of life insurance needed for one who has dependents and life insurance needs.
What is the unholy trinity in Life Insurance?
It is also referred to as the Goodman Triangle. When the owner, insured, and beneficiary are all different parties. When this occurs, the oner of the policy is deemed to have made a taxable transfer or gift to the beneficiary. Planner need to be very careful about potential girl and estate tax consequences of this type of arrangement.
What is a Modified Endowment Contract (MECs)?
It is not really another type of life insurance policy, but rather a cash value life insurance policy that has been funded too quickly. If the policy is a MEC, then withdrawals and loans are taxed on a LIFO Basis. withdrawals and loans taxed as ordinary income until all earnings have been withdrawn. A single premium policy is always a MEC. They are subject to a 10% penalty on taxable withdrawals/loans before the age of 59 1/2
What is a single-premium whole life policy?
It requires the owner to pay a lump sum in return for insurance protection that will extend throughout the insured lifetime. One downside to using a single premium policy is that if the owner receives lifetime benefits form the life insurance policy by borrowing from the cash value, income tax must be paid on the cash received to the extent of the growth on policy cash value.
What is the Human Life Value Approach and how to do you calculate it?
It suggests that the death benefit of a clients life insurance should equal the economic value of his future earnings stream discounted to its present value while considering his tax and consumption patterns. 1. Determine the client's annual earnings. 2. Subtract personal expenses and taxes that the client would have incurred (consumption and taxes). 3. Determine the clients work life expectancy (WLE), or the number or years he/she would have continues to earn income (alternatively stated, the number of years before retirement.) 4. Calculate the future value of the lost earnings for the family (sometimes referred to as the family's share of earnings of FSE) taking into consideration the expected growth rate earnings. 5. Calculate the present value of the family's share of earnings at the inflation rate to determine the human life value.
What is the residual benefit provisions for disability insurance?
It will provide continuing benefits for an insured who return to work but suffers a loss of income due to the disability. Residual disability benefits may be included as a policy provision or may require purchase of a rider that can be added for an additional premium. (Some policies pay an amount equal to the percentage reduction in income x the maximum total disability benefit.)
What are nonforfeiture options for life insurance?
Nonforfeiture options protect the cash values of a policy owner who chooses to discontinue coverage under a whole life policy. This provisions states that the insured, by lapsing or surrendering the policy, does not automatically forfeit the cash value accumulation. The nonforfeiture options give the policy owner some choice in how to receive the cash value of the policy.
What death benefit option if universal life insurance should a client wanting to grow there cash value as quickly as possible choose?
Option A because it results in lower mortality fees, thus allowing more cash to remain in the accumulation account.
What is a limited-pay-policy for whole life insurance?
Premiums are higher than ordinary life, only pay premiums for a specified number of years or until a specific age.
What is Term Life Insurance?
Pure insurance protection which pays a predetermined sum if the insured dies during a specified period of time. The protection ceases at the end of the term unless renewed. The premium pattern may be level (level-term) or increasing on an annual or set period basis. The face amount may be level or decreasing (declining-term). The is generally no cash value, savings component, or investment component. It is very inexpensive at young ages. Most of the time this is the answer for young clients, especially with children.
What is an elimination period in disability insurance?
Represents the amount of time an insured must be disabled to begin receiving payments under the policy. The elimination period represents the deductible. A longer elimination results in lower premiums. This is why is it important to have an emergency fund.
What does Option B of a universal life policy offer?
Same as universal A except that death benefits vary directly with the cash values. Universal B is more expensive than Universal A because the death benefit is equal to a specified amount of insurance plus the cash value. With Option B death benefit increases along with cash value. The beneficiary receives the cash value and life insurance face value. Option B is a better choice for someone who is less concerned about building cash value, and more concerned about increasing the death benefit.
What is the waiver of premium provision?
Says that is the premium payer becomes totally disabled, the premiums are waived during the period of disability
What is the incontestability clause in an life insurance contract?
States that once the policy has been in force for a period of time (typically two years), the insurer may not cancel the policy if they later discover a material misrepresentation, omission, or concealment. There are certain situations in which the incontestable clause will not apply because the policy is treated as being void from the time of its inception.
How can a young person who needs permanent life insurance, but cannot afford it, sold the problem?
Term insurance can be used as an interim step to obtaining permanent life insurance protection. Many term-insurance policies permit the insured to convert the term policy into a permanent policy during a period of time specified in the policy, called the conversion period, without the need to provide evidence of insurability.
What is Morality Risk?
The idea that as individuals age, their morality risk (the risk that they will die within the year) increases.
What are beneficiary designations in a life insurance contract?
The individual or organization that will receive the death benefit upon the death of the insured is referred to as the primary beneficiary. Contingent beneficiaries will receive the death benefit if the primary beneficiary is not available to receive the policy proceeds.
What are surrender charges?
The insurer incurs several costs when issuing a whole life insurance policy that often exceed the first premium payment made by the insured. To prevent incurring losses when policy owners purchase and then quickly cancel the insurance contracts, insurance companies typically enforce a surrender charge that is designed to compensate them for the up-front costs they incur when issuing the policy.
How do mortality, expense, and interest effect the cost of life insurance?
The mortality and expense elements drive the cost up, while the interest element pull the cost down.
What is ordinary (or straight) whole life insurance?
The most common form of whole life policy, it requires the owner to pay a specified level premium every year until death or age 100. The premium can be paid monthly, quarterly, semi-annually, or annual basis, and the policy will remain in force as long as the premium is paid.
What is a Benefit Period for Disability Insurance?
The period of time benefit continue to be paid while the insured is disabled. (The longer the benefit period, the higher the premium). -Short term disability polices have shorter elimination periods (i.e. 5-30 days) and benefit period up to 2 years. - Long term disability polices have longer elimination periods and provide benefits for anywhere from 2 years to retirement.
What is the Needs Approach?
The planner and client work together to estimate the cash needs that the family will require at and after the death of the insured.
What is The Wavier of Premium Provision or Rider in a disability insurance contract?
The policy's premium is waived upon disability. Wavier of premium can be for policy's life following a specified elimination period.
What is underwriting?
The process by which insurance companies decide whether to provide insurance to a customer and under what terms. Underwriters evaluate insurance applications and determine the premium that must be charged to insure that risk.
What is assignment when it comes to life insurance?
The process of transferring all or part of the policy's ownership rights.
What is a modified whole life insurance policy?
They have lower premiums than regular policies fr the initial policy period (often three to five years) and increase to a higher premium at the ned of the initial period. This type of policy gives a person the opportunity to purchase a whole life policy with the initial lower premiums which increase as the insured income increases.
What is a Variable Life Whole Life Policy?
They provide for a fixed premium payment and permit the cash value of the policy to be professionally managed by the insurance company or an outside investment manager. The cash value is invested in stock, bond and money market mutual funds. There is an opportunity for higher returns on cash value. - The cash value fluctuates bade on investment performance - There is an opportunity for higher returns on cash value - Death benefit may increase due to investment performance.
How to calculate Capitalized-Earnings Approach?
This method divides the family's share of earnings (earnings less taxes and consumption) by an inflation-adjusted discount rate, which takes into consideration the expected rate of return and the expected rate of inflation (the desired increase in income to the family each year).
True or False: If a person is covered by a private disability insurance policy, then he or she could also receive benefits from social security
True
True or False: Universal life insurance is a form of permanent life insurance?
True
True or False: all else being equal, the total premium outlay on an annual renewable term (ART) policy will be less than a level-term policy
True
True or False:A way to receive tax-free benefits from a whole life policy during one's life is by taking a loan against the death benefit amount?
True
What is variable universal life insurance (VULs)?
Type of life insurance policy that combines variable and universal life insurance and gives the policyholders the option to invest as well as alter insurance coverage. product with investment options and no minimum guaranteed rate of return or interest. The insured directs investment of the cash value into stock bonds and money market mutual funds.
What is the grace period provision on a life insurance contract?
Typically 31-61 days after the premium due date in which policy reminds in force. If insured dies during grace period, insurer assumes insured would have renewed. the insurer pays the benefit and deducts from it the premium.
What is the policy loan provisions in a life insurance contract?
When a policy loan is issued, there are no income tax consequences for the policy-owner (provided that the life insurance policy was not a MEC), and the interest rate charged on the loan is typically a low rate that is specified in the contract. Any loan outstanding at he death of the insured, plus accrued interest on the loan, is deducted from the death benefit paid to the policy beneficiary.
What is the Misstatement of Gender or Age Clause in a life insurance contract?
Younger persons and women's pay less for life insurance. Misstatement of age or gender on application will not void the contract. The benefit is paid, but adjusted up or down by what premiums would have purchased if age or gender was accurately stated.
What is a policy illustration?
a projection of the financial results that might might be achieved with a life insurance policy. This projection is often based on assumptions about premium payments, investment earnings, and dividends. It is used to educate applicants on how the policy will (may) perform.
What is Decreasing-Term Insurance?
allows the owner to pay the same premium for the insurance protection each year. The death benefit on the policy will, however, decrease each year to offset the increasing mortality cost due to the passage of time.
What is Annual Renewable Term (ART)?
an ART policy permits the policyholder to renew the purchase for the same amount of term insurance in subsequent years without evident of insurability, but premiums on the policy increase each year to reflect the increasing mortality risk being undertaken by the insurer. There is no cash value build up within the policy. The death benefit is fixed.
What is the "split definition" definition of disability?
an insured will be covered against the risk of not being able to preform his or her own occupation for a period of time and, after that period expires, an nay-occupation definition of disability would be used. This type of policy gives the insured a period to adjust to his or her new reality and perhaps obtain the training necessary to perform other occupations.
What is the suicide clause in a life insurance policy?
coverage is excluded if suicide committed within one or two years of purchasing the policy. If suicide within exclusion period, premiums are returned.
What is mortality Cost?
equals the probability of dying within the year times the face value of the policy.
Why is underwriting so critical for disability insurance and was factors are included in the underwriting?
it is critical for the insurance company due to the high degree of moral and morale hazard (insureds may prefer not to work and receive insurance benefits instead). Underwriting factors include: - Age - Gender - Occupational classification - Earnings history - Medical History - Personal habits - Lifestyle
What is universal life insurance?
similar to term life insurance with several additional features or options, including a cash-value accumulation account. It allows individuals to make premium contributions in excess of the term-insurance premium.
What is variable life insurance?
type of life insurance policy that permits the owner of the life insurance policy to direct the investment of the policy's cash value. Variable policies typically offer a series of investment options that often include investment fund managed by the insurer and outside investment mangers.
What are in-force policy illustrations?
used by financial planners to monitor the performance of the policy versus what is expected. An planner reviewing existing life insurance policies owned by a client can (and should) have the client request an in-force policy illustration
who are whole life policies useful too?
when the person wants to ensure that life insurance protection will be avaiable on a permanent basis. They are also useful for middle-aged and older people who need death benefit protection but do not wish to retain the risk that projected rates will not be realized, requiring additional funds to be added to the policy.
What is whole life insurance or permanent life insurance?
whole life insurance policies provide lifetime protection if premiums are paid as agreed. All whole life policies pre-fund future higher mortality costs using present value analysis. The cash value increases to face vale at age 100 (or 120). At age 100 the insured can receive the cash value of the policy, which is equal to the face value of the policy. The death benefit is level throughout the term of the policy. The premiums are typically level throughout the term of the policy. Whole life insurance is a bundled contract (less transparent)
Does whole life insurance have a savings component?
yes, it has a savings or investment component with earnings accruing on the residual of the premium less the cost for the year plus any previous savings balance