Life Insurance - Chapter 8-21
What are some business uses for life insurance?
• To protect the business if a key person dies • To protect the remaining partners if a partner dies • As part of an employee compensation package
What are some individual uses for life insurance?
• To protect your family in case you die prematurely • To create an estate • To protect an estate • To guarantee insurability • To create a cash value savings account • To repay a loan
How would the InurED increase the death benefit with an adjustable life policy?
if an Insured would like to increase the total death benefit, the Insurer will likely require proof of insurability.
What happens to the cash value in a Universal life policy?
interest sensitive; controlled by the company; guaranteed minimum interest rate
Who can participate in a Traditional IRA?
only earned income can be contributed to the IRA. Earned income is compensation a person receives from working and includes wages, salary, commissions, tips, and bonuses. individuals who are active participants in an Employer-Sponsored Qualified Retirement Plan - such as a 401(k) - are not eligible to deduct contributions if their adjusted gross income rises above specified limits.
What is the Premium Payment clause?
outlines how, when, and where premium payments should be made.
Level Term
premiums and death benefits stay the same for the life of the policy
What is the Aviation Rider?
provides coverage for these pilots (stunt, student, military) by charging an additional premium for the increased risk.
What is lapsation (lapse)?
refers to a Permanent policy's termination because the owner fails to pay the premium within the 31- day Grace Period
What is the waiver of premium rider?
should the owner be disabled totally or permanently and cant earn an income, after 6 months, all premiums will be paid by the insurer during the disability period; After 6 months, the premiums will be repaid
Convertable Term
some day exchanging Term coverage for a Whole Life policy without proving insurability. Convertibility is a feature included with most Term Life policies. The new premium will be higher because it is based on the Insured's attained age at the time of conversion - and the Whole Life policy will include a cash value account
What is a Family Maintenance policy?
A Family Maintenance Policy consists of Whole Life Insurance combined with Level Term remember maintain as in stays the same so a level term
Sandra and Charles want to purchase a policy that will automatically cover newborns at no extra cost. Which policy should they choose?
A Family Policy New Point: The only policy in the list which provides any coverage for family members is the Family Policy. It covers the main breadwinner with a whole life policy but offers smaller convertible term policies for the spouse and children. There is no extra cost for policies if newborns come along. The underwriters already have that possibility factored into the premium.
what is a non-qualified pension plan?
A non-qualified pension plan is funded with after-tax dollars and is not eligible for tax deductions
What is a 401(k) plan?
A pension plan offered by an employer, where participation is optional to the employee and is subject to the "retirement account withdrawal rules" • Investment decisions are made by the employer
What is traditional IRA?
A pension plan that is individually sponsored and managed and exists only if an individual takes the initiative to set it up. It is also subject to the "retirement account withdrawal rules"
What it Cash value in a whole life policy?
Cash value generally begins to accumulate during its second year, and it grows continually after that. Cash value is not related to dividends paid by a mutual company. The cash value amount is guaranteed by the policy's cash value table the moment the policy is issued. Based on the cash value table, the Insured knows exactly how much cash value the policy will have at any time
What do convertible terms provide?
Convertible Term policies give the Insured the option of later converting the Term policy to a Whole Life policy without proving insurability. Proof of insurability will be required to convert from Whole Life to Term Life.
What will a Survivorship Life Policy be most likely used for?
Estate Planning remember rich people have ships
What is the payor benefit rider?
Found in juvenile policies which waivers the premiums if the person paying them (often the parent) is unable to make the premium payments while the child is still a minor
What are the "retirement account withdrawal rules"?
Generally, money kept in a retirement account is kept on a tax-deferred basis (you won't be taxed until the money is withdrawn) Money must be kept in the account until 59.5, and withdrawals must begin at age 72
Which of the following would be a good policy for a new college graduate who expects her income to increase significantly over the next few years and will have student loans paid off soon? Decreasing Term Graduated (Modified) Premium Life Straight Life Increasing Term
Graduated (Modified) Premium Life The struggling recent college graduate would opt for the lowest premium in the early years and then have the payments increase as the graduate's earning increase. That is exactly what a Graded Premium life policy does. Watch out! A Graded Premium life policy is sometimes called a Modified Life policy.
Which type of policy can the employer (organizing entity) deduct from their taxes as a business expense?
Group life policies
Renewable Term usually provides for renewal at which of the following times?
At policy expiration.
Under the Conversion privilege, how long does the InsurED have to convert a policy once the group life coverage ends if the organizing entity fails to notify the Insured of the right to convert?
If the organizing entity fails to notify the Insured of the right to convert, the conversion time is 60 days.
What is the Guaranteed Insurability Rider
Optional rider that enables the policyowner to purchase additional amounts of coverage at predetermined times without proof of insurability. The premium charged for the additional insurance will be based on the Insured's attained age.
What is single premium whole life?
Paid for with one premium at the beginning of the contract.
What is a Survivorship Life Policy (Last to die)?
Pays the insured amount upon the death of the LAST surviving insured. because the surviving spouse continues to pay the premium after the death of the first spouse, these policies are cheaper (all things considered) than a Joint Life Policy. remember rich people have ships
What are the key points of a term policy?
Pays upon death (has a death benefit) but which does not build any cash value savings account (no living benefit)
What is a level and fixed premium?
Premiums for a Whole Life policy are set in stone when the policy is purchased and will never change.
What is term life insurance?
Provided coverage upon death, but only for a specified time
What is a Family Income Policy?
a Whole Life policy coupled with a Decreasing Term Rider. The Term Insurance provides a gradually decreasing amount of family income in case the breadwinner dies remember income goes down with time so decreasing term
What is a Business Continuation (Buy-Sell Agreements)?
a contract stating that the business (or the surviving owner) has the right to buy the share (stocks) of the company from the deceased owner's estate at an agreed-upon price.
What is a spousal IRA?
allows a person with sufficient earned income to contribute to an IRA for the benefit of the stay-at-home spouse.
What payment plan violates the rule that Life Insurance premiums are always level and fixed.
The Graded Premium Whole Life payment plan violates the rule that Life Insurance premiums are always level and fixed.
Which provision identifies the parties and defines the scope and limits of coverage? The Incontestable Clause The Entire Contract Clause The Ownership Clause The Insuring Clause
The Insuring Clause
Why are SEPs preferred over Keogh Plans by small business owners? The SEP is less complicated. The funds in the Keough don't grow on a tax-deferred basis. The Keough does not provide a tax deduction for contributions. Contributions to a SEP are never taxed.
The SEP is less complicated. The SEP is simpler to operate than a Keogh Plan. Otherwise, they both provide a tax deduction for contributions, and both defer the taxation on the investments. New Point: They both require the employer to make contributions for the employees - they can't be set up to benefit just the boss.
Under the Conversion privilege who pays for the newly converted policy?
The converted policy is an individual policy, not a continuation of group coverage, and the premium for the new policy is paid by the individual to the insurance company
What can happen to the face value in Interest Sensitive Whole Life?
The death benefit may be increased if the company's investments do well. if the company's investments do poorly the InsurED may voluntarily reduce the death benefit to avoid paying increased premiums.
What is a Split Dollar Plan?
The employee and the employer split both the premium and the death benefit. A split dollar plan is taxable to the employee.
When are taxes not paid with life insurance?
When the beneficiary receives the death benefit.
What is the automatic premium loan rider (automatic policy loan rider)?
When the grace period expires the company will automatically make a loan against the cash value to pay the premium. The premium loan (plus accrued interest) is treated exactly as if the owner borrowed the money and if not repaid, the balance will be deducted from the policy's cash value or death benefit
What tax deduction can a business make with a group life policy.
With Group Life Insurance, the employer (organizing entity) may deduct the cost of the premiums as a business expense, and as long as the face value of the policy is $50,000 or less
When are taxes paid in life insurance?
With whole life policies, it's only on the interest accrued on the cash value and when the policy matures or is surrendered.
During the policy period will the premiums will remain level and fixed?
Yes
What kind of license is required to sell a universal life policy?
"a plain o' life insurance license"
What kind of license is required to sell an Interest Sensitive Whole Life policy?
"a plain o' life insurance license"
What kind of license is required to sell an adjustable life insurance policy?
"a plain o' life insurance license"
What is annually renewable term insurance?
-Renews each year without proof of insurability -Premiums increase due to attained age
If a 30-year old will live to age 99, which of the following policies will pay a death benefit and will have cost the lowest total premium outlay? Paid Up at 55 Whole Life Straight Whole Life 15-Pay Whole Life 30 Year Life
15-Pay Whole Life If an Insured wants the lowest total premium outlay, the solution is to prepay the premiums as early as possible. The 15-Pay Whole Life policy (that is same as a Paid Up at 45 Whole Life policy) will do this for a 30-year old.
What is endowment life insurance?
An Endowment Life policy simply has an earlier than age 100 endowment age, such as 65.
What policy has a two-way conversion feature?
An adjustable life policy An Adjustable Life Policy has the two-way conversion feature - if it is Term Insurance, it may be converted to Whole Life. If it is Whole Life, it may be converted to Term. It may even be a combination of the two.
What is the main rider used in implementing additional riders policies?
An increasing term rider
Why is the premium higher when an Insured converts from Convertible Term to Whole Life?
Because Whole Life costs more than Term Life and the new premium is based on the Insured's age at the time of conversion. The Whole Life policy will accumulate a cash value, but not "rapidly." The premium at the time of conversion will be based on the Insured's higher attained age. However, the Insured's health is not a factor because proof of insurability (medical exam) is not required at the time of conversion.
Why is age 100 significant in a Whole Life policy? That is the year the premiums increase significantly. The total premiums paid are refunded at age 100. It is illegal to insure persons beyond age 100. Coverage ceases at age 100.
Coverage ceases at age 100.
Mortgage protection insurance is the same as?
Decreasing term insurance
What is referred to as investment units?
Due to the investable nature of Variable Whole Life, Variable Universal Life, and Variable Annuity. The cash value and the death benefit/face value is referred to as investment units.
Who has control of how the cash value in invested with an Interest Sensitive Whole Life policy?
Investment decisions controlled by the Insurer
What is cash surrender value?
Is is when the cash value in a policy is surrendered either by the policy lapsing or the cash value being surrendered
What is a 403(b) plan, or a tax-sheltered annuity (TSA)
Its essentially the public school and non-profit sector version of the 401(k).
What is maturity?
Maturity occurs when the policy pays the face value. This happens when the Insured dies with both a Temporary and Permanent Policy but also happens when a Permanent Policy pays the cash value upon the Insured reaching age 100.
What happens to the premium in a Universal life policy?
May be increased, decreased, or skipped
What happens to the face value in a Universal life policy?
May increase or decrease death benefit within policy limits (subject to proof of insurability
A 45 year old may withdraw from a qualified retirement plan, without tax penalty, to pay for all of the following EXCEPT? Disability Health First home purchase New car purchase or lease
New car purchase or lease As you know, early withdrawal (prior to age 59 ½) from a qualified retirement plan (pension, IRA, 401-k, 403-b, Keogh, or SEP) will likely result in paying income tax on the withdrawal plus a 10% penalty. However, the 10% penalty won't apply if the withdrawal is for a significant "life cycle" event, including: Payment of health insurance premiums Higher education expenses for the retiree, spouse, children, or grandchildren First time purchase of a home Medical expenses Disability
Can life insurance tax deductible for Individuals?
No
Does term life insurance have cash value?
No!
Under the Conversion privilege can the converted policy have a higher face value?
No, the face value of the new policy may not be more than the face value of the group policy & when taking a new job the InsurED may choose to convert only the difference in coverage to an Individual policy
What it Permanent Protection in a whole life policy?
Provides protection to age 100
Which form of Term insurance requires the Insured to pass a medical exam in order to have a lower cost of renewal? Renewability Clause Reentry
Reentry
Reentry Term
Renewable Term policy offers two premium levels for renewal; a less expensive premium for clients who can prove insurability at renewal time by passing the medical exam, and a standard premium for folks who cannot.
A wealthy elderly woman wants to purchase a Life Insurance policy to protect her estate from the government's death tax. She will most likely purchase: Term Life 40-Pay Life Straight Life Single-Premium Whole Life
Single-Premium Whole Life The people who are worried about the death tax are invariable the elderly rich. They can usually afford a single premium policy.
Adam purchases a life policy at age 50 and lives to be 100. Which policy type will require the highest total premium outlay? 20-Pay Life Straight Life 10-Pay Life
Straight Life Adam will pay the highest total premium outlay with a Straight Life policy because he will pay to age 100. The other policies will all be paid up at an earlier date and have more premium in the cash value account to grow to achieve the face value by age 100.
What can happen to the cash value with a variable whole life policy?
The investment decisions of the cash value are controlled by the policy owner and therefore is no guarantee on the cash value
What is the Designation of Beneficiary Provision?
The member Insured, not the organizing entity (which is the policy owner), names and changes the beneficiary
Which of the following statements regarding the conversion of a Term Life policy from a Group plan to an individual policy is correct? The new converted policy will likely be Whole Life. The new converted policy is required to be Term Life, the same as the Group policy.
The new converted policy will likely be Whole Life.
How can the policy owner access the cash value?
The owner of a Whole Life policy can access the policy's cash value portion by letting the policy lapse, by surrendering the policy, by borrowing against the cash value, or by reaching endowment at age 100
What can happen to the premiums with a variable whole life policy?
The premiums will remain level and fixed regardless of the performance of the investment account.
Will someone with an endowment policy be protected until age 100?
There will be no protection until age 100 b/c the policy will endow before the InsuED reaches the age of 100.
What does expire mean?
This applies to Term Life only. If the Insured lives beyond the policy's specified period of time, the Term Policy expires.
What percentage of the face value will the insured receive in an accelerated death benefits rider?
This benefit is usually expressed as a percentage of the face value (often 50 percent), and any payments made while the Insured is alive will be deducted from the death benefit that is eventually paid.
What are Modified Endowment Contracts (MECs)?
This is what the IRS refers to Endowment policies as. Since the IRS classifies these policies as investment they may lose the tax deferred status of the cash value account.
Which of the following policies allows premium costs to be deducted from the separate asset account? Endowment Life Whole Life Universal Life Modified Life
Universal Life A Universal Life policy allows the Insured to stop making premium payments at any time. The Insurer will simply deduct funds from the separate asset account to make the premium payments (until the money runs out). The Universal Life policy gives the Insured a great deal of flexibility - including the option of not making payments - a choice that is easily chosen when there are other ways to spend the premium money.
What is the return of Cash Value rider?
Upon death, the death benefit is paid + the aggregate of cash value accumulated to date. This kind of rider usually cannot be extended beyond age 65
A policy loan is actually made: from the policy's cash value.from the policy's cash value. by the Insurance Company itself.
by the Insurance Company itself. The Insurance Company doesn't take the money out of the cash value account. Instead, the Insurance Company loans the Insured other company funds. If the loan was actually taken out of the cash value account, the account wouldn't grow that year and the cash value table would have to be changed. This is a key exam point.
What is the Aviation Exclusion Rider?
excludes coverage for a death that occurs while the Insured is a stunt, student, or military pilot. This rider does not cost extra, but allows a pilot to purchase Life Insurance at standard rates.
What is an Entity Purchase Plan (Stock Redemption Plan)?
company buys a Life Insurance policy on each partner (owner). The company pays the premiums, owns the policy, and is the beneficiary. If one of the partners dies, the company uses the death benefit to purchase that share of the business from the estate
What is a Joint Life Policy (First to Die)
covers multiple lives and pays out when the first insured dies remember poor people smoke joints
What is cash value also known as?
equity, proceeds, surrender value, and nonforfeiture value.
What does the ownership clause state?
states that it is the policy owner who has all the rights granted by the policy including the right to change the beneficiary, transfer ownership, borrow against the cash value, and select from various payment and settlement options. The owner also has the right to receive the financial benefits of the policy. The Ownership Clause sometimes called the Owner's Rights Clause
What is the face value?
the amount that will be paid to the beneficiary upon the Insured's death
What is key employee Life Insurance?
the business owns the policy. The business is also the beneficiary. The business pays all the premiums and receives the entire death benefit if the Insured dies.
How are funds accumulated in the cash value account treated tax-wise?
the growth is not taxed - the growth is tax deferred. However, if the policy is surrendered or lapses, the portion of the cash surrender value that exceeds premiums paid will be subject to income taxation The IRS won't let the policy owner avoid taxes if the growth of the cash value account permanently ends up in the owner's hands
What is the entire contract clause?
the insurance policy and the application (if attached) constitute the entire agreement between the Insured and Insurer. prevents an insurance company from referring to documents, riders, or oral statements that are not contained within the policy
What can happen to the cash value in Interest Sensitive Whole Life?
the policy will always pay a guaranteed minimum interest rate on the cash value. Though the interest paid on the cash value will fluctuate based on the company's investment performance
What can happen to the face value with a variable whole life policy?
the policy will have a guaranteed minimum death benefit as long as premiums are paid, but the is no guarantee on how high or low the face value will be outside of the guaranteed minimum
What is a Level Premium
the premium that does not change throughout the term of a policy
What does it mean for a policy to surrender?
you physically return the policy to the company for cancellation. Some experts say the termination of the policy upon lapsation is also a type of surrender Termination may also result from the surrender of the policy A key reason for surrendering a Permanent Policy may be to get the money in the cash value savings account.
Under the Conversion privilege what happens if the InsurED dies during the conversion period?
• If the Insured dies during the conversion period, the Insurer must pay the death benefit just as though the group coverage was still in place - even if the Insured had not applied for conversion to individual coverage.
How is a Roth IRA different from a traditional IRA?
• Money contributed to a Roth IRA is not tax-deductible, BUT all the account's earnings grow tax-free • there's no need to quit contributing at age 72. • Money held in a Roth IRA never needs to be withdrawn and may be passed income tax-free to heirs
What are the Employer "Sponsored" Retirement Plans?
• Profit Sharing Pension Plans; • Defined Benefit Pension Plans; and - the employer has a specific formula that guarantees each employee a specific retirement benefit paid for by the employer. • Defined Contribution Pension Plans. - the employer contributes a specified amount each year to the retirement plan, which is usually managed by a retirement plan service, often a stock brokerage firm. The employer makes no promise about how much the employee will eventually receive
What are the two individually sponsored pension plans?
• Traditional IRA • Roth IRA.
What is an accelerated death benefits rider?
allows insureds who are terminally ill or requiring nursing home care to collect part or all of their life insurance benefits before they die.
Decreasing Term
Term life insurance in which the face amount of the policy decreases over time in scheduled steps. Most often used to cover a debt obligation (mortgage).
Suicide Clause
A provision stating that if the insured dies by suicide during the first two years the policy is in force, the death benefit be a refund of the premiums a paid without interest Though If the suicide occurs after the 2-year period ends, payment will be the same as with any other cause of death.
What it mean for a whole life policy to endows?
At age 100 the amount of cash accumulated equals the face value of the policy. At this point the policy endows by paying out the face value. This type of maturity is known as Endowment at Age 100
What is the hazardous occupation or hobby clause?
If the Life application contains a Hazardous Occupation or Hobby Clause, the Life Insurer will either: • deny coverage; or • exclude coverage for specified occupations or hobbies; or • cover the hazardous occupation or hobby, but issue a rated policy (charge more). Although if the insured decides to ake up a hazardous occupation or hobby after the policy has been issued the clause would no longer apply.
What is credit life insurance
Insurance that covers a debtor's life and will help provide funds to pay off a loan if the debtor dies before the loan is repaid
Karen owns a Life Insurance policy with a Waiver of Premium Rider with a six month waiting period. Karen has been partially disabled for six months. What will the company do? Nothing Refund the last six month's premiums, waive future premiums, and discontinue coverage. Refund the last six month's premiums, waive future premiums, and continue coverage. Begin sending a monthly income benefit to the Insured.
Nothing
what are optional life provisions and who are they designed to protect?
Optional provisions are included at the insurance company's choice to protect the insurance company by limiting or completely excluding coverage. They are designed to protect the insurer
Al the agent tells a customer that the insurance company will cover items that are actually excluded in the policy. Which provision makes Al's promise unenforceable? The Entire Contract Clause The Free Look Clause The Insuring Clause The Incontestable Clause
The Entire Contract Clause With the Entire Contract Clause, the Insurer is warning the Insured not to believe what the Producer is saying if it conflicts with the policy. The Insured can only rely on the policy terms.
Which is correct regarding a Family Policy? Each family member receives a Whole Life policy. The death benefit is the same for each family member. The policy consists of a Permanent policy on the breadwinner and Term policies for the other family members. The death benefits are provided using Term policies for all family members.
The policy consists of a Permanent policy on the breadwinner and Term policies for the other family members.
What is Continuous Premium Whole Life?
This is Whole Life Insurance on the lifelong installment plan with monthly or annual premium payments that continue until the policy matures or endows at age 100. This can also be known as, Continuous Premium Whole Life and Straight Life or Ordinary Life
What is graded premium whole life?
makes permanent insurance more affordable in the policy's early years. The company charges a lower premium in the early years and a higher premium in the later years. This is also known as a Graduated Premium Whole Life policy
Patty works in a job that is very dangerous. Her Life Insurance policy will likely: require new proof of insurability. decrease the premium. not change her premium if she changes to a less hazardous occupation. increase the premium.
not change her premium if she changes to a less hazardous occupation. Life Insurance premiums are level and fixed. When we get to Health Insurance, we will see that the Health Insurer can change premiums if the Insured's occupation changes. However, Life Insurance companies don't change the premium with the application because, once the policy is issued, the premium is "level and fixed." The Life Insurer is interested in the hazardous occupation or hobby at the time of application, but not thereafter.
What is limited pay whole life?
the owner pays a premium for a predetermined number of years and then has a paid-up policy for life. Even after payments have stopped, the policy still provides coverage for the Insured and the cash value table is designed to equal the face value when the Insured reaches age 100. This is also called Installment Life
What is collateral assignment (also known as temporary assignment)?
the owner uses the policy's cash value to secure a debt. Typically, the policy owner temporarily transfers ownership of the policy to the creditor. Then, the creditor names itself as beneficiary. When the loan is repaid, the creditor releases ownership back to the original policy owner who then changes the beneficiary.
What is a Cross Purchase Plan?
the partners themselves own the Life Insurance policies on each other. With this arrangement each partner is the owner, payor, and beneficiary of the policy on the other's life. The business itself plays no direct role.
What is the additional insured term rider?
usually, the main breadwinner and Term Riders are attached to that policy to cover the lives of the spouse and children. Convertible Term is used so that the spouse and children may in the future switch their coverage to Whole Life A Term Rider covering a spouse is called a Spouse's Rider and a Term Rider covering a child is called a Children's Rider. It is also possible to use a Term Rider to cover another relative or business partner. This may be called an Other Insured's Rider
What is the waiver of premium with disability rider?
waives the premium just like the Waiver of Premium Rider, plus it provides a stated amount of income replacement benefit for the duration of the disability.
What is absolute assignment?
when the owner transfers the owner's entire interest in the policy to the assignee. An absolute assignment is permanent, and the assignee possesses every right under the policy that the original owner did.
What are the key points of the insuring clause?
• It contains the company's basic promise to pay a specified amount - the death benefit. • It refers to the exclusions and limitations of coverage in a general way. • It specifies the amount of death benefit. • It states when benefits will be paid. • It identifies the parties to the contract. • It does NOT specify all of the policy terms
What is entailed in the loan values clause?
• Only applies to Permanent policies because Term policies have no cash value account; • Grants the Insured the right to borrow against the accumulated cash value; • States the interest rate (usually 8 percent); and • Requires that enough collateral be in the cash value account to pay both the loan and the interest. So, the full cash value can never be borrowed!
What is entailed in the reinstatement clause?
• Requires that a reinstatement application be submitted within 3 years of lapsation - which triggers a new 2-year contestable period for statements made in the reinstatement application; • Requires payment of back premiums, loans, and interest; • Requires proof of insurability; but • Does not require a reinstatement fee
What provides the best line of defense for an insurance company should an agent make an unauthorized change to an insurance policy?
The Entire Contract Clause provides the best line of defense for an insurance company should an agent make an unauthorized change to an insurance policy.
What does the insuring clause not contain?
The Insuring Clause contains the company's basic promise to pay, but does not contain the details of the policy (such as specific terms and conditions).
What is the Cost of Living Rider?
This is designed to allow the value of the insurance to keep pace with inflation based on an index. When said index indicates that prices have increased more insurance will become accessible for purchase without having to prove insurability.
What is the assignment clause?
this allows the owner of the policy to transfer ownership to another party. Although the insurer must be notified they have no say in the decision
Aviation issues
The insurance company will likely cover all aviation deaths except those involving student pilots, stunt pilots, and military pilots A commercial airline pilot may be covered.
Leann's $100,000 Whole Life policy had an accumulated cash value of $30,000. Leann requested a maximum loan and received $27,900. Leann died precisely one year later without repaying any of the loans. How much did Leann's beneficiary receive? $70,000 $72,100 $73,100 $100,000
$70,000 This is an example of a routine test question. At the end of the year, exactly $30,000 (principal plus interest) would be deducted from the amount paid to the beneficiary!
Life insurance suitability?
A producer must have reasons to believe that the policy he/she sold to someone is suitable Human life approach: maintain standard of living Needs approach: what client actually needs
What is a qualified pension plan?
A qualified retirement account is funded with pre-tax dollars and is eligible for certain tax deductions
What is a Keogh plan or a HR10 plan?
A retirement plan for those who are self-employed or small businesses. Contributions to Keogh Plans are tax-deductible for the business.
What is a Simplified Employee Pension Plans (SEP)?
A retirement plan for those who are self-employed or small businesses. More popular than the Keogh plan because of it's simplicity.
What is Variable Whole Life Policy?
All the investment decisions of the cash value are controlled by the policy owner
What are the key points of a permanent policy?
Any Life policy which has both a death benefit and a living benefit (a cash value savings account) is a Permanent Policy. Whole Life Policy, provides life insurance only to age 100, at which time it pays the cash value savings account funds to the Insured.
What does the Conversion privilege do?
At the heart of the clause lies a guarantee that an Insured (or family member) who loses Group Life Insurance may convert to an individual Life Insurance policy without evidence of insurability Though a conversion right does not exist where the employer simply switches one insurance carrier for another insurance carrier with no other changes. Because there is no loss of coverage, there is no conversion privilege
Endowment Life policies: Endow when the Insured reaches age 100. Are typically chosen by young couples with a limited budget. Allow policy owners to take advantage of unique tax benefits available only with Endowment Life policies. Have a higher premium than Straight Life, all things being equal.
Have a higher premium than Straight Life, all things being equal. Endowment Life policies have the highest premiums, lose tax benefits available with a Whole Life policy, endow at an earlier time than when the Insured reaches 100, and are never chosen by the young couple on a limited budget. Due to the high premiums, only the "rich" folks will likely choose an Endowment policy - and Congress discourages that by taxing these as Modified Endowment Contracts (MECs).
Which retirement planning option is always available regardless of participation by the employer? IRA 403(b) SEP 401(k)
IRA An IRA can always be established regardless of action or inaction by the employer. The other options all require employer participation.
Increasing Term
Increasing Term, the death benefit keeps pace with rising insurance needs as new children are born, expenses grow, or inflation increases a family's cost of living.
What kind of license is required to sell a Variable life insurance policy?
Insurance and Securities Due to the investable nature of the policy, an insurance agent who wants to sell this product must also hold a securities license from the National Association of Securities Dealers (NASD)
A life policy pays the face amount when the policy: Ends Is surrendered Endows Lapses
Lapses When the whole life policy endows, the cash value account has grown to the point that it equals the death benefit. This is designed to happen at age 100. At that time, the Insurer pays the face value to the Insured. The 100 year old Insured is taxed on the difference between the face value and the amount of premiums paid. Remember that if the policy endows prior to age 100, the policy is known as an Endowment Policy.
Which of the following Term policies would cost the least? Renewable and non-convertible. Renewable and convertible. Non-renewable and non-convertible. Non-renewable and convertible.
Non-renewable and non-convertible. Insurance companies charge extra for extra bells and whistles. So, having no "extras" would cost the least. Nonrenewable and nonconvertible would be cheapest.
Under the Conversion privilege, how long does the InsurED have to convert a policy once the group life coverage ends?
Once Group Life coverage ends, the application for the new policy and payment of the first premium usually must occur within 31 days of Group Policy termination
What do Induvial policies generally have that group policies don't?
One provision that is not in Group Life Insurance policies is the Free Look Provision. The 10-day Free Look Provision is required only for individual policies
Agnes quit her job on March 3rd and her group life coverage terminated on that date. Her company does not inform her of her right to convert her Group Life policy. On April 10th Agnes applies for conversion. What will happen? Agnes has the right to convert to an individual Term policy. Agnes may continue to be a member of the group but she will have the pay 100% of the premium for the Group Term policy. The conversion privilege is no longer available because she waited too long. No policy will be issued. She will be issued a standard Whole Life policy for the original face amount because she made the request within the 60 day limit.
She will be issued a standard Whole Life policy for the original face amount because she made the request within the 60 day limit. If her employer failed to notify her of her conversion right, she has 60 days from termination to choose to convert the policy to an individual policy. The Insurer will require Agnes to purchase a whole life rather than a term policy, however. If Agnes had been promptly notified of her right to convert, she would have had only a 31-day conversion privilege. Even if she converts, Agnes is no longer considered to be a member of the group.
What is the Evidence of Insurability Provision?
The group policy must notify the Insured that evidence of insurability will be required if the Insured first declines coverage but later wants to join.
A business has established a pension (retirement) plan for its employees. As a result, it has a "qualified" plan which permits money in the retirement plan to grow on a tax-deferred basis. Which of the following would result in the plan losing its tax-deferred status? The plan is designed to cover a large majority of the workers. The plan avoids discrimination between highly paid employees and ordinary workers by having proportionally similar treatment. The plan is temporary.
The plan is temporary. For a business retirement plan to receive favorable tax status as a "qualified plan," the plan must comply with a federal law known as ERISA (Employee Retirement Income Security Act) which sets minimum standards for "qualified" retirement pension plans. The qualified retirement plan must avoid discrimination in favor of highly paid workers and must be available to the majority of the workers. In addition, the plan must be intended to be permanent in nature so that employees who quit work usually won't forfeit their retirement benefits. When a worker leaves, the worker usually must be given the right to "rollover" the retirement funds to some other retirement plan. This is a new point that is not in the text.
What can happen to the premiums in Interest Sensitive Whole Life?
The premiums will fluctuate based on the company's investment performance. Though there is a cap on potential premium increases.
What does the beneficiary typically receive when the Insured dies?
Typically, with Whole Life policies, when the Insured dies the beneficiary receives the death benefit and the accumulated cash value goes away.
What is a universal life policy?
Universal Life is a unique combination of TERM INSURANCE plus a cash value account plus coverage to age 100. With a Universal Life policy, the premium payments go into an interest-sensitive cash value account A.K.A: Permanent term & Term insurance
What is a Return of Premium Rider?
Upon death, the death benefit is paid + the aggregate of premiums paid to date;
What is variable universal life?
Variable universal life is the same as universal life with the exception of - All of the investment decisions are made by the policy owner - Due to the investment nature a securities license is required to sell
What is Interest Sensitive Whole Life?
allows the policy owner to share in the insurance company's investment success (if any).
Adjustable Life Policy
an Adjustable Life policy permits the components to be adjusted to meet the changing needs of policyholders. The premium may be increased or decreased - an exception to our rule that premiums are level and fixed. The death benefit may increase or decrease - an exception to our rule that the death benefit is constant. The premium payment period may be stretched or shrunk. And the protection period may be lengthened or shortened.
At what dollar amount will an employee need to report the face value of a group policy as income?
if the death benefit exceeds $50,000, the employee must report as employee income
What happens if the policy owner withdraws money from the MEC?
if the policy owner withdraws money from the MEC prior to age 59 ½, a 10 percent excise tax may also be imposed
What is the penalty for withdrawing money from a retirement account before age 59.5?
if we withdraw money from our retirement fund prior to age 59 ½, the deferred growth will be taxed plus assessed a penalty of 10%