Term Life Insurance
Non-Guaranteed Level Premium
A policy may guarantee the premium that is to be paid for a specified period. After that, the company can increase premiums at its discretion, usually on the policy's anniversary.
pure insurance
A term insurance policy is considered pure insurance, as it provides for payment of the face amount only if death occurs during the term and nothing if the insured survives to the end of the term. Its premiums pay only for the current insurance and generally do not accumulate cash value (living benefits). The exception is when the term policy has a long term (e.g., life expectancy term, term to age 65) and a level premium, which causes an initial cash value build-up which eventually disappears.
RENEWABLE
Not automatic, must be purchased No proof of health Most end at age 60 or 65 Step-rate premium increases to attained age rate at renewal
A mortgage protection policy
(also called a mortgage redemption policy or mortgage life policy) has a term and death benefit equal to the term and amount outstanding on a mortgage loan. The death benefit will decrease as the mortgage loan balance decreases, so the policyowner does not pay for excess coverage. If the insured dies before the mortgage loan has been paid off, the death benefit is payable directly to the lender (mortgagee).
Term insurance has the lowest annual premium when compared with other forms of life insurance, because 0- it builds no reserve. 0- there is so much of it sold. 0- it is sold to young people. 0- it creates cash value.
x- it builds no reserve. Term insurance has the lowest premium because it builds no cash value (reserve).
review 1
Term insurance is temporary insurance referred to as "pure" insurance as it only provides a death benefit and does not provide for living benefits. It provides protection only for a finite term which may be a specified number of years (e.g., a 20-year term or annual term) or up to a specified age (e.g., term to age 70). A term insurance policy is considered pure insurance: it provides for payment of the face amount only if death occurs during the term but pays nothing if the insured survives to the end of the term. Its premiums pay only for the current insurance and generally do not accumulate cash value (i.e., living benefits). There are three basic types of term insurance: Level term, Decreasing term and Increasing term. The names level term, decreasing term and increasing term insurance refer to the amount of insurance during the policy period, not to the premium. The premium could be level or a single premium. A level term policy has a face amount (i.e., death benefit) that remains level during the entire policy term. The premium for a level term policy could be a single premium or a level premium. A decreasing term policy has a level premium and a death benefit that decreases during the policy term. Increasing term insurance has a death benefit which increases during the policy term. It is sold as a rider only to a permanent policy and never as a separate policy. A rider is an addition to a policy. Credit life insurance is insurance on the life of a borrower issued in connection with a specific loan or other credit transaction. A mortgage protection policy (also called a mortgage redemption policy or mortgage life policy) has a term and death benefit equal to the term and amount outstanding on a mortgage loan. Term insurance may or may not be renewable. Not all term insurance policies include a renewability feature; a policyowner must pay a higher premium for such a feature to be included in his policy. When a policy is renewable, the policyowner may renew the policy each time it expires if he wishes to do so. No evidence of insurability (i.e., good health) is required, and the renewability feature is limited to either a certain number of years (e.g., 10 years) or a certain age (e.g., age 65). A renewable term policy is said to have a step-rate premium because the premium increases with each renewal to reflect the insured's current age, known as his attained age.
Indeterminate Premium
Indeterminate premiums occur when the first few annual premiums are smaller than normal. While the initial premiums are guaranteed, future premiums can be increased, but not beyond a guaranteed maximum. Adjustments to premiums reflect the insurance company's anticipated mortality experience, investment, and expenses.
A "mortgage redemption" policy usually is just another name for a(n) 0- automatic convertible term policy. 0- increasing term policy. 0- level term policy. 0- decreasing term policy.
x- decreasing term policy. A mortgage redemption policy is a decreasing term policy which will pay off the mortgage balance upon the death of the insured. The term and face amount are always the same as the loan, and the proceeds are paid to the lender instead of to the insured's family.
Guaranteed Universal Life
Guaranteed Universal Life is a type of permanent insurance that offers a combination of the low-cost protection of term life insurance as well as a savings element and length of benefit period found in whole life insurance that allows for building cash value. All aspects of the policy (e.g., death benefits, savings, and premiums) can be reviewed and changed to meet the policyholder's circumstances.
A decreasing term policy
has a death benefit that decreases during the policy term. The premium is usually level. It is the type of insurance used for credit life and mortgage protection policies, which pay off the insured's debt to the creditor (who is named as the beneficiary) upon death of the insured. To encourage policyholders to keep their coverage as it approaches zero, insurers may set up a limited payment schedule so no premiums are due during the final years of the policy or decrease the coverage to a reasonable amount and then keep it level for the final years.
The guaranteed renewable provision in term life insurance policies usually states that 0- the policy may be renewed a specific number of times. 0- evidence of insurability is required at each renewal. 0- there is no maximum age limit beyond which the policy cannot be renewed. 0- the premium remains the same at each renewal.
x- the policy may be renewed a specific number of times. A guaranteed renewable policy may be renewed a specific number of times without evidence of insurability, but at a higher premium based on the insured's age at the time of renewal. Not all term policies allow renewal; the feature must be purchased and normally adds to the premium amount.
An increasing term contract
has a death benefit which increases during the policy term. It is sold as a rider (an addition to a permanent policy) only, never as a separate policy. For example, the death benefit of a permanent policy would be increased by: a rate equal to the rate of inflation with a cost-of-living rider. the amount of premiums paid for the insurance with a return-of-premium rider. the amount of the cash value in the policy with a return-of-cash value rider.
E is 25 years old. He cannot afford much insurance now, but wants a life insurance policy that he can exchange for permanent life insurance within the next 15 years, without evidence of insurability. He would want 0- annual renewable term. 0- convertible term. 0- decreasing term. 0- level term.
x- convertible term. A convertible policy allows the insured to exchange the term policy for permanent coverage without evidence of insurability.
For Example
John decided he needed more life insurance in case he should die before he paid off the loan on his fishing boat. Since the loan balance will decrease as he makes his loan payments, he does not need a level amount of insurance. If he buys a decreasing term policy starting at an amount equal to the loan amount, it will decrease at the same time, but not in the same amount, as the loan balance is decreasing. Proceeds will be paid to his beneficiary. Another option for John is to buy a credit life insurance policy. This is also a decreasing term policy. But the coverage is different...it will always be equal to the loan balance, and the proceeds will be paid directly to the creditor to pay off the loan.
All term policies 0- accumulate cash value. 0- are renewable. 0- are convertible. 0- provide temporary coverage only.
x- provide temporary coverage only. Term policies usually do not accumulate cash value. Unless they have a clause providing for renewability or convertibility, they are not renewable or convertible.
Term insurance would be most suitable for a person who 0- is in school and has a wife and child. 0- plans to retire shortly and travel. 0- is 45-years old, married with 4 teen-age children and owns a thriving business. 0- is widowed and has 1 married 35-year old daughter.
x- is in school and has a wife and child Term insurance fills a need when the policy owner wants the greatest amount of insurance for the lowest premium; e.g., when a family is living on a tight budget. Those not living on a tight budget may prefer permanent insurance which, though more costly, provides cash value which can be borrowed or used for retirement income.
When a term policy is converted to a whole life policy at attained age, the cash value will be _____ if the conversion was at original age. 0- lower than 0- higher than 0- about the same as 0- exactly the same as
x- lower than Conversion at attained age will result in a higher premium, but lower cash value. To convert at original age, the insured must pay the difference between the term premiums he had paid and the premiums he would have paid if he had originally purchased permanent insurance, plus interest on the difference. This would create immediate cash value. With conversion at attained age, the premium will be higher and there will be no immediate accumulation of cash value
temporary insurance
Whole life insurance is permanent insurance, as it is certain to pay the face amount either as an endowment at age 100 or upon death of the insured. In contrast, term insurance is temporary insurance, as it provides protection for only a specified term. This term may be a specified number of years (e.g., 20-year term or annual term) or to a specified age (e.g., term to age 70). Because term insurance has no cash value: -it has the lowest initial premiums of any type of insurance. -its premium will purchase a greater amount of insurance than it would for any other type of insurance. -there is no endowment if the insured is still living when the policy matures. -there are no nonforfeiture options providing any refunds to the policyowner if the premiums are not paid and the policy lapses.
The three basic types of term insurance are:
Level: death benefit remains level throughout term Decreasing: death benefit reduces over the term of the policy Increasing: death benefit increases during the policy term (riders only) The names level, decreasing and increasing refer to the amount of insurance during the term, not to the premium.
A level term policy
has a face amount (death benefit) that remains level during the entire policy term. The premium for the policy could be a single premium or a level premium. When a premium will be the same for a given period of years, it is a level or guaranteed level premium. When a premium will be the same for a given period of years, it is a level or guaranteed level premium.
Term insurance is appropriate:
when a policyowner wants the greatest amount of insurance for the lowest premium (e.g., when a family is living on a tight budget). when the insurance need is temporary (e.g., to pay off debt, to meet family responsibilities). when a large amount of insurance is needed at the lowest initial cost outlay. when the policyowner is able to save funds to build an estate outside the life insurance policy and wants to pay the insurer only for insurance. to supplement a permanent policy during child-raising years. to pay off expenses remaining after the insured's death.
Which of these may be renewed a certain number of times without evidence of insurability, even if the insured is uninsurable at renewal? 0- Annual renewable term. 0- Convertible term. 0- Decreasing term. 0- Level term.
x- Annual renewable term. Renewable term policies are called "renewable" because the insured is able to renew the policy if he wishes to do so, without evidence of insurability. An annual renewable term policy may be renewed each year, up to a specified age.
Which of these may be designed to pay off a mortgage upon the death of the insured? 0- Annual renewable term. 0- Convertible term. 0- Decreasing term. 0- Level term.
x- Decreasing term. Decreasing term is used to assure a mortgage will be paid off upon the insured's death. As the loan balance decreases, the insurance amount decreases so it is equal to the loan balance. Therefore, the insured just pays for the insurance he needs. If the insured dies before the loan is paid off, the proceeds are paid to the mortgage company.
Credit life insurance
is insurance on the life of a borrower issued in connection with a specific loan or other credit transaction. It can be an individual decreasing term policy issued to the borrower or a group term policy issued to the creditor and insuring the lives of its borrowers. The initial amount of coverage will be the amount repayable under the loan. The coverage will be reduced as the loan is reduced. When the insured dies, the lender will submit the death certificate with a claims form showing the deceased borrower's outstanding indebtedness, and the insurer will pay the claim directly to the lender.
Disadvantages of term insurance are:
premiums that increase and become unaffordable in later years. the need for coverage may exist after the policy expires. no cash value accumulates during the policy period.
RE-ENTRY
Low premium if insured provides evidence of insurability every so often Higher premium if insured does not provide evidence of insurability
CONVERTIBLE TERM INSURANCE
-Not automatic; must be purchased -Only term-to-permanent policy -No proof of health -Can convert up to face amount -Attained age rate based on current age -Original age rate based on younger age, but pay into cash value account ***Conversion = Change***
Which of the following provides for payment of a sum equal to all or a portion of the premiums paid, in addition to the policy face amount? 0- Guaranteed dividend provision 0- Retirement income policy 0- Cost-of-living benefit 0- Return-of-premium rider
x- Return-of-premium rider A return of premium rider promises to pay an additional amount of insurance equal to the total of the premiums paid for the coverage.
review 2
Annual Renewable Term ("A.R.T.") insurance is a term insurance contract that renews annually on the anniversary of the contract. The premium will be higher than the previous term period due to the insured aging ("step-rate" adjustment to the premium at renewal only). Term insurance may be convertible, although not all term insurance policies include a convertibility feature. As with policies with a renewability feature, a policy is only convertible if the policyowner pays a higher premium for the feature to be included in the policy. The converted, permanent policy will be issued by the same insurer that issued the term insurance policy. When a term policy is convertible, the policyowner is able to convert, or change, it to a cash value policy without proof of insurability within a certain period before the policy expires. The premium for the cash value policy may be based on either the insured's attained age at the time the policy is converted; or original age at the time the term policy was first purchased. A premium based on the insured's attained age would be higher. A premium based on the insured's original age would be lower, but the insured would have to pay an additional lump sum amount to the insurer so that the cash value in the account would be equal to the amount that would be in the account if the insured had been paying for a cash value policy from the time he originally took out the term policy.
Convertibility
Term insurance may or may not be convertible. Not all term insurance policies include a convertibility feature. A policy is only convertible if the policyowner pays a higher premium for the feature to be included in the policy. When a term policy is convertible, the policyowner is able to convert, or change, it to a cash value policy without proof of insurability, within a certain period before the policy expires. Restrictions on when the conversion may take place will vary from policy to policy (e.g., one policy may not allow conversion within one year of policy expiration; another may not allow it within five years; another may allow it up until expiration). When the insured does convert the policy, the new face amount cannot exceed the face amount of the term policy. The premium for the cash value policy may be based on either the insured's: -attained age at the time the policy is converted, or -original age at the time the term policy was purchased. A premium based on the insured's attained age would be higher. A premium based on the insured's original age would be lower, but the insured would have to pay a lump sum to the insurer to build up the cash value account so it would be equal to the amount that would be in the account if he had been paying for the cash value policy from the time he had started paying on the term policy.
Renewability
Term insurance may or may not be renewable. Not all term insurance policies include a renewability feature. A policy is only renewable if the policyowner pays a higher premium for the feature to be included in the policy. When a policy is renewable, the policyowner is able to renew the policy each time it expires if he wishes to do so, without evidence of insurability (good health). The renewability feature is limited, to either a certain number of years (e.g., 10 years) or a certain age (e.g., age 65). For example, an annual renewable term policy renews annually on the policy's anniversary and will reflect the insured's "new" and older age as the basis for the premium charges. A renewable term policy is said to have a step-rate premium, as the premium increases with each renewal to reflect the insured's current age at the time of renewal. The insured's current age is called his attained age. However, the new premium will not be changed to reflect the insured's physical condition. About 99% of group life insurance is annual renewable term. This gives the group assurance of continued coverage but allows the insurer to adjust the premiums each year to reflect changes in the group membership. One form of renewable term insurance is re-entry term. Re-entry term offers to renew with premiums at a select (low) level if the insured agrees to provide evidence of insurability periodically, for example every three years. If the insured does not prove insurability at renewal, by choosing not to provide proof or by failing to qualify, rates are charged at an ultimate (higher) level.
A convertible and renewable term policy 0- accumulates cash values. 0- is less costly than a nonconvertible and nonrenewable term policy. 0- allows the insured to convert or renew without proof of insurability. 0- can be converted only at the time of renewal.
x- allows the insured to convert or renew without proof of insurability. A "convertible term" policy is term insurance which allows the policyowner to convert to permanent insurance without evidence of insurability, generally up to a certain time prior to the expiration of the term. A renewable term policy allows the policyowner to renew his term policy without evidence of insurability at the expiration of the term (generally within 30 days after the policy expires). Not all term policies are convertible or renewable. A policy will have this feature only if it is included in the policy. Because these features provide benefits to the policyowner that regular term policies do not offer, policies with these features cost more than policies without them. These policies, like most term policies, do not accumulate cash value.
Q might want term insurance for all of the following reasons EXCEPT that it 0- provides coverage for a specified period. 0- is temporary insurance. 0- builds up cash values. 0- has the highest amount of coverage for the lowest possible immediate cash outlay.
x- builds up cash values. Term insurance provides coverage for a specified period and is therefore temporary insurance. It is also pure insurance in that there is no cash value build-up. Therefore, when the policy matures there is no endowment. Because there is no cash value, the premium will purchase a greater amount of term insurance than it would for any other type of insurance.
Term insurance differs from permanent insurance in that term insurance has 0- no death benefit. 0- living benefits. 0- no cash value. 0- a higher premium rate.
x- no cash value. In general, term insurance is considered insurance which lasts for a certain period of time and builds no cash value. It offers a death benefit only. Permanent insurance is insurance which creates cash value, so that the policy will pay the face amount whether the insured lives to maturity of the policy or dies prior to maturity. Term insurance pays a death benefit. Because it has no cash values, it does not offer living benefits and has a lower premium rate than permanent insurance (since the premium pays for insurance only and not for cash value plus insurance).
When considering whether to buy a term insurance policy or a whole life policy, R chose a whole life policy because the term policy could NOT provide: 0- coverage of burial expenses. 0- repayment of a mortgage loan. 0- a readjustment fund at R's death. 0- protection for R's lifetime.
x- protection for R's lifetime. Term insurance could be useful in paying off any expenses remaining after the insured's death. Mortgage protection insurance is a form of decreasing term insurance designed specifically to repay mortgage loans upon the insured's death. Term insurance does not provide lifetime coverage. Permanent insurance does that.
Over its term, the face amount of a level term rider 0- remains the same. 0- gradually increases. 0- gradually decreases to zero. 0- gradually decreases until it equals the face amount of the permanent policy.
x- remains the same. A level term rider has a face amount which remains level for the term of the rider. Normally, the rider is for 5-20 years with coverage of 3 or 5 times the face amount of the permanent policy. If the permanent policy is cancelled, the rider must be cancelled.
If Y has a renewable term insurance, his policy has 0- step-rate premiums. 0- premiums based on Y's physical condition at the time of renewal. 0- guaranteed renewability for Y's life. 0- renewability only if Y provides satisfactory evidence of insurability.
x- step-rate premiums An annual renewable policy does have a step rate premium based on the insured's age. The premium is not based on his physical condition. Because the policy is renewable, it can be renewed by the insured regardless of his physical condition and without evidence of insurability. However the policy is not renewable for life. It is renewable for a period of time specified in the policy.
All of the following statements regarding life insurance policies are true EXCEPT 0- term insurance contracts provide protection for the term of years specified in the policy. 0- whole life policies provide coverage for the lifetime of the insured. 0- term insurance must develop cash values after three years in force. 0- premiums for ordinary life insurance may be collected annually, monthly, quarterly, or semiannually.
x- term insurance must develop cash values after three years in force. Term insurance does not develop cash value in most cases. Other policies which do develop cash value must do so at least after three years. All of the other choices are true: Term policies only provide protection for the period of time for which the policy was purchased; whole life policies provide protection for the insured's "whole life" (i.e., to age 100); and ordinary life insurance premiums have various frequencies at which they may be paid.
All of the following are true regarding credit life policies EXCEPT 0- the death benefit is payable to the insured's estate. 0- credit life may be written as group or individual policies. 0- the amount of insurance may not exceed the amount of the indebtedness. 0- the benefit is used to pay off an existing loan.
x- the death benefit is payable to the insured's estate. A credit life policy provides for the proceeds to be paid to the creditor to pay off the loan. Such policies may be written on a group basis or on an individual basis. The amount of insurance cannot exceed the loan amount outstanding at any time.
If W had a convertible term policy and converted it to permanent insurance of the same amount on an original-age basis, 0- conversion will be based upon satisfactory evidence of insurability. 0- the new policy will build cash values at a slower rate than if it were based on attained age. 0- a higher premium will be charged than for attained age conversion. 0- the difference in premiums for the period between original age and the attained age must be paid.
x- the difference in premiums for the period between original age and the attained age must be paid. Conversion at attained age will result in a higher premium, but lower cash value. To convert at original age, the insured must pay the difference between the term premiums he had paid and the premiums he would have paid if he had originally purchased permanent insurance, plus interest on the difference. This would create immediate cash value. With conversion at attained age, the premium will be higher and there will be no immediate accumulation of cash value. Conversion is without evidence of insurability. The new policy will have greater cash value than one based on attained age because of the payment of the difference in premiums required and the future premiums will be lower as they are based on a younger age.
If a term life insurance policy contains the conversion privilege, 0- conversion will be automatic at the end of the term unless the policyowner specifically indicates otherwise. 0- evidence of insurability will always be required at the time of conversion. 0- the conversion privilege can be exercised only on an anniversary date. 0- the premium for the new policy will be based on the insured's age at conversion time, unless otherwise specifically provided.
x- the premium for the new policy will be based on the insured's age at conversion time, unless otherwise specifically provided. A convertible policy is convertible only at the request of the insured - it is not automatically converted. Evidence of insurability is not required. Conversion may take place anytime within the period established for conversion - it need not be on an anniversary date. The rate for the new policy will be based on the current age of the insured unless there is an agreement otherwise. This is because the insured would have to agree to pay a lump sum to create a cash value account if he wanted the premiums to be based on his original age at the time he purchased the term policy. The converted policy will always be a permanent life insurance policy issued by the same insurer that issued the term policy.
