Life Insurance - Basic

Question 1

adverse selection

Answer 1

tendency of individuals with higher probability of loss to purchase insurance more often than those who present a lower risk

Question 2

beneficiary

Answer 2

a person who receives the benefits of an insurance policy

Question 3

death benefit

Answer 3

the amount paid upon the death of the insured in a life insurance policy

Question 4

cash value

Answer 4

equity amount accumulated in permanent life insurance

Question 5

estate

Answer 5

a person’s net worth

Question 6

illustrations

Answer 6

presentations or depiction of non-guaranteed elements of a life insurance policy

Question 7

life insurance

Answer 7

coverage on human lives

Question 8

liquidation

Answer 8

selling assets in order to raise capital

Question 9

lump-sum

Answer 9

payment of the entire benefit in one sum

Question 10

minor

Answer 10

a person under legal age

Question 11

solvency

Answer 11

ability to meet financial obligations (e.g. an insurance company maintains enough assets to pay claims)

Question 12

3 income periods

Answer 12

family dependency period
preretirement period
retirement period

Question 13

family dependency period

Answer 13

this is the period when, should the insured die prematurely, the surviving spouse will have dependent children to support. the family’s income need will be greatest during this period

Question 14

preretirement period

Answer 14

this is the period after the children are no longer dependent upon the surviving spouse for support, but before the surviving spouse qualifies for social security survivor benefits (“blackout period”). the income needs of the surviving spouse lessen during this period; however, until the surviving spouse reaches age 60, social security benefits are not available.

Question 15

retirement period

Answer 15

during this period, the surviving spouse’s working income ceases and his or her social security benefits begin. since the surviving spouse’s standard of living does not lessen, he or she will require an income comparable to the preretirement period during this time

Question 16

debt cancellation

Answer 16

insurance may be used to create a fund to pay off debts of the insured such as home mortgage or auto loans

Question 17

emergency reserve funds

Answer 17

insurance proceeds may be used to assist in paying for sudden expenses following the death of the insured, such as travel expenses and lodging for family members coming from a distance

Question 18

education funds

Answer 18

insurance proceeds may be used to pay for children’s education expenses so they can remain in school, or sometimes a surviving spouse who has worked in the home caring for children will need to receive education or training in order to re-enter the job market

Question 19

retirement fund

Answer 19

insurance proceeds may be used as a source of retirement income

Question 20

bequests

Answer 20

an insured may wish to leave funds to their church, school, or other organization at the time of their death

Question 21

raising capital

Answer 21

selling assets or liquidation

Question 22

retention

Answer 22

the retaining of assets

Question 23

retention of capital approach

Answer 23

enough insurance is purchases so that when added to other liquid assets, there is enough to pay income benefits without invading the principal

Question 24

life insurance creates an immediate estate

Answer 24

a person may create an estate through earnings, savings, and investments, but require disciplined action and significant period of time. the purchase of life insurance creates an immediate estate.

Question 25

human life approach

Answer 25

gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured.
its calculated by the insured’s wages, inflation, the number of years to retirement, and the time value of money

Question 26

needs approach

Answer 26

determines how much benefit would be necessary to replace the loss income and increased expense should the insured die prematurely
predicted needs of a family after the premature death of the insured.
factors considered are income, the amount of debt (including mortgage), investments, and other ongoing expenses

Question 27

key person insurance

Answer 27

will pay for costs of running the business and replacing the employee
may be funded by any type of life insurance

Question 28

business overhead expense

Answer 28

is sold to small business owners for the purpose of reimbursing the policyholder for business overhead expenses during a period of total disability. premiums are tax-deductible for a business, but any benefits received are taxable as income. overhead expenses, including equipment and employee salaries, are covered by the plan. salaries and profits of the employer are not protected

Question 29

title page

Answer 29

provides a summary of the benefits and coverages provided by the policy such as:
the premium amount and modal, the effective date and term date of the policy, type of policy and amount of coverage provided

Question 30

title page

Answer 30

provides a summary of the benefits and coverages provided by the policy such as:
the premium amount and modal, the effective date and term date of the policy, type of policy and amount of coverage provided

Question 31

substandard risk classification

Answer 31

also referred to as “rated” since these policies could be issued with the premium rated-up, resulting in a higher premium

Question 32

fair credit reporting act

Answer 32

if an insurance policy is declined or modified because of information contained in a consumer report, the consumer must be advised and provided with the name and address of the reporting agency

Question 33

buy-sell agreement

Answer 33

legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. also referred to as a business continuation agreement
are normally funded with a life insurance policy

Question 34

types of buy-sell agreements

Answer 34

can be used for partnerships and corporations

cross purchase, entity purchase, stock purchase, stock redemption

Question 35

cross purchase

Answer 35

used in partnerships when each partner buys a policy on the other

Question 36

entity purchase

Answer 36

used when the partnership buys the policies on the partners

Question 37

stock purchase

Answer 37

used by privately owned corporations when each stockholder buys a policy on each other the others

Question 38

stock redemption

Answer 38

used when the corporation buys one policy on each shareholder

Question 39

business continuation plan

Answer 39

an arrangement between business owners that provides for shares owned by any one of them who dies or becomes disabled to be sold to, and purchased by, the other co-owners or the business

Question 40

limit of liability

Answer 40

the face value/ amount or death benefit of an individual life insurance policy, subject to any exclusions or riders as applicable, minus any outstanding policy loans and interest payments due to the insurer

Question 41

illustration

Answer 41

a presentation or depiction that includes non-guaranteed elements of a policy of individual or group life insurance over a period of years
must:
distinguish between guaranteed and projected amounts, clearly state that an illustration is not a part of the contract, and identify those values that are not guaranteed as such

Question 42

buyers guide

Answer 42

provides generic information on various types of policies

Question 43

policy summary

Answer 43

provides specific information on the policy being issues

Question 44

underwriting

Answer 44

the risk selection process. the underwriter’s responsibilities include selecting only those risks that are considered insurable and meet the insurer’s underwriting standards
the purpose of underwriting is to protect the insurer against adverse selection (risks which are more likely to suffer a loss)

Question 45

primary criteria for underwriter

Answer 45

applicant’s health(current and past), occupation, lifestyle, and hobbies or habits

Question 46

filed underwriter

Answer 46

the life insurance producer is the company’s field underwriter

Question 47

responsibilities during the underwriting process

Answer 47

proper solicitation of applicants, helping prevent adverse selection, completing the application, obtaining the required signatures, collecting the initial premium and issuing the receipt, delivering the policy

Question 48

conditional receipt

Answer 48

the applicant may be covered as early as the date on the application

Question 49

standard risks

Answer 49

persons who are entitled to insurance protection without extra rating or special restrictions
are representative of the majority of people at their age with similar lifestyles. are the average risk

Question 50

preferred risks

Answer 50

those individuals who meet certain requirements and qualify for lower premiums than the standard risk. they have superior physical condition, lifestyle and habits

Question 51

substandard risk

Answer 51

(high exposure) are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits.
referred to as “rated” because they could be issued with the premium rated-up, resulting in a higher premium

Question 52

risk may be declined because:

Answer 52

there is no insurable interest, the applicant is medically unacceptable, the potential for loss is so great it does not meet the definition of insurance, or insurance is prohibited by public policy or is illegal

Question 53

disclosure statement

Answer 53

help the applicant to make more informed and educated decisions about their choice of insurance

Question 54

stranger originated life insurance

Answer 54

usually purchased by people who have no relationship with the insured with the intention of selling them for life settlements
opposite to the principle of insurable interest

Question 55

delivery of insurance is accepted by all except

Answer 55

priority

Question 56

single premium

Answer 56

policyowner makes one lump-sum payment to the insurance company to create a policy.

Question 57

limited pay

Answer 57

a level annual premium. policy is designed so premiums for the coverage will be completely paid up before age 100. some may be 20 years for limited pay where it is completely paid by age 65

Question 58

modified pay

Answer 58

a lower premium is charged in the first few policy years, usually 3-5, and then higher level premium is paid for the remainder of the insured’s life.

Question 59

level

Answer 59

most life insurance policies have a level premium. the premium remains the same throughout the duration of the contract

Question 60

fixed vs flexible

Answer 60

with a fixed premium, the same amount is paid periodically; with a flexible premium, the policyowner is allowed to pay more or less than the planned premium

Question 61

guaranteed at initial level vs initial and maximum premiums

Answer 61

depending on the type of policy, premiums can either remain the same for the entire policy period, or can increase and decrease at different times

Question 62

liquidity

Answer 62

availability of cash to he insured through cash values

Question 63

insurance monetary value index

Answer 63

must be disclosed in all advertisements and policies of term life insurance for individuals 55 or older

Question 64

life insurance proceeds

Answer 64

legitimate need-based expenses

Question 65

executive bonus plan

Answer 65

executive is the owner, and the executive pays the premium

Question 66

the mode

Answer 66

refers to the frequency the policyowner pays the premium: monthly, quarterly, annually, etc.