Chapter 4: Key Terms

Question 1

Accelerated Benefits Provision

Answer 1

Entitles a qualified insured to receive a pre-death benefit deemed nontaxable

Question 2

Annual Renewable Term (ART)

Answer 2

A type of term insurance that permits the policyholder to purchase term insurance in subsequent years without evidence of insurability, but premiums on the policy increase each year to reflect the increasing mortality risk being undertaken by the insurer

Question 3

Annuity

Answer 3

Periodic payment to an individual that continues for a fixed period or for the duration of a designated life or lives

Question 4

Asset Accumulation Phase

Answer 4

This phase is usually from the early 20s to late 50s when additional cash flow for investing is low and debt to net worth is high

Question 5

Assignment

Answer 5

The process of transferring all or part of the policy’s ownership rights

Question 6

Beneficiary

Answer 6

A person or institution legally entitled to receive benefits through a legal device, such as a will, trust, or life insurance policy

Question 7

Buy-Sell Agreements

Answer 7

Arrangements that require the sale and purchase of securities owned by one individual to another following a specified triggering event, such as the death of a business owner

Question 8

Capitalized-Earnings Approach

Answer 8

Method to determine life insurance needs that suggests the death benefits of a client’s life insurance should equal an income stream sufficient to meet the family’s needs without depleting the capital base

Question 9

Conservation (Risk Management) Phase

Answer 9

This phase is from late 50s to early 70s, when cash flow assets and net worth have increased and debt has decreased somewhat. In addition, risk management of events like employment, disability due to illness or accident, and untimely death become a priority

Question 10

Contingent Beneficiaries

Answer 10

Person(s) or organization(s) names to receive the death benefit if the primary beneficiary is not available to receive the policy proceeds

Question 11

Corridor test

Answer 11

One of two congress-imposed tests to determine whether a life insurance contract meets the definition of a Modified Endowment Contract (MEC). This test calls for the policy to be tested using actuarial principles and requires the premiums to represent no more than a specified portion of the death benefits

Question 12

Cross-Purchase Buy-Sell Agreement

Answer 12

An arrangement between individuals who agree to purchase the business interest of a deceased owner

Question 13

Decreasing-Term Insurance

Answer 13

Type of term insurance that allows the owner to pay the same premium for the insurance protection each year. The death benefit on the policy will decrease each year to offset the increasing in mortality cost.

Question 14

Distribution (Gifting) Phase

Answer 14

The phase from late 40s to end of life and occurs when the individual has high additional cash flow, low debt, and high net worth

Question 15

Entity Purchase (Redemption) Agreement

Answer 15

Type of buy-sell agreement that obligates the business entity to purchase an owner’s interest in the entity upon that owner’s death

Question 16

First-to-Die

Answer 16

A type of joint life insurance policy that covers two individuals, but the death benefit is paid upon the death of the first individual

Question 17

Grace Period

Answer 17

A provision in most insurance policies that allows payment to be received for a certain period of time after the actual due date without a default or cancellation of the policy

Question 18

Group Term Insurance

Answer 18

A type of life insurance coverage offered to a group of people (often a component of an employee benefit package) that provides benefits to the beneficiaries if the covered individual dies during the defined covered period

Question 19

Human-Life Value Approach

Answer 19

Method to determine life insurance needs that suggests the death benefit of a client’s life insurance should be equal to the economic value of the client’s future earnings stream

Question 20

Insured

Answer 20

The person whose life is insured by the policy

Question 21

Joint and Survivor Annuity

Answer 21

An annuity based on the lives of two or more annuitants, usually husband and wife. Annuity payments are made until the last annuitant dies

Question 22

Level Premium Term Insurance

Answer 22

A type of term insurance that charges a fixed premium each year over a specified period of years, so the premium does not increase over that period

Question 23

Limited-Pay Policies

Answer 23

Type of whole life policy with a payment schedule (typically 10 or 20 years). At the end of the payment period, the policy is considered to be paid-up, at which time no additional premium payments are due

Question 24

Modified Endowment Contract (MEC)

Answer 24

A cash value life insurance policy that has been funded too quickly. Under a MEC, the death benefit payable to the beneficiary is not subject to income tax, but policy loans or cash value withdrawals are taxable.

Question 25

Modified Whole Life Policies

Answer 25

A type of whole life policy with lower premiums than a regular policy for an initial policy period (often 3 to 5 years), which increases to a higher-level premium at the end of the initial period

Question 26

Mortality Cost

Answer 26

Equals the probability of dying within the year times the face value of the policy

Question 27

Mortality Risk

Answer 27

The risk that an individual will die within the year

Question 28

Needs Approach

Answer 28

A method to determine life insurance needs that suggests the death benefits of a client’s life insurance should equal the cash needs that the family will require at death plus income replacement needs

Question 29

Ordinary (or Straight) Life

Answer 29

A type of whole life policy that requires the owner to pay a specified level premium every year until death (or age 100 or 120)

Question 30

Owner

Answer 30

The person or institution who owns the policy and can exercise the economic rights in a policy, including assignment, sale, etc. Also the person who is generally obligated for the payment of the premiums.

Question 31

Primary Beneficiary

Answer 31

Person(s) (may be a group designation) or organization to receive the death benefit upon the death of the insured

Question 32

Second-to-Die

Answer 32

Type of joint life insurance policy that is often used in estate planning to provide liquidity at the death of the second spouse. A second-to-die policy names two insureds and pays the death benefit only when the second insured dies

Question 33

7-Pay Test

Answer 33

One of two Congress-imposed tests to determine whether a life insurance contract meets the definition of a Modified Endowment Contract (MEC). This 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 the policy), the life insurance policy would be deemed a MEC

Question 34

Simultaneous Death Provision

Answer 34

A provision in a life insurance policy for situations in which the insured and the beneficiary die within a short time of one another and it is not possible to determine who died first. Generally the policy death benefit is distributed as if the beneficiary had predeceased the insured

Question 35

Single-Premium Policy

Answer 35

Type of whole life policy that requires the owner to pay a lump sum in return for insurance protection that will extend throughout the insured’s lifetime. These policies will always be MECs

Question 36

Sinking Fund

Answer 36

A fund established by a company to pay for future expenses or to retire debt. It is created by setting aside income over a period of time (generally years)

Question 37

Suicide Clause

Answer 37

Provision in a life insurance policy specifying that the insurance company will not pay the benefit if the insured attempts or commits suicide within a specified period from the beginning of the coverage. The clause is designed to hedge against the risk that individuals with suicidal thoughts will purchase life insurance and commit suicide shortly thereafter

Question 38

Surrender Charge

Answer 38

A fee levied on a life insurance policyholder upon cancellation of the policy to cover the up-front costs of issuing the policy

Question 39

Survivorship Clause

Answer 39

A provision in a life insurance policy specifying that the death benefit will only be paid to the beneficiary if the beneficiary survives the insured by a specific number of days

Question 40

Term Insurance

Answer 40

A life insurance policy that states that if the premium has been paid and the insured dies during the term of the policy, the insurance company will pay the specified death benefit

Question 41

Underwriting

Answer 41

The process by which insurance companies decide whether to provide insurance to a customer and under what terms

Question 42

Universal Life Insurance

Answer 42

A type of term insurance with a cash-value accumulation feature allowing individuals to make premium contributions in excess of the term-insurance premium. The excess premiums are deposited into an account with various investment options

Question 43

Variable Life Insurance

Answer 43

A 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 funds managed by the insurer and outside investment managers.

Question 44

Variable Universal Life Insurance (VULs)

Answer 44

A type of insurance policy that combines variable and universal life insurance and gives the policyholders the option to invest as well as alter insurance coverage

Question 45

Variable Whole Life Insurance

Answer 45

A type of life insurance policy that provides for a fixed premium payment and permits the cash value of the policy to be professionally managed by the insurance company or an outside investment manager

Question 46

Viatical Settlement

Answer 46

An arrangement in which a policyholder sells their life insurance policy to a third party

Question 47

Whole Life Insurance

Answer 47

A type of life insurance that provides guarantees from the insurer that are not found in term insurance or universal life insurance