Chapter 1 and 2 Flashcards
Term life insurance is pure insurance, meaning that its value relates solely to____________________________
the benefit that is paid out upon death.
The term life insurance premiums are simply a combination of ____________________________ and ____________________________
the mortality costs experienced by the insurance company, and
the expenses (including the company’s profits) incurred in providing that insurance.
Term life: Mortality costs approximate the_________________________
insurance company’s cost of paying out policy death benefits.
Term life: On a per policy basis, the annual mortality cost is estimated by ________________________________.
multiplying the policy’s face amount by
the life insured’s probability of death during the year
Term life insurance: The insured’s probability of death depends on many factors, including__________________.
During the underwriting process, the life insurance company tries to estimate the life insured’s
probability of death by classifying him in a group of similar people with known _______________
age, gender, and health status
mortality experience
Premiums also have to cover the insurance company’s expenses, including the cost of
______
______
_____
_____
_____
_____
If the insurance company invests the premiums, the resulting investment income may be used to
offset the expenses
selling the policy (e.g., marketing, salaries or commissions to agents),
underwriting the policy (e.g., processing applications, undertaking medical exams),
issuing and administering the policy,
investigating claims,
paying death benefits and
the profits sought by shareholders.
Term life insurance can be either renewable or non-renewable. With a renewable term insurance
policy, the policyholder is guaranteed the right to renew the policy at the end of the term for another
term, without having to provide proof of insurability at the time of renewal. The right to renew is
usually limited to a specific age (e.g., to age 70).
With a non-renewable term insurance policy, the policy expires at the end of the term, and the
policyholder has to apply for new life insurance if he requires continued coverage. If the health
of the life insured has deteriorated, the policyholder risks higher premiums or even being denied
coverage.
Convertible term insurance gives the policyholder the option of converting the term policy to some
form of permanent life insurance (i.e., whole life, term-100 or universal life insurance) at some
future date.
The conversion does not require proof of continued insurability, so the policyholder
can acquire lifetime protection even if the life insured is no longer insurable
Convertible term insurance is more expensive than term insurance that does not include a conversion option, because it exposes the insurance company to additional risk beyond the original term.
In fact, the people who are most likely to convert the policy are those who have experienced a decline in their health, which would make a new life insurance policy too expensive or even impossible to get.
The insurance company may also restrict the age at which conversion is permitted
The new policy issued as a result of the conversion is usually treated as an extension of the
original policy for contractual purposes. This means that the clock is not reset for the purposes of
applying important legal provisions, such as the incontestability limitation and suicide limitation.
Under the mandatory incontestability limitation, an insurance company only has two years after
it issues the policy to void the policy if it discovers an error in a material fact in the application.
A material fact is any piece of information that would have influenced the insurance company’s
decision about providing the insurance coverage (e.g., smoking status, known health issues,
age), had it known about it during the underwriting process. This two-year period is called the
“contestability period.” Once the contestability period has passed, the policy becomes incontestable
and the insurance company can only void the policy if it can prove that the policyholder committed
fraud when applying for the policy
Insurance contracts also usually include a suicide exclusion clause, which states that the
insurance company will not pay the death benefit if the life insured dies by suicide within
a specified period of time (typically two years) after the contract was issued. If the life insured
dies by suicide after the suicide exclusion period ends, the insurance company will pay the
death benefit.
By exercising the conversion option of a convertible term life insurance policy, the policyholder
acquires a permanent policy without being subject to a new two-year contestability period or
suicide exclusion period
Attained age is the age on which ______________.
Depending on the administrative policy of the insurance company, attained age may be considered to be the age of the life insured as of his ______.
the life insurance premiums are based
last birthday, his next birthday, or his nearest birthday
Depending on the convertible policy, the premiums for permanent life insurance upon conversion
may be based on the attained age of the life insured at the time of the conversion to the permanent
policy. This is called an ____________________
Some policies base the permanent life insurance premiums on the original age of the life insured
at the time the insurance contract was first issued. This is called an ______________
“attained-age conversion.”
“original-age conversion,” or a “retroactive conversion.”
Patrick was born on June 1, 1967. His insurance company uses the nearest birthday when determining attained age. He bought a $500,000 5-year renewable and convertible term insurance policy on September 15, 2012, when his attained age was 45.
The policy permits conversions at any time up
to age 65.
Patrick renewed the policy in 2017, and he decided to convert the policy on May 10, 2021.
If this is an original-age conversion, his permanent life insurance premiums will be based on _____.
If this is an attained-age conversion, his permanent life insurance premiums will be based on ____, because his
attained age on May 10, 2021, is based on his nearest birthday, which would be June 1, 2021.
age 45
age 54
Original-age conversions would result in lower premiums for the permanent life insurance, which would appear to be advantageous. However, the initial premiums for an original-age convertible term policy will be higher than the premiums for an attained-age convertible term policy.
This is because the insurance company is taking on the risk of providing lifetime coverage at a lower rate
if the original-age conversion is exercised
What liability arises upon death that can seriously erode an estate?
Income Taxes
