Chapter 12

Question 1

Define life insurance.

Answer 1

legally binding contract where insurance company promises to pay a lump sum at the time of the insured’s death (or sometimes while they are still alive) in return for premiums paid

Question 2

What is the purpose of life insurance?

Answer 2

protect those who depend on you from financial loss related to your death

Question 3

Life insurance premiums are based on

Answer 3

your life expectancy and projections for the payouts for persons who die

Question 4

The Easy Method

Answer 4

Need 70% of your salary for 7 years while your family adjusts (4.9 years of gross income)

Question 5

The DINK Method

Answer 5

dual income, no kids — 1/2 debts + funeral expenses

Question 6

Multiple of Income Method

Answer 6

5-8 times your gross annual income, ignoring family size and assets

Question 7

The “Nonworking” Spouse Method

Answer 7

$10,000 times the number of years until the youngest child reaches 18

Question 8

The “Family Need” Method

Answer 8

considers employer-provided insurance, Social Security benefits, income and assets

Question 9

What are the two types of life insurance companies?

Answer 9

stock life insurance companies and mutual life insurance companies

Question 10

Stock life insurance companies are owned by

Answer 10

shareholders

Question 11

What percentage of life insurance companies are stock life insurance companies?

Answer 11

73%

Question 12

Stock life insurance companies sell

Answer 12

non-participating policies (no dividends)

Question 13

Give two examples of stock life insurance companies.

Answer 13

Prudential, MetLife

Question 14

What percentage of life insurance companies are mutual life insurance companies?

Answer 14

27%

Question 15

Mutual life insurance companies are owned by

Answer 15

policyholders

Question 16

Which is more expensive — non-participating or participating policy premiums?

Answer 16

participating policy premiums are higher

Question 17

What is a policy dividend?

Answer 17

part of the premium refunded to the policyholders annually

Question 18

Give three examples of mutual life insurance companies.

Answer 18

Mass Mutual, Northwestern Mutual, NYLife

Question 19

Term life insurance — renewability

Answer 19

Policy renews without having a physical at term’s end

Question 20

Term life insurance — multiyear level term

Answer 20

Most popular form (5, 10, 20+ years)

Question 21

Term life insurance — conversion option

Answer 21

Can exchange term policy for whole life policy without having a physical exam

Question 22

Term life insurance — decreasing term insurance

Answer 22

Premium stays the same, but the amount of coverage decreases as you age – (e.g., mortgage insurance)

Question 23

Term life insurance — return of premium

Answer 23

Policy refunds all premiums if one outlives the defined term

Question 24

What are two other terms for whole life insurance?

Answer 24

straight life -or- ordinary life insurance

Question 25

What do you pay in whole life insurance?

Answer 25

pay a level premium as long as you live

Question 26

Describe limited payment policy. (2)

Answer 26

pay premiums for stipulated period (20 or 30 years) until you reach specified age (65); policy then becomes "paid up" and you remain insured for life

Question 27

Describe variable life policy. (2)

Answer 27

minimum death benefit guaranteed; premiums do not change

Question 28

Describe adjustable life policy. (2)

Answer 28

whole life insurance policy that can be changed; can change premium payments to increase or decrease coverage

Question 29

Describe universal life policy. (2)

Answer 29

gives you more direct control; can pay premiums at any time in any amount

Question 30

Describe group life insurance. (2)

Answer 30

no physical exam required; no evidence of insurability required

Question 31

Describe endowment life insurance. (2)

Answer 31

provides coverage from beginning of contract to maturity; guarantees face value to beneficiary, even if insured is alive

Question 32

Define credit life insurance. (3)

Answer 32

debts such as car loan are paid off if you die; protects lenders; VERY expensive

Question 33

Nonforfeiture

Answer 33

keep accrued benefits if you lapse policy

Question 34

Incontestability clause

Answer 34

after policy has been in force for a while (1-2 years), company can't dispute its validity for any reson

Question 35

Automatic premium loans

Answer 35

uses accumulated cash value to pay premium, if you do not pay it during the grace period

Question 36

What are the 6 steps to obtaining a life insurance policy?

Answer 36

apply; PMH; (no physical for group policy); read contract; 10-day free look; give beneficiaries and lawyers a copy

Question 37

What is the most common life insurance payout option?

Answer 37

lump-sum payment

Question 38

Limited installment payment

Answer 38

paid equal installments for a specific number of years after your death

Question 39

Life income option

Answer 39

payments to the beneficiary for life (risky if beneficiary dies soon after insured)

Question 40

Proceeds left with the company

Answer 40

pays interest to the beneficiary for N years, then pays face value

Question 41

Define annuity.

Answer 41

financial contract written by an insurance company that provides you with a regular income

Question 42

Annuities are

Answer 42

tax-deferred investment plans

Question 43

Who benefits most from annuities?

Answer 43

those who expect to live longer than average