Chapter 13 Part 1 Flashcards Preview

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Flashcards in Chapter 13 Part 1 Deck (20)
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an lAR should never recommend life insurance to a customer whose first interest is

investing for some other need, such as retirement or a child's college education


Life insurance policies are

contracts between an insurance company and a policy owner (policybolder). The policy owner makes premium payments to the life insurance company and, in return, the company agrees to pay a death benefit to the beneficiary upon the death of the insured


The beneficiary is the person who

receives the money (death benefit) upon the death of the insured. The beneficiary does not need to be a human being-it may be a trust or business


A rider is a

provision that clients may add to an insurance policy or annuity contract that modifies its terms to meet their needs or to provide them with added benefits


Death Benefit The death benefit is the

sum of money paid to the beneficiaiy upon the death of the insured, minus any outstanding loans and overdue premium payments


Tenn life insurance is a type of life insurance that

is in force for a specified period-for example, 10 or 20 years.


Term life insurance is best suited for people who

want life insurance protection only and are not interested in using their life insurance policy as a way to save or for investment purposes.


the main advantage of term life insurance is that it is the

least expensive type of life insurance available


When the policy expires, the insurance company will need to charge the policy owner to renew the policy for the same amount of coverage, resulting in

higher premium payments. The insurance company may also choose to no longer cover the insured, unless the policy has a guaranteed renewable feature


Whole life insurance is a type of

permanent life insurance policy that has fixed, level premium payments and a fixed death benefit, with a potential for building cash value over time. Though the cash value will increase over time, the premiums do not rise as the insured ages. Whole life insurance will remain in force as long as the policyholder continues paying the premiums or the contract matures (endows). Depending on the type of policy, the contract may mature when the insured reaches age 100, which means that the insurance policy has been fully fonded


Cash value is

the amount of money that accmes in an insurance policy. One of the main advantages of whole life insurance, compared to term insurance, is the potential to accumulate cash
value. The policy owner may surrender (cancel) the policy while he is still alive and receive this money (also called the cash surrender value)


whole life The insurance company subtracts the cost of the

insurance and other expenses from the premium payments. The remainder is invested in the company's general account. The company will normally guarantee a minimum return (e.g., 4%) on this money. The longer the policy is in force, and the longer the premium payments arc made, the greater the cash surrender value becomes. The cash surrender value compounds at a fixed interest rate on a tax-deferred basis. In other words, the policyholder is not taxed on any increases in the policy's cash value unless he surrenders it during his lifetime


The policy owner may also borrow against his policy's cash value

without tax consequences. However, the owner will be charged interest on the loan by the insurance company. If the loan is not paid, the interest charges will accumulate and increase the size of the outstanding balance. When the insured dies with outstanding loans, the company will deduct the loan from the death benefit


Investment Risk

The insurance company deposits a portion of the premium payments received from its policyholders in its general account. The company invests the money and uses it to pay death benefits and the fixed rate of return it has guaranteed on the policy's cash value. The insurance company is required to pay these benefits even if its investments perform badly. Therefore, in a traditional whole life policy, the insurance company bears all the investment risk


Universal life insurance is

a form of permanent life insurance in which the policy owner may adjust the death benefit and premium payments, as well as build cash value


The major advantage of universal life insurance is that

it is more flexible than traditional whole life insurance. Policyholders may increase or decrease the amount of their death benefit. They may also increase or decrease their premium payments within cerlain limits, or even skip them altogether. However, if the policy owner stops paying premiums, the policy's cash value must be sufficient to cover the cost of the life insurance or the policy will lapse


The insurance company subtracts the

cost of insurance and other expenses from the premium payments, with the remainder invested in the company's general account. The company generally guarantees a minimum return (e.g., 4%) on this money. the policy's cash value will increase more rapidly if the actual return is better (e.g., 5%). If not withdrawn, or not used to pay the cost of insurance, the money will accumulate to create the policy's cash surrender value. The owner may surrender the policy at any time in exchange for the cash value. however, she may need to pay surrender charges. She may also take a partial withdrawal of the cash value or borrow against it. As with a regular whole life policy, any outstanding loans are deducted from the death benefit at the time the insured dies


Investment Risk

The insurance company bears all the investment risk in a universal life policy. The company must pay death benefits and must still guarantee a minimum rate of return even if its investments lose money. The insurance company, not the policyholders, detrrnmines how the premium payments will be invested


Variable life insurance is a type of

permanent life insurance in which the premiums are fixed, but the death benefit and the cash value may vary depending on the performance of the investment options. Unlike the other types of life insurance policies we have discussed, variable life insurance policies are securities and must be registered with the SEC under the Securities Act of 1933. A prospectus must accompany or precede any offer to sell a variable life insurance policy to a client


variable life These policies are regulated

both by state and federal securities laws. Only an insurance company that is licensed and regulated by the state may issue a variable life insurance policy. The company that sells the policy must be a broker-dealer that is registered with the SEC and must be a member of FINrA. An agent who sells variable life insurance policies must hold both a state insurance license
and either Series 6 or Series 7 registration

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