Chapter 2

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

Death benefit

Answer 2

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

Question 3

Cash value

Answer 3

equity amount accumulated in permanent life insurance

Question 4

Estate

Answer 4

a person’s net worth

Question 5

Illustrations

Answer 5

presentation or depiction of nonguaranteed elements of a life insurance policy

Question 6

Life insurance

Answer 6

coverage on human lives

Question 7

Liquidation

Answer 7

selling assets in order to raise capital

Question 8

Lump-sum

Answer 8

payment of the entire benefit in one sum

Question 9

Minor

Answer 9

a person under legal age

Question 10

Solvency

Answer 10

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

Question 11

insurable interest

Answer 11

policyowner must face the possibility of losing money or something of value in the event of loss

Question 12

In life insurance, insurable interest must exist between the policyowner and the insured ______________; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists

Answer 12

at the time of application

Question 13

A valid insurable interest may exist between the policyowner and the insured when the policy is insuring any of what?

Answer 13

1. Policyowner’s own life;

2.The life of a family member (a spouse or a close blood relative); or

3.The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (for example, a debtor has a financial obligation to a creditor, so the creditor has a valid insurance interest in the life of the debtor).

Question 14

survivor protection.

Answer 14

he death of a nonearning spouse who cares for minor children can also cause great financial hardship for the survivors. Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured’s death

Question 15

The purchase of life insurance ______________.

Answer 15

creates an immediate estate

• Estate creation is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance policy, they will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost

Question 16

some life insurance policies provide __________ to the policyowner

Answer 16

liquidity

• That means the policy’s cash values can be borrowed against at any time and used for immediate needs.

Question 17

___________ is the use of life insurance to guard one’s wealth against creditor claims without engaging in practices that are ultimately illegal, such as concealment or fraudulent transfer.

Answer 17

Asset protection

Question 18

Viatical settlements

Answer 18

allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed: before their death.

Question 19

While viatical settlements are not policy options, they are____________ in which the insured sells the death benefit to a third party at a discounted rate

Answer 19

separate contracts

Question 20

What are the important concepts you need to understand about viaticals?

Answer 20

1. The insureds are referred to as viators;
2. Viatical settlement provider means a person, other than a viator, that enters into a viatical settlement contract;
   3.Viatical producers represent the providers; and
   4.Viatical brokers represent the insureds.

Question 21

Chronically ill

Answer 21

means a condition in which a person is unable to perform at least 2 activities of daily living or that requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

Question 22

Terminally ill

Answer 22

means a condition (illness or sickness) that can reasonably be expected to result in death within 24 months.

Question 23

Viator

Answer 23

means the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract.

Question 24

Viatical Settlement Broker

Answer 24

means a licensed person that, for a fee, negotiates viatical settlement contracts between the viator and viatical settlement providers. The viatical settlement broker represents the viator.

Question 25

Viatical settlement provider

Answer 25

means a person (other than a viator) who enters into or effectuates a viatical settlement contract. This term does not include a bank, financing entity, or the issuer of a life insurance policy providing accelerated benefits.

Question 26

Viatical Settlement Purchaser

Answer 26

means anyone who gives a sum of money as consideration for a life insurance policy or interest in the death benefits of a life insurance policy. It also means a person who owns, acquires, or is entitled to a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy which is or will be the subject of a viatical settlement contract.

Question 27

Fraudulent viatical settlement act

Answer 27

means an act or omission committed knowingly or with intent to defraud for the purpose of depriving another of property or for monetary gain by a person

Question 28

life settlement

Answer 28

refers to any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a third party for some form of compensation, usually cash.

Question 29

viatical settlements

Question 30

human life value approach (HLVA)

Answer 30

gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual’s life value by looking at the insured’s wages, inflation, the number of years until retirement, and the time value of money.

Question 31

The needs approach is based on the predicted ___________ after the premature death of the insured.

Answer 31

needs of a family

Question 32

Costs Associated with Death (postmortem)

Answer 32

taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance;

Question 33

Debt Cancellation (as an alternative to Estate Liquidation)

Answer 33

paying off debts of the insured such as home mortgage, or auto loans. (Most lenders require a collateral assignment of life insurance as a condition for a loan.)

Question 34

Emergency Reserve Funds

Answer 34

paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family members

Question 35

Education Funds

Answer 35

paying for children's education expenses so they can remain in school, or for a surviving spouse who may need additional education or training in order to re-enter the job market;

Question 36

Retirement Fund

Answer 36

as a source of retirement income

Question 37

Bequests

Answer 37

leaving funds to the insured’s church, school, or a charity.

Question 38

key person insurance

Answer 38

Key person insurance may be issued as term or permanent life, with whole life and universal life policies being used most often.

Question 39

A ________ agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.

Answer 39

buy-sell

Question 40

What are the several types of buy-sell agreements?

Answer 40

1. Cross Purchase 2. Entity Purchase 3. Stock Purchase 4. Stock Redemption

Question 41

Cross Purchase

Answer 41

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

Question 42

Entity Purchase

Answer 42

used when the partnership buys the policies on the partners

Question 43

Stock Purchase

Answer 43

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

Question 44

Stock Redemption

Answer 44

used when the corporation buys one policy on each shareholder

Question 45

Partnership AB has two partners, Partner A and Partner B. The value of the business is $1,000,000. The partners each have an equal interest ($500,000 each). Partner A buys a life policy on Partner B for $500,000, and Partner B buys a life policy on Partner A for $500,000. If Partner A dies, Partner B gets 100% ownership of the business and A's heirs receive $500,000. This example is what?

Answer 45

cross-purchase buy-sell agreement

Question 46

Executive bonus

Answer 46

is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee.

Question 47

Regarding the length of coverage, all life insurance policies fall into what 2 categories?

Answer 47

1. Term 2. Permanent Protection

Question 48

Term

Answer 48

life insurance is temporary life insurance provided for a specific period of time. It is also known as pure life insurance

Question 49

Permanent

Answer 49

life insurance is a general term used to refer to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid.

Question 50

A ____________(mutual) life insurance policy refers to any policy that distributes its dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance

Answer 50

participating

Question 51

A _____________ policy does not pay dividends to the policyowners.

Answer 51

nonparticipating

Question 52

_______ life insurance or annuities are contracts that offer guaranteed minimum or fixed benefits that are stated in the contract.

Answer 52

Fixed

Question 53

_________ life insurance or annuities are contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. Variable annuities keep pace with inflation, and are determined by the value of securities backing it.

Answer 53

Variable

Question 54

_________ life insurance is written on a single life. The rate and coverage are based upon the underwriting of that individual.

Answer 54

Individual

Question 55

________ life insurance is written as a master policy covering the lives of more than one individual covered under the single policy.

Answer 55

Group

Question 56

The process of issuing a life insurance policy begins with _____________

Answer 56

solicitation

Question 57

_____________ of insurance means an attempt to persuade a person to buy an insurance policy, and it can be done orally or in writing.

Answer 57

Solicitation

Question 58

_____________ must be accurate and not misrepresent the facts. Advertising rules apply to any insurance advertisement intended for presentation, distribution, dissemination or other advertising use when used or made either directly or indirectly by or on behalf of the insurance company.

Answer 58

advertising

Question 59

The ________ whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them.

Answer 59

insurer

Question 60

What are the rules that apply to insurance advertising in PA?

Answer 60

1. Insurers must submit three copies of all advertisement to the department of insurance for approval 2. Once a mail-order solicitation has been filed, it may be used for 2 years without additional filing 3. Advertising material will remain filed for 4 years, or until the next regular examination of the company, whichever is longer 4. If a testimonial refers to benefits received under a contract, the specific claim data should be retained by the insurer for 4 years or until the filing of the next regular examination of that insurer, whichever is longer.

Question 61

__________ means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.

Answer 61

illustration

Question 62

A life insurance illustration must do what?

Answer 62

1.Distinguish between guaranteed and projected amounts; 2.Clearly state that an illustration is not a part of the contract; and 3. Identify those values that are not guaranteed as such

Question 63

In Pennsylvania, certification of the aforementioned notification must be provided, __________, within 30 days of the anniversary of the original certification.

Answer 63

annually

Question 64

The insurer must maintain the agent's certification that a disclosure statement was delivered for either_________, or until the next regular examination, whichever is later.

Answer 64

3 years

Question 65

A ________ provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance.

Answer 65

buyer’s guide

Question 66

A __________ is a written statement describing the features and elements of the policy being issued. It must include the name and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider

Answer 66

policy summary

Question 67

The _________ compares the cash values available to buyers if they surrender the policy in 10 or 20 years.

Answer 67

Traditional Net Cost method

Question 68

____________ method considers the time value of money (or investment return on the insurance premium had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends

Answer 68

Interest-Adjusted Net Cost

Question 69

Two versions of the interest-adjusted method are the surrender __________ and the net payment cost index

Answer 69

cost index