Chapter 3

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

Liquidation

Answer 6

selling assets in order to raise capital

Question 6

Life insurance

Answer 6

coverage on human lives

Question 7

Lump-sum

Answer 7

payment of the entire benefit in one sum

Question 8

Solvency

Answer 8

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

Question 9

Preretirement Period

Answer 9

This is the period after the children are no longer dependent upon the surviving spouse for support, but before the surviving spouse qualifies for Social Security survivor benefits (“Blackout Period”). The income needs of the surviving spouse lessen during this period; however, until the surviving spouse reaches age 60, Social Security benefits are not available.

Question 10

Family Dependency Period

Answer 10

This is the period when, should the insured die prematurely, the surviving spouse will have dependent children to support. The family’s income need will be greatest during this period.

Question 11

Retirement Period

Answer 11

During this period, the surviving spouse’s working income ceases and his or her Social Security benefits begin. Since the surviving spouse’s standard of living does not lessen, he or she will require an income comparable to the Preretirement Period during this time.

Question 12

Debt Cancellation

Answer 12

Insurance may be used to create a fund to pay off debts of the insured such as home mortgage or auto loans.

Question 13

Emergency Reserve Funds

Answer 13

Insurance proceeds may be used to assist in paying for sudden expenses following the death of the insured, such as travel expenses and lodging for family members coming from a distance.

Question 14

Education Funds

Answer 14

Insurance proceeds may be used to pay for children’s education expenses so they can remain in school, or sometimes a surviving spouse who has worked in the home caring for children will need to receive education or training in order to re-enter the job market

Question 15

Retirement Fund

Answer 15

Insurance proceeds may be used as a source of retirement income.

Question 16

Bequests

Answer 16

An insured may wish to leave funds to their church, school, or other organization at the time of their death.

Question 17

creates an immediate estate.

Answer 17

A person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and a significant period of time. The purchase of life insurance 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 17

liquidity

Answer 17

As a result of the cash accumulation feature, some life insurance policies provide liquidity to the policyowner. That means the policy’s cash values can be borrowed against at any time and used for immediate needs.

Question 18

The human life value approach (HLVA)

Answer 18

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 19

needs of a family

Answer 19

The needs approach is based on the predicted needs of a family after the premature death of the insured. Some of the factors considered by the needs approach are income, the amount of debt (including mortgage), investments, and other ongoing expenses.

Question 20

key person insurance

Answer 20

A business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance. Key person insurance may be issued as term or permanent life, with whole life and universal life policies being used most often.
With this coverage, the key employee is the insured, and the business is all of the following:
* Applicant;
* Policyowner;
* Premium payer; and
* Beneficiary.

Question 21

buy-sell

Answer 21

A buy-sell agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement.

Question 22

Cross Purchase

Answer 22

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

Question 23

Entity Purchase

Answer 23

used when the partnership buys the policies on the partners;

Question 24

Stock Purchase

Answer 24

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

Question 25

Stock Redemption

Answer 25

used when the corporation buys one policy on each shareholder.

Question 26

illustration

Answer 26

a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years. A life insurance illustration must do the following: * Distinguish between guaranteed and projected amounts; * Clearly state that an illustration is not a part of the contract; and * Identify those values that are not guaranteed as such. An agent may only use the illustrations of the insurer that have been approved, and may not change them in any way.

Question 27

Traditional Net Cost method

Answer 27

compares the cash values available to buyers if they surrender the policy in 10 or 20 years. This index does not take into consideration the time value of money (or investment return on the insurance premium had it been invested elsewhere).

Question 28

Interest-Adjusted Net Cost

Answer 28

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. This means that each year premiums and dividends are figured, interest is taken into consideration. Two versions of the interest-adjusted method are the surrender cost index and the net payment cost index.

Question 29

Underwriting

Answer 29

is the risk selection process. The underwriter's responsibilities include selecting only those risks that are considered insurable and meet the insurer's underwriting standards.

Question 30

adverse selection

Answer 30

The purpose of underwriting is to protect the insurer against adverse selection (risks which are more likely to suffer a loss).

Question 31

field underwriter

Answer 31

The agent is the company's front line, and is referred to as a field underwriter because the agent is usually the one who has solicited the potential insured. As a field underwriter, the agent has many important responsibilities during the underwriting process and beyond, including the following: * Proper solicitation of applicants; * Helping prevent adverse selection; * Completing the application; * Obtaining the required signatures; * Collecting the initial premium and issuing the receipt, if applicable; and * Delivering the policy.

Question 32

MIB

Answer 32

The Medical Information Bureau is a centralized information database into which insurers provide information from applications and claims. Subscribing insurers are then able to search the MiB database for information regarding any applicant for insurance.