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Life Insurance Notes > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

Who are said to be the “survivors” of a life insurance policy?

A

The people who are financially vulnerable after the death - children or other loved ones that depend on the financial support of the income earner

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2
Q

Another need for life insurance is the death of a stay-at-home mom or dad that provided daycare or homemaking services

A

Note

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3
Q

Survivor protection is a purpose of life insurance

A

Note

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4
Q

What is a Mortgage payoff (one purpose of life insurance)?

A

THe largest lifetime financial obligation for families is their home mortgage - A mortgage life insurance policy will pay off this debt if the insured dies and assures that their surviving family will be able to stay in the home

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5
Q

What is estate creation (one purpose of life insurance)?

A

Premature death robs people of the opportunity to build an estate over their life - for people in their working years, life insurance can create an estate

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6
Q

What is estate conservation (another purpose of life insurance)?

A

Upon death, their are debts that must be paid from an individual’s estate (death taxes and probate expenses) - a large estate may be dwindled down - Life insurance helps conserve the estate in this case

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7
Q

Why is liquidity a purpose of life insurance?

A

Upon death - costs incurred at death are generally paid in cash - to avoid having to liquidate illiquid assets (and potentially lose value) life insurance provides fully liquid cash which can be used (helps ensure that other assets won’t be sold at a loss)

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8
Q

Can life insurance be used to accumulate cash?

A

Yes

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9
Q

Permanent life insurance policies have a cash value component that grows over time

A

Note

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10
Q

What is the life insurance cash value called?

A

Living benefit

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11
Q

Money from a living benefit policy can be used for multiple things - including what 4?

A
  1. Emergencies,
  2. Opportunities (starting a business)
  3. Education Fund for Children
  4. Supplementary retirement income
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12
Q

What are 6 of the personal purposes behind life insurance?

A
  1. Survivor Protection
  2. Mortgage Payoff
  3. Estate Creation
  4. Estate Conservation
  5. Liquidity
  6. Cash Accumulation
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13
Q

According to the principal of human life value, what is the purpose of insurance?

A

According to human life value, the purpose of life insurance is to replace an individual’s economic value and this begins with a straightforward calculation:

The amount of the individual’s annual income x the number of years until retirement

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14
Q

What is more commonly used - “the human life” approach to determine life insurance needs, or the “needs based approach”?

A

The needs based approach

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15
Q

What is the needs based approach to finding the amount of insurance coverage an individual should buy?

A

The needs based approach focuses not on income, but it looks at the financial situation the survivors will face if the individual dies - this is much more detailed than the human life approach

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16
Q

What two categories do survivors “needs” fall in?

A
  1. Cash Needs

2. Income Needs

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17
Q

What are 4 examples of “cash needs” (would be included in the needs based approach?

A
  1. Final Expenses - funeral/burial costs + final bills
  2. Debt Payoff - home mortgage, credit cards, car loans
  3. Children’s education - college or trade school
  4. Emergency fund - unexpected expenses can cause hardship
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18
Q

What are some examples of “income needs”

A

Ongoing expenses - such as food, clothing, utilities, and a mortgage

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19
Q

What are the 3 distinct income needs periods?

A
  1. Family dependency - young children, can’t support themselves
  2. Preretirement - children have grown, supporting themselves
  3. Retirement - surviving spouse no longer working
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20
Q

Social security pays survivor benefits during the family dependence and retirement periods. However, during the pre-retirement period, often called the “blackout period” this is not the case?

A

True - payments are suspended in that period

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21
Q

what is the blackout period?

A

The social security administration provides benefits for surviving spouses with children under the age of 16. When the youngest child turns 16, benefits stop and do not resume until the surviving spouse turns 60. A widowed spouse is 40 years old with two children, ages 12 and 14. Social security would stop paying a benefit to the spouse at age 44, and would not resume until the spouse turns 60

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22
Q

For the needs based approach to life insurance - After determining the needs of the survivors, those amounts are reduced by any financial resources that will be available to the survivors when the income earner dies - including wha?

A
  1. Existing assets such as bank accounts and investment accounts
  2. Employer Life Insurance or retirement benefits payable to a surviving spouse
  3. Social Security that can pay benefits to the surviving dependents
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23
Q

Must an insurance agent conduct a data gathering or fact finding interview to acquire information required for the needs based approach?

A

Yes

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24
Q

What are 6 things to ask in the “data gathering” session needed for the needs based approach?

A
  1. Names + birthdates of family members and length of income periods
  2. Sources + amounts of income available upon death
  3. Debt (like mortgages) to be eliminated
  4. Existing assets to offset cash needs
  5. Amount of insurance owned
  6. Financial objectives (such as level of child education + Retirement Goals)
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25
Q

What are buy-sell agreements (business use of life insurance)

A

They provide for the sale of a business interest at the death or disability of an owner

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26
Q

What are “buy-sell” agreements often typically referred to as?

A

Business Continuation Plans

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27
Q

To make sure that they have the money needed to buy a business interest when an owner dies, buy-sell agreements can be funded with what?

A

life insurance - the policy is on the business owner’s life, and the buyer of the business is the beneficiary.

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28
Q

How much is the death benefit in a “buy-sell” agreement?

A

The purchase price of the business interest as stated in the buy sell agreement

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29
Q

There are two types of buy-sell agreements - what are they?

A
  1. Entity plan

2. cross-purchase plans

30
Q

What is an “entity” plan (buy-sell, business continuation plan policy)

A

Purchaser is the business entity itself. When funded by life insurance, the business entity owns the policy on the life of each business owner.

31
Q

If a business is a corporation, what are “entity” plans called?

A

Stock redemption plans- because the corporation is actually redeeming the deceased owner’s stock. The term “entity plan” is usually used with non-incorporated business such as partnerships

32
Q

What is a “cross-purchase plan”

A

The surviving owner purchase the deceased owner’s interest in the business - in partnership, each partner owns life insurance on the other (if more than two ownesr, many policies are needed for a cross-purchase plan than an entity plan

33
Q

If there are more than two owners, are many more plans needed for a cross-purchase plan than an entity plan?

A

Yes

34
Q

What is “key person coverage”

A

Businesses can protect themselves against the financial harm that would result from the death of a key employee with “key-person coverage” - can be used to offset drop in sales and find a replacement

35
Q

Rather than giving a yearly bonus to an employee in cash, companies may give an “executive bonus plan” - under an executive bonus plan, what occurs?

A

A business pays the premiums on a life insurance policy which the employee owns. During life, the employee has full access to the policy’s living benefits, and at death the proceeds are paid to the beneficiary named by the employee

36
Q

What is a deferred compensation plan?

A

An employer agrees to pay an employee a stated amount of income beginning at retirement rather than paying the money now - this benefits the employee because the money is not taxable until the employee actually receives it

37
Q

With deferred compensation plans, do they usually only pay out if the employee stays on through the term of employment (prior to retirement)

A

Yes

38
Q

If an employee dies before retirement, what occurs with a deferred compensation plan?

A

The deferred compensation benefit becomes payable immediately to the employee’s surviving spouse or other beneficiary

39
Q

Given the fact that deferred compensation plans generally pay out to a beneficiary in the event of death prior to employment, how do companies de-risk?

A

They often buy life insurance to make sure that they will have the money - if permanent insurance, cash values can be used to help pay the deferred compensation benefits to the employee if he or she lives to retirement

40
Q

Under the life insurance policy that funds a deferred compensation plan,

A
  1. The company is the owner, premium payer, and beneficiary

2. the employee is the insured

41
Q

Human life value principle states that the purpose of life insurance is to replace the economic value of an individual

A

Note

42
Q

What is group life insurance?

A

A single policy that covers an entire group of people

43
Q

Who is the typical policy owner for group life insurance?

A

The employer and the policy covers employees or members of the group

44
Q

Generally, is group coverage far less expensive than what the employees or members would pay for an individual policy with similar coverage?

A

Yes

45
Q

How do group and individual insurance differ based on cost?

A

Individual is based on the cost of the individual insured, group is based upon the group

46
Q

How do group and individual insurance differ based on who the policy is delivered to?

A

Individual insurance is based on the individual policy issued (to the individual), with group insurance, the policy is issued to employers or group sponsors

47
Q

How do individual and group insurance based on who chooses the amount of insurance?

A

For individuals, policyowners choose the amount of insurance, for group, the employer determines the amount of insurance

48
Q

How do term and permanent insurance differ with respect to benefits offered?

A

Term insurance only has a death benefit, permanent insurance has both a death and a living benefit

49
Q

How do term and permanent insurance differ with respect to premiums?

A

Term has increasing premiums, permanent has level premiums

50
Q

How do term and permanent insurance differ with respect to coverage term?

A

Term insurance only has temporary coverage - which expires at the end of the term - permanent insurance has lifetime coverage, with no expiration

51
Q

How do term and permanent insurance differ with respect to age (renewal etc.)

A

Term insurance cannot be renewed or extended after a certain age - permanent insurance continues through advanced ages

52
Q

How do participating and nonparticipating life insurance policies differ with respect to dividends to policyowner?

A

Participating may pay dividends to policyowner - nonparticipating does not pay dividends

53
Q

How do participating and nonparticipating policies differ with respect to premium?

A

Participating generally have higher premiums - nonparticipating generally have lower premiums

54
Q

How do participating and nonparticipating policies differ with respect to who they can be issued by?

A

participating can be issued by mutual or stock insurers - nonparticipating can only be issued by stock insurers

55
Q

How do fixed and variable policies differ with respect to the guarantee of cash value

A

Fixed polices have a guaranteed cash value - variable does not

56
Q

How do Fixed and variable policies differ with respect to the expression of value?

A

Fixed policies are expressed in dollars, variable policies are expressed in investment units

57
Q

What is industrial life insurance? Why was it developed?

A

A way for people of limited means to obtain some of the benefits of life insurance - usually small face amounts ($2000 or less) - useful to help pay burial expenses

58
Q

A distinctive feature of the collection process for industrial life insurance policies is what?

A

premiums come due weekly and are collected in person by producers who go door to door

59
Q

What is home service life insurance?

A

Variation on industrial life - home service life insurance policies are sold by industrial or home service producers in the neighborhoods where they collect premiums at the ouses of industrial life policyowners. (Somewhat larger in size than industrial life - $10,000 to $25,000 in face value) - Policyowners are encouraged to pay the premiums through automatic bank draft (monthly debit plan) or by mail, so that producers don’t have to collect them personally

60
Q

What 3 elements go into the calculation of insurance premiums?

A
  1. Mortality
  2. Interest
  3. Expenses
61
Q

What is mortality?

A

The relative frequency of deahts in a population - death rate

62
Q

What is interest?

A

earnings on premium dollars between the time they are collected and the time they are paid out as claims

63
Q

What are expenses?

A

Insurer operating costs, referred to as the expense load. Adding het expense element to insurance premiums is called loading

64
Q

What is net premium?

A

The premium before loading or the mortality element minus the interest element (the net single premium will fund a policy’s benefit with one premium payment)
Net Premium = Mortality - Interest

65
Q

What is the Gross Premium?

A

The premium plus the interest element - loaded premium. The gross annual premium is the amount a policyowner pays for a policy
Gross Premium = Mortality - Interest + Expenses

66
Q

The gross annual premium is the amount the policyowner pays for the policy

A

Note

67
Q

What is the premium payment mode?

A

The premium payment mode reflects how frequently premiums come due.

68
Q

Premiums may be paid according to different payment modes - what are the 4 main premium payment modes?

A
  1. Annually
  2. Semi-annually
  3. Quarterly
  4. Monthly
69
Q

Premium calculations are based on the assumption that the policyowner will pay the annual premium mode - if premiums are not paid annually, what will be true of them?

A

They will be higher

70
Q

What is the lowest cost premium payment mode?

A

Annual

Life Insurance Notes (12 decks)

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