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Flashcards in Chapter 6 Deck (35)
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1
Q

All life insurance policies have a death benefit - t/f?

A

True

2
Q

What do settlement options do?

A

They are used to determine how the proceeds from the death benefit will be distributed to the beneficiary

3
Q

What are the living benefits of (1) permanent policies and (2) participating policies

A

The living benefit of permanent policies is the cash value - participating polices may pay dividends

4
Q

What are nonforfeiture options?

A

Nonforfeiture options give permanent life insurance policyowners alternatives for using cash value if the policyowner wants to change the existing policy

5
Q

If a policyowner doesn’t specify a certain type of death benefit, then what occurs with respect to settlement/distribution of death benefit?

A

The death benefits are distributed as a lump sum

6
Q

What are the 8 different types of “settlement options” (in addition to lump sum)

A
  1. Interest income only
  2. Fixed period option
  3. fixed amount option
  4. Life Income Option
  5. Life with Period Certain
  6. Joint and Survivor Life
7
Q

What is the “interest income only” settlement option?

A
  1. Interest paid on death benefit
  2. Death benefit paid at later date

Insurer retains the death benefit and pays a stated amount of interest on the money - the interest is paid at regular intervals - good choice for those who do not need the life insurance proceeds until a later date - perhaps to be used for education

8
Q

What is the fixed period settlement option?

A

Proceeds and interest divided into equal payments over a selected period

9
Q

With a “fixed period settlement option” what 3 factors are used to determine the amount of each payment?

A
  1. Amount of death benefit
  2. A guaranteed interest rate
  3. The length of the chosen period
10
Q

With fixed period settlement option, if the interest is greater than the guaranteed rate - what will be true of the final payment?

A

It will be higher

11
Q

What is a “fixed amount” settlement option?

A

Proceeds paid out in a fixed amount over time until both the principal and interest have been completely paid to the beneficiary. Recipient has the ability to either increase or decrease the payment amount or switch to a different settlement option altogether

12
Q

What three factors are used to determine the minimum length of the payment period for a “fixed amount” settlement option?

A
  1. Death benefit
  2. Interest
  3. Defined Payment
13
Q

In the case of a “fixed payment” settlement option - if the interest exceeds the guaranteed rate, what will occur?

A

The term of payments will last longer than initially anticipated (note, this differs from a “defined term” option where interest being higher than the guaranteed rate results in the final payment being higher)

14
Q

What are the two components of permanent life insurance?

A
  1. Death benefit (or face value)

2. Cash Value (savings element funded by a portion of the premium)

15
Q

If a policyowner needs cash but doesn’t want to surrender their policy, how can they access the cash value?

A

Through the policy loan provision

16
Q

What are the main advantages of a policy loan over other loans?

A
  1. No credit check
  2. Low interest rates
  3. Not legally obligated to pay it back
  4. Can pay back according to virtually any payment schedule
17
Q

If there is a death while a policy loan is outstanding, how much is the death benefit reduced by?

A

The amount of the loan plus interest outstanding

18
Q

When the policy loan and the accumulated interest exceed the cash value of the policy, what occurs?

A

The policy lapses

19
Q

Some policies have an automatic premium loan provision - what is that?

A

If the insured fails to pay the policy premium by the end of the grace period, then the insurer will pay the premium with a policy loan and will continue to do so until the cash value of the policy falls below the premium account - in which case, the policy will lapse

20
Q

Loans are subject to loan interest and any unpaid loan will be deducted from the death benefit upon the insured person’s death - loans may be repaid at any time while the policy is in force - contrast this with withdrawals

A

Withdrawals, or partial surrenders, are allowed on universal life insurance policies but not whole life policies. A withdrawal will result in a reduction of the cash value and the death benefit amount. A withdrawal may be subject to a pro-rata surrender charge and/or processing fee. A withdrawal cannot be repaid

21
Q

Can you take withdrawals from whole life?

A

No - only universal life

22
Q

What are policy dividends (only paid on participating policies)

A

A refund of a portion of the premium

23
Q

Are policy dividends taxable?

A

No - because they are a return of premium (not guaranteed)

24
Q

What acronym can be used to recall the dividend options in participating policies?

A

CARPPO

25
Q

What are the meanings of the letters in CARPPO (the different options for participating dividends)

A
C: Cash
A: Accumulated Interest
R: Reduced Premium
P: Paid Up additions
P: Paid up insurance
O: One-year term insurance
26
Q

Is the interest credited to the “accumulated interest” dividend option taxable?

A

Yes - but not the dividend itself

27
Q

What is the “paid up additions” option for the receipt of dividends?

A

Uses each annual dividend to purchase an additional amount of insurance - resulting in larger life insurance and the opportunity to earn dividends on that amount

28
Q

What is the “paid up insurance” options (CARPPO) for the receipt of dividends?

A

Dividends plus interest on dividends are applied to the annual premiums and are enough to pay the entire annual premium. In a high interest rate environment, this may allow the policyowner to not have to pay premiums out of pocket

29
Q

What is the “one-year term insurance” options (CARPPO) for the receipt of dividends?

A

The dividend may be used to buy one-year term insurance equal to the policy’s cash value

30
Q

Are dividends guaranteed on participating policies?

A

No

31
Q

What is a nonforfeiture clause?

A

An insurance policy that allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse

32
Q

What are the 3 nonforfeiture clauses?

A
  1. Cash Surrender
  2. Reduced paid-up insurance
  3. Extended Term insurance
33
Q

What is the “cash surrender” nonforfeiture option?

A

The policy is canceled and the policyowner receives the current cash value

34
Q

What is the “reduced paid up insurance” nonforfeiture option?

A

The policyowner obtains a reduced amount of paid-up whole life insurance based on the insured’s attained age and the amount of guaranteed cash value available to buy a single premium policy. This policy will pay the reduced death benefit whenever the insurer dies

35
Q

What is the “extended term insurance” nonforfeiture option?

A

The net cash surrender value is used to buy a term insurance policy with a death benefit the same as the original whole life policy and is based on the insured’s attained age