Chapter 6: Life Insurance Premiums, Proceeds and Beneficiaries

Question 1

Common Disaster Provision

Answer 1

Uniform Simultaneous Death Act
If both the insured and the primary beneficiary die withing a short period of time, the death benefits will be paid to the contingent beneficiary.
The primary beneficiary must outlive the insured by a specified period of time.

Question 2

Expense Factor

Answer 2

AKA Loading Charge
A measure of what it costs an insurance company to operate.

Question 3

Excess Interest

Answer 3

Whehe n the cash value will increase faster than the guaranteed rate if the insurer earns a greater return than the guaranteed rate.

Question 4

Fixed Amount Installment Option

Answer 4

Pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted.

Question 5

Fixed/Level Premium

Answer 5

Concept of averaging the cost over monthly periodic payments.
More periodic payments = higher total premium.

Question 6

Interest Factor

Answer 6

Calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums.

Question 7

Life Settlement

Answer 7

An agreement where the policyholder sell or transfer ownership in all or part of a life insurance party to a third party for less than the expected death benefit.

Question 8

Modified Premium

Answer 8

Initial premium is lower than it should be (3-5 years).
After, premium increases and then remains level for the rest of the policy

Question 9

Morbidity Rate

Answer 9

Incidence and extent of disability that may be expected from a given group of people.

Question 10

Mortality Rate

Answer 10

Measure of the number of deaths, scaled to the size of population, per unit time

Question 11

Net Payment Cost Index

Answer 11

A formula used to determine the actual cost of a policy for a policyowner.
Helps the consumer compare costs of death protection between policies that will be held for ten or twenty years.

Question 12

Per Capita

Answer 12

AKA By the head
Evenly distributes benefits among all named living beneficiaries

Question 13

Per Stirpes

Answer 13

AKA By Bloodline
Evenly distributes benefits amongst insured’s family line

Question 14

Policy Proceeds

Answer 14

Amount actually paid as a death, surrender or maturity benefit.

Question 15

Settlement Options (5)

Answer 15

1) Lump sum cash
2) Interest Only
3) Fixed-period
4) Fixed-amount
5) Life Income

Question 16

Spendthrift Clause

Answer 16

Prevents creditors from obtaining any portion of policy proceeds upon death.
Also, the policyowner can prevent the beneficiary from spending it all by having the benefits paid out in fixed amounts over time after death.

Question 17

Surrender Cost Index

Answer 17

A cost comparison calculation formula used to determine the average cost-per-thousand for a policy that is surrendered for its cash value.

Question 18

Uniform Simultaneous Death Act

Answer 18

States that if the insured and the primary beneficiary die at approx the same time, in a common accident, the law will assume the primary died first.

Question 19

Viatical Settlement

Answer 19

When someone with a terminal illness selling their existing life insurance policy to a third party for a percentage of the death benefit.

Question 20

Viatical (Viatee)

Answer 20

New third party owner in a viatical settlement

Question 21

Viator

Answer 21

The original policyowner in a viatical settlement

Question 22

Factors in the premium calculation (3)

Answer 22

1. Mortality
2. Interest
3. Expenses

Question 23

Where does the mortality factor originate from?

Answer 23

The Commissioners Standard Ordinary Mortality Table

Question 24

Interest Factor

Answer 24

An insurer’s return on investment.

Question 25

Expense Factors (4)

Answer 25

AKA Loading Charge/Factor Operating expense including: Death benefits paid Commissions Salaries Admin costs

Question 26

Other factors that influence premium cost (7) include:

Answer 26

1. Age 2. Sex 3. Health 4. Occupation 5. Hobbies 6. Habits 7. Travel

Question 27

Net Premium Formula

Answer 27

Makes provision for mortality cost and interest. Net single premium = mortality - interest.

Question 28

Gross Premium

Answer 28

Actual premium paid Gross premium = Net Premium + Insurer Expenses

Question 29

Fixed/Level Funding

Answer 29

Averages the single premium over the policy period. Policyowner pays more than the actual cost of insurance in early years to help cover the cost of insurance in later years; that is how it remains level

Question 30

Minimum Deposit/Financed Insurance

Answer 30

Not an actual policy type Best suited for individuals who are in a high marginal tax bracket; allows them to use policy loans to pay premiums that are due each year. Use the cash value increase to pay the premium

Question 31

Reserves

Answer 31

AKA Unpaid Claim Reserves Funds set asided by an insureer to pay current and future claims. Fixed liability

Question 32

Legal Reserve

Answer 32

Amount of funds an insurance commissioner requires an insurer to maintain based on the CSO Mortality table and the assumed rate designated by the state commissioner or state insurance law.

Question 33

What does the Interest Adjusted Net Cost Method provide information for? (4)

Answer 33

Provide information for : 1. Premiums 2. Death benefits 3. Cash value 4. Dividends

Question 34

Index Numbers

Answer 34

Designed to give consumer a means of comparign the cost policies of the same generic type.

Question 35

What 2 interest adjusted indexes must be used in policy illustrations according to the NAIC reg?

Answer 35

Surrender cost index Net payemnt cost index

Question 36

Net payment cost index

Answer 36

Useful for the insured who is concerned by the death benefit over the cash value.

Question 37

Surrender Cost Index

Answer 37

Useful for the insured who is concerned over the cash value over the death benefit

Question 38

Comparative Interest Rate Method

Answer 38

AKA Buy term and invest the rest strategy Determines the rate of return thats required on an investment account to yield the same return as a life insurance policy that has cash value

Question 39

Chronically ill

Answer 39

A person who need considerable supervision due to cognitive impairment or is unable to perform at least two activities of daily living

Question 40

Terminally Ill

Answer 40

A person who's not expected to survive a medical condition for more than 24 months

Question 41

Life Settlement

Answer 41

The sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than the net death benefit. Unlike viatical settlements, the insured doesn't have to be chronical or terminally ill.

Question 42

Life settlements do not include the following alternatives: (5)

Answer 42

1) Policy assigned as collateral for loan 2) Policy loans 3) 1035 exchange 4) An agreement in which all of the parties are closely related to the insured by blood law or substantial economic interest 5) Legitimate corporate or pension benefit plans

Question 43

Death Benefit (other names, 5)

Answer 43

1. Face Value 2. Face Amount 3. Coverage Amount 4. Coverage Limit 5. Policy Proceeds

Question 44

Life Income Options (4)

Answer 44

1. Single, Pure or Straight Life 2. Refund Life Income 3. Life Income w/ Period Certain 4. Joint & Survivor Option

Question 45

Single, Pure or Straight Life

Answer 45

1. Life income, monthly payments 2. Most significant amount of income 3. Most risk due to no survivorship

Question 46

Refund Life Income Option

Answer 46

AKA Joint Life Option Guarantees the return of an amount that's equal to the principal minus any payments. Minimum guaranteed return Once the primary beneficiary dies, his survivors may receive the refund on an installment basis or in a lump sum

Question 47

Life Income w/ Period Certain

Answer 47

Pays a monthly income for as long as the beneficiary lives. However if the beneficiary dies before a predetermined number of years, the insurer will continue monthly payments to a second beneficiary for the remainder of the years

Question 48

Joint and Survivor Options

Answer 48

Guarantees that benefits will be paid on a life-long basis to 2 or more people. May include a period certain with reduction in benefits once the primary beneficiary dies. Amount payable is based on the age of both beneficiaries.

Question 49

What are the 2 standard methods for changing a beneficiary?

Answer 49

1. Filing method 2. Endorsement method

Question 50

Testementary Trust

Answer 50

Created at the time of the insured's death according to a will.

Question 51

Inter vivos trust

Answer 51

AKA Living Trust Created during the life of the insured

Question 52

Common Disaster Provision

Answer 52

Requires the beneficiary to survive 14-30 days past the insured. If both die, then the death benefits are paid to the contingent beneficiary. If the primary beneficiary lives past the minimum period, then the estate receives the payemnt

Question 53

Spendthrift Clause

Answer 53

Protects a beneficiary from creditors with regard to life insurance proceeds. When the death benefit is left with the insurer, no creditors can attach a lien of any kind to the proceeds.

Question 54

When can life insurance be tax deductible? (3)

Answer 54

1. To an employer (employee benefit) 2. To provide for charitable contributions 3. To benefit an ex-spouse as court-ordered alimony

Question 55

Taxation of accelerated death benefit

Answer 55

Terminally ill (death within 2 years) will receive benefits tax free

Question 56

Taxation of policy dividends

Answer 56

Tax exempt since they're considered a return of overpaid/excess premiums.

Question 57

What are the 3 exchanges allowed under the 1035 Rule?

Answer 57

1. Life insurance > life insurance, endowment, annuity 2. Endowment > endowment, annuity 3. Annuity > annuity It is not allowed to change an annuity > life insurance.