Lesson 3 - Life Ins.

Question 1

Reasons for Life Insurance

Answer 1

1. Income replacement
2. Final Expenses
3. Estate Preservation

Question 2

Parties to Life Ins. Contract

Answer 2

The insured - whose life is covered by the life insurance policy.

The owner - purchased and can sell a policy as well as who typically pays the premiums.

The beneficiary - entitled to receive the death benefit.

(One person can be all three with bene being their estate)

(When they are 3 diff. people = Goodman Triangle or Unholy Trinisty = tax issue)

Question 3

Life Ins. Underwriting

Answer 3

• Underwriters may work with customers to explain steps that the customers can take to become insured.
• insurers attempt to select applications from those who have a level of expected losses that is similar to the level of expected losses of their current customers.
• underwriting typically begins with an insurance agent
• underwriting involves both the selection and pricing of applicants.

Question 4

Calculating Life Ins. Needs: Human Life Value Approach

Answer 4

Annual earnings - expenses/taxes would have been incurred

• Calc # yrs would have worked (WLE)
• Calc future value of lost earnings w/ expected earnings growth rate
• Calc present value fam share of earnings at inflation rate to get HLV

Question 5

Calculating Life Ins. Needs: Needs Approach

Answer 5

estimates the surviving family’s cash needs at and after the death of the insured
-income replacement needs

Question 6

Calculating Life Ins. Needs: Capitalized Earnings Approach

Answer 6

modification of the human life value approach

Modifications:

• No need to find WLE
• Returns on the life insurance are presumed to be at the long-term riskless rate

Question 7

Types of Life Ins.

Answer 7

• Term

- Permanent (whole and universal)

Question 8

Types of TERM life Ins. : Annual Renewable Term

Answer 8

Annual Renewable Term:

• can purchase in sub. years w/out evidence of insurability…but premiums increase
• ^ many comp. limit renewal period without insurability
• DB is fixed
• no CV

Question 9

Types of TERM life Ins. : Level Term

Answer 9

• premiums level for period
• no CV
• DB is fixed
• Larger premiums in earlier years than ART…less in later yrs

Question 10

Types of TERM life Ins. : Decreasing Term

Answer 10

• premiums level throughout policy
• no CV
• DB decreases over time (need for life ins. generally decreases over time)

ex. Mortgage insurance is decreasing term

Question 11

Term Life Provisions

Answer 11

• renewable - most without insurability
• convertible - most can be converted to whole w/out insurability for a certain period
• waiver of premium - if payer totally disabled, premiums waived during that time

Question 12

Whole Life Policies

Answer 12

-Premiums paid= lifetime protection

^ may be paid in cash throughout life of policy or from investment returns in cash value that has accrued

Question 13

Whole Life Policy Provisions

Answer 13

Premiums -
typically same trhoughout policy
-Pre fund higher mortality costs - expensive when originated, coverage becomes inexpensive over time (compared to new policy)
-Vanishing Premiums: pay premiums with accrued cash value

Death Benefit

• Remains level while in force
• ***also called policy face value (bene receives when insured dies)

Cash Value

• Part of premium to DB and part to CV
• CV increases to the FV at age 100 or 120 (insured can receive this)
• CV can be used for loans or received if surrendered (get CV - surrender charges)
• CV usually has min guaranteed rate of int.
• Participating - receive dividends from insurer (Non-part does not)

Appropriate Use

• Perm life ins needs
• liquidity at death to pay taxes , provide income, pay off debts
• those with perm. disabled dependents, intent to leave charitable bequest, estate planning needs

Question 14

Whole Life: Advantages and Disadvantages

Answer 14

Advantages

• tax def. growth of CV
• perm. protection to age 100

Disadv.

• expensive, inflexible high premiums
• gradual cash value growth and insured might not be able to purchase as much protection

Question 15

Types of Whole Life

Answer 15

First to Die:

• benefit paid when first insured dies, provide for surviving spouse
• life exp. less than either single life
• more expensive, more likely to pay out

Second or Last to Die:

• paid when second insured dies
• provide estate liquidity or for surviving children/benes
• Life expectancy more than either single life, less expensive, less likely to pay out

Question 16

Types of Whole Life

Answer 16

Oridinary Life: traditional, level premiums until age 100 or death (at 100 CV = FV)

Limited Pay Life: higher premiums than ^
-pre fund policy, only pay premiums for certain # of years

Variable Life: CV invested in stocks bonds MF (otherwise cv is in cash equiv. account)

• Riskier = higher returns
• DB and CV fluctuate

Question 17

Dividends on Whole Life

Answer 17

Forms=

• cash
• reduction in premium
• paid up additions (accumulate at interest)
• increase CV
• one year term (5th dividend)

Question 18

Surrender Charges and Non-Forfeiture Options for Whole Life

Answer 18

• receives the accumulated cash value when terminating less surrender charges
• reduced paid up ins. - receive CV in form of paid up policy with smaller FV
• extended term ins. - Receives cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.

Question 19

UNIVERSAL Life Insurance

Answer 19

• Permanent
• DIFFERENCE FROM WHOLE LIFE- flexibility in premiums, face value, cash value

Basic UL: insured does not direct investment, CV can be used to pay premiums, must select either universal life A or B (how DB calculated)

A:flex premium, adjustable DB unbundled life contract…bene receives DB or CV
B: same as A except DB varies directly with CV (more expensive)
-bene receives cash value and DB

Question 20

Variable Universal Life (VUL)

Answer 20

• Allows owner to direct the investment of the policy’s cash value - stocks bonds funds…which have no min guaranteed rate of int.
• often for young ppl - risk tol. and time

Question 21

Life Insurance Policy Provisions

Answer 21

Grace Period: 31-61 days after premium due date - remains in force…if insured dies, insurer pays benefit less the premium

Incontestability: once policy in force for period of time (usually 2 years) insurer cannot cancel

Mistatement of gender/age: women and young pay less
-benefit paid up or down by what premiums would have been if accurate

Assignment: owner can assign rights to someone else
Absolute assigment: transfer all policy ownership (typically result of divorce)
Collateral assignment: used as collateral for debt, owner assigns limited ownership rights…terminates when debt is satisfied

Suicide: coverage excluded if suicide within one or two years

War is typically an exclusion (prem. returned with interest)

Reinstatement: after policy lapses, may allow reinstatement…avail. w/out evidence of reinsur. period after expiration of grace period

Policy Loan:

• When issued, no income tax conseq. for owner (as long as not MEC), low int rate
• Any loan at death of insured (plus interest) is deducted from DB

Question 22

Life Ins. Settlement Options

Answer 22

Most common: single lump sum payment of DB

• Can leave DB with ins. company and receive installment payments of interest only
• Bene can use DB to purchase an annuity and receive annuity payments

Question 23

Annuity Payment Options

Answer 23

Fixed Amount: bene receives fixed pmt. each year until proceeds depleted…should name contingent

Life Income: portion of pmt. representing the return DB received by bene. iss tax free…pmt. stops when beneficiary dies

Fixed Period: If the beneficiary dies prior to receiving all the fixed payments, a contingent beneficiary can be named to receive the remaining payments
If a contingent beneficiary is not named, the payments will be made to the primary beneficiary’s estate.

Life Income with Period Certain:

• combines the benefits of the life income method with the benefits of the fixed period method.
• This approach will transform the death benefit into a life annuity contract based on the age and health of the beneficiary, yet will promise to make a specified number of payments under the contract.

Joint and Last Survivor: annuity payments will be made over the joint lives of two individuals, and, when one of them dies, the survivor will receive a reduced payment for the rest of his or her life.
*bene wants to ensure another will continue to get benefits