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Flashcards in Life Insurance Deck (135):


The concept of indemnity states that insurance should restore the insured, in whole or in part, the the condition he enjoyed before the loss. Restoration may take the form of payment for the loss or repair or replacement of the damaged or destroyed property.


Elimination Period

Also know as a "time deductible", the elimination period is simply the number of days the insured must be disabled before disability income payments become payable.



It means that for a specified coverage range, the insured and insurer will share the expenses according to a certain split.


Casualty Insurance

Casualty insurance protects the insured against the financials consequences of legal liability, including that for death, injury, disability, or damage to real or personal property.


What are the three major sources for insurance

1. Private commercial insurers (profit making)
2. Private noncommercial insurers )nonprofit service organizations)
3. United States government (special nonprofit)


Commercial Insurers:
Mutual Company vs Stock Insurance Company

In a mutual company, ownership rest with the policyholders. In a stock insurance company, the company is owned by stockholders.


Private Insurers:
Reciprocal Insurers

Reciprocal insurers are unincorporated groups of people that provide insurance for one another through individual indemnity agreements.


Private Insurers:

Lloyd's of London is not an insurance company but may be compared to a stock exchange, where its members can sell insurance. Such things as character, experience, business integrity, and amount of capital are factors considered for any new member.


Private Insurers:
Assessment Company

An assessment company retains the right to charge policyholders additional premiums if those paid in are insufficient to meet claims.



Reinsurance is a form of insurance between insurers. It is a way for an insurer to share risk with another insurance company.



Self-insurance is a means of retaining risk. For a risk to be truly self-insured, two important characteristics will be present:
1. A large number of homogeneous exposure units, so that the law of large numbers can be used to predict expected losses.
2. Sufficient liquid assets to pay claims and other costs of retaining risk.


Social Insurance

Federal, state, and local governments provide social insurance to a segment of the population who would otherwise be without disability income, retirement income, or medical care.


Insurer's Domicile:
What is the difference between Domestic, Foreign, and Alien insurers?

Domestic insurer - An insurer doing business in the state where it is incorporated.
Foreign insurer - An insurer doing business in a state where it is not incorporated.
Alien insurer - An insurer doing business in a country where it is not incorporated.


Surplus Lines Insurance

Often called the "safety valve" of the insurance industry, surplus lines insurers fill the need for coverage in the marketplace by insuring those risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers.


Independent Insurance Producers

1. Independent Insurance Producers sell the insurance products of several companies and work for themselves or other producers. They sell their clients the policy that fits their needs best among the many insurers they represent and are paid a commission for each sale. The independent producer owns the expirations of the policies he sells, meaning that the individual may place that business with another insurer upon renewal if it is in the best interest of the client.


Exclusive or Captive Producers

Exclusive or Captive Producers represent only one company and have an agency relationship with that company. These producers are sometimes referred to as career agents working from career agencies. Mos t often, these captive or career producers are compensated by commissions. A career producer's compensation will normally consist of first-year commissions and renewal commissions in subsequent years. Usually, the first-year commissions may represent 50% or more of the first-year life insurance premium. Thereafter, the renewal commissions will usually be 10% or less each year.


General Agent

If a producer hires, trains, and supervises other producers within a specific geographical area, he is referred to as a general agent or managing general agent (MGA). The MGA is compensated by commissions earned on business he sold as well as an overriding commission (overrides) on the business produced by the other producers managed by the general agent.


What is the difference between Agent and Broker?

In contrast to the agent-client relationship in which the agent represents the insurers to the purchaser, a broker represents the buyer to the insurer. A broker may do business with several different insurers. Brokers are independent sales representatives who select insurance coverages from these various companies for their clients.



Usually referred to as a third-party administrator (TPA), an administrator works for a self-funded (self-insured) group collecting charges or premiums and adjusting claims in connection with life or health insurance or annuities.


Paul v. Virginia

The 1869 case was brought before the Supreme Court to determine whether the individual states had the right to regulate the business of insurance. The courts decision established, as law, that the transaction of insurance across state lines was not interstate commerce and therefore should be regulated by local law. The decision was held in case after case for 75 years.


South-Eastern Underwriters Decision

In 1944, the Supreme court overturned the previous decision from Paul v. Virginia by saying that insurance transacted across state lines was, in fact, interstate commerce that could be regulated federally.


McCarran-Ferguson Act

To waylay impending confusion from the South-Eastern Underwriters Decision, Congress enacted the McCarran-Ferguson Act in 1945. This act stated that the federal government had the right to regulate the business of insurance, but only to the extent that such business is not regulated by state law.


Privacy Act of 1974

The three goals:
1. To minimize intrusiveness
2. To be fair and impartial in collecting, analyzing, and presenting information and reports.
3. To make it known to the public that they can expect personal information to be handled in confidence.


Pretext Interview

A pretext interview is an interview whereby a person in an attempt to obtain information about another person, pretends to be someone he is not, misrepresents the true purpose of the interview, or refuses to properly identify himself.

Pretext interviews may be legally conducted only when an insurer is conducting an investigation of suspected fraud or material misrepresentation.


Financial Services Modernization Act of 1999

Also known as the Gramm-Leach-Billey Act (GLBA), this legislation was passed in 1999 primarily to remove Depression-era barriers between commercial banking, investment banking, and insurance.


California Financial Information Privacy Act (Cal GLBA)

This act provides additional protections for consumer nonpublic personal information. Instead of the opt out provisions of GLBA, California requires an opt in.



The Health Insurance Portability and Accountability Act (HIPAA) imposes specific requirement on health care providers with respect to the disclosure of insureds' health and medical information, or protected health information. Health care providers must preserve patient confidentiality and protect this information.


California Life and Health Insurance Guarantee Association

The purpose of the CLHIGA is to protect persons covered under life and health insurance policies against loss resulting from insurer insolvencies.


Insurance Code, Statutes, Rules and Regulations

Insurance Code: The body of laws at the state level is called the Insurance Code.

Statutes: Statutes are the body of law developed by the legislative branch of the government.

Rules and Regulations: Rules and Regulations are developed by the Department of Insurance, to expand upon statutory requirements and explicate legislative intent.


Nation Association of Insurance Commissioners (NAIC)

The NAIC, an association of state commissioners, although without legal authority as a group, also imposes a strong influence in the area of the industry's self-regulation. The NAIC is the organization that has done the most to standardize law between the states.


What are the 3 types of agent authority?

1. Express authority - An explicit, definite agreement granting authority.
2. Implied authority - Actual authority not written into the agency agreement.
3. Apparent authority - Authority an agent does not actually have.


What is waiver and estoppel?

Waiver - the intentional and voluntary surrender of a known right. An insurance company may waive its right to cancel a policy for nonpayment by accepting late payments.
Estoppel - An insurer may waive a right, and the, after the policy owner has relied on the waiver and acted upon it, the insurer will be estopped from asserting the right.


What elements are necessary for the formation of a valid contract?

Agreement (offer and acceptance), consideration, competent parties, and legal purpose.


What are the 4 basic parts of an insurance contract?

1. Policy Face (title Page) - Usually the first page of an insurance policy. It includes the policy number, name of the insured, policy issue date, the amount of premium and dates the premium is due, and the limits of the policy.
2. Insuring clause - Generally appears on the policy face. It is a statement by the insurance company that sets out the essential element of insurance--the promise to pay for losses covered by the policy in exchange for the insured's premium and compliance with policy terms.
3. Conditions - Spells out in detail the rights and duties of both parties.
4. Exclusions - States what the company will not do and what the insurance does not cover. (suicide etc)



An insurance contract is said to be aleatory, or dependent on chance or uncertain outcome, because one party may receive much more in value than he gives in value under the contract.



An exchange of a promise for a promise is bilateral, whereas an exchange of an act for a promise is unilateral. Generally, insurance contracts are unilateral because the insured completes that act of paying the premium and the insurer makes a promise.



An insurance contract is an executory contract in that the promises described in it are to be executed in the future, and only after certain events occur.


Parol (Oral) Evidence Rule

The parol evidence rule limits the impact of waiver and estoppel on contract terms by disallowing oral evidence based on statements made before the contract was created. It is assumed that oral agreements made before contract formation were incorporated into the written contract. Once formed, earlier oral evidence will not be admitted in court to change or contradict the contract. An oral statement may waive contract provisions only when the statement occurs after the contract exists.



Underwriting is the process of selection, classification, and rating of risks. The risk selection process consists of evaluating information and resources to determine whether a risk is acceptable.


Adverse Selection

The underwriter's purpose is to protect the insurance company insofar as he can against adverse selection--very poor risks and parties with fraudulent intent.



Another source of medical information available to the underwriter is an Attending Physician's Statement. AFter a review of the medical information contained on the application or the medical exam, the underwriter may request an APS from the proposed insured's doctor. Usually, the APS is designed to obtain more specific information abot a particular medical problem.


Simplified Issue Life Insurance

Simplified issue life insurance requires no medical exam and only asks very basic health-related questions on the application. Usually, this type of insurance is only available in low face amounts to reduce the risk of adverse selection against the company.


Gross Annual Premium vs Net Premium

The gross annual premium, or the amount the policyholder actually pays for the premium, equals the mortality risk discounted for interest, plus expenses.

The net premium is the mortality risk discounted for interest, without any expense adjustment.


Level Premiums

Unlike term life insurance, level premiums do not increase with age.


Premium Mode

The premium mode is the frequency with which the insured will pay premiums (eg. monthly, quarterly, annually). The premium mode is important because the insurer will invest these funds.


Loss Ratio and Expense Ratio

A loss ratio is determined by dividing losses by total premiums received.

An expense ratio is determined by dividing expenses (commissions, etc) by total premiums received.

When the combined loss and expense ratio is 100%, the insurer breaks even. If it is more than 100%, the insurer loses money.


Contributory vs Noncontributory group insurance plans

If the insured contributes money toward the premium, the plan is considered contributory. In most states, at least 75% of employees must participate under a contributory plan. If the premium is paid entirely by the policy-owner, the plan is considered noncontributory. All of the eligible members must participate under noncontributory plans.


Probationary Period

Oftentimes, individuals coming into a covered group will be required to serve a probationary period before becoming eligible for group coverage. This period is usually 90 days, but may be more or less.


Eligibility Period

The eligibility period typically runs for 30 or 31 days after the probationary period expires. If the group member does not apply during the eligibility period, he is generally required to take a medical exam before being eligible for coverage.
If an individual does not enroll during the eligibility period but wants to enroll later, he generally will be required to take a physical examination and will be selected on an individual basis, just as if the policy were an individual policy.


Viatical Settlement

An arrangement whereby a person with a terminal illness sells their life insurance policy to a third party for less than its mature value in order to benefit from the proceeds while alive.


Conditional Receipt

Once the producer has completed the application, it is normal to collect the first full premium from the policyowner. The receipt of this premium is generally a conditional receipt. The receipt is conditional because the producer cannot guarantee that the policy will be issued. The conditional receipt explains to the proposed insured that the policy will be issued subject to the approval of the insurance company.


Binding Receipt

Another type of receipt is an unconditional or binding receipt that makes the company liable for the risk from the date of application. This coverage lasts for a specified time or until the insurer issues the policy or notifies the applicant that the policy is being refused. The specified time limit is usually 30 to 60 days.


Temporary Insurance Agreement

This type of receipt or agreement provides the applicant with immediate life insurance coverage while the underwriting process is taking place.



Conservation means any attempt by the existing insurer to dissuade a policyowner from replacing existing life insurance or annuity.



A fiduciary is a person in a position of financial trust.


Renewable Term Policy

A renewable term policy is one that may be renewed at the end of the specified period for another term period without evidence of insurability. When a renewable term policy is being renewed, however, the rates will be based on the age the insured has reached at the time of renewal. This is why premiums for renewable term coverage are often called step-rate premiums.


Convertible Term Policy

A convertible term policy allows the policyowner to convert or exchange the temporary protection for permanent protection without evidence of insurability. Usually, this conversion feature is used to convert term insurance to some form of whole life insurance.


Reentry Term

A reentry option (also known as reissue) is also a common feature of term policies. This option gives the opportunity to provide evidence of insurability at the end of the term to qualify to renew the policy at a lower premium rate then the guaranteed rate available without evidence of insurability. Essentially, the renewing insured is reviewed as a new applicant for term insurance.


Level Term

Level term provides a level death benefit and level premium during the policy term. For example, if an individual purchases a 10-year term policy with a face amount of $100,000 both the premium and the face amount will remain constant for the entire 10-year period.


Indeterminate Premium Term

Indeterminate premium term is a type of term insurance for which the premium may fluctuate between the current premium charge and a maximum premium charge that is stipulated in the insurer's premium tables and is based on the insurer's mortality experience, expenses, and investment returns.


Interim Term

When a person wants immediate protection and is thinking of starting a permanent insurance policy in the near future, interim term may be used to cover the period before permanent protection is to begin.


Whole Life Insurance

Whole life insurance gets its name from the fact that the policy is designed to provide coverage for the whole of life (actually, up to age 100). In reality, many consumers who purchase whole life insurance use the cash value for retirement income or some other purpose prior to death or policy maturity. Whole life is often called "permanent insurance" because the maturity date is beyond the life expectancy of most individuals. If a whole life policy were actually allowed to reach its maturity date, the cash value would equal the face amount and the net insurance protection would have declined to zero.


Limited-Payment Whole Life

Many insured policyowners want the lifetime insurance protection afforded by the whole life policy but do not like the thought of paying premiums for their entire lives. Limited-payment whole life policies allow the policyowner to pay for the entire policy in a shorter period.


Single Premium Whole Life Policy

The most extreme version of a limited-pay policy is one that can be paid for with only one premium. For this reason, it is called a single premium whole life policy.


Current Assumption Whole Life Policy

Current assumption whole life policies (also know as interest-sensitive whole life) offer flexible premium payments that are tied into current interest rate fluctuations.



An economatic policy is a whole life-type policy with a term rider that uses dividends to purchase additional paid-up insurance. Let's assume that an individual wants $100,000 of whole life but can't quite afford it. Instead, he purchases $70,000 of whole life with $30,000 of term insurance. Thus, he has $100,000 of death protection at a lower cost. As policy dividends are declared, they are used to purchase additional paid-up insurance. As the paid-up insurance is added, an equal amount of term insurance is removed from the policy, thus maintaining the full face amount of $100,000 at no additional cost. When the paid-up additions equal $30,000, the insured now owns $100,000 of whole life but pays only an economical premium of $70,000.


Characteristics of Flexible Policies

Ordinary whole life policies offer premiums, cash values, and face amounts that are determined at the time the policy is purchased and, unless the policyowner takes out a loan or partial withdrawal, generally do not change over the life of the policy.

Flexible policies, in contrast, offer the policyowner the opportunity to change one or more of these components in response to changing needs and circumstances. Each type of policy offers different types of flexibility.


Adjustable Life Insurance

Adjustable life is a policy that offers the policyowner the options to adjust the policy's amount, premium, and length of protection without having to complete a new application or having another policy issued.


Universal Life

Universal life was the insurance industry's answer to the extremely high interest rates we experienced in the decade of the 70's. Traditional whole life contracts have earned 3.5-5% interest. In an effort to be more competitive, many insurers developed universal life products with relatively high interest rates (8-12%). Universal life is a flexible premium, adjustable benefit life insurance contract that accumulates cash value.


Indexed Universal Life

Policies that have current rates linked to an outside index are known as indexed universal life.



Under current tax laws, if the universal life policy is to maintain its status as life insurance and thus provide a tax-free death benefit, there must be a degree of mortality risk until the insured's age 95. This is the reason for the automatic increase in the death benefit if the cash value equals or exceeds the policy's face amount. This buffer or corridor between the death benefit and the cash value must be maintained.


What are the two options regarding the death benefit payable under a universal life policy?

Option A (or Option 1) provides a level death benefit equal to the policy's face amount. As the policy's cash value increases, the mortality risk decreases. Thus, the cost of the death protection actually decreases over the life of the policy and, accordingly, more of the premium can be placed in the cash account. This same concept applies to whole life.

Option B (or Option 2) provides for an increasing death benefit equal to the policy's face amount plus the cash account. Unlike option 1, the mortality risk remains at a level amount equal to the policy's face value. Thus, the policyowner will incur a higher expense for the cost of the death protection over the life of the policy and less of the premium will be deposited in the cash account. Under option B, the death benefit increases by the cash value's amount.


Variable Life Insurance

Variable life insurance is a securities-based whole life insurance product. Producers selling variable life must be registered with FINRA. This registration may be done by passing the Series 6 or 7 exam. In addition, an agent needs a valid life license, and in many states, a state issued variable life or variable producer license.


General vs Separate Account

When people purchase fixed annuities or guaranteed life insurance products, a portion of the premiums is invested in the insurer's general account. In this account, the insurer maintains an investment portfolio of relatively safe and conservative investments, such as real estate and mortgages. In contrast, insurers are required to maintain a separate account for equity products like variable life insurance.


Securities Act of 1933, Securities and Exchange Act of 1934, and Investment Company Act of 1940

Securities Act of 1933 requires that a prospectus be delivered at or before the point of sale of a variable life product.

Securities and Exchange Act of 1934 requires registration of the company and the company's sales representatives with the federal authorities.

Investment Company Act of 1940 provides for the registration of separate accounts as an investment company.


The 12% Rule

At the time of solicitation, variable life illustrations may not be based on projected interest rates greater than 12%. This prevents the producer and the policyholder from assuming excessive and unrealistic rates of return.


Current Assumption Whole Life

Current assumption whole life goes by various other names, including interest-sensitive whole life and excess interest whole life. The premium and cash value amounts of a current assumption whole life policy may change on the basis of the insurer's experience. However, there is a minimum guaranteed cash value based on a minimum guaranteed rate of return.

Unlike universal life, current assumption whole life is a bundled policy. The pure insurance and investment elements are not broken out separately.


Indeterminate Premium Policies

Indeterminate premium policies offer a low current premium at the beginning of the policy period, usually for two years. After that period, the premium can be adjusted to reflect the insurance company's experience with regard to investment return, mortality, and expenses.


Endowment Policy

The accelerated growth of the cash values of endowment policies resulted in legislation against them. According to the tax reform act of 1984, any policy issued after January 1, 1985, that endows before age 95, will not qualify as life insurance. That would mean that the policy's cash value accumulation and death benefit would be taxed.

The endowment policy has all the same elements as the whole life policy. The primary difference is that it matures earlier.


Types of Endowments

Retirement endowment: A retirement endowment was one of the most commonly sold endowment contracts. Typically, this type of policy was issued to mature at age 65 when the insured planned to retire. Like whole life insurance, the face value was payable as a death benefit if the insured died before the maturity date. However, at maturity, the full face amount became payable as a living benefit, usually in the form of monthly installment income.

Pure endowment: This policy offered no life insurance protection. The pure endowment provided for the payment of the policy's face amount only if the insured lived to the maturity date.

Endowment Life Insurance: A combination of a pure endowment plus term insurance for a specified period.

Juvenile Endowment Policies: Were designed to mature at a specific age, such as 18, so that the maturity value was available to help fund a college education.


Family Income Policy

The family income policy provides an income to be paid upon the death of the family breadwinner. The payout period, which is determined when the policy is purchased, is scheduled to last until the family's income needs diminish.

Example: If Kim has a 15-year family income policy and dies two years after purchasing this policy, Kim's family can expect to receive income benefits for 13 years.


Family Maintenance Policy

Family Maintenance policies are similar to family income policies in that they both provide an income to be paid to the insured's beneficiary. The difference is that with a family maintenance policy, coverage is provided by combining level term insurance with a permanent policy.

Example: Let's say Sandy. age 30, wants to provide funds for family maintenance for at least 15 years following her death, as long as death occurs before age 45. If Sandy were to die 10 years later at age 40 this family maintenance policy would pay monthly income to Sandy's beneficiary for 15 years from the date of Sandy's death.


Joint Life Policy

A joint life policy may pay the face amount upon the first death among the persons covered by the policy or upon the last death among the persons covered by the policy.

Under a first-to-die joint life policy, the contract ends at the first death and there is no further insurance protection for the other person or persons covered by the policy.

Survivor life insurance, or second-to-die insurance, covers two lives and guarantees payment only when the second insured dies. Premiums are usually payable until the second death.


Modified Premium Plan

A modified premium plan is an ordinary life policy in which the premium obligation is redistributed. Premiums are lower during the first three to five years of the policy, usually only a little more than would be paid for a level term policy for the same period. After this initial period, the premiums go up so that they're somewhat higher than would be paid for an ordinary whole life policy.

The advantage of the modified premium plan is that it allows the purchase of permanent insurance at a time when a person;s income might otherwise not permit it and transfers much of the cost to a later period when the policyowner's income can be expected to be higher.


Graded Premium Plan

A graded premium plan is similar to modified whole life in that initially the premium is very low. Unlike modified life, which has one increase to a higher, level premium for the life of the contract, graded premium policies provide for an increase in premium each year for the first 5 to 10 years of the policy. At the end of this step-rated premium period, the premium remains level for the life of the policy.


Deposit Term Insurance

Deposit term insurance is a level term insurance policy that has a much higher premium for the first year than for subsequent years. The initial premium is significantly higher than the average premium needed to cover the cost of mortality during the term period. The excess front-end premium (the deposit) is then set aside to earn interest, and these dollars (deposit plus interest) will be applied to reduce the premium payments required in the following years.



Riders are frequently included or made part of a life insurance policy or annuity contract. They take their name from the fact that they have no independent existence. They have force and effect only when they are attached to a policy. Riders are special policy provisions that provide benefits that are not found in the original contract or that make adjustments to it.



A waiver is a type of rider that is used to exclude benefits and for which no premium is charged.


Waiver of Premium

The waiver of premium rider exempts a disabled policy owner from needing to pay premiums during the term of disability while keeping the policy in force.


Payor Rider

The payor rider states that if the person who's paying the premiums, in most cases the parent, dies or becomes disabled before the child has reached a specified age, the company will waive all further premiums until the child reaches that age.


Guaranteed Insurability Rider (GIR) or Insurance Protection Rider (IPR) or Future Increase Option

A rider that will guarantee that the insured can purchase more permanent insurance at specified ages, without proof of insurability.


Return of Premium

This rider was developed primarily as a sales tool to enable the agent to say, 'in addition to the face amount payable at your death, we will return all premiums paid if you die within the first 20 years,' for example. In reality, the rider does not return premium but pays an additional amount at death that equals the premiums paid up to that time-as long as death falls within the time specified by the rider.


Accelerated Benefits Rider or Living Benefits Rider

This rider allows policyowners who are terminally ill or who require long-term care or permanent confinement to a nursing home to collect all or part of their death benefit while they are still alive.


LTC Rider

Long-term care insurance, which reimburses health and social service expenses incurred in a convalescent or nursing home facility, can be marketed as a rider to life insurance policies.


Accelerated Benefits vs Long-Term Care Riders

The distinction between an accelerated benefits provision or rider and a long-term care rider is an important one under California law. Under both types of riders, benefits can be triggered by a diagnosed need for long-term care. However, under a long-term care rider, benefits may be paid only when the insured actually incurs expenses for long-term care services.

In contrast, payment of benefits under an accelerated benefits provision cannot be restricted in regard to the receipt of long-term care services.


Viatical Settlement

Under a viatical settlement contract, the insured, or viator, sells his insurance policy to a viatical settlement provider for a reduced percentage of the policy's face value.


Insuring Clause

The insuring clause contains the basic promise of the life insurance company to pay a specified sum of money in a lump sum or an equivalent income stream to the beneficiary upon the death of the insured.


Consideration Clause

The consideration clause is the second important clause found in every life insurance policy. As its name implies, the consideration clause deals largely with the consideration paid by the policyowner for the life insurance protection-the premium.


Execution Clause

The execution clause simply says that the insurance contract is executed when both parties (the company and the policyowner) have met the conditions of the contract.


Absolute Assignment

A policy also may be assigned permanently and irrevocably. This is called an absolute assignment, For example, the policyowner may wish to make a gift of a policy to his daughter. He would accomplish this by making an absolute assignment.


Automatic Premium Loan Provision

The automatic premium loan provision, when included, allows the company to use automatically whatever portion of the cash value is needed to pay premiums as they become due.


Incontestability Clause

The incontestability clause states that after the policy has been in force a certain length of time, the company can no longer contest it or void it, except for nonpayment of premiums.


Filing Method or Recording Method

This method of effecting a beneficiary change is also known as the recording method. Under this method, the request must be filed in writing to the insurer. The request is made effective by the insurance company recording the change in its records. Once recorded, the change takes effect as of the date the insured signed the request.


Per Capita

Per capita is derived from latin and literally means "per head" and, therefore, "per person". Under per capita distribution, proceeds are split evenly.


The Uniform Simultaneous Death Act

Beneficiary designations may seem perfectly clear when read in a life insurance policy. Nevertheless, if an insured and the primary beneficiary are both killed at the same time, problems arise. How can it be determined who outlived whom?

Many states have adopted the Uniform Simultaneous Death Law. Under it, if there is no evidence as to who died first, the policy will be settled as though the insured survived the beneficiary.


Spendthrift Clause

A person who spends money extravagantly is known as a spendthrift. The insured can protect the proceeds of an insurance policy from the actions of a spendthrift beneficiary thorough the use of a spendthrift clause. This clause in a life insurance policy provides the following features:
-The proceeds will be paid in some way other than a lump sum.
-The proceeds or payments to be made to the beneficiary are protected from the beneficiary's creditors while they are still held by the insurance company.


What are the four life insurance settlement options?

1. Interest Only - The life insurance company keeps the proceeds for a limited time and invests them for the beneficiary, paying the earned interest as income to the beneficiary.

2. Fixed Period Option - A form of annuity, the beneficiary receives regular income for a specified period, comprising both principal and interest.

3. Fixed Amount Option - A form of annuity, the beneficiary receives regular income in a fixed amount until the principal runs out.

4. Life Income Option - A form of annuity, the beneficiary receives payments for life.


Standard Nonforfeiture Law

This law prescribes that any cash value accumulation must be made available to the policyowner if he stops paying the premiums for any reason.


Reduced Paid-Up Insurance Option

Another nonforfeiture option is called the reduced paid-up insurance option. Under this option, the policyowner essentially uses the cash value of a present policy to purchase a single premium insurance policy at attained age rates for a reduced face amount.


Extended Term Option

Another nonforfeiture option, the policyowner can use the policy's cash value accumulation as a single premium to purchase paid-up term insurance in an amount equal to the original policy face amount.


Participating Policies vs Non-Participating Policies

Participating Policies receive dividends which depend on the company's performance.


What are the three sources of funds for insurance policy dividends?

1. Mortality - The mortality tables tell us that a certain number of persons in each age group will probably die in the next year. If fewer people die than predicted, the insurance company experiences a mortality savings.

2. Assumed interest - A life insurance company estimates that invested money will earn a given rate over the long run, usually around 4%. If a company assumes its investments will earn 4%, but the invested premium actually earn 8%, the company has earned excess interest.

3. Operating expenses - If the company's operating expenses are less than expected, it will have saved money.


Paid-Up Additions Option for Dividends

If a policyowner decides to use dividends as a single premium option to buy additional life insurance protection, the additional coverage is fully paid for, or paid-up, with that premium.


Paid-Up Option for Dividends

This option actually allows the policyowner to pay up the policy early. For example, the insured has a 20-pay lie policy. By using the dividends over the life of the policy, it may be paid up after 16 or 17 years instead of the full 20 years.


Guaranteed Minimum Payments

Many people were not happy knowing that most or all of their investment would be lost if they were to die after receiving just a few payments. This caused insurance companies to start offering some alternatives that provided a minimum guaranteed payment.


Refund Life Annuity

The main difference between the refund and life annuity is that a refund annuity guarantees that an amount at least equal to the purchase price of the contract will be paid.


Life Annuity Certain

Another type of annuity is the life annuity with period certain, which calls for payments for a guaranteed minimum number of years-often 10, 15, or 20. Most often, the period is 10 years because 10 years is approximately the average life expectancy of a male who retires at age 65. Obviously, the annuitant could outlive the minimum number of years specified in the contract, in which event the income payments continue until he dies.


Temporary Annuity Certain

As you know, under a life annuity with period certain, if the annuitant lives longer than the certain period stated in the contract, income payments continue for the lifetime of the annuitant. This is not the case with a a temporary annuity certain, however. If the insured outlives the period of payments stipulated in the temporary annuity certain contract, payments stop at the end of the period.


Tax-Sheltered Annuity Plans

To encourage public school systems and tax-exempt charitable, educational, and religious organizations to set aside funds for their employees' retirements, tax-sheltered annuity plans (TSA's) may be set up and the contributions may be excluded from the current taxable income of the employees.


Retirement Income Annuity

A retirement income annuity is an ordinary deferred annuity, but with an additional feature-a decreasing term life insurance rider that provides term life insurance with a face amount that decreased each year the policy is in force. The effect is that if the annuitant reaches retirement age, say 65, the decreasing term insurance death benefit expires and annuity payments begin providing retirement income. If, however, the annuitant dies before retirement, the decreasing term insurance death benefit is combined with the value of the annuity and then paid to the annuitant's beneficiary in any settlement option chosen.


Old Age Survivors and Disability Insurance (OASDI)

The Social Security Act covers a wide assortment of social insurance and public assistance (welfare) programs. What we refer to as Social Security is more properly called Old Age Survivors and Disability Insurance (OASDI).

Generally speaking, OASDI provides the following categories of benefits:
-Monthly retirement benefits for retired workers at least age 62.
-Monthly benefits for spouses of retired workers.
-Monthly survivor benefits for the spouse and certain other survivors of deceased workers.
-Monthly disability benefits for disabled workers and their dependents.
-A modest lump-sum death benefit payable at a worker's death.


Eligibility for Social Security

Generally, most workers must be covered under social security, including common-law employers and employees, most self-employed persons, Armed Forces personnel, and employees of nonprofit organizations.

The main excluded worker groups are railroad workers and federal employees hired before 1984. Federal employees hired after 1984 are covered. Railroad workers contribute to their own railroad retirement system.

In addition, employees of state and local governments are not covered unless the government entity has entered into an agreement with the social security administration or does not have a retirement program. Generally, most government workers are covered.

Finally, there are certain types of family employment situations in which a family member may not be covered under social security. These situations include employment of a minor child (under 18) by his parent, employment of a parent as a domestic in the home of the parent's child, and employment of a parent to do work not in the course of a son's or daughter's business.


Social Security - Fully Insured Status

To achieve fully insured status, a worker must accumulate at least one quarter of coverage for each year after the person's 21st birthday and have a minimum of at least six quarters of coverage. This birthday rule allows young workers to achieve fully insured status within a relatively short time. Th maximum requirement for fully insured status is 40 quarters of coverage, which gives the worker permanent status. Under the 40-quarter rule, once a worker accumulates credit for 40 quarters of coverage, that person is fully insured for life and the status cannot be lost even if the person drops out of the workforce.


Social Security - Currently Insured Status

A worker who is not fully insured still is currently insured if he has earned six credits within the last 13 calendar quarters. For example, a 35-year-old worker who did not have the 13 credits required to be fully insured is currently insured as long as he earned at least six credits within the last three years and three months.


Social Security - Disability Insured Status

A special insured status is required if a worker is eligible for disability benefits under social security. This status required that the worker be fully insured and have earned at least 20 quarters of coverage in the 40 calendar quarter periods ending with the calendar quarter in which the disability begins. This requirement is modified slightly if a covered worker is disabled before age 31. To receive disability benefits, workers disabled before age 31 must have at least one quarter of coverage for every two calendar quarters after their 21st birthday, with a minimum of at least six quarters of coverage.


Benefit Eligibility by Insured Status

-Retirement at 65 - Fully Insured
-Disability - Fully Insured or disability Insured
-Lump-sum death benefit - Fully Insured or Currently Insured
-Spouse's benefit (worker living) - Fully Insured
-Spouse's Survivor Benefit - Fully Insured
-Child's Benefit (worker living) - Fully Insured
-Child's Survivor Benefit - Fully Insured or Currently Insured
-Parent's Survivor Benefit - Fully Insured


Primary Insurance Amount (PIA)

Social Security benefits are expressed as a percentage of the primary insurance amount. The PIA for a worker is based on her average level of earnings and is updated and published annually in tables by the federal government. Most types of social security benefits are some percentage of the PIA as set for the year for the worker's earnings level.


Modified Endowment Contract (MEC)

To discourage the use of life insurance contracts with high premiums as investments, federal law subjects all permanent policies to a test. A life insurance policy that fails the test will be considered a modified endowment contract (MEC), which makes the policy subject to less favorable tax treatment. A policy that passes the 7-year test is not an MEC.


Why would a business use a non-qualified retirement plan?

Non-qualified retirement plans, like deferred compensation, can be limited to select employees, such as the business owner and top executives. This is not true for qualified retirement plans.


What determines whether or not an individual may make a deductible IRA contribution?

Whether an individual may make a fully deductible IRA contribution depends on the answer to this question: Is the individual, or the individual's spouse, if filing jointly, covered by an employer-maintained retirement plan?

If the answer to this question is "no", then the IRA contribution is deductible. If a married worker's spouse does not work, then the working spouse can contribute up to the limit for both spouses, resulting in a contribution and deduction double the individual limit (5,500 if under 50).

If the answer to this question is "yes", then the IRA contribution is fully deductible as long as one of the following holds true:
-The individual has an AGI of less than $61,000
-The married couple filing joint has an AGI less than $98,000

Note: Married persons not covered by an employer-maintained retirement plan who file separate returns are considered covered if their spouses are covered by such a plan unless they have lived apart from their spouses for the entire year.

Since 1998, a separate limit applies to an individual who is married, filing jointly, and who is not an active participant in an employer-maintained retirement plan but whose spouse is. In that case, the limits just discussed apply to the participating spouse and the deduction for the non-participating spouse is phased out between $183,000 and $193,000.


Roth IRA Contributions

Each spouse can contribute up to the limit to an IRA (Roth or Traditional) in any combination. Availability of Roth IRA's is phased out between $183,000 and $193,000 of AGI for married couple filing jointly and between $116,000 and $131,000 of AGI for singles. Availability of the Roth IRA is not affected by participation in an employer-sponsored retirement plan.


SIMPLE Retirement Plans

To establish a Savings Incentive Match Plan for Employees (SIMPLE), a business must employ no more than 100 people who earned more than $5,000 the preceding year, and the business must have no other qualified plan.

SIMPLE plans may be structured as an IRA or as a 401(k) cash or deferred arrangement. Under these plans, employees who elect to participate may defer up to a specified amount each year ($12,500 in 2015-but $15,000 for those 50 and older- plus cost of living adjustment, or COLA, increases) and the employer then makes a matching dollar-for-dollar contribution, up to an amount equal to 3% of the employee's annual compensation. All contributions to a SIMPLE IRA or SIMPLE 401(k) plan are nonforfeitable; the employee is immediately and fully vested. Taxation of contributions and their earnings is deferred until funds are withdrawn or distributed.

In place of dollar-for-dollar matching contributions, an employer can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee. In 2015, only the first $269,000 of the employee's compensation can be taken into account when determining the contribution limit.



Simplified employee pensions are across between an IRA and a profit-sharing plan. Under a SEP, each eligible employee of an employer establishes an IRA. The employer then makes contributions to the employee's IRA according to a formula described in the SEP document. The maximum contribution that may be deducted by the employer is 25% of the total compensation paid to all participating employees.


Keogh Plan

A keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A keogh plan can be set up as either a defined benefit or defined contribution plan.

For qualified defined benefit plans, the IRS stated that in 2017, the maximum annual benefit is set at $215,000 or 100% of the employee's compensation, whichever is lower.


403(b) Arrangements

A 403(b) arrangement (sometimes referred to as a 403(b) plan) is an employee-sponsored qualified retirement arrangement available to employees of public school systems. Under this tax-deferred annuity arrangement, the employee agrees to let the employer withhold a part of the employee's salary, or perhaps the amount of a salary increase. The employer then uses this deferred salary to purchase an annuity.