Life Insurance Basics Flashcards
(42 cards)
What is life insurance?
Life insurance is a contract that pays a lump sum to a beneficiary when the insured person passes away. It provides financial protection for dependents.
What is the difference between term and permanent life insurance?
• Term life insurance covers you for a set period (e.g., 10, 20 years). If you outlive it, there’s no payout.
• Permanent life insurance lasts for your entire life and includes a cash value component.
What is the face amount of a policy?
The face amount is the sum of money the insurance company agrees to pay the beneficiary upon the insured’s death.
What is underwriting in life insurance?
Underwriting is the process where the insurance company evaluates the applicant’s risk, based on factors like age, health, and lifestyle, to determine premiums.
What are premiums?
Premiums are the regular payments made by the policyholder to keep the life insurance policy active.
What is the cash value in permanent life insurance?
Cash value is a savings component that grows over time in permanent life insurance policies. It can be borrowed against or withdrawn.
What is the formula for calculating premiums for term life insurance?
Net premium+ loading charges
What happens if the policyholder outlives their term policy?
There is no payout unless the policyholder renews or converts the policy to permanent life insurance, depending on the terms.
What is the difference between a whole life and a universal life policy?
• Whole life has fixed premiums and a guaranteed cash value.
• Universal life has flexible premiums and an adjustable death benefit and cash value.
What is a non-forfeiture option?
A non-forfeiture option allows a policyholder to receive some benefit from a policy if they stop paying premiums (e.g., cash surrender value or paid-up insurance).
What is a term rider?
A term rider is added to a permanent life insurance policy to provide extra coverage for a specific time, usually at a lower cost.
What plan is this?
Coverage for a set period (10, 20, or 30 years).
If you die within the term, your beneficiary gets paid.
If you outlive the term, the policy ends (unless renewable).
💰 Cost: Cheapest option. Premiums increase at renewal.
💵 Taxation: No tax on death benefit. No cash value.
✔️ Best for:
Temporary needs (e.g., mortgage, kids’ education).
Young families who need coverage at a low cost.
Variations:
✅ Renewable: Can extend after the term (higher premiums).
✅ Convertible: Can switch to permanent insurance later.
Term Life Insurance
What plan is this?
Lifetime coverage (never expires if premiums are paid).
• Has a cash value that grows over time.
• Premiums are fixed (higher than term but never increase).
Cost: More expensive than term.
Taxation:
• Death benefit = Tax-free.
• Cash value growth = Tax-deferred (taxed if withdrawn).
Best for:
• Estate planning & leaving an inheritance.
• People who want guaranteed lifelong coverage.
Whole life insurance
What plan is this?
Lifetime coverage with investment options.
Flexible premiums (you can pay more or less).
Cash value grows based on investments.
💰 Cost: Higher than term but flexible.
💵 Taxation:
Death benefit = Tax-free.
Investments grow tax-deferred but taxable if withdrawn.
✔️ Best for:
People who want life insurance + investment growth.
Business owners or high-income earners for tax benefits.
Variations:
✅ YRT (Yearly Renewable Term) – Cheaper at first, increases yearly.
✅ LCOI (Level Cost of Insurance) – Higher upfront but stable long term.
Universal Life Insurance
What plan is this?
Permanent coverage, but no cash value.
Cheapest permanent option.
💰 Cost: Cheaper than whole life, more than term.
💵 Taxation: Death benefit is tax-free.
✔️ Best for:
People who need lifetime coverage at a lower cost.
Final expenses, estate planning.
Term - to - 100 (T100) insurance
What plan is this?
Life insurance through an employer.
Cheap or free but not portable (you lose it if you leave).
💰 Cost: Low (sometimes covered by employer).
💵 Taxation:
Death benefit = Tax-free.
If employer pays premiums, they are a taxable benefit.
✔️ Best for:
Extra coverage while employed.
Not reliable for long-term needs.
Group Life Insurane
These plans are best for?
Key Person Insurance: Protects a business if a key employee dies.
Buy-Sell Agreement: Helps business partners buy out a deceased partner’s share.
💵 Taxation:
Death benefit to business = Tax-free.
If policy is personally owned, cash value may be taxed.
Key Person Insurance/ Buy/Sell Agreement Insurance
How do you calculate
Prorated Premiums
If paying for only part of a year:
(Total Premium ÷ 12) × # of months used
How do you calculate Tax on Withdrawals (Cash Value)
If you take money out of a policy:
✅ Cash Value – ACB (Adjusted Cost Basis) = Taxable Amount
How do you calculate Estate Tax Calculation (if applicable)
Account Value × Tax Rate = Tax Owed
Death Benefit – Tax Owed = Net Benefit to Estate
Cash value growth for term life
None
Cash value growth for whole life
Tax deferred
Cash value growth for universal life
Tax deferred
Cash value growth for term to 100
None
