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Flashcards in Other Life Topics Deck (36):



A provision in a policy that states in the event of loss an insured or beneficiary is permitted to collect only the extent of the financial loss and not allowed to gain financially.



A absolute true statement upon which the validity of the insurance policy depends. Breach of warranty can be grounds for voiding the contract. Sets aments made at application aren't considered warranties.



Statements believed to be true to the best of ones knowledge.
Misrepresentations could void the contract
Material misrepresentations a statement if discovered would alter the underwriting decision by insurance co
Intentional misrepresentations are considered fraud



Intentional withholding of information of material fact crucial in decision making. Can void policy



False pretense...
Act of assuming the name or identity of another person for the purpose of committing fraud ie taking the medical for another insured. Illegal!


Unilateral contract

Only one of the parties of the contract is legally bound to do anything. The insured makes no legally binding promises.



Contract of adhesion is prepared by one of the parties (insurer) and accepted or rejected by the other party. Insurance contracts are offered on a take it or leave basis



Exchange of unequal amounts or values. The premium amount may be small compared to the that will be paid by the insurer.



Conditional contract requires that certain conditions be met by the policy owner and the company in order for the contract to be executed. Ie insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.


Conditional receipt

Says the effective date of policy will either be the date of application or date of medical exam whichever is occurs last.


Approval conditional receipt

Coverage begins only when per paid application is approved by insurer. No approval during underwriting process.


Unconditional (binding) receipt

Most often with property and casual insurance. Coverage begins immediately for a specific period of time



The risk selection and classification process


Interest adjusted net cost method

Considers the time value of money (or investment return had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends
Surrender cost index
Net payment cost index


Comparative interest rate

(CIR) the rate of return that must be earned on a "side fund" in a buy term invest the difference plan so that the value of the side fund will be equal to the surrender value of the higher premium policy at a designated point in time.


Business insurance

Find business continuation
Reimburse a business for a lost revenue or profit following death of a key employee
Provide employee benefits


Buy and sell agreements

Allow surviving partner or partners to purchase the deceased partner's share of the business from the deceased's family.
Life insurance can in part or wholly fund the buy-sell agreement.


Cross purchase plan

Each partner involved buys insurance on every other owner



The business itself is obligated to buy out the ownership of any deceased or disabled partner.


Group underwriting

Purpose of the group
Size of the group
Turnover of the group
Financial strength of the group


Types of groups

Credit union for all of its members
Credit life for the life of a debtor usually decreasing term
Mortgage life usually decreasing term


Tax treatment of premiums, proceeds and dividends

Premiums:not tax deductible
Death benefit(proceeds):tax free when taken as a lump sum to a named beneficiary or when taken in installments the principal is tax free the interest is taxable.
Dividends: not taxable
Dividend interest:taxable in the year earned(accumulations)


Tax treatment of cash value

Policy owner is not taxed on the annual increase in cash value.
If policy owner withdraws the cash value or surrenders the policy, the amount that exceeds the premiums paid will be taxed as ordinary income.
Partial surrender : FIFO interest last basis


Tax treatment of policy loans

A loan for the cash value is not taxable.

One cannot receive a tax deduction for interest paid on a policy loan.


Estate taxation

Death benefit may be included in taxable estate.

If the insured owns the loan it will be included in the estate for tax purposes. If the policy is given away and the insured dies within three years it will be included in the estate.


Group life premium taxation

Premiums paid by an employer for life insurance as a benefit to an employee is tax deductible.


Business insurance taxation

Key employee insurance
Stock redemption or entity purchase agreement
Split dollar insurance

Not tax deductible


Cash value of a business owned life insurance policy

Accumulates on a tax deferred basis

Policy loans are not taxable to businesses. However unlike individuals, businesses may deduct interest on a policy loan up to 50,000.


7-pay test

Cumulative premiums paid during first 7 years of policy must not exceed the total amount of net level premiums that would be required to pay the policy using guaranteed mortality costs and interest.


Modified endowment contract

Any policy that fails the 7 pay test, becomes a MEC and looses its tax benefits.


MEC taxation rules

Tax deferred accumulations
Any distributions are taxable, withdrawals and policy loans
Distributions are taxed on LIFO basis. Interest first
Distributions before age 59 1/2 are subject to a 10% penalty


Tax qualified retirement plan

Approved by the IRS. Give both employer and employee tax benefits.


IRA tax exemptions

10% penalty is waived but still subject to standard income taxation

Age 59 1/2
Totally disabled
Down payment on a home; not to exceed 10k
Post-secondary education expense
Catastrophic medical expenses or death


Tax sheltered annuities

Tax defend annuity 403b plan available to nonprofit orgs under sec 501(c)(3) or public schools


Keogh plans

HR-10 make it possible for a self employed person to be covered under IRS qualified retirement plan



simplified employe pension plan for small employer of self employed. SEP has a larger contribution value, the lessor of 25% of employee compensation or IRS value.