Part 1 - Life Insurance Products

Question 1

UL death benefit pattern - option A or 1

Answer 1

Death benefit remains level; the NAR decreases as the account value increases (and vice versa)

Question 2

UL death benefit pattern - option B or 2

Answer 2

Level NAR, death benefit equals what is sometimes called the face amount plus an additional death benefit equal to the account value.

Question 3

UL death benefit pattern - option C or 3

Answer 3

Death benefit = face amount + sum of premiums paid.

The NAR is the difference between the combination of the two death benefits and the account value.

Question 4

3 types of mortality tables

Answer 4

1) select
2) ultimate
3) aggregate

Question 5

Policy provisions that make payment less secure

Answer 5

1) suicide clause
2) delay clause
3) exclusion clauses - eg aviation (rare), war (related to persons in the military)

Question 6

Provisions that make payment more secure

Answer 6

(Required in all life insurance sold in the US)

1) entire contract clause
2) incontestable clause (validity of contract can’t be contested after 2 years)
3) premium provision
4) grace period provision
5) reinstatement clause
6) nonforfeiture provision (applicable to cash value, non variable policies)
7) participation/policy value provision
8) misstatement of age or sex provision

Question 7

Revocable beneficiary designation

Answer 7

Can be changed by policyowner without the beneficiary’s consent

Question 8

Irrevocable beneficiary designation

Answer 8

(Policy) Can be changed only with the beneficiary’s express consent

Question 9

Nonforfeiture provision

Answer 9

Required of cash value policies stating the options available if the policy is terminated.

Options are activated automatically or can be elected by policyholder if they choose to terminate. 3 options:
1) cash (net cash surrender value)
2) reduced paid up insurance
3) extended term insurance

Question 10

3 categories of health insurance

Answer 10

1) medical expense
2) LTC
3) disability income

Question 11

Riders providing life insurance coverage (4 generic types)

Answer 11

1) term riders
2) family riders
3) accidental death benefit riders
- guaranteed insurability option
4) living benefit riders
- terminal illness coverage
- catastrophic illness coverage
- LTC riders/combination plans

Question 12

Survivorship clause

Answer 12

(aka time clause)

Provides that beneficiary must survive the insured by a fixed period of time (eg 60 days) to be entitled to the proceeds

Question 13

3 categories of morbidity based policies

Answer 13

1) medical expense
2) LTC
3) disability income

Question 14

Non can policies

Answer 14

i.e. noncancellable

Health insurance policy under which premiums are guaranteed and the insured has a contractual right to continue the policy by the timely payment of premiums, usually to a specified age, such as 65

Question 15

4 requirements for ideal insurable risk

Answer 15

1) large # of independent and homogenous exposure units
2) accidental losses (unintentional)
3) losses easily determinable as to the time, amount and type
4) economically feasible premiums

Question 16

Exposure unit

Answer 16

A person, place, or thing exposed to the possibility of loss or other insured event

Question 17

Interdependent/correlated risks

Answer 17

When exposure units in insurance pools are all subject to the possibility of suffering losses due to a single catastrophic event - the risks are systematic and are no longer statistically independent

Question 18

Annuities

Answer 18

Series of periodic payments (or receipts)

Question 19

Separate accounts

Answer 19

Mutual find type account maintained by a life insurer to receive premiums and other payments from its contract holders who bear 100% of the investment risk

Question 20

Provisions that provide flexibility

Answer 20

1) right to return policy (aka free look)
2) death benefit provision
3) beneficiary clause
4) settlement options
5) nonforfeiture options
6) policy loan provision
7) dividend options
8) assignment/ownership provision

Question 21

Reentry feature

Answer 21

(Term life policy feature)

Allows policyholders to pay lower premiums than the guaranteed renewal premium if insured can demonstrate they meet continuing insurability criteria

Question 22

Conversion feature

Answer 22

Feature of term life

Affords policyowner the option to change the term policy for a cash value insurance contract, without evidence of insurability

Question 23

4 types of personal life insurance products

Answer 23

1) term
2) universal
3) whole
4) endowment

Question 24

Homogeneous (or identically distributed) exposure units

Answer 24

Random variables whose probability distributions prescribe the same probability to each potential occurrence, which renders the distribution’s expected values and variance equal

Question 25

Ruin

Answer 25

When total insured losses exceed total premiums and investment returns received by an insurance pool

Question 26

3 pricing objectives

Answer 26

1) adequate
2) equitable
3) economically feasible

Question 27

4 policy pricing components (life insurance)

Answer 27

1) mortality charges
2) investment credits
3) loading charges (i.e. taxes and expenses, profits and contingencies)
4) persistency

Question 28

Persistency

Answer 28

Percentage of a block of life insurance policies not terminated by lapse or surrender during a given time period

Question 29

Lapse

Answer 29

Termination of a life insurance policy and the insurer’s obligations after expiration of its grace period for failure to pay a premium necessary to maintain it in full effect

Question 30

Surrender

Answer 30

Voluntary termination of a life insurance policy by its owner for its cash surrender value

Question 31

Endowments

Answer 31

Life insurance that makes 2 mutually exclusive promises to pay a stated death benefit if:
1) the insured dies during the term, or
2) if the insured survives the policy term

Question 32

Cash surrender value

Answer 32

Amount payable to the policyholder on voluntary termination, ignoring policy loans, and less any surrender charges

Question 33

Cash value/policy value

Answer 33

Life insurance policy’s internal savings before deduction of any surrender charges or policy loans

aka: account value, accumulated value, or gross cash value

Question 34

Net amount at risk (NAR)

Answer 34

Difference between the policy’s death benefit and the cash value or policy reserve

Question 35

Current assumption policies

Answer 35

Unbundled life insurance policy containing non guaranteed policy elements

Question 36

Cost of insurance (COI)

Answer 36

Charge assessed to pay for the policy’s internal term insurance - the NAR

internal age-based rate assessed against each life insurance policy based on its NAR to cover its share of mortality charges for the period

Question 37

Participating (par) policies

Answer 37

“with bonus”

Policies entitled to receive dividends declared by an insurer

Question 38

Term life insurance

Answer 38

Policy that pays a prescribed death benefit if the insured dies during the policy term, which is a specified # of years (eg 10 or 20 years), or to a specified age (eg 85 years old)

Question 39

3 categories of cash value policies

Answer 39

1) universal
2) whole life
3) endowment

Question 40

Variable life insurance (aka unit linked life insurance)

Answer 40

May be bundled or unbundled

Policyholder allocates premium payments to separate accounts offered by the insurer, with the cash values and usually death benefits directly determined by the investment performance of the assets held in these accounts which are separate from the insurer’s general asset accounts

Can be WL or UL

Question 41

Level-premium WL (ie ordinary life)

Answer 41

(lowest premiums, lowest cash values)

Uniform premiums payable for the entirety of the insured’s life

Question 42

Limited-payment WL

Answer 42

Uniform premiums payable over some period shorter than the insured’s entire possible lifetime, such as age 65, after which the policy guarantees that no further premiums will be due

Question 43

Single-Premium WL

Answer 43

(highest premium, highest cash values)

Only one premium payment is made

Question 44

Paid up

Answer 44

Condition under which a policy is guaranteed to remain in effect with no further premium payments due, in accordance with the terms of the contract

Question 45

Renewable (aka yearly renewable term, annual renewable term)

Answer 45

Right of a policyholder to continue an insurance policy for one or more policy periods merely by paying the billed premium.

Premiums increase at renewal

Question 46

Guaranteed renewable

Answer 46

Contractual right within a health insurance policy to continue the policy by timely payment of premiums, usually to a specified age such at 65, but with no guarantee as to the magnitude of future premiums

Question 47

Universal life (UL) insurance policies

Answer 47

Unbundled policy

Characterized by flexible premium payments and adjustable death benefits whose cash value and coverage period depend on the premiums paid into it

Question 48

Whole life (WL) insurance
(aka ordinary life)

Answer 48

Typically bundled policy

Characterized by fixed death benefits and fixed uniform premiums designed to enable the policy to remain in effect for the entirety of the insured’s life

Question 49

Private placement life insurance

Answer 49

Individually tailored variable life insurance designed specifically for, and available only to, qualified investors and not subject to SEC registration requirements

Question 50

Accredited investor

Answer 50

Wealthy investor who meets SEC requirements as to minimum net worth (> $1 million) or annual income (> $200k)

Question 51

Qualified purchaser

Answer 51

Any individual or family organization with net investments of $5 million or more

Question 52

Joint life insurance
(i.e. first to die life insurance)

Answer 52

Life insurance that promises to pay the face amount on the first death of two or more in insureds

Question 53

Split option

Answer 53

(under a survivorship policy)

Option to divide the policy into two individual policies of the same generic type (one on the life of each insured)

Can only be elected under certain conditions, such as divorce

Question 54

Last to die life insurance

Answer 54

Promises to pay the face amount on the death of the second insured or the last insured to die

(aka survivorship life insurance or second to die life insurance)

Question 55

Current assumption whole life (CAWL)

Answer 55

Unbundled, non-par with nonguaranteed elements

(aka interest sensitive WL or fixed premium UL)

Question 56

Non-guaranteed policy elements

Answer 56

Insurer may change elements at any time, as long as policy guarantees are respected

Commonly includes: Mortality charges, loading charges, interest crediting rate, dividends, premium (sometimes)

(aka current assumptions)


Question 57

Equity-indexed UL (EIUL)

Answer 57

(Funds held in general account)

Owner elects the proportion of account value to be allocated to the insurer’s general account based interest crediting rate and to an indexed account whose crediting rate is tied directly to some external index (i.e. S&P 500)

Question 58

No lapse guarantee (UL)
(NLG)

Answer 58

Rider or policy provision

Insurer guarantees policy will not lapse if at least a minimum continuation premium is paid

Question 59

Specified premium test

Answer 59

(No lapse guarantee (NLG) mechanism)

Guarantee remains in effect if actual premiums paid equals or exceeds a cumulative minimum premium requirement to date

Question 60

Shadow account

Answer 60

(NLG mechanism)

Derived from modified UL account value calculation using a set of guaranteed policy elements different from the set applicable to the regular account value calculation.

If neither the regular account nor the shadow account has a positive value, the policy lapses.

Re NLG mechanisms: some products include provisions for catch-up and/or reset


Question 61

Managed care

Answer 61

Programs that are designed to reduce costs and increase the quality of care by:

1) providing economic incentives for providers and beneficiaries to choose less costly forms of care
2) Implementing utilization review/management
3) Implementing cost sharing by beneficiaries
4) Implementing pre-certification procedures
5) Implementing discharge planning procedures (limit length of hospital stays to medically necessary minimum)
6) Providing economic incentives for outpatient procedures
7) Selective contracting with providers
8) Intensive management of high cost individual cases

Question 62

Minimum premium plan (MPP)

Answer 62

Contract owner assumes liability for all but the largest claims or very unfavorable total experience of the plan

Question 63

Self funded plans

Answer 63

Claims are paid in cash as they arise with no element of pre-funding through commercial insurance

Intent is to avoid the administrative cost of transferring individual risks

Question 64

Stop loss reinsurance

Answer 64

Reimburses a self-funded employer for claims incurred above certain limits and is available on an individual or aggregate basis

Question 65

Administrative services only (ASO)

Answer 65

Employer purchases specific administrative services from an insurance company or from an independent third-party administrator

Question 66

Combination plans

Answer 66

Life insurance or Annuity contracts that include long-term care insurance riders commonly providing for an acceleration of a policy’s death benefit payment in the form of monthly payments for qualified expenses

Question 67

Living benefit riders

Answer 67

(aka Accelerated benefit riders)

Promise to pay some or all of a policy’s face amount prior to the insured’s death if the insured suffers some specified adverse health condition

3 forms: Terminal illness, catastrophic illness, LTC riders/combination plans

Question 68

Guaranteed insurability option

Answer 68

(aka Additional or guaranteed purchase option)

Permits the purchase of additional insurance on the insured’s life without providing evidence of insurability, at periodic intervals and stated life events

Question 69

Accidental death benefit riders

Answer 69

Sometimes called double indemnity

Provides that double (or other multiple) of the face amount is payable if the insured dies as a result of an accident

Question 70

Term blending

Answer 70

Replaces portions of the cash value policy death benefit with term insurance

Question 71

Variable annuities (VA)

Answer 71

Performance and benefit depend directly on the performance of separate account funds specified by the owner

Question 72

Fixed annuities (FA)

Answer 72

Annuity contract that credits investment returns based indirectly on the performance of the insurer’s general account investments or directly on changes in a specified inflation or equity index, subject to a guaranteed minimum crediting rate

Question 73

Four pillars of retirement funding

Answer 73

1) Government benefits
2) Employer benefits
3) Individual savings
4) Part-time employment

Question 74

Medicare Part A

Answer 74

Covers hospital and nursing home care facility charges

Deductibles and co-pays apply

There is no coverage for non-institutional care in the home or on an outpatient basis

Question 75

Medicare Part B

Answer 75

Pays for physician, nursing, and testing services as well as durable medical equipment such as mobility devices, prosthetics, and oxygen supply machines

Deductibles/co-pays apply

Question 76

Medicare Part C

Answer 76

Provides the option of receiving Medicare benefits under private insurance plans known as Medicare Advantage Plans

Provides most of Part A (Hospital Insurance) and Part B (Medical Insurance) coverage and typically offer extra benefits such as vision, hearing and dental care.

Available to beneficiaries with both Part A and B coverages

Question 77

Medicare Part D

Answer 77

Provides prescription drug benefits under stand alone plans that are distinct from Parts A, B and C

Available only through private insurers

Question 78

Presumptive disability (clause)

Answer 78

An insured is always considered totally disabled, even if he/she is at work, if sickness or injury results in the loss of eyesight in both eyes, hearing in both ears, power of speech, or the use of any two limbs

Insurer usually starts benefits immediately and waives the medical care requirement

Question 79

3 basic components of the disability benefit provision

Answer 79

1) Elimination period (ie. waiting period)
2) Benefit period (time period for which benefits are paid)
3) Monthly benefit amount (usually fixed)

Question 80

Stated value basis

Answer 80

Stated policy benefit is paid without regard to the actual economic loss suffered

Question 81

Transplant benefit

Answer 81

(Other disability income insurance provision)

If totally disabled because of an organ transplant from the insured’s body, insurer will deem him/her disabled as a result of sickness

Question 82

Rehabilitation benefit

Answer 82

(Other disability income insurance provision)

Allows a specific sum (i.e. 12 times monthly benefit) to cover costs not paid by other insurance or public funding when the insured enrolls in a formal retraining program to help him/her return to work

Question 83

Non-disabling injury benefit

Answer 83

(Other disability income insurance provision)

Pays a specific sum (i.e. 1/4 of monthly benefits) to reimburse the insured for medical expenses incurred for treatment of an injury that did not result in total disability

Question 84

Principal sum benefit

Answer 84

(Other disability income insurance provision)

Lump sum amount payable if the insured dies accidentally, caused directly and independently by an injury, and death occurs within a specified number of days from the injury (ie 90 or 180 days)

Question 85

(Disability income)

Guarantee of future insurability

Answer 85

(aka Future increase option)

Guarantee designed to adjust insurance benefits for individuals who anticipate substantial annual income growth that is above the average national rate for salary changes or who expect periodic substantial changes in income as they mature in their careers

Allows an insured to purchase additional disability income insurance in future years without evidence of insurability

Question 86

(Disability income)

Residual disability benefit

Answer 86

(common optional or supplemental benefits)

Provides reduced monthly benefit in proportion to the insured’s loss of income when he/she has returned to work at reduced earnings

Question 87

(Disability income)

Partial disability benefit

Answer 87

(common optional or supplemental benefits)

Typically 50% of the monthly total disability indemnity and is payable for up to six months or, if less, for the remainder of the policy benefit period when the insured has returned to work on a limited basis after a period of compensable total disability

Question 88

(Disability income)

Social insurance supplement

Answer 88

(common optional or supplemental benefits)

Provides an additional disability income benefit that approximates Social Security disability benefits but which is payable only if the insured meets the policy’s definition of total disability and doesn’t qualify for any social insurance disability income benefit

Question 89

(Disability income)

Inflation protection benefits

Answer 89

(common optional or supplemental benefits)

COLA benefits: adjusts benefits while the insured is receiving disability income to account for changes in the cost of living from the start of the disability

Question 90

(Disability income)

Provisions for increased future benefit amounts

Answer 90

(common optional or supplemental benefits)

Flexibility offered to insureds (prior to a claim) to accommodate inflation and increased earnings

(Automatic increase benefit, guarantee of future insurability i.e. future increase option)

Question 91

(Disability income)

Automatic increase benefit

Answer 91

Designed to keep benefits current with changes in earned income or financial needs as a result of modest annual salary increases or the effects of inflation while the insured is not disabled

Scheduled increases with annual premium increases; insured has the right to refuse one or more of the automatic increases

Question 92

Annuity certain

Answer 92

If the annuitant dies before the end of the annuity period, payments continue to a named beneficiary for the balance of the prearranged period

Question 93

3 Special individual insurance coverages

Answer 93

1) Hospital confinement indemnity - Coverage pays a fixed sum for each day of hospital confinement

2) Specified disease policies (aka dread disease insurance) - Provides individual health insurance that pays a variety of benefits up to substantial maximums solely for the treatment of a disease named in the policy (i.e. cancer or heart disease)

3) Medicare supplement policies - Pays benefits for services not fully covered under Medicare

Question 94

Health savings accounts (HSA)

vs

Health reimbursement accounts (HRA)

Answer 94

HSAs - Permit individuals to accumulate pretax contributions to pay qualified medical expenses associated with high deductible health plans. Remain under the control of employee.

HRAs - Permit tax-free employer contributions on both high deductible and traditional healthcare plans. Balances may be forfeited to the sponsor on termination of employment.

Both HSAs and HRAs roll over and accumulate from year to year.

Question 95

Flexible spending account (FSA)

Answer 95

Accumulate pre-tax salary deductions to be applied to the reimbursement of a variety of plan participant healthcare, dependent care, and other benefits.

Unused funds are forfeited at the end of the year to the employer sponsor.

Question 96

Subrogation

Answer 96

Is the transfer of one party’s legal rights against a third-party to another

Question 97

Medical necessity

Answer 97

Means that it must be generally reasonable, necessary, and appropriate based on accepted clinical standards of care.

Question 98

Point of service PPOs (POS)

Answer 98

Hybrid PPOs under which beneficiaries typically are treated by an in-network primary care physician who may make referrals to in-network or out-of-network specialists as the beneficiary chooses

Question 99

Provider networks

vs

Out of network providers

Answer 99

Provider networks are affiliated healthcare providers

whereas

Out of network providers are unaffiliated healthcare providers and are compensated by cash payments for expenses incurred for services rendered

Question 100

Preferred provider organizations (PPO)

Answer 100

Healthcare intermediaries between sponsors and physicians, and other healthcare providers, who agree to provide services at discounted rates

Question 101

Health maintenance organizations (HMO)

Answer 101

Healthcare financing and delivery corporations that contract with doctors, hospitals, and other providers to provide services to beneficiaries rather than cash reimbursement

Question 102

“BUCA”

Answer 102

Health insurance in the US is dominated by:

“B” - Blue Cross and Blue Shield associations
“U” - United Healthcare
“C” - CIGNA
“A” - Aetna

Question 103

Moral Hazard

Answer 103

Asymmetric information problem resulting from the presence of insurance causing a change in loss prevention behavior (ie ex ante moral hazard) or loss minimization behavior (ie ex post moral hazard) of the insured

Question 104

Disability income insurance

Answer 104

Usually provides stated periodic payments when an insured loses income because of injury or sickness

Question 105

Long term care (LTC) insurance

Answer 105

Pays stated benefits when insureds incur exceptional expenses because of their need for assistance arising from an inability to perform the essential activities of daily living

Question 106

Medical expense insurance (aka Health insurance)

Answer 106

Reimburses insureds or pays providers directly for hospital, medical care, and related services

Question 107

Contingent deferred annuities (CDA)

Answer 107

(aka Standalone living benefits)

Guarantee lifetime withdrawal benefits from the owner’s mutual fund or managed investment account

If the account value is exhausted, the insurer continues the guaranteed withdrawals for the life of the annuitant

Question 108

Guaranteed lifetime withdrawal benefit (GLWB)

Answer 108

Guarantees the annuitant will receive a guaranteed stream of income payments, regardless of the contract account value, and provides complete access to a substantial part of the account balance throughout the deferral and liquidation periods

Question 109

Assumed interest rate (AIR)

Answer 109

(Also called benchmark rate or target return)

The interest rate which, if earned uniformly throughout the liquidation period, would produce level annuity benefit payments

Question 110

Riders protecting against policy lapse

Answer 110

1) Waiver of premium/charges - Pay or “waive” premiums otherwise due under fixed premium products if the insured becomes disabled

2) Overloan protection riders (OPR) - Purpose is to guarantee that a policy will not lapse. As policy loans equal or exceed a policy value and the policy lapses, a significant income tax event may be created for its owner

3) No lapse guarantee riders - Guarantee that the policy will not lapse for specified period or for life, even if the account value goes to zero, if a specified minimum premium is paid