Life Insurance Study Guide

  1. Peril vs. Hazard
    Perils and hazards are factors that cause or give rise to risk

    A peril is the immediate specific even causing loss and giving rise to risk. It is the cause of a risk. EX: When a building burns, fire is the peril.

    A hazard is any factor that gives rise to a peril. There are three basic types of hazards: physical, moral, morale
  2. Treatment of Risk (Name 4)
    • 1. Risk Avoidance
    • 2. Risk Reduction
    • 3. Risk Retention
    • 4. Risk Transference
  3. Types of insurance companies
    • Stock insurance companies
    • Mutual insurance companies
    • Assessment mutual companies
    • Reciprocal insurance companies
    • Lloyd's of London
    • Reinsurers
    • Risk retention group
    • Fraternal benefit societies
    • Service insurers or providers
    • Home service insurers
  4. Stock vs Mutual insurance companies
    • Stock insurance companies
    • Owned by stockholders
    • Non-participate policy
    • Not participate in dividends
    • Publicly owned, private organization that is incorporated under state laws for the purpose of making a profit for its stockholders. Stockholders may or may not be policyholders. When declared stock dividends are paid to stockholders

    • Mutual insurance companies
    • Owned by policyholder
    • Participating policy
    • Dividends are paid to policyholders
    • Money from dividends can be used with the dividends option
    • Organized and incorporated under state laws, but have no stockholders. Owners are the policyholders. Anyone purchasing insurance from a mutual insurer is both a customer and an owner and has the right to vote for members of the board of director. By issuing participating policies that pay policy dividend, mutual insurers allow their policyowners to share in any company earnings
  5. Regualtion of Insurers (Name 3)
    All insurers doing business within a state must be licensed or certified by that state. Thus, insurance companies are referred to as licensed or nonlicense, or admitted or nonadmitted. An insurer's licensed is called a certificate of authority.

    These terms are frequently used to describe insurance companies and their site of incorporation:

    1. Domestic insurers - A company is a domestic insurer in the state in which it is incorporated

    2. Foreign insurers - A foreign insurer is licensed to conduct business in states other than the one in which it is incorporated

    3. Alien insurers - Alien insurers are companies incorporated in a country other than the US, the District of Columbia or any US territorial possession
  6. MIB reports
    • Medical Information Bureau  The primary sources of information include the application, medical examinations, inspection reports, and the agent's report. One of the more comprehensive sources of information available to insurance companies is the MIB report
    • MIB complies confidential information regarding past applications for life or health insurnace submitted by an applicant
    • MIB serves as an aid to underwriting since it will attempt to guide an insurer toward other sources of information if some medical impairment is detected
  7. Unilateral contract
    A contract such as an insurance policy in which only one party to the contract, the insurer, makes any enforceable promise. The insured does not make a promise but pays a premium, which constitutes the insured's part of the consideration.
  8. Who initials when there are changes in the contract
    Any changes made to an insurance application after it is completed must be initialed by the applicant.
  9. 4 roles in the policy

    The beneficiary is the person, organization, or trust that will receive the benefits (face amount) payable upon the death of the insured. A beneficiary may also be the owner of the policy. A beneficiary is not a party to the contract (unless she is also the owner)

    Then insured is the individual whose death causes the policy benefits (face amount) to be paid. The insured in a life insurance contract can also be the owner of the policy

    The policyowner is the individual who pays the premiums and has other rights under the contract such as naming the beneficiary, receiving dividends, and borrowing from the cash value. The owner of a life insurance policy may also be the insured, the beneficiary, or another third party, such as creditor or business partners
  10. Types of Insurance (Name 5)
    • Term
    • Universal Life
    • Variable Life
    • Variable Universal Life
    • Whole Life
  11. Term
    A contract that provides protection for a limited number of years, the face amount being payable only if the death occurs during the stipulated term and nothing being paid if the insured survives the stipulated period. Term insurance has no cash savings value and has also been defined as temporary or pure protection.
  12. Whole Life
    Whole life insurance provides protection for an individual’s life
  13. Modified Endowment Contracts, MECs
    • An endowment contract where the amount payable upon survival of the endowment period is greater than the face amount and the amount payable at death is the greater of the face amount or cash value. Modified endowment contracts are subject to taxation and subsequent penalties.
    • Policy not consider life insurance
    • To get rid of it is if you cancel it or you die
    • Death benefit will be paid
    • Have to do with taxes to the IRS
    • Life insurance policy that has a CV that grows too fast
    • CV exceed the premium paid in the first 7 years, contract becomes a MEC
    • Once a MEC always a MEC
    • Loan are taxable (normal life insurance = tax free)
    • Early withdraw has penalty
  14. Amount of risk under different types of contracts
  15. Payout options for Annuity (Name 7)
    1. Life annuity (no refund) This form of annuity provides payments to an annuitant from a specified date and for the rest of the annuitant’s life. Payments cease upon the annuitant’s death with no refund to survivors. A pure life annuity has the potential for providing the maximum income per dollar of premium. No beneficiary. Riskiest payout option

    2. Period certain annuity These annuities provide a guaranteed number of payments. Payments will continue for the annuitant’s life even if he survives the guaranteed period provided. The longer the period selected, the smaller the monthly income payment. Have beneficiary only for the period certain

    3. Joint life annuity This type of annuity provides a specified amount of income for two or more persons. The income received ceases upon the first death of the covered persons

    4. Joint and survivor annuity Benefits under this type of annuity are paid throughout the lifetime of one or more annuitants. Therefore, payments continue until the last annuitant dies.

    5. Temporary annuity This annuity pays benefits for a specific number of years or until the annuitant’s death, which ever comes first.

    6. Installment refund annuity This annuity guarantees to pay an income to the annuitant each year as long as he lives. Upon death, the annuity will refund the remaining payments to a beneficiary in installments

    7. Cash refund annuity This annuity pays, in a lump sum, the difference between the amount deposited into the annuity and the benefits received before the annuitant’s death. The lump-sum payment will be made to the annuitants beneficiary or estate
  16. Revocable vs Irrevocable Beneficiaries
    A revocable beneficiary is one that may be charged by the policyowner. The policyowner may change revocable beneficiaries without their knowledge or consent

    Irrevocable beneficiary Beneficiary designation cannot be charged without the consent of that named beneficiary. The policyowner retains all other ownership right even though he selects a irrevocable beneficiary
  17. Uniform Simultaneous Death Act
    State law that states that if the insured and beneficiary die in the same accident and it cannot be determined who died first, the beneficiary is assumed to have died first, and all proceeds then pass to the insured's contingent beneficiary.
  18. Waiver of premium
    • If a policyowner becomes totally disabled during the term of the policy, premium payments will be waved during the period of disability. The contract will remain in force just as if the policy owner continued to pay the premium. If the policyowner is still disabled after the typical 90 day period, premiums are waived retroactively from the date of disability.
    • Costs extra
    • Designed in the event of your total disability
    • When you're totally disabled the rider has a 6 month waiting period (you pay for the first 6 months). When you make it through the 6 months, the rider will pay you back the premiums you paid in
    • Rider will waiver your premium while you're disabled
    • CV will grow slowly
    • Policy added on your own life (not others)

    A provision in a life insurance policy that provides: in the event of total dis- ability as defined by the policy, premiums for the policy will be waived for the duration of that disability. The rider is temporary, usually expiring at age 65. There's usually a six-month waiting period before the rider's benefits are payable.
  19. Accidental death benefit
    ▪ This benefit is sometimes referred to as double indemnity because it provides double the face amount of the policy if the insured dies due to an accident.

    ▪ To be covered, death must occur within 90 days of an accident

    ▪ Death results excludes: illegal activities, war, aviation activities, or where an accident was involved in conjunction with illness, disease, or mental infirmity
  20. Accelerated death benefit
    • This rider allows an insured to utilize a portion of the policy's death benefit while he is still alive.
    • Expected to die in 12 months
    • Partial payout of your FA
    • No interest, not a loan, doesn't deal with CV
    • Money must be used for illness

    Riders on life insurance policies that allow the policy's death benefits to be used to offset expenses incurred in a convalescent or nursing home facility. Any living benefits paid by the insurance company reduce the remaining death benefit. The government does not currently consider accelerated benefits to be taxable income, and the policyowner can get between 50 and 95 percent of the policy's face value.

    EX: If the insured is suffering from a terminal illness and his $100k policy includes 50% accelerated benefit, he may withdraw up to $50k to pay for medical expenses. Whatever amount is withdrawn will be deducted from the face amount when death occurs. Accelerated benefits are paid free from federal income taxation if the insured person is terminally ill
  21. Per Stripes vs. Per Capita
    Per Stirpes Distribute beneficiary's shares of a policy's proceeds will be passed down to their living childeren or children in equal shares

    Per Capita Policy's proceeds are paid only to the beneficiaries who are living and have been names in the policy

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  22. Grace period
    • Common policy provisions and option
    • Every life insurance contract contains a grace period. This is the period of time following the date that each premium is due during which the insurance policy remains in force and coverage is provided, even though the premium has not yet been paid

    A prescribed period, usually 30 to 31 days from the premium due date, when an insurance contract is in force and the premium may be paid. The grace period simply allows the policyholder additional time to pay a premium after the due date.
  23. Reinstatement
    • Common policy provisions and option
    • (1) Restoration of a lapsed policy. (2) Restoration of the original amount of a type of policy that reduces the principal amount by the amount of claims. (3) Putting back into effect a catastrophe reinsurance coverage that has been reduced by the payment of a reinsurance loss as the result of one catastrophe. This is usually effected by the payment of a reinstatement premium.

    • What to do to reinstate:
    • - Pass a physical
    • - Pay back all premium plus interest
    • - Repay all loan plus interest
  24. Traditional Whole Life Products (Name 6)
    1. Ordinary Whole Life

    2. Limited-Pay Life Policy

    3. Single-Premium Life Policy

    4. Modified Premium Whole Life (set FA, low premium for a set term than raise to appropriate premium price)

    5. Graded Premium Whole Life (set FA, premium raises yearly till appropriate premium price)

    6. Adjustable Life Insurance (commission)
  25. Universal Life Insurance
    • Customer who wants to buy a product that is tied to the current interest rate
    • Good in times of higher interest rate
    • 2 Death Benefit: Plan A (FA) or Plan B (costs extra, FA+CV)
    • NO fixed premium
    • Has “target premium”
    • Uses CV to pay premium (not a loan)
    • FA is made up of term insurance
    • When interest rate changes, insurance can ask you to pay more

    A combination flexible premium, adjustable life insurance policy. The premium payer may select the amount of premium he or she can pay and the policy benefits are those which the premium will purchase. Or, the premium payer may change the amount of insurance and pay premium accordingly. Many believe this is the only true solution to the "buy term invest the difference" problem.
  26. Variable Whole Life
    • Tied to the rate of return found in the stock market
    • Must be registered with NASD, Series 6 and 7, Life and Variable authority
    • Premium goes into separate account (act like mutual fund)
    • Insured has risk in separate account
    • When die, insurance pays your FA
    • No guarantee interest rate
    • CV is variable
    • Premium is fixed
    • A form whose face value varies depending upon the value of the dollar or securities or other equity products at the time payment is due.
  27. Variable Universal Life
    • Has a “target premium”
    • 2 Death Benefit option: Plan A (FA) or Plan B (cost extra, FA+CV)
    • FA is made up op term insurance
    • CV in spate account as self-directed by the insured (allow insured to chose who they want their money invested)
    • Regulate in state and federal level

    A combination of the features of variable life insurance and universal life insurance under the same contract that provides death benefits and cash values that are variable based on the value of equity investments. Premiums and benefits are adjustable at the option of the policyholder.
  28. Features of Term Insurance (Name 2)
    • Renewable Feature (Term insurance that may be renewed for another term without evidence of insurability.)
    • Convertible Feature (converts to whole life without physical and base on current age)
  29. Type of Term Policy (Name 3)
    Level, Decrease, Increase

    *Premium is leveled and FA changes according to term type)
  30. Nonforfeiture Options (Name 3)
    These options or provisions provided by a life insurance contract are available to a policyowner who wishes to cease paying policy premiums

    1. Cash surrender value The policyowner is to surrender the policy for its cash value. All types of permanent life insurance contracts may be surrendered to the company for the amount of cash which has accumulated.

    2. Extended term insurance Available to the policyowner provides extended term insurance. The policyowner may request that the insurance company use the existing cash value to purchase term insurance equal to the face amount of the original policy with a single net premium

    3. Reduced paid-up insurance The insurance company uses the cash value of the contract to purchase a single premium insurance contract of the same form as the original policy. The amount of coverage will be much less than the original policy but no more premium payments will be required. Thus, the policy owner will receive a policy that is paid in full for life
  31. Annuity
    Designed to pay you when you’re alive. Not protection

    • Pay-in period
    • Means not annuitized yet but you put in money
    • You have beneficiary during the pay-in period
    • When you die before annuitize, beneficiary gets the value of your account
    • Insurance has no risk during pay-in
    • Partial and full withdraw only allowed during pay-in (once annuitized, no withdraws allowed)

    • Payout period (or annuitized)
    • Means start the payout period
    • Pays out monthly for life
    • There may or may not be a beneficiary, depending on payout option
    • Once you pick payout option you can’t change
    • Annuity is a retirement product
    • Withdraw penalty under the age 59½
  32. Modes of Premium Payment
    • The method of premium payment (mode) elected by the policyowner. Modes generally available are monthly, quarterly, semiannually and annually.
    • Annual premiums are the least expensive of any mode, while monthly payments are the most expensive
  33. Automatic Premium Loan (APL)
    • Must have CV
    • 62 days pass premium
    • Loans money from cash value to pay for premium
    • Free on policy, must be selected by insured
    • Exist to keep WL policy in force
    • Exist to keep policies to go into nonforfeiture
    • Creates a loan against your CV (plus interest)
    • Paid to you when die is FA minus loan minus interest on loan
  34. Underwriting life and health insurance policies includes reviewing the background information and medical history of the applicant. This information determines whether to accept or reject an applicant for coverage. What are some underwriting considerations involved in issuance of insurance? (Name 3)
    • Insurable interest
    • Medical information and consumer reports
    • Risk classification
  35. Insurable Interest
    • This doctrine states that the individual purchasing insurance coverage must have a direct and identifiable interest in the individual to be insured. It must be clear that the party purchasing insurance coverage has an economic interest of some sort in the insured.
    • The purpose of this doctrine is to prevent individuals from profiting from the purchase of life or health insurance on the lives or health of others
    • Insurable interest must be present at time off application
  36. Policy Riders (Name 6)
    Supplemental additions. A rider may be used to add more life insurance or add a different type of insurance. A rider may also specify conditions that could affect the coverage

    • Waiver of Premium
    • Guaranteed Insurability
    • Payor Benefit
    • Accidental Death Benefit
    • Term Insurance Riders
    • Accelerated Death Benefits
  37. Accidental death and dismemberment insurance (AD&D)
    • This provides benefits for death due to an accident, or for the loss of one or more hands, feet, arms, legs, or loss of sight
    • Money goes to beneficiary when die in accident
    • Doesn't cover natural causes (ie. heart attack)
    • Doesn't cover: DUI, occupational injury, lost of limb, loss of hearing even if it was an accident, loss of digits (fingers and toes)
    • Accidental death pays you principal sum
    • Accidental dismemberment pays you capital sum (half of principal)

    A policy or a provision in a disability income policy which pays either a specified amount or a multiple of the weekly disability benefit if the insured dies, loses his or her sight, or loses two limbs as the result of an accident. A lesser amount is payable for the loss of one eye, arm, leg, hand or foot. Although technically a health insurance product, AD&D coverage is frequently provided as part of an individual or group life insurance contract.
  38. Combination Policies
    Life insurance companies also make available special types of policy or combination contracts that may be purchased separately or added as a rider to whole life plans
  39. Family income policy or rider (FIP)
    • Combination policy
    • This contract is designed to provide an income for the survivors of the family's primary wage earner
    • FIPs involve a combination of decreasing term and whole life insurance on primary wage earner
    • Term insurance rider = add term insurance to whole life on same insured
    • Term starts when policy has purchased (time on term starts ticking down immediately)
    • EX: Smith purchases a $50k whole life policy with an FIP rider paying $500/month for 10 years. After the policy has been in for the three years Smith died. His survivors will receive $500/month for the next seven years. The beneficiary also receive the FA of $50k either at the insured's death or when monthly income payments stop, depended upon the terms of the policy.
    • If the insured lives beyond the specified period, only the FA is paid to the beneficiary
  40. Family Maintenance policy/rider
    • Combination policy
    • Designed to provide additional income to the survivors of the primary wage earner
    • FMP pays a monthly benefit amount to the insured's survivors for a specified payment period beginning with the date the insured's death and continuing for the full monthly benefit period
    • EX: Smith purchases a $50k whole life policy and adds a family maintenance rider paying $500/month for 10 years. Three years into the contract, Smith dies; the actual monthly benefit payment period begins at Smith's death. His survivors will receive $500 for the next 10 years. His beneficiary will also receive the FA of $50k, either at the death or when the payments end
  41. Family policy
    • Combination policy
    • Covers the entire family under one contract. Whole life coverage will be purchased on the life of the father (or mother), and term insurance is provided on the spouse and children
    • Children are covered up to the age of 18
    • Spouse has set term period and FA
    • A policy typically consisting of whole life insurance for the head of the household with smaller amounts of term insurance on other family members.
  42. Joint life insurance
    • Combination policy
    • This contract is written on two or more lives.
    • This type of contract promise to pay the FA in the event of the first death with regard to all the lives covered. Therefore, there is no coverage provided after the first person dies
  43. Joint and Survivor (survivorship-life policy)
    • Combination policy
    • If the policy payable upon the death of the last of the two lives
    • Pay when survivor dies
  44. Fixed annuity
    • Source of annuity income
    • Guarantees a fixed number of dollars which will be paid each month once the payment period commences. With fixed annuity, the annuitant knows the exact amount that will be received each month
    • An annuity that provides the annuitant with a fixed payment during the period of the annuity. Fixed annuity payments are considered part of the insurance company's general account assets (the conservative investment portfolio, not the stock market portfolio).
  45. Variable annuity
    • Source of annuity income
    • Provides monthly benefits based upon a fixed amount of annuity units rather than fixed dollars
    • Because premium payments are invested in common stocks and other equity investments, the value of the units generally varies each month and cannot be guaranteed
    • An annuity contract in which the amount of the periodic benefit varies, usually in relation to security market values, a cost-of-living index or some other variable factor in contrast to a fixed or guaranteed return annuity. As a hedge against inflation, the variable annuity presents investment risks to the annuitant.
  46. Primary beneficiary
    The person designed by the applicant to recieve the FA upon the insured's death
  47. Contingent beneficiary
    • The individual who will be paid the policy proceeds if the primary beneficiary is not living at the time the insured dies
    • If no contingent beneficiary is present, proceeds are left to the insured's estate
  48. Endowment Insurance
    • Life insurance where the face amount is payable to the insured at the end of the contract period or to a beneficiary if the insured dies before that (e.g., an insured purchasing an endowment payable at age 65. Upon reaching that age, the proceeds would be payable to the insured. If the insured dies prior to that age, the proceeds would be payable to the designated beneficiary as a life insurance benefit).
    • Life insurance policy designed to mature before age 100 (WL policy matures at age 100)
    • Designed to have a specific dollar amount in future
    • Always a expensive life insurance
    • CV grows the fastest
  49. Automatic Payment Loan Rider (APL)
    • Common policy provisions and option
    • Free on policy, must be selected by insured
    • Exist to keep WL policy in force
    • Exist to keep policies to go into nonforfeiture
    • Create a loan against your CV (plus interest)
    • Must have CV
    • Paid to you when you die is FA minus loan minus interest on loan
    • A provision in a life policy authorizing the insurer to use the loan value to pay any premiums still due at the end of the grace period.
  50. Insuring Clause
    • Common policy provisions and option
    • That portion of an insurance contract which defines the scope or extent of the policy's benefits (i.e., the perils insured against, the persons and/or property covered, their locations and the period of the contract).
    • Insurance promise to pay as long as premium is paid
  51. Entire Contract Clause
    • Common policy provisions and option
    • Built into policy
    • Protect insured from having changes made to policy which they are unaware of
    • No changes made without mutual agreement of the parties
    • A provision in an insurance contract stating that the entire agreement between the insured and the insurer is contained in the contract, including the application if it is attached, declarations, insuring agreements, exclusions, conditions and endorsements.
  52. Common Disaster Clause
    A clause sometimes added to a life insurance policy that provides a means for the insurer to distribute the proceeds of the policy in the event of a common disaster.
  53. Consideration Clause
    • Common policy provisions and option
    • For a contract to be binding each party to the contract must give what is known as consideration or the exchange of values on which a contract is based. In an insurance contract, the insured person makes a premium payment (consideration now) and promises to comply with the provisions of the policy (consideration future). In return, the insurance company promises to pay in accordance with the terms of the contract.
  54. Guaranteed Insurability Rider
    • An option in life and health insurance contracts that permits the insured to buy additional prescribed amounts of insurance at prescribed future time intervals without evidence of insurability
    • Cost extra
  55. Payor Benefit Rider
    A rider or provision often found in juvenile policies that waives the premiums if the person paying the premium, usually one of the parents, becomes disabled or dies while the child is still a minor.
  56. Owner's Rights
    • Common policy provisions and option
    • The owner of a life insurance contract is usually the applicant, the insured, or the premium payer. The owner of a policy has several stipulated rights in the contract. Some of the rights include:
    • changing the beneficiary
    • receiving dividends if any are paid
    • borrowing funds from the cash value if they exist
    • assignment of some or all rights of the contract to another party
  57. Dividends and Dividend options
    Cash payments

    Accumulation at interest

    Paid-up additions

    Reduced premium payments

    One-year term insurance option
  58. Term Insurance Rider
    • Policy rider
    • Cost extra
    • A person who wants WL insurance of X amount and can only afford WL of Y amount. They can add term insurance to WL of Y amount on the same insured to receive WL of X amount
    • EX: It is less expensive to purchase a $50k WL policy with a $100k term rider than to purchase $150k of WL
  59. Free Look Period
    • Common policy provisions and option
    • A period of time (usually 10, 20 or 30 days) during which a policyholder may examine a newly issued individual policy of life or health insurance, and surrender it in exchange for a full refund of premium if not satisfied for any reason.
    • The free look period begins when the policyowner revieves the policy
  60. Incontestability
    • Common policy provisions and option
    • A clause that states an insured's statements in his application cannot be contested by the insurer after the policy has been in effect for a given time (two or three years). For example, in life policies, if an insured lied about the condition of his health at the time the policy was taken out, that lie could not be used to contest payment under the policy if death occurred after the time limit stated in the incontestable clause.
  61. Assignment
    Common policy provisions and option

    An assignment of a life insurance contract involves the transfer of some or all the policyowners legal rights under the contract to another party. The policy provisions concerning assignment do not usually grant the owner/insurer any rights to assign, but do set out the procedures by which assignments may be made. When assignments are effected, the insurer must be notified

    Absolute Assignment Assignment by a policyowner of all control of and rights in the policy to a third party.

    Collateral Assignment Assignment of a life insurance policy or its value as security for a loan. In the event of default, the creditor would receive proceeds or values only to the extent of the creditor's interest.
  62. Policy Loan
    • Common policy provisions and option
    • A loan made by an insurer to a policyowner of a part or all of the cash value of the policy assigned as security for the loan. This is one of the usual nonforfeiture values.
    • Any outstanding policy loans that are in existence at the time of the insured’s death would reduce the policy proceeds. The outstanding loan would be subtracted from the race amount of the contract and the remainder paid to the named beneficiary
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Life Insurance Study Guide