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death benefit
The death benefit in a life insurance contract is generally used to provide income for beneficiaries when the insured dies. In this way, the death benefit replaces the deceased insured’s future lost income.
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Living benfit
The funds from cash values that life insurance provides; these cash values are used during the insured’s lifetime.
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Insurable interest
is the financial interest someone has in property or a person’s life
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Insurable Interest in Personal Relationships
- Individuals have insurable interest in themselves.
- Spouses have insurable interest in each other.
- Parents have insurable interest in their children.
- Children have insurable interest in their parents or grandparents (or another on whom a child might be financially dependent).
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Group life insurance
policies cover many non-related people, while an individual policy covers one person.
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With group coverage,__________________ covers multiple people—from as few as ten to hundreds or more. The policy is owned by the organization (most commonly an employer) that represents the group and sponsors the coverage
one master policy
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joint life insurance
Permanent coverage that insures two persons under one policy. The policy pays the death benefit when the first insured dies
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_________________________offers individual coverage in small face amounts, traditionally ranging from $2,500 to $10,000, though policies today are often sold with face amounts up to $25,000. These policies typically require no medical exam to qualify. Modest premiums are paid frequently—weekly in many cases. In many cases an insurance agent meets personally with the policyowner at home, weekly or monthly, to collect the premium.
home service insurance or industrial life
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___________________is designed to provide life insurance protection for the insured’s entire life. Coverage is provided until the insured dies or reaches age 120, whichever comes first.
Permanent life
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level premium
Premiums never change says the same throughout entire life
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Cash value
The cash value feature is the investment part of a whole life insurance policy. Cash value is the money that builds within the policy over the policy’s life.
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Term life insurance
Provides protection for a specified, limited period. The term can be defined in years or by the age of the insured
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participating policy
commonly issued by mutual insurance companies, the policyowner is eligible for policy dividends declared by the insurance company. Dividends are paid from the insurer's divisible surplus, which is essentially premiums that exceed all company expenses and liabilities
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nonparticipating policy
issued by stock insurance companies, there are no policy dividends.
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Fixed Life Insurance
A form of permanent life insurance in which the insurer guarantees a fixed death benefit and a minimum rate of return on the policy’s cash value. The insurer assumes all risk for investing premiums received from policyowners through its general accounts and making enough profit to cover the policy’s promised benefits.
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variable life insurance
A form of permanent whole life insurance in which premiums are placed in investment sub-accounts that the policyowner owns. The insurer guarantees a minimum death benefit, usually the face amount of the policy at issue. However, the cash values and the death benefit rise and fall on the basis of the sub-account’s investment performance.
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Premium Factors
- Mortality is the risk of death posed by the applicant. It is a charge.
- Interest is the amount the insurer can expect to earn on invested premiums. It is a credit.
- Expenses represent the insurer’s costs of doing business. It is a charge.
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The mortality factor reflects the insured’s risk of death. At its base, the mortality factor is drawn from mortality statistics compiled by the National Association of Insurance Commissioners (NAIC) into a set of rates called the Commissioners Standard Ordinary (CSO) table.
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mortality rates
Used by insurers in pricing health insurance policies. Mortality rates indicate the average number of persons within a very large group who can be expected to die
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An expense factor (sometimes called a load factor) is worked into the premium calculation. The____________ factor reflects the costs (other than mortality) that the insurer expects to incur on the policy. These operational costs include the insurer's expenses for rent, salaries, benefits, commissions, and field expenses. The insurer also accounts for a margin of profit it wants to earn on its operations.
load
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an ____________ to their premium calculations to recognize the company’s investment earnings. The interest factor works as a credit; the higher the assumed rate, the lower the premium
interest factor
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___________ is a tax levied on insurance companies when they receive premiums
premium tax
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Some variable life insurers charge a_______________ to cover the costs of managing the complex investment element of the contract. Separate account management is far more complicated than general account management, and this is generally reflected in the gross annual premium of variable insurance contracts.
maintenance fee
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Calculate___________________ , using the factors of mortality and interest. This is the theoretical amount, excluding the load factor, which would be needed to fund the face amount for the duration of the policy with a single premium payment
net single premium
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Calculate the_______________ by applying a factor to the net single premium that essentially spreads out the premium for the duration of the premium-paying period
net level premium
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Calculate the_________________ that is actually charged for the policy by adding the expense load to the net single premium or net level premium. Applicants who are purchasing a single premium life insurance policy will pay a gross single premium, while those who will spread premiums out over a number of years will pay a gross level
gross premium
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In calculating gross level premiums, actuaries make two key assumptions:
- Premiums will be paid once each year (annually).
- Premiums will be paid at the beginning of the policy year.
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third-party ownership.
In a life insurance policy, when the insured and policyowner are not the same person.
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A primary reason for third-party ownership of a life insurance policy in the personal insurance market is to prevent the policy's death benefit from being included in the insured's federal gross estate
they are not taxed
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If the insured dies within three years after the transfer, then the policy death benefits are included in the insured's estate for tax purposes. (This situation is called the___________ .)
bring-back rule
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STOLI
life insurance purchase on a person by an complete stanger
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traditional net cost method
- Total the premiums that are projected to be paid over a specified period of time (e.g., 10 years and 20 years).
- Subtract any anticipated policy dividends and the cash value at the end of this period.
- Divide the net result in step 2 by the policy face amount (in terms of thousands). For example, if the policy has a $50,000 face amount, the net result would be divided by 50.
Divide the result in step 3 by the number of years under study (e.g., 10 or 20 years). The end result is the net cost of $1,000 of protection per year.
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The______________________ , also called the surrender cost index method, identifies the cost of funding the pure insurance portion of a life policy over a specified study period
traditional net cost method
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The_______________________________ factors in the interest rate credited to the policy. Because it accounts for the time value of money, the interest-adjusted net cost method is more widely used today than the traditional net cost method.
interest-adjusted net cost method
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Producers also inform consumers about the practices that companies use during the review and underwriting processes. Typically, this process includes giving the applicant a________________________ statement
"Notice of Information Practices"
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The activities a producer performs when seeking applications for insurance is called____________ . This includes requesting information about prospective insureds and helping people fill out applications for coverage, collecting right data
field underwriting
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The first part of the application contains all the personal information about the applicant. Such personal information includes
- name
- address
- date of birth occupation
- beneficiary information
- other non-medical information the insurer may require
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The second part of the application covers the applicant's medical history.
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Insurers normally allow an applicant to backdate a policy by up to__________. This backdating qualifies the applicant to have the policy issued at a younger age. (Another name for this practice is to save age.) Because the policy is issued at a younger age, the policyowner pays a___________
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_________________ provide interim coverage while the application is being approved and before the policy is issued. Premium receipts are given only when the applicant submits the first premium payment with the application
Premium receipts
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A____________ provides for conditional coverage that begins on the date of application or on the date of a medical exam, if required, whichever is later
conditional receipt
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A_____________________ guarantees coverage from the time the applicant completes the application (or the insured completes the medical exam), even if the insured is later found to be uninsurable. That means coverage is guaranteed throughout the underwriting period, which can extend for a number of weeks, until the company rejects the application (or issues a different policy). Usually it is limited to a set period (such as 60 days) and to a set amount (such as $100,000). Though common with property and casualty insurance, binding receipts are rarely given with life insurance applications
binding receipt
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When completing an application for insurance, the agent must meet three important goals:
- accuracy
- thoroughness
- clarity
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The applicant must answer all of these questions with a "no" for a temporary insurance receipt to be issued. The questions typically ask whether the proposed insured had
- been admitted to a hospital or other facility or had surgery performed or recommended within the previous six months;
- been treated for various named diseases or conditions;
- and ever had an insurance application modified, declined, or rated.
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a delivery receipt attesting to the fact that the policy was, in fact, received. Besides serving the practical purpose of assuring all parties that the policy is in the owner’s hands, this receipt also starts the “free-look” period (_______________) during which the policyowner may review the policy and, if desired, return it for a full refund.
typically ten days
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The effective date of the policy's coverage is important for two reasons:
- The effective date determines when coverage begins.
- The effective date sets the date for annual premium payments
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Sources of Underwriting Information
- the applicationthe agent's report
- an attending physician's statement (APS)
- an inspection or consumer report
- the Medical Information Bureau (MIB) report
- a medical exam
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agent's report (or producer’s report)
It includes information that the producer knows about the client that would be useful to the underwriter
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Investigative Consumer Report (Inspection Report)
to help evaluate an applicant’s lifestyle, most typically done with applicants seeking very high amounts of life insurance
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judgment method
was the basis of the risk classification process in the early years of the life insurance industry
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numerical rating system
weights are assigned to selected factors (typically ten factors) that have the greatest impact on the risk
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