California Insurance Exam 516 Questions with Answers Latest 2023
Two methods of determining insurance need:CORRECT ANSWER - Human Life Approach
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... [Show More] Needs Approach
Human Life Value Approach~CORRECT ANSWER - One of two ways of calculating insurance need.
- By discounting estimated future income
- Calculating the amount of life insurance a family will need based on the financial loss that they will suffer if the insured person were to pass away today
- 10X salary
- Based on age, gender, planned retirement age, occupation, annual wage, employment benefits, as well as the personal and financial information of the spouse and/or dependent children.
*Needs ApproachCORRECT ANSWER Ask yourself:
1. How much will be needed at death to meet obligations.
2. How much future income is needed to sustain the household.
- Focuses on the financial needs of the family
- Considers final expenses
- Considers disability income
- Consideres monthly income
Main list of private insurance companiesCORRECT ANSWER - Stock insurers
- Mutual insurers
- Lloyd's of London
- Reinsurers
- Risk retention groups
- Fraternal benefit societies
- Home service insurers
Government supplied insuranceCORRECT ANSWER - OASDI (Social Security)
- Medicare
- Medicaid
- Military plans (SGLI & VGLI)
Lloyd's of LondonCORRECT ANSWER - Take greater risks and charge larger premiums.
- A British insurance and reinsurance marketplace
- Come together to pool and spread risk
ReinsurersCORRECT ANSWER Companies that take part of the risk of insurance companies. (The company that is taking a part of the risk)
Ceding CompanyCORRECT ANSWER The company that is transferring the risk
Risk retention groupCORRECT ANSWER A mutual company formed to cover a bunch of people in the same occupation.
Fraternal benefit societyCORRECT ANSWER Membership groups that are created for membership to purchase insurance and gain other benefits.
Home service insurersCORRECT ANSWER - Sell low dollar value policies (e.g. $1000/$2000 of face amount)
- Paid for by bank draft of check sent in by mail
Insurance is sold throughCORRECT ANSWER Career agents
Brokers
Aka Producers (independent insurance agents)
AgentCORRECT ANSWER - Sells the company's products to the public
- When someone becomes an agent, they become a "field underwriter"
- Develops base for long-term sources of clients by using referrals, occupational, and special-interest groups to compile lists of prospects.
- Approaches potential clients by utilizing mailings and phone solicitation; making presentations to groups at company-sponsored gatherings; speaking publicly to community groups on the subject of financial well-being.
- Determines clients' particular needs and financial situations by scheduling fact-finding appointments; determining extent of present coverage and investments; ascertaining long-term goals.
- Develops a coordinated protection plan by calculating and quoting rates for immediate coverage action and long-term strategy implementation.
- Obtains underwriting approval by completing application for coverage.
- Completes coverage by delivering policy; planning future follow-up visits and evaluations of needs.
- Provides continuing service by providing direct deposit forms; processing changes in beneficiary and policy loan applications.
- Provides death benefits by delivering policy proceeds; reassessing client needs.
- Updates job knowledge by participating in educational opportunities; reading professional publications; maintaining personal networks; participating in professional organizations.
- Enhances insurance agency reputation by accepting ownership for accomplishing new and different requests; exploring opportunities to add value to job accomplishments.
BrokersCORRECT ANSWER - Represents the people and finds a company to insure them
- Assist prospective insureds with developing risk management strategies appropriate to their risk profiles.
- *Cannot legally bind insurance
- Represents the client in purchasing the insurance product
*Vending Machines~CORRECT ANSWER - Direct selling
- (A method of distribution)
- Generally limited to travel accident insurance , supplemental health or disability policies, or life insurance policies with a small face amount.
*Mass marketing~CORRECT ANSWER - A client interacts with an agent by phone or e-mail. Trying to get a number of people at one time to purchase insurance.
- It reaches insureds who generally have no access to their own brokers or agents.
- It also brings the policies to the insureds usually at lower prices than those charged in one-on-one sales because it reduces the "middleman" cost of agents.
- *Direct response / direct mail.
- A system that does not use an agent
*Paul vs VirginiaCORRECT ANSWER State would be in charge of the insurance industry
*US vs SE Underwriters AssociationCORRECT ANSWER Federal government in charge of the insurance industry
*McCarran Ferguson ActCORRECT ANSWER Return supervisory power to the states
*Fair Credit Reporting ActCORRECT ANSWER - Provides that the applicant for insurance be informed that a consumer report may be requested
- A federal provision that requires privacy of a client's information
- Designed to promote accuracy, fairness, and privacy of information in the files of every "consumer reporting agency"
- You must be told if information in your file has been used against you.
- You can find out what is in your file.
- You can dispute inaccurate information with the CRA.
- Inaccurate information must be corrected or deleted.
- You can dispute inaccurate items with the source of the information.
- It is not required that the CRA name be disclosed if you are denied coverage
- Outdated information may not be reported.
- Access to your file is limited.
- Your consent is required for reports that are provided to employers, or reports that contain medical information.
- You may choose to exclude your name from CRA lists for unsolicited credit and insurance offers.
- You may seek damages from violators.
Financial Services Modernization Act of 1999CORRECT ANSWER Banks can do insurance and insurance companies can do banking
1933 Class Steagall ActCORRECT ANSWER Required banks to remain in banking and not do insurance and insurance companies to remain in insurance and not do banking.
Pooling the riskCORRECT ANSWER Distributing the risk over a large number of people.
*Law of large numbersCORRECT ANSWER Having a large number of people in a pool helps to correctly predict the outcome.
Speculative riskCORRECT ANSWER Hoping for a gain
Pure riskCORRECT ANSWER Covering for losses. No gain. So it's insurable.
UnderwritersCORRECT ANSWER Determine if prospective clients fall into the normal category or if they are more risky in one category or another.
- They classify risks and determine which categories the insured should be placed
- Adhesion: categories have been decided and approved in advance by the state in conjunction with the insurance company.
- Categories of risks: Preferred (best premium rate), Standard, Substandard (most expensive)
PerilCORRECT ANSWER The actual incident happening
HazardCORRECT ANSWER - What causes the incident to happen. (e.g. your thoughts, actions, habits?)
- 3 types
Physical HazardCORRECT ANSWER - Has to do with the body.
- Is the body going to live a normal length of time?
- Are there negatives due to health issues, hobbies, or profession?
*Moral HazardCORRECT ANSWER - Issues resulting from weakness of human behavior
- Does the person follow rules and laws of society?
- Dealing with the difference between right and wrong
*Morale HazardCORRECT ANSWER - Focus on hobbies and jobs
- Jump out of airplanes?
- Attitude towards the item insured and to act carelessly about it
4 Treatments of RiskCORRECT ANSWER - Avoidance
- Reduction
- Retention
- Transference
*Risk AvoidanceCORRECT ANSWER Stopping the behavior all together. (e.g. stop smoking)
Risk ReductionCORRECT ANSWER (e.g. smoking less cigarettes a day)
*Risk RetentionCORRECT ANSWER Doing nothing and retaining all the risk without any outside assistance.
- "Self insuring" or retaining only a portion of the risk through paying deductibles
Risk TransferenceCORRECT ANSWER Transferring the risk to an insurance company
Elements that makes risk insurableCORRECT ANSWER - Loss must be due to chance
- Loss must be definite and measurable
- Loss must be predictable
- Loss cannot be catastrophic
- Loss exposures to be insured must be large (risk pooling and the law of large numbers)
- Loss exposure must be randomly selected
Four ingredients to make contractCORRECT ANSWER - Offer and Acceptance
- Consideration
- Legal purpose
- Competent parties (minor under age of 14 or 15)
- It's made up of the policy and when attached, the application
Contract must have consideration. Which includes?CORRECT ANSWER - The initial premium
- The application
At which point does the insurance contract become binding?CORRECT ANSWER ...
*When does the offer begin?CORRECT ANSWER When the agents sends the consideration into the company
Characteristics of insurance contracts:CORRECT ANSWER - Aleatory: the money being put in compared to the benefits received does not work out equally
- Adhesion: states have approved all insurance policies and contracts. Therefore, no negotiations on policies
- Unilateral: one of the two parties are stuck. which is the insurance company. Client can get out when they wish.
- Not a personal contract: can change the ownership of the policy. The owner is the one paying for it which is different from the "insured person"
- Conditional: payment must be made to continue and company must pay if insured dies
Valued Policy vs.CORRECT ANSWER - A policy is valued if you know what the outcome will be ahead of time. You know the monetary value you will get if that outcome happens.
Indemnity PolicyCORRECT ANSWER - Only covers for the loss. Don't know what you will get a head of time.
Insurable InterestCORRECT ANSWER - Having a family or financial connection. The owner/beneficiary must suffer in some way if the insured dies.
- *Therefore the OWNER must have insurable interest
*Do you have an insurable interest in yourself?CORRECT ANSWER Yes
*Insurable interest must exist at which point?CORRECT ANSWER - Must exist at the inception of the policy (at the time of the application)
Captive agentsCORRECT ANSWER - An insurance agent who can only sell one insurance company's products
-An insurance agent who only works for one insurance company. A captive agent is paid by that one company either with a combination of salary and commissions or with just commissions. He or she may be a full-time employee or an independent contractor, and may be provided with office space and benefits by the employer.
- Captive agents have in-depth knowledge of their particular company's insurance products, but cannot help a client who does not need or does not qualify for that company's products.
- The parent company may push its captive agents to sell certain policies or meet certain sales quotas.
Career agentsCORRECT ANSWER - Represent multiple insurance companies and work on behalf of the client to find them a policy. Non-captive agents receive the majority of their earnings through the commission of policies sold, although they may also be compensated by their sponsored agencies.
- While some non-captive agents are completely independent of a primary company, most non-captive agents report chiefly to one company,
As an independent agent of XYZ Company, the agent must report the majority of their business to XYZ. However, if XYZ is unable to sell a policy to a customer for any reason, the non-captive agent can then find the customer a policy through another affiliated insurer. Theoretically, non-captive agents are able to pick and choose the best policy for their clients.
Independent agentsCORRECT ANSWER - Functions like brokers
Principles of Agency LawCORRECT ANSWER - The acts of the agents are the same as the company
- Contracted completed by the agent is same as company doing it
- Payment made to an agent is same as paying the company
- Knowledge of the agent is the same as the company knowing it
What title as a financial advisor is legally acceptable to use?CORRECT ANSWER ...
*Express AuthorityCORRECT ANSWER - What the contract spells out
- Kind of authority that is expressed within the contract between the agent and the agent's company
*Implied AuthorityCORRECT ANSWER - Not written but needed to perform as an agent
- The agent has the right to operate in a business manner doing the things typical of any business
- Implied that an agent can do something that can be done within the normal functioning of a business situation. (e.g. business cards)
- A representation in an insurance contract is an example
*Apparent AuthorityCORRECT ANSWER - What the public assures the agent possess
- Authority that is granted to the agent as an employee of the company
*Fiduciary responsibilitiesCORRECT ANSWER Being responsible and being careful for the assets and rights of another person. (a fiduciary is a person who has responsibilities of care)
WaiverCORRECT ANSWER The giving up of a right. (e.g. signing a waiver that you won't sue)
EstoppelCORRECT ANSWER - What someone or a company is prevented from doing because of the waiver.
- (e.g. the company waives the right to collect premium if client becomes ill. The company is estopped from collecting)
Parol evidence ruleCORRECT ANSWER Whatever is said to the clients by the agent is no longer considered when the policy arrives. The policy takes over for everything.
VoidCORRECT ANSWER Something never happened. (e.g. making the policy invalid)
VoidableCORRECT ANSWER The client can walk away whenever they wish. (does no get all money back but is entitled to the cash value in the policy)
FraudCORRECT ANSWER If death occurs 2 years after the fraud takes place, the benefit of a life insurance policy is still paid.
3 Categories of Life InsuranceCORRECT ANSWER - Ordinary Life
- Industrial Life
- Group Insurance
Ordinary Life Insurance~CORRECT ANSWER - Purchased by one person from one agent
Industrial InsuranceCORRECT ANSWER - Aka "home service, debit, burial policy"
- Purchased and issued in low dollar amounts
- Frequent premium payments
- If an insured wants to convert several industrial life policies to a single ordinary life policy, the combined face value of the industrial life policies must be $3000
Group InsuranceCORRECT ANSWER - Covering a group of people
- The company, association or employer is writing the check and paying for the policy
- 10 people are needed to qualify
Health Insurance vs. Life InsuranceCORRECT ANSWER ...
Term Life Life Insurance~CORRECT ANSWER - Does not include a savings plan
- Lasts for only a set amount of time
- An individual with a low income and high insurance needs should buy term insurance. It has lowest cost to benefit ratio
Decreasing Term Life Insurance~CORRECT ANSWER - Used for covering mortgages and other financial debts
- The coverage gradually decreases
Increasing Term Life Insurance~CORRECT ANSWER - Used to hedge against inflation, increased family responsibility, or increased income expected
- The coverage gradually increases
Level Term Life Insurance~CORRECT ANSWER -
Ways Term Life Insurance can be renewed:CORRECT ANSWER - Guaranteed renewable
- Annually Renewable Term (ART) ~
automatic method
- Reentry option
*Guaranteed Renewable Term Life InsuranceCORRECT ANSWER - Allows clients to renew the policy on an anniversary date
- Premium rises only based on age
- Coverage is guaranteed
- Incontestability clause is not renewed
- The face value of the policy normally remains the same
*Annually Renewable Term (ART) Term Life InsuranceCORRECT ANSWER - Premium increases year by year based on mortality costs
- Coverage is guaranteed
Reentry Method Term Life InsuranceCORRECT ANSWER - Coverage is guaranteed
- Assess the insured's health at the time of renewal to determine amount of premium to pay
Term Life Insurance can be converted to Permanent Policy (pricing) by:CORRECT ANSWER - Original Age Method
- Attained Age Method
*Original Age MethodCORRECT ANSWER - Uses the insured's starting age of the term policy as the set age of the permanent policy
*Attained Age MethodCORRECT ANSWER - Use whatever age the insured has reached at the time of the conversion as the set age of the permanent one
*Whole Life Life InsuranceCORRECT ANSWER - The coverage is for a person's whole life
- The cash value grows over a person's whole life
- The premium is paid over a person's whole life.
- Has a savings portion (the cash value)
Whole Life Insurance is more expensive in the beginning than Term Life InsuranceCORRECT ANSWER Premiums of whole life policies remain level, so the premiums are higher because part of the money goes into the savings portion (cash value)
3 Ways Whole Life Insurance is paid (time-wise):CORRECT ANSWER - Straight Whole Life
- Limited Pay Whole Life
- Single Premium Whole Life
*Straight Whole LifeCORRECT ANSWER Level premium payment over a person's lifetime
*Limited Pay Whole LifeCORRECT ANSWER - Limits the length of time of payment.
- As the length of time is shortened, the premium rises.
*Single Premium Whole LifeCORRECT ANSWER The client pays one time for the entire policy
Other forms of Whole Life Insurance:CORRECT ANSWER - Modified Whole Life
- Graded Premium Whole Life
- Indexed Whole Life
*Modified Whole LifeCORRECT ANSWER - The premium is reduced alot the first 5 years. Then it goes back up to the regular price for the remainder of the lifetime.
- Allows people to get in at a lower price in the beginning.
Graded Premium Whole LifeCORRECT ANSWER - Premium is reduced the first 5 years but will stair-step up over 5 or 10 years allowing people to get in at a lower starting price
Indexed Whole LifeCORRECT ANSWER - Connected to the Consumer Price Index (government figure generated monthly indicating inflation. The face amount gradually rises as inflation increases)
Special Situation Whole Life Insurance Policies:CORRECT ANSWER - Family Plans Policies
- Multiple Protection Policies
- Joint Life Policies
- Juvenile Insurance
- Credit Life Insurance
*Family Plans PoliciesCORRECT ANSWER - Where all members of the family are in one policy.
- The primary person has a permanent policy and the spouse and children have level or decreasing term riders.
- A policy that is sold in proportioned units to cover an insured, spouse and children
- Child rider: a term insurance. Child riders last until your children are a certain age, then it expires. Depending on the company, it ranges from ages 21-25. After your child rider expires, you have to purchase an individual life insurance policy if you want to continue coverage.
Multiple Protection PoliciesCORRECT ANSWER - A mixture of term life and whole life insurance that pays out a multiple of the face value during the term policy's period, and then turn into a whole life policy after the term is over.
- The period known as the 'multiple protection period' is the time during which both policies are in effect.
*Joint Life / First to Die PoliciesCORRECT ANSWER - Policies that cover two people but pays only once
- When one spouse dies, the other is the beneficiary
- The surviving person can elect to continue the insurance contract as an individual without proof of insurability.
*Last Survivor / Second to Die Joint Life PolicyCORRECT ANSWER - Benefits are only paid when the second spouse dies (When the first spouse dies, estate taxes don't have to be paid)
- The benefits are used to pay estate taxes
Juvenile InsuranceCORRECT ANSWER - Can be sold up to the age of 14 or 15 to cover the life of the person as a "child"
- Do not have to sign the application
- The policy is usually owned by the applying adult
- The policies may be Ordinary or Industrial types
Jumping Juvenile InsuranceCORRECT ANSWER - At age 21, the insurance coverage increases by 5x the previous face amount without the premium increasing.
*Payor RiderCORRECT ANSWER - The payor is the adult who's buying the child's policy.
- If the adult is disabled due to accident or sickness, or dies, the company discontinues collecting premiums until the adult gets better or the child turns 25.
*Credit Life InsuranceCORRECT ANSWER - Policy used to cover a financial debt.
- An individual policy covering an individual's death
Non-traditional Life Insurance PoliciesCORRECT ANSWER - Adjustable Life
- Universal Life
- Equity Indexed Universal Life
*Adjustable LifeCORRECT ANSWER - A policy made up of a term and whole life insurance combined.
- As a person or family's needs change, it's easy to adjust the payment amounts or payment coverage.
- Gives holders the option to change the characteristics of their policies as their needs change over time.
- Adjustable life insurance policies allow holders to manipulate the period of protection, increase or decrease the face amount, raise or lower the premium amount, and change the length of the premium payment period.
- These policies also incorporate an interest bearing side fund (cash value).
- No requirement to cancel or purchase additional policies as holders' circumstances change.
- Adjustable life insurance is also known as "flexible premium adjustable life insurance".
**Universal Life~~CORRECT ANSWER - A major permanent insurance policy.
- Made up of an ART policy and a savings plan (the cash value portion)
- A contract containing a cash value account from which current mortality costs are drawn by the insurer
- The maximum mortality charges against the cash values permitted by the insurer are disclosed in the policy and are based upon industry tables
- The interest rate credited to the cash value is variable, and responds to the fluctuating market rates, but usually is guaranteed for an initial period
- The main difference with whole life is premium schedules
Equity Indexed Universal LifeCORRECT ANSWER A policy where the cash value is hedged again inflation.
*Variable Life Insurance~~CORRECT ANSWER - Regulated by the State & SEC
- THe owner may balance the risk of loss with the desire for gain
- The cash values are determined by the value of underlying mutual funds selected by the owner
*Variable Universal Life Insurance~~CORRECT ANSWER ...
*Participating Whole Life InsuranceCORRECT ANSWER - Have higher premiums than non because they have the intent on returning the excess
*Non-participating Whole Life InsuranceCORRECT ANSWER ...
Characteristics of variable policies:CORRECT ANSWER - Has to guaranteed cash value because money is invested in the market
- The agent needs a securities license to sell these products because the products are dually regulated by the state and by the SEC
Rights of ownershipCORRECT ANSWER - The owner has all the rights.
- The owner can:
assign or change a beneficiary,
decide on how the proceeds will be paid, cancel the policy,
take out a loan against the policy,
receive policy dividends if policy is from a mutual company,
assign ownership to someone else
Conditions of insurance policies:CORRECT ANSWER - Entire contract provision
- Insuring clause
- Free look provision
- Consideration clause
- Grace period provision
- Reinstatement provision
- Policy loan provision
- Incontestable clause
Entire Contract ProvisionCORRECT ANSWER - What you see is what you get
- Everything in the policy is a description of the way the policy functions, and the company cannot refer to an outside document.
- Everything has to be stated within the policy
Insuring clauseCORRECT ANSWER - A description of what the company is going to do for the client
- How much the coverage is
- When does the policy begin
- When does the policy end
*Free Look ProvisionCORRECT ANSWER A period of time immediately following the issuance of a life insurance policy, during which you may legally cancel your policy with a full refund
- *10 days normally (starting at the time the policy is physically delivered)
- 30 days for seniors starting at age 60 or older
Consideration ClauseCORRECT ANSWER States what the client is going to do in exchange for the insuring clause: how much they have to pay and how often they have to pay it. (the consideration that the insured is going to give in return)
- It's the amount and the frequency of premium payments
*Grace Period ProvisionCORRECT ANSWER - How long can the client still keep their policy without paying their premium.
- If a client has a claim within the grace period, the company pays the client but will subtract for the amount of the premium that should have been paid.
Reinstatement ProvisionCORRECT ANSWER - Lapsed policies can be restated even after no payment has been made (typically 3-5 yrs. up to seven years)
- To reinstate the policy, the policyholder must provide evidence of insurability
- The policyholder must provide evidence of insurability; pay all overdue premiums plus interest; and any policy loan must be repaid or reinstated with interest.
Some question about having a rider where you don't need to prove insurability?CORRECT ANSWER ...
Policy Loan ProvisionCORRECT ANSWER - Insurance companies allow clients to borrow from their policies if there is cash value in the policy.
The loan does not have to be repaid (but you might want to because the value of the policy will gradually decrease)
- Highest fixed policy loan interest rate is 8%
Incontestable ClauseCORRECT ANSWER - If after 2 years have passed and then the material misstatement, concealment, or fraud was discovered, insurance companies cannot contest the claim.
- It is 2 years from the issue date
- 3 exceptions:
Impersonation
No insurable interest
Murder
Policy exclusions (will not be insured):CORRECT ANSWER - War: if the insured is killed in a war zone
- Aviation: will not cover death on an airplane
- Hazardous occupation or hobbies
- Commission of a felony: insured committing a felony at time of death
- Suicide: will pay after 2 years of holding the policy
If someone commits suicide within two years of purchasing a policy, the total of all premiums paid will be return and nothing more.CORRECT ANSWER ...
Non-forfeiture ValuesCORRECT ANSWER - Insureds have the right to the cash value of their policy if they stop their policy
- The cash value can come in 3 forms:
Cash Surrender Value
Reduced Paid Up
Extended Term Policy
Cash Surrender ValueCORRECT ANSWER - The amount of accrued cash value in a policy that would be payable to the policy owner at surrender of the policy minus any surrender fees
- Must be available to the insured within 6 months
*Reduced Paid UpCORRECT ANSWER The face amount will be reduced so that the cash values remaining in the policy will be enough to cover the policy for the lifetime of the insured.
The policy would continue but at a face amount less than the stated amount on the policy. The cash value would be used to purchase a reduced paid up policy based on the amount of cash value available in the policy. No additional premiums would be due for the life of the reduced policy.
*Extended TermCORRECT ANSWER The policy will continue at the current face amount but the policy will become a term policy and will continue until the cash value runs out due to premium payments.
A provision that would allow the face amount of the policy to remain the same and the cash value would be used by the insurance company to pay the premiums at term rates. The policy would continue until the cash value is depleted by premium payments.
Something about the contract being mailed out is it considered binding from time it left the office, time it was stamped at the post office, or time receivedCORRECT ANSWER ...
Two kinds of insurance companies:CORRECT ANSWER - Stock Companies
- Mutual Companies
Stock CompaniesCORRECT ANSWER - The company is owned by stockholders
- Major purpose is to create a profit
- Company does this by selling insurance products to the public with competitive pricing.
- At end of the BOD declares dividends to the stockholders from the profits of the company.
- Dividends are taxable because they are a return on the stockholder's investment
Mutual CompaniesCORRECT ANSWER - (not-for-profit) Trying to make a surplus
- Owned by the policy holders
- The company has no stock
- Goal of the company is to reduce the cost for the policy holders
- When they have a surplus, they redistribute part of the surplus back to the policy owners in the form of dividends
- Don't have to pay but want to
- *Dividends are not taxable because they are an intentional return of overpayment of premium
*What are dividends?CORRECT ANSWER - They are not taxable and are a return of overpayment of premium
5 Ways to Receive Dividends:CORRECT ANSWER - Cash
- Reduce the Premium
- Accumulate at Interest
- Paid Up Additions
- One Year Term
Reduce the PremiumCORRECT ANSWER Take the cash, divide it by 12, and subtract that off my premium this coming year
Accumulate at InterestCORRECT ANSWER Take the cash and hide it at the company in a separate account and let it accumulate at interest
Paid Up AdditionsCORRECT ANSWER Use the dividends to purchase small amounts of insurance coverage which will increase the amount your beneficiary will receive when you die.
One Year TermCORRECT ANSWER Use dividends as a single premium to purchase a one year term insurance.
*Whole Life vs. Term Life~~CORRECT ANSWER - WL has higher premiums
Policy Riders:CORRECT ANSWER - Guaranteed Insurability Rider
- Waiver of Premium Rider
- Automatic Premium Loan Rider
- Payor Provision or Rider
- Accidental Death Benefit Rider
- Cost of Living Rider
*Guaranteed Insurability RiderCORRECT ANSWER - An option to buy more insurance coverage later without proving insurable.
- Between ages 25 to 40, in 3 year intervals, at any one of those points can purchase addition coverage without proving insurable.
*Waiver of Premium RiderCORRECT ANSWER - Rider is purchase as an option
- The insurance company stops collecting the premium if the insured becomes disabled due to accident or sickness.
- The premiums start up again when the insured recovers.
- (Does not require retroactive pay back)
- An option that may be rated or denied
*Automatic Premium Loan RiderCORRECT ANSWER - Used if the insurance company loses the client because the client's checking account was closed and the insured did not notify the company
- First they try to find the client, if they are unable, they take the premium out of the cash value as a loan until they can find the client.
- Does not work with term policies (policy must have cash value to work)
Payor Provision or RiderCORRECT ANSWER - Mentioned in # 98
Accidental Death Benefit RiderCORRECT ANSWER - Aka double indemnity
- The beneficiary will receive twice the face amount of the policy if the insured dies in an accident
Cost of Living RiderCORRECT ANSWER - Allows you to upgrade or purchase additional insurance coverage to cover the increasing cost of living
ActuariesCORRECT ANSWER People who compute the premiums
3 Factors in Calculating Premiums:CORRECT ANSWER - Mortality
- Interest
- Expenses
MortalityCORRECT ANSWER - Mortality tables indicate how long people are expected to live
- The probability of death
- The average number of deaths that will occur each year in each age group in comparison to the number of living people in that same group
- Mortality tables: probability of death and expectation of life
*What are mortality tables?CORRECT ANSWER Indicate how long people are expected to live
InterestCORRECT ANSWER How well the company is doing on their investing
Expense FactorCORRECT ANSWER Actuaries need to be able to estimate how long people are going to live, how well they're doing on their investing, and what kind of expenses are going to be incurred out into the future as far as maybe 100 years.
5 Other Factors in Calculating Premiums:CORRECT ANSWER - Age
- Sex
- Health
- Occupation / Avocation
- Habits
*Something about how sex? is illegal to be taken into account when determining insurability?CORRECT ANSWER Asking for a person's age or sex is NOT discriminatory. But asking for religious beliefs IS discriminatory
Asking about marital status is discriminatory.CORRECT ANSWER ...
Criterium for InsurabilityCORRECT ANSWER - Age and gender of policy holder
- MIB: Medical history/pre-existing conditions (you fill in form, but many companies also use database of Medical Information Bureau - MIB)
- Family medical history
- Results of medical exam
- Smoker or not
- Mental health record
- Occupation
- Lifestyle issues, such as leisure activities that the insurance company considers risky
- Driving record
- Where you travel regularly
- Features, coverages and limits selected
- Credit history
Premiums for 10 Year Term PolicyCORRECT ANSWER Has premiums level for 10 years
ReservesCORRECT ANSWER Huge pot of money that the companies are required by the states to set aside in order to be able to pay the claims that occur next year.
Cash ValesCORRECT ANSWER Small tanks of money that are inside each permanent policy
Ways Policy Proceeds are paid When Insured Dies:CORRECT ANSWER (method chosen when setting up the policy)
- Lump Sum Cash Option
- Interest Only Option
- Fixed Period Option
- Fixed Amount Option
- Life Income Options (6 choices)
Lump Sum Cash OptionCORRECT ANSWER Beneficiary is paid in a single check, a lump sum
Interest Only OptionCORRECT ANSWER - Beneficiary is paid in interest payment until a certain point. Then the remaining balance is paid at that point.
- (The interest is based on how well the company is doing in their investments)
Fixed Period OptionCORRECT ANSWER - The payout is set over a length of time (requested by the insured)
- The amount paid out each month will be calculated to match the length of time set
Fixed Amount OptionCORRECT ANSWER - The insured wants a set dollar amount monthly.
- Money will be paid out until it runs out
Viatical settlementsCORRECT ANSWER - Another variation of policy proceeding method
- Offers cash ahead of time but at a reduced amount
- If you were ill and needed the money from the insurance policy, take a % loss but get money right away
- Viatical agents are required to have life insurance license
- Accomplished through absolute assignment
Tax treatment of policy proceeds:CORRECT ANSWER - If buy policy individually, it's with after tax dollars so benefits will not be taxed.
- If company buys policy, it's before tax dollars, so proceeds will be taxed.
Whether policy is taxed when it's cashed in depends on:CORRECT ANSWER - If amount paid in premium is less than cash value received, the difference is taxable.
- If the amount paid in premium is more than cash value received, no tax is due.
1035 ExchangeCORRECT ANSWER - When you cash in your policy, you can move the cash value from it to the cash value of an annuity.
- Money is tax deferred until you take the money out of the annuity for good.
- This only works from a Life Insurance Policy to an annuity or from an annuity to an annuity
Who can be a beneficiary?CORRECT ANSWER - Individuals
- Businesses
- Trusts
- Estates
- Charities
- Minors
- Classes (a group of people e.g. children of the insured)
3 Categories of BeneficiariesCORRECT ANSWER - Primary
- Secondary
- Tertiary (collects only when the primary and secondary die before the insured)
Methods of Distribution to Beneficiaries:CORRECT ANSWER - Per stripes
- Per capita
*Per StripesCORRECT ANSWER - Your immediate surviving family will receive equal share
- Your grandchildren's generation will split the share of their deceased parent
*Per CapitaCORRECT ANSWER - Assume per capita unless otherwise states
- All surviving family members will receive an equal share
Revocable beneficiaryCORRECT ANSWER - All beneficiaries considered revocable unless otherwise stated
- The beneficiary can be changed at any time
*Irrevocable beneficiaryCORRECT ANSWER - Nothing can be changed without the consent of the beneficiary
*What is an irrevocable beneficiary allowed or not allowed to do?CORRECT ANSWER ...
*What is needed for an insurance contract to be a real contract?~~CORRECT ANSWER - Signature
- Date
-???
*Who has the right to change the beneficiary on insurance policy?CORRECT ANSWER ...
*Simultaneous Death (Uniform Simultaneous Death Act)CORRECT ANSWER - When the insured and the beneficiary die at the same time, the insured person died last.
- Even after 14 to 30 days, the Insured is still considered to have died last
- If we know who died last, go to "Common Disaster Provision" where the insured still dies last
- This prevents the proceeds going to the estate of the primary beneficiary
*What is the Common Disaster Provision?CORRECT ANSWER - When we know who died last but the insured is still considered to have died last.
- When the beneficiary dies 30 days AFTER the insured, the insured is still considered to have died last.
*When does the second beneficiary get to have the proceeds?CORRECT ANSWER ...
*What if the primary beneficiary dies before the insured? The second beneficiary gets it?CORRECT ANSWER ...
Underwriting Process:CORRECT ANSWER - 1st: determine if the applicant is insurable;
Application
Medical Report
MIB (Medical Information Bureau)
Special Questionnaires
Inspection Reports
Credit Reports
**Parts of an Insurance Application:CORRECT ANSWER - Part One: General (clerical information)
- Part Two: Medical History (not same as medical report) Made up of a list of medical questions
- Part Three: Agent's Report
- Signatures need from: Applicant, Insured, Owner, and agent
*Part OneCORRECT ANSWER General information
- Details of requested insurance
- Beneficiary name
- Additional life insurance pending
- Alcohol
- Drugs
- Habits
- Foreign travels
- Insurer (any person capable of making a contract)
- Plan
- Amount of insurance
- Death benefit
- Riders
- Premiums
- Insured's insurance needs
- Insured's personal history
*Part TwoCORRECT ANSWER Medical information
- Past & current health
- Chronic
- Family info
- What you have or don't have medically
- Primary care provider
*What kind of information is in the agent's report?CORRECT ANSWER ...
*Know what type of information is considered under each part of the applicationCORRECT ANSWER ...
Medical ReportCORRECT ANSWER Made up of:
- APS (Attending Physicians Report)
- The paramedics who obtain blood test, urine test, EKG, and ask questions.
*MIB (Medical Information Bureau)CORRECT ANSWER - Company owned by the insurance industry
- Gathers information:
Every time someone applies
Every time someone has a health insurance claim
Gets all Medicare records, Medicaid records, and military medical records
- The purpose is "the prevention of misrepresentation and fraud"
- The main purpose is to hold down the cost of insurance
*Know what type of information the MIB gathers and disclosesCORRECT ANSWER ...
*If someone is rejected because of an MIB report, it must be disclosed. They have to be given the contact information, but cannot be told what the report contained. Agents don't get to see it either.CORRECT ANSWER ...
Special QuestionnaireCORRECT ANSWER - Asks questions about hobbies and jobs.
- (The more experienced someone is in their hobby the less concerned they are)
Inspection ReportsCORRECT ANSWER - Used to provide a picture of the applicant's character and reputation
- *Information on the prospective insured's lifestyle
- Contains information about assets, liabilities, and their mode of living.
- The more insurance coverage, the more involved the report is.
- Assets and Liabilities are listed
**Underwriting / Application ProcessCORRECT ANSWER - Applicant watches while the application is filled out and then signs his/her name
- The agent signs, witnessing the signature
- If there is a change in the application, the agent drives back, makes the change with the applicant watching, both applicant and the agent initials it, and the agent drives home.
-The policy effective date is the same as the date of application.
- When application is completed, and the applicant has signed the check for the initial premium, they're given a conditional receipt. (means client is covered if everything checks out). If it does check out then get approval receipt.
- The client is covered if everything checks out.
- The conditional receipt goes into effect after the paramedic has completed the exam (but will remain conditional until the exam comes back positive)
- If the client died after exam and it was positive, claim would be paid.
- (Conditional receipt has maximum payout of $100,000)
BackdatingCORRECT ANSWER If an agent discovers that George's birthday is a week earlier than it's stated on the application, the agent can write on the application "please backdate to save age"
- Company will charge extra for the number of days to get past that point by one day
- But will cause the applicant to be one year younger for the rest of their life on their policy
*Policy Issue and its Delivery:CORRECT ANSWER - Constructive delivery: done by phone call, a postcard, or email
- Free Look does not begin until real delivery
- When the policy is delivered to the client, that's when they explain it and make sure that the policy covers the needs of the client.
- If no check for the premium was received at the time of application, meaning there was no offer,when the policy is delivered to the client, that's when the first check is received from the client and it's also the time when the client signs a statement of insured's good heath (only when there's no premium). [Show Less]