risk - chance of loss
speculative risk - -involves the chance of gain or loss and is NOT insurable
-ex: gambling
pure risk - involves only the
... [Show More] chance of loss and is insurable
exposure - being subject to the possibility of loss because of an activity, location, or characteristics
-second hand smoke
-no control on exposure
peril - cause of loss
natural peril - lightning, hail, hurricane, and so forth
human peril - theft, murder, auto accidents, industrial accidents, and illness
loss - accidental/unexpected death or injury to a person or any reduction in quality, quantity, or value of property
hazard - situation that introduces or increases the probability of loss
-triggers the event
-overloaded light switch
elements of an insurable risk - (CANHAM)
-Calculable
-Affordable (premiums have to be affordable)
-Noncatastrophic (not war, nuclear)
-Homogenous (similar in nature; how many 31-yr-old males die each yr)
-Accidental and definite (not on purpose)
-Measurable (have to be able to put a $ amount on it)
insurance vs. gambling - insurance is a pooling of funds and sharing the cost of losses.
the insured transfers risk away from themselves to another entity
what is buying insurance? - a transfer of risk
-risk management
personal uses of life insurance - 1. final illness and funeral expenses
2. liquidity for immediate expenses
3. income for ongoing expense
4. survivor protection (loan spouse $ if you die, or recoup loss if spouse dies & you are sole provider)
5. estate creation (life ins. creates an estate to the death but life ins. could create estate tax)
6. cash accumulation (cash value life ins. is appropriate for all except emergency fund)
7. estate conservation
what could ownership of life insurance cause in an estate? - estate tax, only if over 3.5 million
Contract - the legal agreement between the insurer and the policyowner.
What are the essential elements of all enforceable contracts? - 1. competent parties
2. legal purpose
3. agreement
4. consideration
competent parties - a). insurance agency--certificate of authority
b). applicant
requirements of competent party applicant - 1. of lawful age (usually 18; for the purchase of life insurance, 14 in Texas)
2. mental competence
3. not acting under duress
what does the contract agreement consist of? - offer and acceptance (counteroffer)
-counteroffers are NOT required
What is cash value life insurance good for? - all except emergency fund
consideration - equitable terms are not required
what is not considered an element of an enforceable contract? - counteroffer
counteroffer - -not considered an element of an enforceable contract
-occurs when the offeree rejects the offer, amends the offer and submits a different offer back to offerer
(e.g. the insurer rejects the applicant's offer as a standard risk and counteroffers a policy as a substandard risk; an agreement is not reached until the two parties agree to the exact offer or counteroffer)
no consideration = - no coverage
insurable interest - the applicant/policyowner has an insurable interest (emotional and financial) in his own life and can name any beneficiary he chooses
when is insurable interest required? - a). when the proposed owner/applicant is to be someone other than the proposed insured (third-party insured)
b). at the time of ISSUE, not at time of LOSS in life insurance (e.g. not at time of claim)
insurable interest is NOT on... - next door neighbor
types of insurable interest - -emotional interest (i.e., blood or marriage)
-financial interest--for someone to whom you owe a debt or with whom you have a business relationship
insurable interest & co-signing a loan - if you co-sign a loan, you now have insurable interest on person getting a loan, by that person does not have insurable interest on you
law of large numbers - 1. when you increase the number of units exposed to loss in a study, the accuracy of predictions of future losses also increases
2. the larger the number of events observed, the greater the accuracy of the prediction
actuary - business professional who analyzes the financial consequences of risk
who uses the law of large numbers - actuaries
-come up with raw numbers
two methods to determine how much insurance you need - 1. salary
2. economic worth
determining amounts of life insurance - 1. human life value approach
2. needs approach
3. planning for income needs
4. liquidation vs. retention of capital
5. social security blackout period
6. face value vs. death benefit
human life value approach - an individual's economic worth, measured by the sum of his or her future earnings that is devoted to his or her family
needs approach - a method for determining how much insurance protection a person should have by analyzing a family's or business's needs and objectives should the insured die, become disabled, or retire
-NOW
-whether you need money for mortgage credit cards NOW
liquidation vs. retention of capital - -pay off lower
-the proceeds (capital) will be used up either at or slightly after the end of the surviving spouse's life expectancy.
-your family's life insurance proceeds should last just through the 4 ongoing income periods:
1. readjustment
2. dependency
3. blackout
4. retirement
social security blackout period - period following the death of a family breadwinner during which no Social Security benefits are available to the surviving spouse
spouse gets check until/when youngest child turns 16
18/19 if still in high school spouse will get a check
then they get nothing until they turn 60
face value vs. death benefit - loans do NOT change face value
loans DO change death benefit
a). face value is the death benefit stated on the first page of the policy
b). a death benefit is the amount paid upon the insured's death and may be slightly more or less than the face value
face value - the death benefit stated on the first page of the policy
death benefit - the amount paid upon the insured's death and may be slightly more or less than the face value
classifications of insurers - (where company is located vs. where they do business)
1. domestic
2. foreign
3. alien
domestic - domiciled in Texas
foreign - home office in another state or possession--Colorado for example
alien - located outside the borders of the United States--another country
resident agent - live in state where you do business
nonresident agent - do business in a state where they do not live
types of insurers - 1. stock company
2. mutual company
3. fraternal associations/societies
4. reciprocal exchanges
5. Lloyd's associations
Stock company - owned by the shareholders/stockholders
a). nonparticipating policies
b). dividends--taxable (paid on stock--not policies owned; taxable income in year paid--ROI)
often referred to as a nonparticipating company bc policyholders do not participate in dividends
Mutual company - -owned by the policyowners
-participating/policy dividend (participate in dividends)
-owner chooses policy dividend
-policy dividends usually not taxable income (they are considered a return of unused premium)
-policy dividends are not guaranteed
policy dividend options (mutual company, owner chooses) - 1. paid-up additions (policyowner can use dividends to buy additional coverage)
2. reduce premiums (policyowner can use dividends to pay premiums)
3. one-year term insurance (policyowner can use dividends to buy term coverage)
4. paid-up option (policy owner can use dividends to pay up all premiums due--(stop paying at some point))
5. accumulate at interest (policyowner allows the policy dividends to accumulate at interest with the company; the company pays interest on the policy dividends
6. cash (if you put in bank & earn interest, the interest is taxable)
who owns the mutual company? - policyowners
dividends in a mutual company are___________ - nontaxable
T/F: Mutual companies can guarantee dividends - false
who rule the insurance contract? - owners
in mutual company, owners receive____________ - nontaxable dividends
fraternal associations/societies - a). nonprofit
b). organized for the mutual benefit of its members and their beneficiaries
c). have a lodge system and representative form of government
d). association/society authorized to do business in Texas may provide:
-death benefits in any form
-annuity benefits
-temporary or permanent disability benefits
-hospital, medical, or nursing benefits
-monument or tombstone benefits not to exceed statutory amount
-funeral benefits
(added benefits not for profit)
fraternal association/society authorized to do business in Texas may provide the following: - -death benefits in any form
-annuity benefits
-temporary or permanent disability benefits
-hospital, medical, or nursing benefits
-monument or tombstone benefits not to exceed statutory amount
-funeral benefits
reciprocal exchanges - a). unincorporated insurer operating through an attorney-in-fact to provide insurance for its subscribers
b). not rate regulated
c). members share profits and losses
Lloyd's asociations - Texas Lloyd's association have no connection with underwriters at Lloyd's of London
-individuals, partnerships, or associations (underwriters) can join together to provide insurance
-co. operates through an attorney-in-fact, who has power of attorney for the underwriters
-must be a minimum of 10 underwriters
-they are subject to same regulation as other companies except for forms and rates
-must use the word Lloyd's in their name
-can write ALL forms of insurance EXCEPT life
underwriter - company receiving premiums and accepting responsibility for fulfilling the policy contract.
company employee who decides whether or not the company should assume a particular risk.
the agent who sells the policy
how does the Lloyd's association company operate? - through an attorney-in-fact, who has power of attorney for the underwriters
How many underwriters must the Lloyd's association company have? - minimum of 10
What regulation are Lloyd's associations subject to? - same as other companies EXCEPT for forms and rates
What is the maximum book of business Lloyd's associations can write? - 10 times their net assets
What types of insurance can Lloyd's associations write? - all forms except life
Where does shared risk underwriting come from? - a Lloyd's company
independent rating services - evaluate insurers.
ratings are assigned to each insurer on the basis of such factors as:
-financial strength
-claims paying ability
-investment performance
-management
-underwriting
-reserves
-capital
-surplus requirements
the more A's, the higher the rating (report card)
independent rating services (companies) - 1. A.M. Best, Inc
2. Standard & Poor's Rating Services
3. Moody's Investors Service (rate bonds)
4. Duff & Phelps Credit Rating Company
5. Weiss Research
when insurance companies come in and look at ratings, they look at everything except what? - length of time in business
reinsurance - the insurer buys insurance from another insurer for part of the risk
AKA insurance for insurance companies
1. ceding company
2. assuming company
3. reinsurance is provided by the terms of automatic treaties or by facultative arrangements (facultative = a policy-by-policy approach with the reinsurer underwriting each application)
ceding company - -in reinsurance
-direct writer
-issues the policy for total amount
-responsible for all death claims
assuming company - (reinsuring company)
assumes all or part of the risk
all reinsurance is done on what basis? - facultative basis--case by case, application by application
underwriting - selection of risk by the insurer
classification of risk - ensures that each person pays the correct premium for the risk they bring to the insurance pool
4 classes of risk
4 classes of risk - 1. preferred--below average risk pays discounted premium
2. standard--average risk; majority of policies are issued
3. substandard--above average risk pays an increased premium (based on type of job w/ great risk)
4. declined--unacceptable risk (rejected), uninsurable
adverse selection - selecting against the insurance company to get the best benefit at the lowest premium
sources of information for underwriting - a). the application (main source of underwriting info. truthful statement)
b). agent's report (field underwriters. are you related to insured)
c). Medical Information Bureau (MIB) -- (info from MIB cannot be the sole basis for declining an application) (members of MIB are doctors. info on applications and claims go on MIB
d). Medical examination (questionnaire)--depends on age and amount of insurance applied for
e). attending physician's statement (APS)--request for medical records
f). inspection report--credit and background of applicant
g). The Fair Credit Reporting Act (FCRA)--a federal law
h). HIV and AIDS questions and tests must be administered to everyone on a nondiscriminatory basis. Agents must get the applicant's signed authorization to perform tests for HIV or AIDS
What goes on MIB? - info on applications and claim
who are field underwriters? - agents
What is involved in field underwriting? - agents' observations
The Fair Credit Reporting Act - FCRA
federal law
Requires the following:
-at the time of application, the applicant is given notice that credit will be pulled
-the applicant has a right to know; if credit is denied, the company must send the applicant the name & address of the credit agency used within 10 days
-the applicant can submit correct information
-have to notify you they are pulling credit report, but do not need consent to pull credit report
once the credit report is received & __ creditor record.... - do not send explanation to underwriter
underwriting substandard applications - -substandard life policies
-substandard health policies
-complete application
underwriting substandard life policies - a). Rated policy (rate up) (percentage method, flat extra premium, rated-up age)
b). modified life policy (not standard) any premium that is altered from the regular premium for a similar life policy
life insurance ____% morbidity charge for health reasons - 50%
Substandard health policies may be underwritten using the following: - -Extra premium--rate up
-modified health policy--any premium that is altered from the regular premium for a similar health policy
-waivers--impairment--exclusion to an impatient for life of policy (ex: heart cord)
completing the substandard application - a). delay if questions are not all answered on the application
b). agent's responsibilities--The agent is the agent of the insurer; info or money obtained by agent is considered to be received by the insurer
c). changes on the application must be initialed by the applicant by crossing out the original, making the change, and initialing it. Correction fluid and erasure are not allowed (changes made by APPLICANT ONLY)
d). necessary signatures--the agent and the applicant sign each application. in case of a third-party application:
-owner/applicant
-insured, and
-agent
beneficiary does NOT sign application
e). always see the proposed insured personally
key persons to have sign underwriting application - -owner/applicant
-insured
-agent
beneficiary does not sign application
Representation vs. Warranties - warranties are absolutely true & representations are true to the best of the applicant's knowledge
warranties - statements that must be absolutely true
-of absolute fact
-affect the contract
What could breach of warranty result in? - a void contract of denial of coverage
Representations - with life policies statements that are true to the best of the applicant's knowledge
answers to questions on an insurance application are considered representations
misrepresentations - misstatements of fact (i.e. false statements, untruthful answers), usually not serious enough to affect coverage
material misrepresentation - false statement that is so serious that if the insurer had knowledge of the truth, it would have affected the underwriting decision (i.e. not issued policy or charged an additional premium)
how much time do you have to discover material misrepresentations? - 2 years
if discover within 2 years, can cancel & return premiums, has to do with health issues
after 2 years you are clean
-discover person misstated their age within 2 years. can send letter to adjust the premium for original insurance
What is the purpose of providing coverage with a conditional receipt? - to insure the person before the effective date of the policy
-breach of warranty could result in void contract or denial of coverage
conditional receipt - given to the policyowners when they pay a premium at time of application.
such receipts bind the insurance company if the risk is approved as applied for, subject to any conditions stated on the receipt
what is coverage in effect under? - a conditional receipt on the date the requirements (conditions) of the receipt are satisfied
4 requirements that must be met for coverage under conditional receipt: - (AMPS)
1. Application is fully completed and signed before death
2. Medical examination (if one is required), by the age or amount of insurance, completed before death
3. Premium (full mode) has been paid, before death (need to collect the standard premium
4. Standard risk as determined before or after death
When does conditional receipt prevent coverage? - if comes back from underwriting as substandard or unstated--?
backdating - allowed by Texas law for life insurance policies up to six months from date of application, to preserve age-related premium
law of agency - knowledge of the agent is knowledge of the principal; payment to the agent is payment to the principal
agent - a person or entity who acts on behalf of another
-agents are producers
principal - the party for whom the agent acts (the insurer)
types of authority - -express authority
-implied authority
-apparent authority
express authority - granted in an agent's contract; it is the written authority to the agent
written authority
an appointment--work for someone
gets me paid--employment contract
implied authority - authority an agent needs to carry out the express authority.
does not conflict with the express authority; not written out in detail in the agent's contract
not written
doing the job that is not in writing
going on appointments not on books
use of business card or application
apparent authority - created when the action or inaction of the insurer creates the impression that the authority exists
clients assumption on messing up--the agent screws up paying a claim insurance company does not ...?
client's assumption
what is the best way to prove you work for an insurance company? - use of company forms and paperwork
Producer responsibilities - -fiduciary
-ethical
producer fiduciary responsibilities - the producer has a fiduciary responsibility to the insurer
the producer must always protect the insurer's interests and follow any lawful instructions from the insurer
the producer may disobey instructions that are illegal
producer ethical responsibilities - the producer must adhere to high standards of ethical conduct when dealing with an applicant
the product must always act fairly and honestly, disclosing all information the applicant needs to make a well-informed decision when buying insurance
waiver and estoppel - when a provision of an insurance contract is waived (not enforced by the insurance company), the provision cannot subsequently by enforced by the insurance company to justify denial of a claim; the insurer is "(e)stopped" from denying the claim
waiver - agreement waiving the company's liability for a certain type or types of risk ordinarily covered in the policy; a voluntary giving up of a legal, given right
voluntarily giving up/relinquishing a known right
estoppel - legal impediment to denying the consequences of one's actions or deeds if they lead to detrimental actions by another
insurance company plays fast to keep from paying a claim (cannot enforce a rule at their convenience)
Marketing systems: how insurance policies are sold - 1. full-time career (captive agents)
2. independent agents (brokers)
3. direct response insurers (no agent involved)
captive agents - full-time career--represent one company
brokers - independent agents--represent several companies
direct response insurers - no agent involved
direct mail solicitations instead of agents
delivering the policy - duties of the agent
-everything in person
Duties of the agent - 1. explain the policy, benefits, riders, and so forth in person
2. if a counteroffer, explain and have applicant sign acceptance form
3. if collection on delivery (COD [initial premium not paid with application]), get a health statement from the insured; if insured suffered a serious accident or illness prior to delivery, the agent CANNOT accept money or deliver the policy
4. coverage begins when premium is accepted
5. free-look period starts when policy delivery receipt is signed
when does coverage begin? - when premium is accepted
when does free-look period begin? - when policy delivery receipt is signed
if he cancels can receive all premium back
If insured suffered a serious accident or illness prior to delivery, can agent accept money or deliver the policy? - NO
COD - Collection on delivery
unique features of insurance policies - 1. unilateral
2. adhesion
3. conditional
4. aleatory
5. executory
6. personal contract
7. utmost good faith
unilateral - the insurer is bound to the contract; the policyowner is not bound and is not considered to have breached the contract if he does not pay the premium
-1-way enforcement
-nonpayment of premiums are not considered to be a breach of contract
adhesion - "take it or leave it"
contract is designed and written by the insurance company, and the insured adheres to the terms of the contract
if there is any ambiguity in the contract terms, the ruling will be in favor of the insured or beneficiary
conditional - an insurance policy is a conditional contract
the performance of the contract is conditional upon the occurrence of an uncertain event
if no claim occurs during the policy period, no money is paid
dependent upon chance or outcome
aleatory - unequal consideration between premium and benefit
uneven between risk and reward premium has then paid benefit
executory - obligations remain to be executed at a later date
in the future
personal contract - many policies are personal contracts between the policyowner and the insurer
insurance is generally not transferable to another person
life insurance policies are an exception
they can be assigned, sold, given away, or transferred
Premiums will remain the same!
1. property and casualty policies are personal contracts
2. life insurance policies are not personal contracts
are property and casualty policies personal contracts? - yes
are life insurance policies personal contracts? - no
utmost good faith - insurance is based on the applicant's honest and complete answers in the application and on the insurer's promise to pay benefits after some possible future event
the public relies on the honesty and integrity of the agent and insurer
the applicant and insurer must enter into the contract in good faith
reinsurance is________ - an insurer placing some of the risk with another insurer
life and health insurance policies explain that the answers to questions on the application will be interpreted as_______ - representations
An application for life insurance was taken on a COD basis. When the agent returned with the policy, the applicant had suffered a heart attack. The agent should__________ - not accept any premium or deliver the policy
The agent wrote the application on Aug 1, and the medical examination was done on Aug 4. The insurer approved the application on Aug 18, and the policy was issued on Aug 20. The agent delivered the policy on Aug 24 and collected the initial premium. When was the coverage effective? - Aug 24
All of the following will normally be acceptable reasons for buying life insurance EXCEPT
a. survivor protection
b. key employee insurance
c. accumulation of funds for education expenses
d. speculation on a neighbor's life - d. speculation on a neighbor's life
Which of the following would prevent the coverage provided by a conditional receipt from being effective?
-the medical questionnaire form was completed by a nonmedicallly trained person
-the policy was issued after underwriting was completed as a rated policy
-the agent required the applicant to initial several changes made on the application
-the premium was paid later than the date of the application - the policy was issued after underwriting was completed as a rated policy
(substandard above standard)
There are 3 types of authority involved in the relationship between the agent and the insurance company: express, implied, and apparent. If an agent misrepresents a policy benefit and obligates the insurer to pay a claim they would not otherwise owe, which authority is it? - apparent
In delivering a new policy to the client, an agent should
-thank the client for buying the policy
-explain any benefits or provisions not already covered with the policyowner
-offer to provide service and info as needed
-all of the above - all of the above
An insurance policy is an example of a contract of adhesion, which means that it was written by only one of the parties to the contract and if there is any ambiguity, courts will generally rule in favor of__________ - the policyowner or beneficiary rather than the insurer
An actuary says that she uses a principle in her work that makes her job of predicting losses more accurate when she increases the number of exposures to loss in her studies. This principle is called___________ - law of large numbers
The have a valid insurance contract, all of the following must be present EXCEPT:
-offer
-acceptance
-equitable terms
-consideration - equitable terms
An agent took an application for life insurance, received a full premium in cash, and had the medical examination done on the same date. He spent the cash and turned the application in as a COD. He was surprised when the applicant died suddenly before the underwriting of the standard policy was completed. What legal principle will cause the company to pay or refuse this claim?
-when the policy is issued standard, the insurer must offer to pay if the beneficiary will pay the premium
-even though the policy was issued standard, the insurer must directly receive the premium payment for the policy before it is considered to be in place
-when the agent took the cash, it was as if the money had been placed in the hands of the insurer, even though the cash was not received by the insurer
-when the policy is issued standard, the insurer must pay the benefit and deduct enough from the settlement to cover 1 month's premium - -when the agent took the ash, it was as if the money had been placed in the hands of the insurer, even though the cash was not received by the insurer
law of agency
knowledge of agency = knowledge of company
An insured has been careless about paying her term policy premium on time for several months. The insurer has not enforced the contract condition that allows them to lapse the policy but has waived policy terms by accepting the late premiums without comment. This month, the premium was not paid during the grace period, and the insured died 2 days later. The company decided to lapse the policy to avoid paying the death benefit. Which of the following might prevent them from doing that?
-late payment principle
-contract recession
-estoppel
-grace period extension - estoppel
Which of the following are costs associated with death?
-doctor and hospital bills from a final illness or accident
-paying off credit cards, loans, and other debts
-taxes
-all of the above - all of the above
A top producer at ABC Insurance Company has analyzed D's life insurance needs, taking into account D's salary, his expenses, his current age, and the depreciation of the dollar over time. The producer was using the
-analytical approach to needs analysis
-human life value approach to needs analysis
-needs approach to needs analysis
-planning approach to needs analysis - human life value approach to needs analysis
B, an insurance producer, analyzed C's life insurance needs, taking into account the number of money C anticipated needing for her funeral, the amount of income that would be required to maintain her family's standard of living in the event of her death, including projected college costs and the cost of supporting her stay-at-home husband. B was using the
-analytical approach to needs analysis
-human life value approach to needs analysis
-needs approach to needs analysis
-planning approach to needs analysis - needs approach to needs analysis
A wealthy businessman has asked you if he should consider buying life insurance. If he dies, his family will be well cared for through his will and his accumulated wealth. What is a possible motive for his purchase of life insurance?
-survivor protection
-estate creation
-cash accumulation
-estate conservation - estate conservation
what is life insurance? - a contract that pays an income tax-free death benefit to a named beneficiary upon the death of the insured
what is life insurance used for? - to provide cash to meet financial obligations left behind when the insured dies
what does life insurance do? - protection against dying too soon and creates an estate
Gross premium = - mortality + expense (outgoing) - intererst
Net premium = - mortality - interest or investments
mortality - (claim costs)
1980 Commissioner's Standard Ordinary (CSO) Mortality Table--stops at age 100
3 premium calculation factors that make up the gross annual premium - 1. mortality (claim costs)
2. expenses (loading)
3. interest/earnings on investments
4. premium
mode of premium payment - the mode of premium payment is the schedule of payment: monthly, quarterly, semiannually, or annually
single premium - one-time payment of the present value of all future policy benefits
a single premium mode is often used when a person purchases life insurance to pay estate taxes (estate conservation)
when is single premium mode often used? - when a person purchases life insurance to pay estate taxes (estate conservation)
When are adjustments made to the gross annualized premium amount? - when the mode is other than annual
gross premium is - net premium + expenses
types of life policies - -term insurance
-whole life, ordinary life, straight whole life, or continuous premium
-limited-pay whole life
-family life policy or family plan policy
-juvenile policy
-adjustable life policy
-indeterminate premium whole life insurance
-joint life policy
-survivor or survivorship life insurance policy
-universal life
-variable whole life
-variable universal life
-interest sensitive
term insurance - pure protection (policy or rider)
pure death protection
1. temporary--coverage for a set number of years of to a certain age
designed for a temporary need
2. low premium (no cash value)
cheapest
3. renewable to a set age (if stated) with no proof of insurability; premiums will increase. In an annual renewable term (ART) or yearly renewable term (YRT), the policy is renewable annually at the option of the policyowner with no evidence of insurability. However, the premium is subject to an annual increase based on the insured's age
premium will go up
4. convertible until a set age (if stated)--allows change to a permanent policy (whole life) without evidence of insurability
5. level term
6. decreasing term
7. increasing term
8. level premium term
closer to death, higher the premium
term insurance renewable ART YRT - -renew with no proof of insurance
-premium increases, renew annually based on increase in age
proof - a fact or piece of info which shows that something exists or is true
evidence - one or more reasons for believing that something is or is not true
level term - the death benefit remains level during the term of the policy
premium stays the same
decreasing term - commonly used to cover the unpaid balance of a mortgage, pay for the rearing of children, or both
the benefit decreases during the term of the policy
rider or stand alone policy
increasing term - death benefit increases over the term
available as a rider only
level premium term - the premium remains stable during the term of the policy.
in this instance the insurer averages the premium over the term (e.g. 5, 10, or 20 years). additionally, the death benefit remains level
rider or stand alone policy
amortize - to pay off a debt
Whole life (WL), ordinary life (OL), Straight Whole Life, or continuous premium - 1. insurance for whole life of the insured and premiums are payable for life (to age 100); aka ENDOWMENT at age 100
2. permanent insurance
3. the most important factor in building the reserve (cash value) is the level premium; cash value grows tax deferred
4. The death benefit (face amount) is made up of the cash value (reserve) plus the amount at risk
When is whole life endowment? - payable for life aka age 100
What is the most important factor in building the reserve (cash value) in whole life insurance? - the level premium; cash value grows tax deferred
What is the death benefit for whole life made of? - made up of the cash value (reserve) plus the amount at risk
Limited-Pay Whole Life - shorter premium paid than whole life; examples are 7-pay life, 10-pay life, and 20-pay life, and life paid up at age 65
coverage until age 65
in limited-whole pay life, what is cash value at age 65 - less than face value amount
cash value = - face value - pays at face value
term is NEVER considered _________ - permanent
Family Life policy or Family Plan Policy - 1. designed to cover all family members under one policy
2. whole life on a parent
3. Level term
-on spouse to age 65
-on children from 15 days of age to 19th birthday
fixed premium, stays the same
4. family policies are usually sold in units
5. Child life rider--the term insurance on dependents is convertible to a permanent policy without evidence of insurability at age 19
6. Children born later are covered at 15 days after birth without evidence of insurability
Under WCFP premium payments are derived mainly on _______ - breadwinners (WL)
50 yr old buys 10 pay policy (pay for 10 years). at what age does cash value = face amount? - age 100
child life rider - the term insurance on dependents is convertible to a permanent policy without evidence of insurability at age 19
Juvenile policy - juvenile estate builder or jumping juvenile
1. juvenile is the owner of the policy at age 18-21. Death benefit increases by up to five times at age 21 without evidence of insurability and no change of premium. Coverage is until age 100
2. payor provision (rider)
payor provision - (rider) a life and disability rider on the adult premium payor of a juvenile policy; if anything happens to the payor, the premium will continue to be paid until age 21 (when the child becomes the owner)
juvenile - owner of policy at age 18-21
What is adjustable life policy - a combination of whole life and term that can be adjusted to fit changing needs of the insured
Adjustable Life Policy - 1. combo of whole life & term that can be adjusted to fit changing needs of the insured
2. allows policyowner to adjust:
-premium and/or premium paying period
-face amount and/or period of protection
(death benefit)
3. policyowner cannot decrease cash value (can't access cash)
What does adjustable life policy allow policyowner to adjust? - -premium and/or premium-paying period
-face amount and/or period of protection
cannot decrease cash value though
what can't the policyowner do in adjustable life? - cannot decrease cash value
What is the only type of WL policy you can increase or decrease death benefit (face amount) through the use of term insurance? - adjustable life
evidence of insurability - any statement or proof regarding a person's physical condition, occupation, and so forth, affecting acceptance of the applicant for insurance
Indeterminate Premium Whole Life Insurance - 1. a whole life policy with guaranteed premium for some initial period (usually 3 years)
2. after the initial period, the premium can increase or decrease depending of the investment and mortality experience of the insurer
if company does good, premiums can go down
3. a policy summary must be presented to and signed by the applicant to future changes in premium
What is the only cash value life insurance policy where you cannot access the cash? - adjustable life policy
Joint life policy - first to die (JLP =FTD)
1. insures two people and pays when the first person dies
2. the advantage is a lower premium than with two policies
Survivor or Survivorship Life Insurance Policy - last to die (second to die)
1. Policy is written on 2 people
2. pays only when the last person dies
3. lower premium than two separate policies
4. used in estate planning; ideal way to provide each cash to pay federal estate taxes
buy for estate planning purposes
owned by a trust
don't need death benefit minimum $60,000
What makes up death benefit makeup of ord life or WL - at risk + cash value
Universal Life (UL) - unbundled
accum. cash values
1. flexible premiums; can pay varying premiums and skip a premium payment occasionally
cash value grows taxed deferred when you take money out pay tax on gain
2. interest sensitive
-minimum interest guaranteed
-pays a current interest that cannot be less than the guaranteed minimum (3%)
3. adjustable death benefit (increase will require proof of insurability
4. Unbundled premium--the premium can be broken down into its different components (whole life policies have an indivisible premium) each month
5. the industry opinion is that UL policies are cash value driven
6. the UL policy offers two options:
-option A
-option B
7. Partial surrender (partial withdrawal) allows the policyowner to surrender part of the cash value; the death benefit and cash value will be reduced by that amount
-not subject to interest
who takes on the risk in WL? - insurer
Unbundled premium (UL) - -premium is credited to the cash account
-interest is credited to cash account
-cost of pure protection (i.e. term insurance) is charged to cash account
-expenses (e.g. loading & administrative costs) are charged to cash account
UL policy offers 2 options: - Option A--designed to provide a level death benefit
Option B--designed to provide an increasing death benefit
can switch from A to B--have to prove insurability
UL option A - designed to provide a level death benefit
cash value grows
= death benefit = face amount - face amount + cash value
UL option B - designed to provide an increasing death benefit
parital surrender - (partial withdrawal) allows the policyowner to surrender part of the cash value; death benefit and cash value will be reduced by that amount
not subject to interest [Show Less]