FIN3100: Exam 5 Life Insurance

Premature Death

Death of a family head while financial obligations remain and others rely on their income.

Economic Costs of Premature Death

Loss of future earnings, funeral costs, medical bills, and reduced standard of living.

Non-Economic Costs of Premature Death

Emotional grief, loss of guidance, loss of companionship, psychological stress.

Human Life Value

Present value of the deceased’s future earnings allocated to the family, discounted to today.

Needs Approach

Life insurance amount based on actual financial needs if the breadwinner dies (funeral, income, debts).

Estate Clearance Fund

Funds needed immediately after death for funeral, medical bills, burial, and debts.

Readjustment Period

1–2 years of income needed for a family to adjust financially after death.

Dependency Period

Time until the youngest child turns 18 and still needs financial support.

Blackout Period

Period when surviving spouse receives no Social Security benefits (after youngest turns 16 until spouse 60).

Special Needs

Additional funds for college education, emergencies, or special family situations.

Term Life Insurance

Temporary protection with no cash value that expires unless renewed.

Yearly Renewable Term (YRT)

Term insurance renewed annually with increasing premiums.

Term to Age 65

Policy providing protection until age 65, then terminates.

Decreasing Term Life Insurance

Term insurance with a benefit that decreases over time (often used for mortgages).

Whole Life Insurance

Lifetime protection with level premiums and cash value accumulation.

Cash Value

Savings component that grows tax-deferred and can be borrowed against.

Ordinary Life Insurance

Level-premium whole life policy providing lifetime coverage and cash value.

Limited-Pay Whole Life

Whole life insurance where premiums are paid for a limited number of years (10-pay, 20-pay).

Variable Life Insurance

Whole life policy with investments in separate accounts

Universal Life Insurance

Flexible-premium policy with separate protection and savings components.

Universal Life Option A

Level death benefit in early years, later increases as cash value grows.

Universal Life Option B

Death benefit equals cash value + net amount at risk (increasing benefit).

Variable Universal Life Insurance

Flexible premium policy with investment options and no guaranteed returns.

Ownership Clause

Policyowner has all contractual rights while the insured is alive.

Entire Contract Clause

Policy + application constitute the full contract

Incontestable Clause

Insurer cannot deny claim after policy has been in force 2 years (with limited exceptions).

Suicide Clause

If suicide occurs within 2 years, insurer refunds premiums instead of paying the benefit.

Grace Period

31 days to pay an overdue premium before the policy lapses.

Reinstatement Provision

Allows reinstatement of lapsed policy if evidence of insurability and past premiums + interest are paid.

Misstatement of Age/Gender Clause

Benefit adjusted to what premiums would have bought at correct age/gender.

Primary Beneficiary

First person entitled to receive death benefit.

Contingent Beneficiary

Receives benefit if primary beneficiary is deceased.

Revocable Beneficiary

Beneficiary can be changed without consent.

Irrevocable Beneficiary

Beneficiary cannot be changed without consent.

Specific Beneficiary

A specifically named individual receives benefits.

Class Beneficiary

A group designation (e.g., “children of the insured”).

Fixed-Period Settlement Option

Benefit paid over a fixed number of years.

Fixed-Amount Settlement Option

Benefit paid out in fixed dollar amounts until exhausted.

Life Income Settlement Option

Provides income as long as beneficiary lives