Life insurance Chapter 4

Accidental Death Benefit (ADB)

Extra insurance that pays benefits if a person dies or is seriously injured in an accident (such as losing sight, hearing, or a limb).

Adjustable Life Insurance

A permanent life insurance policy that lets the owner change premium payments and the death benefit. It also builds cash value at a guaranteed rate.

Attained Age

The insured person's current age at a specific time.

Cash Surrender Value

The amount of money a policy owner can receive if they cancel a life insurance policy before it ends.

Convertible Term Life Insurance

A term life policy that can be changed into a permanent life policy without needing another health exam.

Decreasing Term Insurance

A type of term insurance where the death benefit gets smaller over time, often used to cover loans or mortgages.

Endowment Contract

A policy that pays the face amount either when the insured dies or when a set time period ends.

Extended Term Insurance

An option that uses the policy's cash value to keep the same coverage amount for a limited time after the policy is surrendered.

Family Income Policy

A policy that provides both a lump-sum death benefit and regular monthly income payments to beneficiaries.

Joint Life Insurance

One policy that covers two or more people and pays out when the first insured person dies.

Universal Life Insurance

A flexible permanent life insurance policy that allows changes to premiums and death benefits while building cash value.

What is the main purpose of life insurance?

To transfer the risk of death from an individual to an insurance company and provide money to a beneficiary.

What does life insurance create immediately when a policy pays at death?

An immediate estate for the beneficiary.

What are the two main categories of life insurance?

Temporary (term) insurance and permanent insurance.

What is term life insurance?

Temporary life insurance that provides protection for a specific period and pays only if the insured dies during that period.

What is permanent life insurance?

Insurance designed to last the insured’s lifetime and build cash value.

What is the main advantage of term life insurance?

It provides the greatest amount of death benefit for the lowest cost.

Does term life insurance build cash value?

No.

What happens if a person outlives a term policy?

The policy expires and no death benefit is paid.

What are the three basic types of term insurance?

Level term, decreasing term, and increasing term.

What is level term insurance?

A policy with a fixed death benefit and usually fixed premiums for a specific period.

What is decreasing term insurance used for?

Paying off debts such as mortgages or loans.

What happens to the death benefit in decreasing term insurance?

It gradually decreases over time.

What is increasing term insurance?

Term insurance where the death benefit increases over time.

Why might someone buy increasing term insurance?

To keep up with inflation or increasing income needs.

What is renewable term insurance?

Term insurance that can be renewed without proving insurability.

Why is renewable term insurance valuable?

It allows coverage to continue even if the insured becomes unhealthy.

What happens to premiums when term insurance is renewed?

Premiums increase because they are based on the insured’s attained age.

What is convertible term insurance?

Term insurance that allows conversion to permanent insurance without a medical exam.

Why is conversion important?

It protects an insured who may no longer qualify for new insurance due to health changes.

What is attained-age conversion?

The new premium is based on the insured’s age at conversion.

What is original-age conversion?

The premium is based on the insured’s original age when the policy began.

What is whole life insurance?

Permanent life insurance with a fixed premium, fixed death benefit, and cash value.

What are the three main features of whole life insurance?

Lifetime protection, level premiums, and cash value accumulation.

How is whole life different from term life?

Whole life builds cash value; term life does not.

What happens to whole life cash value at maturity?

It equals the face amount of the policy.

Traditionally, at what age did whole life policies mature?

100

What is straight whole life insurance?

Whole life insurance with premiums paid for the insured’s entire life or until age 100

What is limited-pay whole life?

Whole life where premiums are paid for a shorter period but coverage lasts for life.

Example of limited-pay whole life?

10-pay life, 20-pay life, or paid-up at age 65.

What is single-premium whole life?

A policy paid with one large lump-sum premium.

What is the disadvantage of single-premium life insurance?

It becomes a Modified Endowment Contract (MEC).

What makes universal life different from whole life?

It has flexible premiums and adjustable death benefits.

What are the three things that can change in universal life?

Premiums, cash value, and death benefit.

What does "unbundled premium" mean?

The policy shows how premium money is divided among insurance costs, expenses, and cash value.

What happens if universal life premiums are not paid?

Cash value may pay expenses until it runs out; then the policy may lapse.

What is indexed universal life (IUL)?

Universal life where cash value growth is linked to a market index like the S&P 500.

True or false, Does IUL directly invest money in the stock market?

False

What happens if the market index decreases in IUL?

The policy generally does not lose cash value, but no interest may be credited.

Who regulates variable life insurance?

The SEC (Securities and Exchange Commissions)

What license does an agent need to sell variable insurance?

Life insurance license and securities license.

What is variable life insurance?

Life insurance where cash value is invested in separate accounts like stocks and bonds.

Who takes the investment risk in variable life?

The policy owner.

What is variable universal life (VUL)?

A combination of variable life and universal life.

• Flexible premiums and a death benefit with control over the investment aspect

• Combines an investment feature and a flexible premium

What is a family plan policy?

One policy covering a family using whole life for the main insured and term riders for family members.

What is a family income policy?

Whole life plus decreasing term that provides income payments after death.

What is joint life insurance?

Coverage on two or more people that pays when the first person dies.

What is survivorship life insurance?

Coverage on two people that pays after both people die.

What is juvenile life insurance?

Life insurance covering a child, usually owned by a parent or guardian.

What is jumping juvenile insurance?

A child policy that increases coverage at a certain age without medical proof.

What is a Modified Endowment Contract (MEC)?

A life insurance policy that is overfunded and fails the seven-pay test.

What is the seven-pay test?

A test that limits how much premium can be paid into a policy during the first seven years.

Can a policy go back from MEC status to normal life insurance?

No. It cannot go back

How are MEC withdrawals taxed?

Earnings are taxed first.

What penalty applies to MEC withdrawals before age 59½?

10% penalty tax.

What is AD&D insurance?

Coverage for accidental death, loss of limbs, blindness, or paralysis.

What is participating life insurance?

Insurance that may pay dividends to policy owners.

What is nonparticipating life insurance?

Insurance that does not pay dividends.

What is STOLI?

Stranger-owned life insurance, where someone without insurable interest buys insurance on another person.

Why is STOLI illegal?

It is considered a wager on human life and lacks legitimate insurable interest.

What is a partial surrender?

A partial surrender is when a policy owner withdraws part of the policy’s cash value while keeping the policy active.