Principles of Risk Management and Insurance - Chapters 11 & 12

Flashcards covering key life insurance concepts, policy types, contractual provisions, and riders from Chapters 11 and 12.

How is premature death defined in the context of life insurance?

The death of a family head with outstanding unfulfilled financial obligations.

What is the human life value approach used for estimating life insurance needs?

It estimates the amount of life insurance needed based on the present value of the family's share of the deceased breadwinner's future earnings.

What key periods and financial needs are considered when calculating life insurance coverage under the needs approach?

An estate clearance fund, income for a one- or two-year readjustment period, income for the dependency period (until the youngest child reaches age 18), life income to the surviving spouse (including during and after the blackout period), special needs funds (such as college education and emergencies), and retirement needs.

What are the primary characteristics of term life insurance?

It provides temporary protection that expires at the end of the policy period unless renewed, does not accumulate cash value, and has premiums that increase at each renewal with age.

What is the difference between the attained-age method and the original-age method for converting term insurance?

Under the attained-age method, the premium for the new cash-value policy is based on the insured's age at the time of conversion. Under the original-age method, the premium is based on the insured's age when the original term policy was issued.

What is reentry term insurance?

A term insurance policy where renewal premiums are based on select (lower) mortality rates if the insured can periodically demonstrate acceptable evidence of insurability.

In an ordinary life insurance policy, what is the net amount at risk and how does it relate to the legal reserve over time?

The net amount at risk is the difference between the face amount of insurance and the legal reserve; as the legal reserve increases over the policy duration, the net amount at risk decreases.

What is ordinary life insurance?

A level-premium whole life policy that accumulates cash values and provides lifetime protection to age 121.

What is variable life insurance?

A fixed-premium whole life policy in which the death benefit and cash values vary according to the investment experience of a separate account, with no minimum guaranteed cash values.

What is the difference between Option A and Option B death benefit options in universal life insurance?

Option A pays a level death benefit during early years that increases in later years to satisfy the corridor test, whereas Option B provides an increasing death benefit equal to a constant net amount at risk plus the accumulated cash value.

What are the key features of indexed universal life insurance?

It provides a minimum guaranteed interest rate and allows additional interest to be credited based on investment gains of a specific stock market index, subject to a maximum cap.

How does variable universal life insurance differ from standard universal life insurance?

The policyholder decides how premiums are invested across subaccounts, there is no guaranteed minimum interest rate or cash value, high expense charges apply, and the policyholder bears all investment risk.

What is current assumption whole life insurance?

A non-participating whole life policy in which cash values are based on the insurer's current mortality, investment, and expense experience.

What is a modified life policy?

A whole life policy in which premiums are lower for the first three to five years and higher thereafter.

What is the difference between joint life insurance and second-to-die life insurance?

Joint life insurance pays the death benefit upon the death of the first person to die, whereas second-to-die life insurance pays the death benefit only upon the death of the second or last insured.

What rights does the policyholder possess under the ownership clause of a life insurance contract?

The policyholder holds all contractual rights while the insured is living, including naming beneficiaries, surrendering the policy for cash value, and transferring ownership to a new owner.

What is the function of the incontestable clause in a life insurance policy?

It prevents the insurer from contesting the policy after it has been in force for two years during the insured's lifetime.

How does the suicide clause protect life insurance companies?

If the insured commits suicide within two years after policy issuance, the face amount of insurance is not paid and the insurer only refunds the premiums paid.

What requirements must a policyholder satisfy to reinstate a lapsed life insurance policy?

Provide evidence of insurability, pay all overdue premiums plus interest, repay or reinstate any policy loans, and ensure the policy was not previously surrendered for its cash value.

What happens under the misstatement of age or sex clause if the insured's age or sex was incorrectly stated on the application?

The amount payable upon death is adjusted to whatever amount the premiums paid would have purchased at the correct age and sex.

What is the distinction between a revocable beneficiary and an irrevocable beneficiary?

A revocable beneficiary can be changed by the policyholder without the beneficiary's consent, whereas an irrevocable beneficiary designation cannot be changed without the beneficiary's consent.

What is the difference between an absolute assignment and a collateral assignment of a life insurance policy?

An absolute assignment transfers all ownership rights in the policy to a new owner, while a collateral assignment temporarily assigns specific policy rights to a creditor as collateral for a loan.

What are the three standard nonforfeiture options in cash-value life insurance policies?

Cash value, reduced paid-up insurance, and extended term insurance.

In a table of guaranteed values, what options are provided as alternatives to taking the cash surrender value?

Paid-up insurance (providing a reduced face amount for life) and extended term insurance (providing the full face amount for a specified number of years and days).

What are the common settlement options for paying life insurance proceeds?

Cash, interest option, fixed-period option, fixed-amount option, and life income option.

What benefit does a guaranteed purchase option rider provide?

It permits the policyholder to purchase additional amounts of life insurance at specified future times without providing evidence of insurability.

What is the difference between a viatical settlement and a life settlement?

A viatical settlement is the sale of a life insurance policy by a terminally ill insured to a third party, whereas a life settlement is the sale of an unwanted policy by any policyholder to a third party for an amount greater than its cash surrender value.

What is Stranger-Owned Life Insurance (STOLI)?

A arrangement where investors induce an individual to purchase a large life insurance policy with the intent to sell it on the secondary market; insurers oppose STOLI because it functions as a wagering transaction involving material misrepresentation.