Life Insurance (Chapter 1)

Adverse Selection

Insuring of risks that are more prone to losses than the average risk.

Agent/Producer

A legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer.

Applicant or Proposed Insured

A person applying for insurance.

Attained Age

The insured's age at the time the policy is issued or renewed.

Beneficiary

A person who receives the benefits of an insurance policy.

Death Benefit

The amount paid upon the death of the insured in a life insurance policy.

Deferred

Withheld or postponed until a specified time or event in the future.

Endow

To have the cash value of a whole life policy reach the contractual face amount.

Face Amount

The amount of benefit stated in a life insurance policy.

Insured

Person covered by the insurance policy; may or may not be the policyowner.

Insurer (Principal)

The company that issues an insurance policy.

Lapse

Policy termination due to nonpayment of premium.

Level Premium

The premium that does not change throughout the life of a policy.

Nonforfeiture Values

Benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses.

Policyowner

The person entitled to exercise the rights and privileges in the policy.

Policy Maturity

In life policies, the time when the face value is paid out.

Premium

The money paid to the insurance company for the insurance policy.

Securities

Financial instruments that may trade for value (ex: stocks, bonds, options).

Which insurance provides the most coverage for lowest premium

Term insurance provides the greatest amount of coverage for the lowest premium.

Which insurance has no cash value

Term insurance has no cash value.

What does ‘Level’ refer to?

"Level" in level term insurance refers to the death benefit, which does NOT change.

Which insurance provides permanent protection and cash value?

Whole life insurance provides lifetime (permanent) protection and accumulates cash value.

Know This!

If an insured skips a premium payment on a universal life policy, the missing premium may be deducted from the policy's cash value. The policy will NOT lapse.

Who bears investment risks

In variable contracts, the policyowner bears the investment risk (assets in a separate account).

Know This!

Premium rates on a joint life policy are determined by averaging the ages of both insureds.
Joint life = first to die; survivorship life = second to die (last survivor).

If a policy offers pure death protection, what does this mean? What does this reveal about the cash value of the policy?

It means there is no cash value.

With annually renewable term insurance, what happens to the premium as one's age increases?

The premium increases each year with the age of the insured.

Many policies are both renewable and convertible. What are the similarities between these two provisions?

With both a renewable policy and convertible policy, the premium for the renewed or converted policy will be based on the insured's current age at the time of the renewal or conversion. Also, evidence of insurability is not required for each provision.

How does continuous premium straight life differ from 20-year limited pay life?

The premiums for straight life will be spread over the insured's lifetime, thus enabling the insurance company to charge a lower annual premium. When the premium-paying period is condensed to a 20-year duration, a higher annual premium is required.

Does the death benefit of an Adjustable Life policy automatically increase with inflation?

Adjustments to the death benefit can be made by the policyowner, and not automatically, and would usually require evidence of insurability.

As time progresses, what happens to a premium in a Graded Premium Whole Life Policy?

The premium gradually increases each year for the first few years (5-10) of the policy and then remains level thereafter.

How does the premium for Joint Life compare to the premium on two policies covering the same two individuals for the same death benefit?

The premium for joint life would be less than the same type and amount of coverage on the same individuals; it is based on a joint average age that is between the ages of the insureds.

Who is the insured under a Juvenile Life policy?

Juvenile life insurance is, as the name implies, any life insurance written on the life of a minor.

What are the death benefit options in Universal Life policies?

Option A is the level death benefit option, and Option B is the increasing death benefit option.

Which authorities regulate Variable Life policies?

Variable life insurance products are dually regulated by the State and Federal Government: The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the State Department of Insurance.

In annually renewable term policies, what is the annual premium based upon?

The insureds attained age.

An insured receives his monthly summary for his life insurance policy. He notices that the cash value of the policy is significantly lower this month than it was last month. What type of policy does the insured have?

Variable.

What policy component must decrease in decreasing term insurance?

Face amount.

In what type of life insurance policies can the policyowner skip premium payments without the policy lapsing?

Universal life.

A whole life policy that requires that the policyowner only pays premiums for a specified number of years is known as what kind of policy?

Limited-pay whole life.

What type of life insurance policy provides permanent protection?

Whole life.

What type of whole life insurance policy generates immediate cash value?

Single premium whole life. // Like other types of whole life policies, Single Premium Whole Life (SPWL) endows for the face amount of the policy if the insured lives until the age of 100. The distinguishing feature of a SPWL is the fact that it generates immediate cash value, due to the lump-sum payment made to the insurer.

What type of whole life insurance policies only requires a payment of premium at its inception, and in addition to providing insurance protection for the life of the insured, endows at the insured's age of 100?

Single premium whole life.

What type of life insurance policy offers pure death protection?

Term.

What type of life insurance policy is Life Paid-up at age 65?

Limited-pay whole life.

What are the living benefits of whole life insurance?

Loan values.

In a joint life policy, when is the death benefit paid?

Upon the first death.

When does an adjustable life policy accumulate cash value?

When the premiums paid are more than the cost of the policy.

What elements of an adjustable life policy can be changed by the policyowners?

The amount and payment period of the premium, the face amount, and the period for protection.

Universal life policies have two types of interest rates. What are they?

Guaranteed and current.

Under Option B in a universal life policy, what happens to the death benefit?

The death benefit increases each year by the amount of the cash value increases.

Under a 20-pay whole life policy, in order for the policy to pay the death benefit to a beneficiary, the premiums must paid for what time period?

For 20 years or until the insured's death, whichever occurs first.

What type of life insurance is best suited to cover a mortgage?

Decreasing term.

What happens to the cash value when a whole life insurance policy matures?

Cash value is paid to the policyowner.

What is the major difference between the most common types of whole life policies: Straight Life, Limited Payment and Single Premium?

Premium payment mode.

When the amount of insurance is increased in an adjustable life policy, what will the insurer require from the insured?

Evidence of insurability.

What is the purpose of establishing the target premium for a universal life policy?

To prevent the policy from lapsing.

What is the main advantage of converting from group life insurance to individual coverage?

Evidence of insurability is not required.

What are the characteristics of the group that underwriters will consider before issuing a group life policy?

Group's purpose, size, financial strength and turnover.

What universal life option has a gradually increasing cash value and a level death benefit?

Option A.

Who owns a group life insurance contract?

The employer (also known as the sponsor of the group).

An individual has just borrowed $10,000 on a 5-year note from his bank. The note is due in installments. What type of life insurance policy would be best suited to this situation?

Decreasing term.

Regarding taxation, how does the cash value of a universal life policy accumulate?

Tax deferred.

What happens to the premium in an annually renewable term life policy?

The premium increases with each renewal.

The death protection component of a universal life policy is expressed as what type of coverage?

Annually renewable term.

A policy states it will pay a specified face amount if the insured dies during the 20-year premium-paying period and nothing if death occurs after the 20 year period. What type of policy is this?

20-year level term.

How is the premium determined in a joint life insurance policy?

The premium is based on the average age of the insureds.

What are the death benefit options in universal life policies?

Option A - level death benefit, and Option B - increasing death benefit.

What does level refer to in level term insurance?

Face amount.

Whole life policies provide protection until the insured reaches what age?

Age 100.

In term policies, what happens to the premium throughout the term of the policy?

The premium remains level.

The policyholder of a whole life insurance policy is also the insured. What age must the insured attain in order to receive the policy's face amount?

Age 100.

Why are policy loans not available on term insurance?

There is no cash value to borrow against.

Whole life insurance policies mature when the insured reaches the age of 100. If the owner of a whole life policy (the insured) dies at age 80, and there are no outstanding loans on the policy, what portion of the death benefit will be paid to the beneficiary?

The full death benefit.

Group life insurance policies are written as what type of insurance?

Annually renewable terms.

What type of premium is charged on a straight life policy?

A level premium for the life of the insured.

In variable universal life insurance, to what policy component does the term variable refer?

Cash value and death benefit.

If an insured terminates membership in group life insurance, to what type of insurance can the insured covert the coverage?

Whole life.

If an employee wants to join group life insurance coverage outside of the open enrollment period, what would the employee have to provide?

Evidence of insurability.

Who is entitled to the cash values in a life insurance policy?

The policyowner.

When would a 20-pay whole life policy endow?

When the insured reaches age 100.

Between adjustable life and universal life policies, which one provides more flexibility to the policyowner?

Universal life.

Who is insured under a juvenile life policy?

A minor.

What type of policy issues certificates of insurance to the insured?

Group policy.

What type of policy is typically issued without proof of insurability from the insured?

Group policy.

What kind of policy allows withdrawals or partial surrenders?

Universal life.

What would help prevent a universal life policy from lapsing?

Target premium.

A young father would like a life insurance policy to provide coverage for all five family members at the lowest cost. Which type of policy would he most likely buy?

Family Protection Policy. // Family protection insurance combines protection for all members of a family into one policy. It usually provides a permanent plan of insurance on the base insured, and term riders on other members of the family. Because they are all covered under a single policy, there is only one policy fee.

A married couple owns a permanent policy which covers both of their lives and pays the death benefit only upon the death of the first insured. Which policy is that?

Joint Life Policy. // Joint life policies cover the lives of two insureds; rates are blended. Upon the death of the first insured, the policy ends.

An Adjustable Life policyowner can change which of the following policy features?

The coverage period.

Which of the following would be considered an advantage of owning term insurance?

It provides the highest amount of coverage for a temporary period of time.

Which of the following policies would be classified as a traditional level premium contract?

Straight Life. // Straight whole life policies have a level guaranteed face amount and a level premium for the life of the insured.

What policy component decreases in decreasing term insurance?

Face amount.

An insured owns a life insurance policy. To be able to pay some of her medical bills, she withdraws a portion of the policy's cash value. There is a limit for a withdrawal and the insurer charges a fee. What type of policy does the insured most likely have?

Universal life.

All of the following are true regarding a decreasing term policy EXCEPT?

The payable premium amount steadily declines throughout the duration of the contract. // Premiums remain level with a decreasing term policy; only the face amount decreases.

Which component increases in the increasing term insurance?

Death benefit.

Which of the following best describes annually renewable term insurance?

It is a level term insurance. // Annually renewable term is a form of level term insurance that offers the most insurance at the lowest cost.

A 27-year-old has limited income and can only budget $15 per month for life insurance. Which policy would provide the largest face amount for that amount of premium?

Term insurance. // Because a term policy is not accumulating cash value, the cost is lower than those policies that do.

What type of premium do both Universal Life and Variable Universal Life policies have?

Flexible. // Variable universal life, like universal life itself, has a flexible premium that can be increased or decreased as the policyowner chooses, as long as there is enough value in the policy to fund the death benefit.

A father owns a life insurance policy on his 15-year-old daughter. The policy contains the optional Payor Benefit rider. If the father becomes disabled, what will happen to the life insurance premiums?

The insured's premiums will be waived until she is 21. // If the payor (usually the parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21.