Part 2 Life Insurance Exam Study

Insuring agreement

Core insurer promise to pay the covered death benefit when policy conditions are met.

Entire contract

Policy together with the attached application and endorsements or riders forms the full contract; outside statements do not automatically become part of it.

Consideration clause

Describes the exchange that supports the policy: premium plus application representations in exchange for the insurer's promise.

Ownership provision

Policyowner controls rights such as beneficiary changes, assignments, loans, and surrender, subject to irrevocable beneficiary rights.

Policyowner versus insured

Owner controls the contract; insured is the person whose death triggers the death benefit; these can be different people.

Primary beneficiary

First person or entity entitled to the death proceeds when the insured dies.

Contingent beneficiary

Receives proceeds if the primary beneficiary is unable or ineligible to receive them.

Revocable beneficiary

Can generally be changed by the policyowner without that beneficiary's consent.

Irrevocable beneficiary

Has protected contractual rights; changes affecting those rights generally require consent.

Per stirpes beneficiary designation

A deceased beneficiary's share passes down their family branch to their descendants.

Per capita beneficiary designation

Living beneficiaries of the specified class divide proceeds equally rather than automatically passing shares by family branch.

Common disaster provision

Policy language setting survivorship assumptions or a required survival period when insured and beneficiary die near the same time.

Spendthrift clause

Helps prevent a beneficiary from assigning future proceeds or having certain proceeds reached by creditors before distribution, subject to law.

Absolute assignment

Transfers the policyowner's complete ownership interest and rights to another party.

Collateral assignment

Transfers limited policy rights to a creditor as security for a loan; remaining proceeds go to the beneficiary.

Policy loan

Borrowing against available cash value; unpaid principal and interest reduce available proceeds and may cause lapse.

Automatic premium loan

Policy provision permitting a loan from cash value to cover an unpaid premium and prevent lapse while enough value remains.

Partial withdrawal

Removing part of available cash value; unlike a loan it generally is not repaid, and it may reduce policy values or benefits.

Cash surrender

Policyowner cancels a permanent policy in exchange for available cash surrender value; death coverage ends.

Extended term nonforfeiture

Uses cash value to buy term coverage for a limited period, generally for the original face amount.

Reduced paid-up nonforfeiture

Uses cash value to purchase a smaller fully paid permanent policy with no further premiums.

Paid-up additions dividend option

Uses participating-policy dividends to buy extra paid-up whole life insurance, increasing death benefit and cash value.

Dividend reduce-premium option

Uses declared dividends to offset premiums due; it does not automatically convert the policy to paid-up status.

Dividend accumulation at interest

Dividends remain with the insurer and earn interest; generally interest is taxable even if the dividend itself is return of premium.

Dividend cash option

Participating-policy dividends generally represent a return of excess premium and are usually not taxable until they exceed the owner's basis.

One-year term dividend option

Uses dividends to buy temporary one-year term insurance, instead of permanent paid-up additions.

Interest-only settlement

Insurer retains principal death proceeds and pays interest periodically; beneficiary typically receives principal later as contract provides.

Fixed-period settlement

Death proceeds and interest are distributed over a selected number of years; payment amount is calculated accordingly.

Fixed-amount settlement

A specified amount is distributed each period until the proceeds plus credited interest are exhausted.

Life-income settlement

Uses proceeds to pay the beneficiary for life; a pure life option normally stops at their death.

Reinstatement versus renewal

Reinstatement restores lapsed coverage subject to requirements; renewal extends renewable term coverage without new medical evidence under the policy.

Misstatement of age or gender

Insurer equitably adjusts benefits or premiums based on correct information, not automatically voids the contract.

Material misrepresentation

False statement material to underwriting, such as one that would affect issuing or pricing coverage; may permit contest during contestable period.

Conditional receipt

Temporary coverage may apply from the specified date only if conditions, typically insurability, are satisfied.

Binding receipt versus conditional receipt

Binding receipt can create immediate temporary coverage subject to its terms; conditional receipt requires stated underwriting conditions.

Policy delivery and first premium

If initial premium wasn't collected with application, coverage usually requires collection and any necessary good-health conditions at delivery.

Free-look period

Time after policy receipt when policyowner may return the policy for a refund; NC generally 10 days new life and 20 days replacements.

Waiver of premium rider

Insurer waives premiums during qualifying total disability, often after an elimination period and while rider conditions are met.

Payor benefit rider

On juvenile coverage, waives premiums if the adult payor dies or meets disability conditions before a specified child's age.

Guaranteed insurability rider

Allows extra coverage at specified dates or life events without new evidence of insurability, though premiums reflect attained age.

Accidental death benefit rider

Additional death benefit if death meets the rider's accidental-death conditions, exclusions, and time limits.

Accelerated death benefit

Allows qualifying insureds to receive part of the death benefit before death, generally reducing what beneficiaries later receive.

War status exclusion

Excludes death based on insured's status as a member of armed services during war, depending on policy wording.

War results exclusion

Excludes death resulting from war activity, whether or not insured served in armed forces.

Aviation exclusion

May exclude specified hazardous aviation activity, not necessarily ordinary commercial passenger flights.

Term insurance renewability

Policyowner can renew term coverage without proving insurability; premiums can rise with attained age.

Term insurance convertibility

Policyowner can switch eligible term coverage to permanent insurance without new evidence of insurability before conversion deadline.

Decreasing term

Death benefit falls over time, often used to cover a shrinking mortgage balance; usually no cash value.

Increasing term

Death benefit rises under the contract's schedule, sometimes to address increasing financial obligations.

Annual renewable term

One-year term coverage that can be renewed; renewal premiums generally rise with age.

Straight whole life

Permanent life insurance with generally level premiums payable for life or to a stated maturity age.

Limited-pay whole life

Permanent insurance with premiums paid only for a set number of years or to a specified age; coverage continues afterward.

Single-premium whole life

Permanent coverage funded by one large premium; may become a modified endowment contract under tax rules.

Modified whole life premium

Starts with lower premiums then increases once to the long-term level established by the policy.

Graded whole life premium

Starts lower and rises in stages over a set introductory period before reaching a level premium.

Indeterminate-premium whole life

Insurer can adjust current premiums based on experience but not above contractual guaranteed maximums.

Interest-sensitive whole life

Permanent policy whose nonguaranteed values or premiums respond to current interest or insurer experience, with minimum guarantees.

Universal life flexibility

Permanent insurance permitting flexible premiums and often adjustable death benefits; charges may use cash value when premiums are insufficient.

Universal life Option A

Generally level total death benefit; net amount at risk falls as cash value grows, subject to tax-law corridors.

Universal life Option B

Generally death benefit equals stated amount plus cash value; net amount at risk stays closer to level.

Universal life corridor

Tax-law minimum death benefit relative to cash value, which can cause a death benefit to rise even under level Option A.

Variable life

Permanent insurance with investment-sensitive cash value held in separate accounts; traditional variable life generally uses fixed scheduled premiums.

Variable universal life

Combines flexible universal-life premiums with owner-selected separate-account investments and investment risk.

Joint first-to-die life insurance

Covers two lives and pays on the first insured's death, ending the joint policy.

Survivorship second-to-die life insurance

Covers two lives and pays only after the second insured dies, often used for estate planning.

Modified endowment contract (MEC)

A life policy that fails the tax code's 7-pay test; it remains life insurance but has less favorable tax rules for distributions.

MEC distributions

Gains generally come out first for taxation, and loans are generally treated as distributions; possible extra 10% tax before age 59½ unless exception applies.

Section 1035 exchange

Qualifying tax-free exchange of life insurance for life insurance or an annuity, or an annuity for an annuity; annuity-to-life is not permitted.

Nonqualified annuity early withdrawal

Before annuitization, taxable earnings generally come out before after-tax basis; taxable early distributions may face extra 10% federal tax before age 59½.

Tax treatment of life death proceeds

Death benefits paid by reason of death are generally free of federal income tax, subject to exceptions such as transfer-for-value rules.

Tax treatment of cash surrender

Cash received above the policyowner's adjusted basis is generally taxable income; return of basis is generally not.

Key person insurance

Business owns insurance on a valuable employee, pays premiums and receives the death proceeds; premiums generally aren't deductible.

Cross-purchase buy-sell

Individual owners own policies on one another and use proceeds to buy a deceased owner's business interest.

Entity-purchase buy-sell

Business owns life policies on owners and uses proceeds to redeem a deceased owner's ownership interest.

Group life conversion

Eligible departing insured can convert group coverage to an individual policy without evidence of insurability within the required conversion window, commonly 31 days.