chapter 3 exam fx

Attained age 

 — the insured's age at the time the policy is renewed or replaced

Deferred

 — withheld or postponed until a specified time or event in the future

Face amount

 — the amount of benefit stated in the life insurance policy

Fixed life insurance products

— contracts that offer guaranteed minimum or fixed benefits

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

Policy maturity 

 — in life policies, the time when the face value is paid out

Securities

— financial instruments that may trade for value (for example, stocks, bonds, options)

Variable life insurance products 

-contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance

Term insurance

is temporary protection because it only provides coverage for a specific period of time. It is also known as pure life insurance. Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection. There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed.

provides what is known as pure death protection:

• If the insured dies during this term, the policy pays the death benefit to the beneficiary;

• If the policy is canceled or expires prior to the insured's death, nothing is payable at the end of the term; and

• There is no cash value or other living benefits.

• Regardless of the type of term insurance purchased, the premium is level throughout the term of the policy; only the amount of the death benefit may fluctuate, depending on the type of term insurance. Upon selling, renewing, or converting the term policy, the premium is figured at attained age (the insured's age at the time of transaction).

Level term insurance

is the most common type of temporary protection purchased. The word level refers to the death benefit that does not change throughout the life of the policy.

the level refers to the death benefit

Level premium term

, as the name implies, provides a level death benefit and a level premium during the policy term. For example, a $100,000 10-year level term policy will provide a $100,000 death benefit if the insured dies any time during the 10-year period. The premium will remain level during the entire 10-year period. If the policy is renewed at the end of the 10-year period, the premium will be based on the insured’s attained age at the time of renewal.

Annually renewable term (ART)

is the purest form of term insurance. The death benefit remains level (in that sense, it’s a level term policy), and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as the probability of death increases.

Decreasing term

-policies feature a level premium and a death benefit that decreases each year over the duration of the policy term. Decreasing term is primarily used when the amount of needed protection is time sensitive, or decreases over time. Decreasing term coverage is commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. The amount of coverage thereby decreases as the outstanding loan balance decreases each year. A decreasing term policy is usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term.

Increasing term

features level premiums and a death benefit that increases each year over the duration of the policy term. The amount of the increase in the death benefit is usually expressed as a specific amount or a percentage of the original amount. Increasing term is often used by insurance companies to fund certain riders that provide a refund of premiums or a gradual increase in total coverage, such as the cost of living or return of premium riders.

This type of policy would be ideal to handle inflation and the increasing cost of living. It is also often added to another policy as a rider, such as with return of premium policies.

Return of premium (ROP

life insurance is an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid. The return of premium is paid if the death occurs within a specified period of time or if the insured outlives the policy term.

ROP policies are structured to consider the low risk factor of a term policy but at a significant increase in premium cost, sometimes as much as 25% to 50% more. Traditional term policies offer a low-cost, simple-death benefit for a specified term but have no investment component or cash value. When the term is over, the policy expires, and the insured is without coverage. An ROP policy offers the pure protection of a term policy, but if the insured remains healthy and is still alive once the term limit expires, the insurance company guarantees a return of premium. However, since the amount returned equals the amount paid in, the returned premiums are not taxable.

renewable

-provision allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability. The premium for the new term policy will be based on the insured's current age. For example, a 10-year term policy that is renewable can be renewed at the end of the 10-year period for a subsequent 10-year period without evidence of insurability. However, the insured will have to pay the premium that is based on their attained age. If an individual purchases a 10-year term policy at age 35, they will pay a premium based on the age of 45 upon renewing the policy.

convertible

-provision provides the policyowner with the right to convert the policy to a permanent insurance policy without evidence of insurability. The premium will be based on the insured's attained age at the time of conversion.

Permanent life insurance

-is a general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid. The most common type of permanent insurance is whole life.

Whole life insurance

-provides lifetime protection, and includes a savings element (or cash value). Whole life policies endow at the insured's age 100, which means the cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100. The policy premium is calculated assuming that the policyowner will be paying the premium until that age. Premiums for “ “ policies usually are higher than for term insurance.

-Level premium — the premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy.

• Death benefit — the death benefit is guaranteed and also remains level for life.

• Cash value — the cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policyowner. (Remember: the insured and the policyowner do not have to be the same person.) Cash values are credited to the policy on a regular basis and have a guaranteed interest rate.

• Living benefits — the policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash value, also called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred.

Straight life

-also referred to as ordinary life or continuous premium whole life) is the basic whole life policy (illustrated above). The policyowner pays the premium from the time the policy is issued until the insured’s death or age 100 (whichever occurs first). Of the common whole life policies, “ “ will have the lowest annual premium.

Limited Payment

-is designed so that the premiums for coverage will be completely paid-up well before age 100. Some of the more common versions of limited-pay life are 20-pay life whereby coverage is completely paid for in 20 years, and life paid-up at 65 (LP-65) whereby the coverage is completely paid up for by the insured's age 65. All other factors being equal, this type of policy has a shorter premium-paying period than straight life insurance, so the annual premium will be higher. Cash value builds up faster for the limited-pay policies.

are well suited for those insureds who do not want to be paying premiums beyond a certain point in time. For example, an individual may need some protection after retirement, but does not want to be paying premiums at that time. A limited-pay (paid-up at 65) policy purchased during the person's working years will accomplish that objective.

Single premium whole life

(SPWL) is designed to provide a level death benefit to the insured's age 100 for a one-time, lump-sum payment. The policy is completely paid-up after one premium and generates immediate cash value.

Adjustable Life

-was developed in an effort to provide the policyowner with the best of both worlds (term and permanent coverage). An adjustable life policy can assume the form of either term insurance or permanent insurance. The insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insured’s needs. As the insured’s needs change, the policyowner can make adjustments in the policy. Typically, the policyowner has the following options:

• Increase or decrease the premium or the premium-paying period;

• Increase or decrease the face amount; or

• Change the period of protection. policyowner also has the option of converting from term to whole life or vice versa. However, increases in the death benefit or changing to a lower premium type of policy will usually require proof of insurability. In the case of converting from a whole life policy to a term policy, the insurer may adjust the death benefit. The policyowner may also pay additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash value or to shorten the premium-paying period.

• premiums paid must be higher than the policy to develop cash value

Universal life

-nsurance is also known by the generic name of flexible premium adjustable life. That implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance. If the cash value is too small, the policy will expire.

Since the premium can be adjusted, the insurance companies may give the policyowner a choice to pay either of the two types of premiums:

• The minimum premium is the amount needed to keep the policy in force for the current year. Paying the minimum premium will make the policy perform as an annually renewable term product.

• The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.

• . Although the insurer guarantees a contract interest rate (usually 3 to 6%), there is also potential for the policyowner to get a current interest rate, which is not guaranteed in the contract but may be higher because of current market conditions.

Option A (Level Death Benefit option),