Life insurance Chapter 6

Grace Period

Time after the premium due date to pay without losing coverage.

Policy Lapse

Policy ends because premiums weren't paid.

Loading Charge

Extra premium amount to cover insurer expenses.

Mortality Table

Chart showing the likelihood of death at each age.

Surrender Value

Cash received if a policy is canceled before it pays out.

Policy Loan

Loan borrowed against the policy's cash value.

Settlement Option

How the death benefit is paid to beneficiaries.

Contingent Beneficiary

Backup beneficiary if the primary beneficiary dies first.

Spendthrift Clause

Protects policy proceeds from the beneficiary's creditors.

Common Disaster Clause

Determines who receives benefits if the insured and primary beneficiary die in the same accident.

Policy Reserves

Money insurers set aside to pay future claims.

Premium Mode

How often premiums are paid (monthly, quarterly, annually, etc.).

Single Premium

The entire policy is paid for with one large payment.

Fixed/Level Premium

The policyholder pays the same amount on a regular basis.

Modified Premium

The policy starts with a lower premium, which later increases to a higher fixed amount.

Graded Premium

The premium starts low and increases each year for a certain period before becoming stable.

Flexible Premium

The policyholder can adjust how much they pay during the life of the policy, within the policy's rules.

Lump-Sum Payment

The beneficiary receives the entire death benefit at once.

Interest Only (Death Benefit Settlement)

The insurance company keeps the death benefit and pays the beneficiary only the interest earned.

Fixed Amount (Death Benefit Settlement)

The beneficiary receives a specific dollar amount in installments until the money runs out.

Fixed Period (Death Benefit Settlement)

The beneficiary receives equal payments for a specific number of years.

Life Income (Death Benefit Settlement)

The beneficiary receives payments for their entire lifetime.

Per Capita

The money is divided equally among the living named beneficiaries.

Per Stripes

The money follows the family line. If a beneficiary dies, their share can pass to their descendants/heirs.

Uniform Simultaneous Death Act

If the insured and beneficiary die at about the same time and it cannot be determined who died first, the insured is considered to have survived the beneficiary for purposes of the insurance policy.

Common Disaster Provision

Requires the beneficiary to survive the insured for a certain amount of time, often 14–30 days, before receiving the benefit.

Spendthrift Clause

Can protect insurance proceeds from the beneficiary's creditors when the money is left with the insurance company.

Facility of Payment

Allows the insurance company to pay some or all of the proceeds to someone who is considered fairly entitled to receive them.

1035 Exchange

A qualifying exchange of one insurance product for another that can be completed without immediate taxation of the gain.

Policy Loans

Policy loans generally do not create immediate taxable income, unless special rules apply, such as with a Modified Endowment Contract (MEC).

Modified Endowment Contract (MEC

a life insurance policy that fails certain IRS funding rules and gets special tax treatment.

What is the transfer-for-value rule?

A tax rule that can cause some life insurance proceeds to become taxable when a policy is transferred for valuable consideration.

Estate Conservation

is the use of life insurance to provide funds for estate expenses or taxes so that the deceased’s assets don't have to be sold to cover those costs.

viatical settlement

allows a policyowner who is terminally or chronically ill to sell their life insurance policy to a third party for a percentage of the policy's death benefit before death.

What would be an expense factor in an insurance program?

Morality Costs