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RMI 200 Chapter 11-13
Question Answer
Premature death can be defined as the death of a family head with outstanding unfulfilled financial obligation
What are the three approaches to estimate the amount of life insurance to own? Human Life Approach, Needs Approach, Capital Retention Approach
Human life value how much money do you make?
Needs approach The amount of insurance needed depends on the financial needs that must be met if the family head should die
What should the needs approach calculate? an estate clearance fund, readjustment period, dependency period
Life insurance policies can be classified in two general categories term insurance, whole life or cash value life insurance
Term insurance policy protection is temporary
Most term policies are CONVERTIBLE means the policy can be exchanged for a cash-value policy without evidence of insurability
Attained-age method the premium charged for the new policy is based on the insured's attained age at the time of conversion
original-age method the premium charged for the new policy is based on the insured's original age when the term insurance was first purchased
Yearly-renewable term insurance issued for a one year period
term to age 65 policy provides protection to age 65
decreasing term insurance policy the face value gradually declines each year
reentry term insurance renewal premiums paid by the insured are based on select (lower) mortality rates
return of premiums term insurance a product that returns the premiums at the end of the term period provided the insurance is still in force
Whole life insurance is a cash-value policy that provides lifetime protection
Ordinary life insurance is a level-premium policy that provides lifetime protection
Cash surrender values a policyholder overpays for insurance protection during the early years, cash values are not the same as the legal reserve, the policyowner has the right to borrow the cash value
limited payment life insurance policy the insured has lifetime protection, and premiums are level, but they are paid only for a certain period
paid-up policy at age 65 or 70 another form of limited-payment life insurance
single-premium whole life policy provides lifetime protection with a single premium
endowment insurance pays the face amount of insurance if the insured dies within a specified period
What are the variations of whole life insurance? variable life insurance, universal life insurance, indexed universal life insurance, variable universal life insurance, current assumption whole life insurance
Variable life insurance fixed premium policy in which the death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer
universal life insurance flexible premium policy that provides lifetime protection with a contract that unbundles the protection and savings component
What are the 2 forms of universal life insurance? Option A and Option B
Option A pays a level death benefit during the early years, and the death benefit increases in later years to meet the corridor test required by the Internal Revenue Code
Option B provides for an increasing death benefit which is equal to a constant net amount at risk plus the accumulated cash value
Indexed universal life insurance variation of universal life insurance with certain key characteristics, minimum interest rate guarntee
Variable universal life insurance an important variation of whole life insurance, most are sold as investments or tax shelters
Current assumption whole life insurance is a nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience
What are the two forms of current assumption whole life products? Low Premium and high premium products
low premium (and a re determination provision) that allows the insurer to recalculate the premium after the initial guaranteed period expires- you can pay the higher premium or reduce the death benefit
High premium with a provision that allows the policyholder to discontinue paying premiums after a certain time period when the policy becomes self sustaining- however you may need to pay premiums in the interest and or mortality results deteriorate
Modified life policy is a whole life policy in which premiums are lower for the first three to five years and higher thereafter
preferred risk policy are sold at lower rates to individuals whose mortality experience is expected to be lower than average
joint life insurance (first to die policy) insures the lives of two or more people and pays the death benefit upon the death of the first person to die
second to die life insurance (survivorship life insurance) insures two or more lives and pays the death benefit upon the death of the second or last insured- used in estate planning for estate tax purposes
Savings bank life insurance (SBLI) is a type of life insurance that is sold by savings banks
Home service life insurance previously known as industrial life insurance, is a type of insurance in which the policies are sold in small amounts and an agent of the company collected the premiums at the insured's home
group life insurance provides life insurance on a group of people in a single master contract accounts for around one half of all insurance
ownership clause the policyowner possesses all contractual rights in the policy whole the insured is living
entire contract clause states that the life insurance policy and attached application constitute the entire contract between the parties
incontestable clause states that the insurer cannot contest the policy after it has been in force 2 years during the insured's lifetime- even if there is material misrepresentation or fraud
suicide clause states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid, there is only a refund of the premiums paid
reinstatement provision permits the owner to reinstate a lapsed policy
Grace period a life insurance policy contains this in which the policy holder has a period of 31 days to pay an overdue premium
misstatement of age or sex clause if the insured's age or sex is misstated, the amount payable is the amount that the premiums paid would have purchased at the correct age and sex
beneficiary the party named in the policy to receive the policy proceeds
primary beneficiary the first entitled to receive the policy proceeds on the insured's death amounts must be specified
contingent beneficiary receives the benefit if the primary beneficiary dies before the insured
what are the four types of beneficiaries? revocable and irrevocable, specific and class
revocable beneficiary means that the policyholder reserves the right to change the beneficiary designation without the beneficiary's consent- most policies are like this
irrevocable beneficiary one that cannot be changed without the beneficiary's consent- unless beneficiary is dead
specific beneficiary specifically identified
class beneficiary is a member of a group, children of the insured
change of plan provision allows policyowners to exchange their present policies for different contracts- there may be costs associated- provides flexibility
premium payments can be paid annually, semiannually, quarterly, monthly
Exclusions from life insurance Suicide (2 years), war clause, aviation, undesirable hobbies
Absolute assignment all ownership rights in the policy are transferred to a new owner, donated policy to a church
collateral assignment the policyowner temporarily assigns a life insurance policy to a creditor as collateral for a loan, but only certain rights are transferred to the credior
policy loan provison allows the policyowner to borrow the cash value
automatic premium loan provision an overdue premium is automatically borrowed from the cash value after the grace period expires
If a policy pays dividends it is a… participating policy
if a policy does not pay dividends it is a non participating policy
dividends come from three main sources 1) a favorable difference between expected and actual mortality experience 2) higher than expected interest earnings 3) actual operating expenses lower than expected
the payment to a withdrawing policyholder is known as…. nonforfeiture value or cash surrender value
What do all states have? standard nonforfeiture laws
Policyholders have three nonforfeiture options 1) Cash equal to the cash value, 2) reduced paid-up insurance (whole life) i.e. cash value used to pay net single premium, 3) extended term insurance
Life income option installment payments are paid only while the beneficiary is alive and cease on the beneficiary's death
An insurance windfall…. can create problems
waiver-of-premium provision if the insured becomes totally disabled, all premiums coming due during the period of disability are waived
guaranteed purchase option permits the policyowner to purchase additional amounts of life insurance at specified times in the future without evidence of insurability
insurance rider can be added to a cash-value policy to increase the total death benefit but still keep the policy affordable
accidental death benefit rider doubles the face amount of life insurance if death occurs as a result of an accident
cost-of-living rider allows the policyholder to purchase one-year term insurance equal to the percentage change in the consumer price index with no evidence of insurability
accelerated death benefits rider allows insureds who are terminally ill to collect part of all of their life insurance benefits before they die
viatical settlement is the sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups, who hope to profit by the insured's early death
life settlement is a financial transaction by which a policyholder who no longer wants to keep a life insurance policy sells the policy to a third party for more than its cash value
STOLI is a large policy acquired by a group of investors who convince an older insured to originally purchase the policy with the specific intention of selling the policy in the secondary market
traditional net cost method the cash value and expected dividends are subtracted from annual premiums to obtain a net cost per year figure
interest-adjusted cost method is more accurate because it considers the time value of money
Interest-adjusted cost indices come in two forms… 1) surrender cost index 2) net payment cost index
surrender cost index measures cost as if you surrender the policy- useful if the owner expects to surrender the policy after some time period
net payment cost index is useful if the owner expects to keep the policy in force i.e. does not surrender policy
traditional net cost interest not considered
surrender cost index interest adjusted
net payment cost index interest adjusted
life insurance policy illustration model regulation requires insurers to present certain information to applicants for life insurance
the estate tax on the gross estate is reduced or eliminated by a tax credit called…. unified credit
the gross estate includes property you own, annuities for heirs, one- half of the value of property owned jointly with your spouse, life insurance paid to the estate

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