Title: Life Exam Study Guide
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State of California
# Life Exam Study
# Guide
1/1/2016 Life Exam Study Guide Page 1
Table of Contents
Table Rf CRnWenWV Page 1
GeneUal InVXUance TeUmV Page 2
CRnWUacW TeUmV Page 5
The Application Page 7
Life InVXUance PRlic\V Page 8
PRlic\ PURYiViRn TeUmV Page 11
PRlic\ OSWiRnV Page 13
PRlic\ RideUV Page 15
AnnXiWieV Page 17
INDEX Page 20 Life Exam Study Guide Page 2
General Insurance Terms
x Insurance: A contract whereby one party (insurer/ agent) agrees to indemnify another party (insured/ client) against a loss by a specifies future contingency or peril in return for payment of a premium
x Risk: Uncertainty of a loss
x Pure risk: Insurable because it involves a chance of loss only
x Speculative risk: not insurable because it involves a chance of loss or gain, i.e. Gambling
x Hazards: Events or conditions that increase the chance of a loss
- Physical: a physical condition: medical history, blindness, deafness
- Moral (MO- RAL): a lie
- Morale (MO-RAH-LEE ): doing really (REAL-LEE ) unsafe things
x Peril: The cause of a loss: fire, accident, flood
x Law of Large Numbers: Predicts the number of deaths that should occur within a similar group of people; the larger the number, the more accurate the prediction
x Captive/ Career agent: works for one company and sells only their products
x Independent agent: Works for self and sells products for many companies
x Domestic agent: incorporated in the state they are doing business (i.e. California) Life Exam Study Guide Page 3
x Foreign agent: incorporated in another state (i.e. Oregon or Arizona) but doing business in California
x Alien agent: incorporated in a country outside the United States (i.e. Canada or England) but doing business in California
x Fiduciary: a person in position of financial trust. For example, an agent that collects premiums must remit them promptly to the insurance company
x Appointment: Authorization of an agent/ producer by an insurer to represent the company
x Authorized/ Admitted: All companies (domestic, foreign, alien) must have a license to conduct business in a state regardless of where their company in incorporated; An authorized company has a Certificate of Authority to conduct business in a state
x Certificate of Authority: A license granted by the states insurance a uthority which allows an insurer the right to conduct business in that state
x Expressed: Powers specifically stated ad written in the contracts
x Implied: Not specifically stated in the contract but is assumed authority that is needed to conduct insurance businesses
x Commissioner: Public official in charge of the states Department of
Insurance responsible for regulating the insurance industry by enforcing the insurance laws Life Exam Study Guide Page 4
x Conditional Receipt: A type of premium receipt that states the coverage will be effective either : the date of application or the date of medical exam, whichever is later, IF the premium is submitted with the application and the coverage is approved as applied for Life Exam Study Guide Page 5
Contract Terms
x Consideration: Value given in exchange for the promise to pay the benefit
x Insurable interest: a financial interest in the life of another person. In a position to lose something of value if the insured should die. Must exist AT TIME OF APPLICATION
x Adhesion contract: A contract offered on a take it or leave it basis by an
insurer, in which the insureds only option is to either accept or reject the contract.
x Aleatory contract: A contract in which participating parties exchange unequal amounts.
x Conditional contract: A type of an agreement in which both parties must perform certain duties and follow rules of conduct to make the contract enforceable
x Unilateral contract: A contract that legally binds only one party to contractual obligations after the premium is paid
x Buy Sell (Agreement): A contract that establishes wat will be done with a business in the event an owner or partner dies
x Indemnify: To restore the insured the same condition as prior to loss with no intent of loss or gain
x Utmost Good Faith: both parties must want the contract to work. Life Exam Study Guide Page 6
x Representations: Statements believed to be true to the applicants best knowledge (answers on the application)
x Misrepresentations: a lie
x Concealment: Hiding the truth, failure to disclose material facts
x Warranties: Statements guaranteed to be true -- Absolute truths
x Fraud: A lie for financial gain
x Underwriting: The process
x Proof of Insurability : A statement about or evidence of a persons physical
and/or mental health, persona; character, occupations, living habits, etc. Used by the insurance company in assessing whether to accept the persons
risk Life Exam Study Guide Page 7
The Application
x Human Life Value Approach: Probable future earnings of the insured using:
- Wages
- Inflation
- Years to retirement
- Time value of money
x Needs Approach: The predicted needs of the family using:
DIME
- Debt
- Income
- Mortgage
- Expenses
x Parts of the Application:
I. General Information
II. Medical
III. Agents report
x Risk Classifications:
- Preferred : Healthier than the standard risk; usually issued policies on a discounted premium basis
- Standard : A normal or average risk; no special conditions are required in the policy
- Substandard : A higher risk; requires special conditions included in the policy or policy issued with higher/ rated premiums Life Exam Study Guide Page 8
Life Insurance Policies
Term Life Insurance
Level Term Pure protection that lasts for specific
term, most insurance for least
premium. Coverage stays the same for
the specified period.
Annual Renewable Term Policy renews every year without proof
of insurability, premiums increase each
year because they a re based on attained
age.
Decreasing Term
(Usually used for credit life)
Coverage decreases as your debt
decreases. Best used when the need for
protection declines from year to year.
Whole Life Insurance (Cash Value)
Straight Life Basic policy, level death benefit
insured pays level premiums until
death or age 100, whichever occurs
first.
Limited Pay Premiums are aid until a certain age or
time. Although premiums are paid up,
coverage remains until death or age
100.
Single Premium Premiums paid in one lump sum and
coverage continues to age 100. Life Exam Study Guide Page 9
Specialized Policies
Joint Life
(first -to -die)
2 or more insureds on the same policy.
The policy pays the death benefit when
the FIRST insured dies
Survivorship Life
(second -to -die)
2 or more insured on the same policy.
The policy pays the death benefit when
the LAST/ SECOND insured dies.
Group Life x Master Contract goes to the
sponsor; usually employer
x Certificate of Insurance goes to
member
x Usually written for employee -
employer groups
x Underwritten as a group
x Contributory members pay
x Noncontributory owner pays
x Ratings previous group claims
experience determines premiums
x Conversion to individual policy
in 31days same face amount at
higher premiums due to attained
age.
Flexible Premium Policies (Cash Value)
Adjustable Life Three parts of the policy are adjustable
(flexible): Coverage, premium, and
type of plan. The insured chooses two
and the insurer one.
Universal Life x Interest sensitive cash value
x Flexible coverage and premiums
x Two death benefit options, A &
B
x Can make partial surrender/ cash
withdrawal
x Mortality charger deducted each
month from cash value for cost
of insurance & also expenses. Life Exam Study Guide Page 10
Special Coverages
Mortgage Redemption x Insures borrower for an amount
equal to their mortgage
x If the insured/ borrower dies, the
insurer assumes responsibility
for paying the outstanding loan
balance to the insureds creditor
Family Maintenance x A life insurance policy based on
a family income policy which
combines whole life with level
term
Family Policy
(Family Protection)
x Combines whole life with term
insurance to cover family
members in a single policy
x Provides coverage on each
member of the family
Family Income Policy
x A combination of decreasing
term insurance and whole life
insurance on the breadwinner of
the family
x Designed to provide an income
period which begins from the
effective date of the policy &
commonly runs for twenty years
Jumping Juvenile x Any life insurance written on the
life of a minor
x Face amount increases at a
predetermined age, often 21.
x The face amount jumps but the
premium remains level Life Exam Study Guide Page 11
Policy Provision Terms
x Insuring clause : Companys promise to pay benefits
x Consideration clause : Application and initial premium = applicants
consideration
x Grace Period: 30/31 days after due date. Still covered when premium is not paid on time
x Reinstatement Clause: Returning a lapsed policy to a premium-paying status
- Payback back all premium plus interest
- Payback any loans (if cash value policy)
- Proof on insurability
x Incontestable period: 2 years for insurer to contest death benefit
x Misstatement of Age and Sex: Make it right; adjust the face amount
x Free Look: Full refund of policy premium; 10 days new policy, 20 days replacement policy- varies by state
x Ownership clause: owner has all rights to the policy i.e. make changes
x Assignment clause: Owner can assign policy owner ship either:
- Permanently = Absolute
- Temporarily = Collateral Life Exam Study Guide Page 12
x Beneficiary: The person who receives the proceeds from the policy when the insured dies
x Primary beneficiary: first beneficiary listed
x Contingent beneficiary: An alternate beneficiary designated to receive the policy proceeds in the event that the primary beneficiary dies before the insured
x Revocable: Policy owner can change beneficiary whenever they choose
x Irrevocable : Policy owner cant change beneficiary without their written
consent
x Common disaster provision: if insured and sole beneficiary are in a common disaster and sole beneficiary out lives insured by less than a state specified number of days, Death Benefit (DB) is paid to the estate of the insured
x Spendthrift clause : Creditors of the insured CANNOT go after beneficiarys
death benefit
x Premium Modes: Frequency of premium payments (monthly, quarterly, semi-annually, or annually). The more often the premium is paid, the higher the total annual cost Life Exam Study Guide Page 13
Policy Options
Settlement Options (CLIFF)
Cash Payment (Lump Sum) Not taxable to beneficiary.
Life Income Pays guaranteed installments as long as
the recipient lives. Principal is forfeited
upon death. Principal is made up of
principal and interest; interest is
taxable.
Interest Only Temporary option, until proceeds are
paid. Interest is taxable.
Fixed Period Deplete funds over a fixed period.
Fixed Amount Fixed amount until proceeds are
exhausted.
Dividend Options (OCRAP) :
Return of excess premiums, non-taxable and nonguaranteed.
x One-year term company uses the dividend to purchase additional insurance in the form of one-year term insurance that increases the overall policy death benefit
x Cash option The insurer sends the policy owner a check for the amount of the dividend as it is declared; usually annually.
x Reduction of premium Insurer used the dividend to reduce next years
premium Life Exam Study Guide Page 14
x Accumulation at interest Insurance company keeps the dividend in an account where it accumulates interest
x Paid- up additions Dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy.
Policy Loans/ Withdrawal Options
x Cash Loans loans are not subject to income tax
x Automatic Premium Loan Prevents the policy from lapse due to nonpayment of premiums
x Withdrawal or Partial Surrender Universal life insurance products only, surrender charge applies on withdrawals, & could be taxed
Non-forfeiture Options (REC)
x Reduced paid-up reduced face amount
x Extended term same face amount/ turns into term policy
x Cash interest taxable, surrender charge (decreases over time) Life Exam Study Guide Page 15
Policy Riders :
Extra provisions attached to a policy that cost extra to the insured
Disability Riders
x Waiver of premium waives premium if insured becomes totally disabled; 6 month waiting period before benefit begins (expires at age 65)
x Accelerated benefit rider- early payment if insured is diagnosed with a specified catastrophic illness; benefit is a specified percentage or dollar amount of death benefit. The death benefit is reduced by the amount paid to insured.
Riders Covering Additional Insureds Term Riders
x Spouse allows for addition of spouse for a limited time and limited coverage; usually expires when spouse turns 65
x ChildUeQV WeUm UideU allows for addition of children for a limited time and limited amount. Most provide option to convert to a permanent policy.
x Family term rider- incorporates spouse and children into one rider
x Payor benefit/ disability (juvenile insurance) If payor become disabled or dies, insurer will pay premiums until child is no longer a minor Life Exam Study Guide Page 16
Riders Affecting the Death Benefit Amount
x Accidental death usually pays double or triple indemnity if he accidental death occurs as defined in the policy; death must occur within 90 days of accident.
x Guaranteed insurability allows purchase of additional insurance at specified times without evidence of insurability; additional coverage is purchased at the insureds attained age
x Cost of living Increases or decreases the face value by a cost of living factor (usually inflation) each year
x Return of premium - not only is the death benefit payable to the beneficiary but all premiums paid as well Life Exam Study Guide Page 17
Annuities:
An annuity is a retirement plan, NOT life insurance, used to liquidate an estate. Prevents the risk of outliving your money and earnings grow tax-deferred.
Owner, annuitant, and beneficiary
x Owner- purchases the annuity contract and pays the premium
x Annuitant receives the payments which are based on amount, age, and gender
x Beneficiary receives cash value or premiums, whichever is higher, if the annuitant dies during the accumulation phase. Interest is taxable
Accumulation Period Annuity Period
x Pay -in period
x Building your estate
x Grows tax deferred
x Money belongs to the policy
owner
x Pay -out period
x Money belongs to the company
x Policy owner gets the payout
How are premiums paid?
x Single premium one lump sum
x Level premium same payment frequency
x Flexible premiums periodic or many
PREMIUMS ARE NOT TAX DEDUCTIBLE Life Exam Study Guide Page 18
Annuity payment options
x Cash one-time payment interest immediately taxed; penalty of 10% before age 59
x Annuity certain Guaranteed for a fixed period or fixed amount
x Straight life guaranteed payments for life; payment ceases at annuitants death
x Life with period certain the annuity payments are guaranteed for the lifetime of the annuitant and for a specified time for the beneficiary
Exclusion ratio:
x Nonqualified annuity portion of the payout is taxable (interest) & a portion is not (premiums paid); premium was paid in on an after- tax basis and growth was tax deferred
x Qualified annuity all of the payout is taxable, interest and premium paid; the premium was paid in on a pre-tax basis and the growth was tax deferred Life Exam Study Guide Page 19
FIXED
ANNUITIES
VARIABLE
ANNUITIES
EQUITY INDEXED
ANNUITIES
x Interest rates are
guaranteed
x Income payments do
not vary from one
payment to the next
x Premiums are held in
the companys general
account
x Company guarantees
the specified dollar
amount for each
payment; length is
determined by the
settlement option
chosen by the
annuitant . Inflation
may decrease
purchasing power
x Growth is NOT
guaranteed
x Premiums are held in
a separate account
x Is a security
x Level benefit payout
x Policy owner assumes
the risk. Can keep
pace with inflation
x Like fixed annuities
that invest on a
relatively aggressive
basis to aim for a
higher return
x Has a guaranteed
minimum interest rate
x Less risky than a
variable annuity or
mutual fund but are
expected to earn a
higher interest rate
Immediate Annuities Deferred Annuities
x Payment begins WITHIN 12
months
x Single premium payment only
x Payment begins AFTER 12
months
x Single, level, or flexible
payments