Chapter 6: Premiums and Proceed

Question 1

Name the 9 aspects premiums are calculated on

Answer 1

• Mortality (deaths in a population)
• Interest factor
• Expense Factor (operating cost)
• Age
• Gender
• Health
• Occupation
• Hobbies
• Habits

Question 2

Premium Mode

Answer 2

• Policyowner can select timing of premium payments

Options:

• Annual
• Semi-annual
• Quarterly
• Monthly

The more frequent the payment the higher the premium

Question 3

Level Premium Funding

Answer 3

• Policyowner pays more in the early years then premiums remain level after

Question 4

Single Premium Funding

Answer 4

• Single premium that provides protection for life

- Associated with whole life Insurance

Question 5

Reserves

Answer 5

Money set aside to pay future claims

Question 6

Cash value

Answer 6

Savings element of whole life insurance

The cash value is less than the amount of premiums paid early on (it takes awhile to build cash value)

Question 7

Tax Treatment for Premiums

Answer 7

Usually not tax deductible except:

• premiums used for charity
• Premiums paid by an ex-spouse as court ordered alimony
• Employer paid premiums for group insurance

Question 8

Death Benefit settlement options (five)

Answer 8

• Lump Sum
• Interest only (insurance company holds benefits and pays only interest earned to beneficiary)
• Fixed period (paid in equal installments)
• Fixed Amount (specific amount)
• Life Income (paid on a life long basis)

Question 9

Living benefits

Answer 9

• Using benefits if needed during life

Question 10

Living benefits options

Answer 10

Accelerated: Physician certifies someone is temporarily ill and needs to use benefits

• Viatical Settlement: Terminal illness to sell their insurance to a third party for a percentage of face value
• Life Settlement: Sell insurance policy for more than its cash value but less than end death benefit

Question 11

Who can be beneficiaries?

Answer 11

• Individuals
• Businesses
• Trust
• Estates
• Charities
• Minors

Question 12

Order of Succession

Answer 12

Primary: First in line to receive benefits

• Secondary: Second in line
• Tertiary: Third in line (if not named benefits go to estate)

Question 13

Two types of Distribution of Descent

Answer 13

Per Stirpes: By bloodline. If beneficiary dies money goes to their heirs

Per Capita: Evenly distributes benefits to all living beneficiaries

Question 14

Two ways to change beneficiary

Answer 14

Revocable: May change beneficiaries at any time without getting permission from beneficiary

• Irrevocable: May not be changed without written consent

Question 15

Special Situations

Answer 15

Simultaneous Death: Primary beneficiary died first so the next in line receives benefits

Common Disaster Provision: Benefits paid as if the insured outlived the beneficiary

Spendthrift Clause: Benefits received in fixed installments

Question 16

What type of term life insurance has premiums that are averaged over the policy period?

Answer 16

Level premium term life insurance

Question 17

Naming “all surviving children” as a contingent beneficiary is called what?

Answer 17

Class designation

Question 18

What is a tax advantage of life insurance?

Answer 18

Income tax is typically not owed on money paid directly to a beneficiary

Question 19

What is a 1035 exchange?

Answer 19

Replacing a whole life policy with an annuity without any tax penalty