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91 Cards in this Set

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6–1 Identify life risk exposures facing a client in a given situation.

List four personal risk exposures that may indicate a need for life insurance.
a. death before debt repayment
b. spouse outliving pension plan pure life annuitant
c. debtor’s death before having repaid the client money owed (insurance would be required on the debtor)
d. death before reaching personal goals the client wants funded, regardless of whether he or she lives to see them fulfilled
6–1 Identify life risk exposures facing a client in a given situation.

List family risk exposures related to the death of a primary income earner that may indicate a need for life insurance.
final expenses
contingent liabilities
dependent income
education
family goals
support of parents
6–1 Identify life risk exposures facing a client in a given situation.

List four closely held business risk exposures that may indicate a need for life insurance.
death of a partner or co-shareholder
death of a key employee
loss of a key employee to a competitor
illiquidity of the business in the event of an owner’s (probably the client’s) death
special situations
6–1 Identify life risk exposures facing a client in a given situation.

What is the general purpose of a buy-sell agreement, and how may life insurance be used in a buy-sell agreement?
A buy-sell agreement is often used to transfer the ownership interest of a deceased business owner to the remaining owners (or corporate entity). Buy-sell agreements have many forms, including:
Stock redemption
Cross purchase
Wait and see
Third party buy-out
Life insurance is often used as a funding vehicle to provide the money required to purchase the deceased owner’s share (often from the deceased’s estate).
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is term insurance?
It protects against financial loss resulting from death during a specified period of time. It may have an annually increasing premium or a premium that is level from 5–20 years.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the advantages of using term insurance?
Initial premium is lower than for whole life.
It initially provides more insurance protection per premium dollar than permanent forms of insurance.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the disadvantages of using term insurance?
The premium cost increases as the policy owner gets older.
It does not develop cash values and has no savings element.
At the end of the specified ter, poliy owner may be declined for coverage.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is whole life insurance?
provides GUARANTEED INSURANCE PROTECTION FOR ENTIRE LIFETIME of Insured
provides GUARANTEED NONFORFEITURE VALUES that can be used as forced savings
has a GUARANTEED LEVEL PREMIUM
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the advantages of using whole life insurance?
It provides a guaranteed cash value that can be:
1. used as a savings plan
2. used for financial emergencies
3. borrowed against
The premium is level for the life of the insured.
The death benefit is guaranteed for life.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the disadvantages of using whole life insurance?
It has a higher initial premium than term.
In the early years, it is not flexible to meet changing needs.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is limited pay whole life insurance?
protection and guarantees are LIKE WHOLE LIFE (e.g., extend to age 100)
premium PAYMENTS ARE MADE FOR SHORTER PERIOD of time than whole life
during the payment period, PREMIUMS ARE HIGH ENOUGH TO PREPAY POLICY
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is endowment life insurance?
It is a COMBINATION of a PURE ENDOWMENT and TERM insurance for the endowment period.
The company promises to pay the FACE AMOUNT IF THE INSURED DIES within the policy period or the FACE AMOUNT IF THE INSURED LIVES to the end of the specified period.
Since the Deficit Reduction Act of 1984’s definition of life insurance, use of this policy is usually limited to some qualified retirement plans and policies that endow at age 95 or later.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is universal life insurance?
Its TECHNICAL NAME IS FLEXIBLE PREMIUM ADJUSTABLE LIFE.
It is an unbundled life insurance product with a CASH VALUE FUND THAT ACCUMULATES TAX DEFERRED.
The cash value earns at least a minimum guaranteed rate of interest.
It includes FLEXIBLE PREMIUM PAYMENTS, ADJUSTABLE DEATH BENEFITS, UNBUNDLED STRUCTURE, AND FULL DISCLOSURE.
It may be set up as a level death benefit policy, termed Type A or Type 1, or as an increasing death benefit policy, termed Type B or Type 2.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the advantages of using universal life insurance?
It has flexible premium payments.
It has an adjustable death benefit.
It provides full disclosure annually.
It has an unbundled structure.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the disadvantages of using universal life insurance?
The compulsory form of savings is reduced due to flexible premium payments.
There is no assurance that a given premium will be adequate.
The policyowner may receive neither the most competitive insurance coverage nor the most competitive savings vehicle.
The future yield is uncertain.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is variable life insurance?
It is designed to COMBINE traditional PROTECTION AND SAVINGS FUNCTIONS of life insurance with GROWTH POTENTIAL OF EQUITIES OR FIXED INCOME INVESTMENTS.
It includes investments similar to mutual funds, called separate accounts or sub-accounts.
It has a GUARANTEED PREMIUM and OFTEN A GUARANTEED DEATH BENEFIT, but NO GUARANTEED CASH VALUE.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the advantages of using variable life insurance?
The policy has a HIGHER YIELD POTENTIAL because of use of equities.
The owner generally chooses from among investment options.
The policy has a GUARANTEED PREMIUM AND DEATH BENEFIT (USUALLY).
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the disadvantages of using variable life insurance?
The buyer must be willing to GIVE UP GUARANTEED CASH VALUE in exchange for the possibility of enhanced cash value and death benefit.
The owner MUST CHOOSE FROM AMONG INVESTMENT OPTIONS.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is variable universal life insurance (VUL)?
COMBINES all the features of UNIVERSAL LIFE with VARIABLE LIFE
FLEXIBLE PREMIUM
INVESTMENT CHOICES for cash fund
ADJUSTABLE DEATH BENEFIT
NO GUARANTEES beyond ability to keep coverage in force
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is interest-sensitive whole life?
It is a WHOLE LIFE plan written by stock life insurance companies under which INTEREST RATES REACT TO CURRENT MONEY RATES AND AFFECT THE CASH VALUE OR PREMIUMS, depending on the structure of the specific policy.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is adjustable life insurance?
It is a COMBINATION OF TERM AND WHOLE LIFE where the MIX IS DICTATED BY THE FACE AMOUNT OF INSURANCE COMBINED WITH THE CHOSEN PREMIUM.
The premium and face amount are adjustable at any monthly policy anniversary.
Policy can change from term to whole life or vice versa.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What is an indeterminate premium policy?
It is a WHOLE OR TERM LIFE POLICY WITH MAXIMUM GUARANTEED PREMIUM RATES STATED IN THE CONTRACT; current premiums reflect current investment and mortality experience.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

Participating and nonparticipating life insurance differ in their approach to dividends. Briefly describe the differences.
PARTICIPATING POLICY: It is a policy on which ANNUAL DIVIDENDS MAY BE PAID TO THE POLICYOWNER; for tax purposes, the dividend is generally treated as a tax-free return of excess premium.
NONPARTICIPATING POLICY: NO DIVIDENDS ARE PAID, although the policy may have provisions for excess interest or current interest to be paid on the cash value.
6–3 Compare the purposes of the general provisions of a life insurance policy.

What is meant by the designation primary beneficiary on a life insurance policy?
It is the person(s) or entity FIRST ENTITLED TO PROCEEDS of the policy following the death of the insured.
6–3 Compare the purposes of the general provisions of a life insurance policy.

What is meant by the designation contingent beneficiary on a life insurance policy?
It is the person(s) or entity ENTITLED TO POLICY BENEFITS IF THE PRIMARY (OR DIRECT) BENEFICIARY PREDECEASED THE INSURED OR IS INELIGIBLE to receive the proceeds.
6–3 Compare the purposes of the general provisions of a life insurance policy.

What is the difference between a revocable beneficiary on a life insurance policy and an irrevocable beneficiary?
With a REVOCABLE BENEFICIARY, the policyowner reserves the right to CHANGE THE BENEFICIARY DESIGNATION AT ANY TIME, WITHOUT THE CONSENT or notification of the beneficiary.
With an IRREVOCABLE BENEFICIARY designation, the policyowner CANNOT CHANGE THE DESIGNATION OF THE BENEFICIARY WITHOUT THE LATTER’S CONSENT.
Additionally, a policy loan or assignment of contract requires the written permission of the beneficiary.
6–3 Compare the purposes of the general provisions of a life insurance policy.

Sally Hansen owns a whole life insurance policy on her own life and has designated her husband, John, as irrevocable beneficiary. What rights does John have concerning the policy and policy proceeds?
JOHN’S WRITTEN CONSENT IS NECESSARY FOR SALLY TO CHANGE BENEFICIARY DESIGNATION, ACQUIRE A POLICY LOAN, ASSIGN THE CONTRACT, OR SURRENDER IT; however, he has only a contingent vested interest in the death benefits.
6–3 Compare the purposes of the general provisions of a life insurance policy.

Joan Ryan owns a whole life insurance policy on her own life and has designated her sister, Cindy, as revocable beneficiary. What rights does Cindy have concerning the policy and policy proceeds?
She HAS NOTHING MORE THAN A MERE EXPECTATION, subject to all rights and privileges that Joan may exercise in the contract.
She receives a legal interest in the contract only at Joan’s death.
6–3 Compare the purposes of the general provisions of a life insurance policy.

Define the purpose of the following clauses in a life insurance policy. a. entire contract
The policy and the application constitute entire contract between the insurer and the policyowner/insured. It DECLARES THAT STATEMENTS OF THE INSURED ARE REPRESENTATIONS AND NOT WARRANTIES, so the insurer must prove materiality of any misrepresentations by the insured.
6–3 Compare the purposes of the general provisions of a life insurance policy.

Define the purpose of the following clauses in a life insurance policy. b. ownership
A life insurance policy is PERSONAL PROPERTY. The designated owner has vested privileges of ownership, including the RIGHTS TO ASSIGN OR TRANSFER THE POLICY, NAME A BENEFICIARY, RECEIVE THE CASH VALUE AND DIVIDENDS, AND BORROW AGAINST THE CASH VALUE.
6–3 Compare the purposes of the general provisions of a life insurance policy.

Define the purpose of the following clauses in a life insurance policy. c. incontestable
After the policy has been IN FORCE FOR TWO YEARS, THE VALIDITY OF THE CONTRACT CANNOT BE QUESTIONED, except in most cases of fraud.
6–3 Compare the purposes of the general provisions of a life insurance policy.

Define the purpose of the following clauses in a life insurance policy. d. misstatement of age
It provides that, if the insured has misstated his or her age, the POLICY FACE AMOUNT WILL BE ADJUSTED TO THE AMOUNT OF INSURANCE THAT THE PREMIUM PAID WOULD HAVE PURCHASED AT THE CORRECT AGE. The incontestability clause is not applicable to a misstatement of age by the insured.
6–3 Compare the purposes of the general provisions of a life insurance policy.

Define the purpose of the following clauses in a life insurance policy. e. grace period
A specified NUMBER OF DAYS ARE ALLOWED FOR PAYMENT OF A PREMIUM BEYOND THE DUE DATE, USUALLY 30 OR 31. The grace period prevents a policy from lapsing during this time period.
6–3 Compare the purposes of the general provisions of a life insurance policy.

Define the purpose of the following clauses in a life insurance policy. f. reinstatement
It comes into play after the end of the grace period.
It provides for a policy to be reinstated within a specified time period after the date of premium default if the policy is not surrendered for its cash value.
It usually requires evidence of insurability and payment of all overdue premiums with interest.
6–4 Describe a characteristic of a viatical agreement.

Describe the basic structure of a viatical agreement.
It is a CONTRACT BETWEEN A LIFE INSURANCE POLICYOWNER AND ANOTHER PERSON OR ENTITY. The policy is sold for a price that is determined by calculating the ESTIMATED PRESENT VALUE OF THE FUTURE DEATH BENEFIT AND SUBTRACTING FROM THAT THE ESTIMATED PRESENT VALUE OF THE PREMIUMS THAT WILL HAVE TO BE PAID THROUGH THE DEATH of the insured.
6–4 Describe a characteristic of a viatical agreement.

David Smith has terminal cancer, and his physician has given him three months to live. His adult children own an insurance policy on his life. Briefly describe the viatication process as it relates to David and his children.
David’s children may sell the policy to a viatical company. The company would verify David’s life expectancy and make an offer to purchase the policy from the children. Even though David is the insured, he does not have to approve the transaction.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

Define each of the following items that appear on a nonforfeiture table. a. cash or loan value
This value, also known as the SURRENDER VALUE, is shown as the number of dollars per thousand dollars of insurance that can be obtained by the policyowner if he or she surrenders the policy. It also represents the GROSS AMOUNT AGAINST WHICH THE POLICYOWNER MAY BORROW from the insurance company.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

Define each of the following items that appear on a nonforfeiture table. b. reduced paid-up insurance
This value represents THE AMOUNT OF INSURANCE, per thousand dollars of the policy face amount, THAT THE CASH OR LOAN VALUE WOULD PURCHASE IF THE POLICYOWNER WANTED TO STOP PAYING PREMIUMS BUT WANTED TO KEEP INSURANCE IN FORCE as long as the insured lives.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

Define each of the following items that appear on a nonforfeiture table. c. extended term insurance
This value represents THE NUMBER OF YEARS AND DAYS THAT A TERM INSURANCE POLICY WILL REMAIN IN FORCE IF THE POLICYOWNER WANTS TO STOP PAYING PREMIUMS, BUT WANTS THE ORIGINAL FACE AMOUNT OF INSURANCE TO CONTINUE for as long as the cash or loan value will permit. The cash or loan value is essentially a single premium for this term insurance.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

List and explain the advantages of the following dividend options available for a participating life insurance policy. a. cash
The CLIENT CAN HANDLE AND INVEST OR SPEND THE MONEY.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

List and explain the advantages of the following dividend options available for a participating life insurance policy. b. paid-up dividend additions
It allows for the PURCHASE OF ADDITIONAL NET COST PERMANENT INSURANCE. It can be added each year, REGARDLESS OF THE INSURED’S HEALTH OR OCCUPATION. NO FURTHER PREMIUMS ARE DUE ON IT, and it pays dividends. MAXIMIZES TAX-DEFERRED ACCUMULATION.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

List and explain the advantages of the following dividend options available for a participating life insurance policy. c. reduced premium
It DECREASES OUT-OF-POCKET EXPENSES.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

List and explain the advantages of the following dividend options available for a participating life insurance policy. d. accumulate at interest
It ALLOWS FOR PROFESSIONAL MANAGEMENT OF MONEY, and a MINIMUM RATE IS GUARANTEED. DIVIDENDS ARE TAX FREE up to the taxpayer’s basis in the policy, but INTEREST EARNED ON THE ACCUMULATED DIVIDENDS IS NOT tax fre e.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

List and explain the advantages of the following dividend options available for a participating life insurance policy. e. one-year term (fifth dividend option)
It ALLOWS THE ACQUISITION OF INEXPENSIVE INSURANCE THAT IS EQUAL TO THE GUARANTEED CASH VALUE. It is added to each year, regardless of health or occupation, and it usually is used in addition to another option.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

Identify which dividend option provides the GREATEST COMBINATION OF INCREASED DEATH BENEFIT AND CASH VALUE, and explain your answer.
PAID-UP ADDITIONS (PUAS) add to the death benefit and, in doing so, increase the cash value.
6–5 Calculate the value of a given nonforfeiture option in a life insurance policy at a specific point in time.

Identify which dividend option provides the LEAST BENEFICIAL CURRENT TAX CONSEQUENCES, and explain your answer.
When dividends are left to ACCUMULATE AT INTEREST, the interest is currently taxable. Other dividend options do not increase current tax liabilities.
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the settlement options available for life insurance policies. LUMP SUM:
It is a single payment in cash.
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the four basic categories of life income settlement options. INTEREST OPTION:
The proceeds of a policy are left with the insurance company to be paid out at a later time, in which case only interest on the principal amount is paid to the beneficiary (with a minimum rate of interest guaranteed).
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the settlement options available for life insurance policies. INSTALLMENTS FOR A FIXED PERIOD:
The policyowner may specify (or beneficiary may elect) to have the proceeds paid out over some specified period.
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the settlement options available for life insurance policies. INSTALLMENTS OF A FIXED AMOUNT:
The policyowner (or beneficiary) may elect to have policy proceeds paid out as some fixed amount per month for as long as principal and interest on the unpaid portion of principal lasts.
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the settlement options available for life insurance policies. LIFE INCOME OPTIONS:
The proceeds are paid out in the form of an annuity over the life of the recipient. However, payments may be received by a person other than the one whose life determines the payout period.
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the four basic categories of life income settlement options. A. STRAIGHT LIFE INCOME:
The proceeds are paid to a beneficiary on the basis of life expectancy.
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the four basic categories of life income settlement options. B. LIFE INCOME WITH PERIOD CERTAIN:
The beneficiary is paid a life income for as long as he or she lives, with a minimum number of payments guaranteed.
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the four basic categories of life income settlement options. C. LIFE INCOME WITH REFUND:
A beneficiary is paid a life income for as long as he or she lives; if the original proceeds are not paid out when the beneficiary dies, the remainder is paid to a contingent beneficiary.
6–7 Compare settlement options available under a life insurance or annuity policy.

List and describe the four basic categories of life income settlement options. D. JOINT AND SURVIVOR INCOME:
It provides income to two payees, with payments continuing to the survivor after the death of the first payee.
6–7 Compare settlement options available under a life insurance or annuity policy.

Mac Dahrr wants to use a settlement option with the life insurance proceeds he is receiving from a policy on his father. He can’t decide between a 10 c&c or a 20 c&c payout. Which one will provide him with the most monthly income, and why?
THE 10 C&C PAYOUT WILL PROVIDE THE HIGHEST INCOME. Even though he may live for 30 years or more, the insurance company would have to guarantee payments for at least 20 years under the 20 c&c settlement option. That is a much greater certain obligation than a certain 10-year obligation.
6–8 Analyze a situation to select an appropriate dividend, nonforfeiture, or settlement option plan for a client’s life insurance policy.

David Walder wants to maximize the income-tax-deferred accumulation in his participating whole life policy. Which dividend option will appropriately accomplish this, and why?
DIVIDENDS USED TO PURCHASE PAID-UP DIVIDEND ADDITIONS WILL PROVIDE THE GREATEST TAX-DEFERRED ACCUMULATION. Until the cumulative dividends exceed the cumulative premiums paid, they are income tax free. The dividends purchase small amounts of life insurance that are paid up and have a cash value approximately the same as the amount of the dividend. These paid-up additions also earn dividends.
Susan Arnolt wants to stop paying for the whole life policy she purchased 12 years ago, but she wants to maintain the full amount of insurance. What is an appropriate option? Explain.
Susan should choose the nonforfeiture option of extended term insurance. This option trades her surrender value for a term insurance policy in the same amount as her original policy (less any policy loans) for a specified number of years and days as found in the nonforfeiture table printed in the policy.
6–8 Analyze a situation to select an appropriate dividend, nonforfeiture, or settlement option plan for a client’s life insurance policy.

Pat Zeit’s grandfather died. He left Pat the proceeds of a life insurance policy. Rather than take the lump sum, she wants to have the proceeds paid out quarterly from now until her youngest child, now age 11, turns 21. She also wants to receive the largest guaranteed payment available. What is an appropriate option? Explain.
TEN-YEAR QUARTERLY PAYOUT. This option accomplishes exactly what Pat wants done. The proceeds will be paid out in equal installments for 10 years. If she had chosen a life income with 10 years certain, her payments would have been substantially less.
6–9 Analyze the application of a given optional provision (rider) available in a life insurance policy.

Explain the following optional provisions (riders) available in a life insurance policy. A. RENEWABILITY PROVISION
It guarantees the policyowner the RIGHT TO RENEW A POLICY FOR A SPECIFIED NUMBER OF ADDITIONAL PERIODS (in renewable term insurance).
6–9 Analyze the application of a given optional provision (rider) available in a life insurance policy.

Explain the following optional provisions (riders) available in a life insurance policy. B. CONVERSION PROVISION
The policyowner is granted an OPTION TO EXCHANGE A TERM CONTRACT FOR SOME TYPE OF PERMANENT INSURANCE, without having to prove evidence of insurability.
6–9 Analyze the application of a given optional provision (rider) available in a life insurance policy.

Explain the following optional provisions (riders) available in a life insurance policy. C. COMMON DISASTER CLAUSE
A settlement of policy proceeds is withheld for a designated number of days after the insured’s death. Any BENEFICIARY SURVIVING THE INSURED, BUT DYING WITHIN THAT PERIOD, IS CONSIDERED TO HAVE PREDECEASED THE INSURED.
6–9 Analyze the application of a given optional provision (rider) available in a life insurance policy.

Explain the following optional provisions (riders) available in a life insurance policy. D. SPENDTHRIFT CLAUSE
It DENIES THE BENEFICIARY THE RIGHT TO COMMUTE, ALIENATE, OR ASSIGN INTEREST IN THE POLICY PROCEEDS PAID UNDER AN INSTALLMENT SETTLEMENT OPTION. It must be requested in writing.
6–9 Analyze the application of a given optional provision (rider) available in a life insurance policy.

Explain the following optional provisions (riders) available in a life insurance policy. E. DISABILITY WAIVER OF PREMIUM
The COMPANY AGREES TO WAIVE THE ENTIRE PREMIUM OR THE MONTHLY CHARGES, WHICHEVER APPLIES, IF THE POLICYOWNER BECOMES TOTALLY DISABLED in accordance with the provisions in the contract.
6–9 Analyze the application of a given optional provision (rider) available in a life insurance policy.

Explain the following optional provisions (riders) available in a life insurance policy. F. ACCIDENTAL DEATH BENEFIT
If the DEATH OF THE INSURED IS CAUSED BY AN ACCIDENT, AND DEATH IS WITHIN 90 DAYS OF THE ACCIDENT, AN ADDITIONAL SUM EQUAL TO THE AMOUNT OF THE RIDER WILL BE PAID.
6–9 Analyze the application of a given optional provision (rider) available in a life insurance policy.

Explain the following optional provisions (riders) available in a life insurance policy. G. GUARANTEED INSURABILITY
The POLICYOWNER MAY PURCHASE ADDITIONAL SPECIFIED AMOUNTS OF INSURANCE AT STATED INTERVALS WITHOUT PROVIDING EVIDENCE OF INSURABILITY.
6–9 Analyze the application of a given optional provision (rider) available in a life insurance policy.

Jeremy Potter decided to take up flying lessons. Unfortunately, he was having such a good time on his first solo flight that he failed to see the mountain he flew into. He managed to survive the crash, but died four months later after being on life support equipment the whole time. Will the accidental death benefit rider on his life insurance policy pay off? Explain your answer.
If Jeremy had died within 90 days of the crash, the accidental death benefit would probably have paid. Since he survived more than 90 days, the rider will not likely result in a benefit being paid.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Identify the five ways annuities may be classified and list the annuities that fit each classification.
a. METHODS OF PAYMENT/ACCUMULATION: fixed or variable.
b. NUMBER OF LIVES ARE COVERED: single life (paid for duration of a single life) or joint and survivor annuities (paid for duration of two or more lives).
c. WHEN PAYMENTS ARE TO COMMENCE: immediate versus deferred annuities.
d. METHOD OF PREMIUM PAYMENT: single premium annuity or on a flexible basis over a period of years.
e. NATURE OF INSURER’S OBLIGATION: pure life annuity, refund annuity, or period certain.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Describe the following types of annuities. a. joint and survivor
Covers two or more annuitants with payments continuing until death of last survivor.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Describe the following types of annuities. b. immediate
Benefits payable immediately after purchase (usually at the end of each benefit period). The first annuity payment is due one payment interval from date of purchase.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Describe the following types of annuities. c. deferred
May be a spread of years between the date of purchase and beginning of annuity payments.
Benefits payable after expiration of a given period.
May be a gain in value, on a tax-deferred basis, between premium payment date and the annuity start date.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Describe the following types of annuities. d. single premium
Annuity purchased with single premium rather than on installment basis.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Describe the following types of annuities. e. pure life/straight life
Payments made only for balance of annuitant’s lifetime, regardless of how long.
Considered fully liquidated at annuitant’s death, with nothing payable to his or her estate.
Provides maximum income per dollar of principal sum.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Describe the following types of annuities. f. life and period certain
Payments made for life of annuitant, but guaranteed a certain number of years (5, 10, 15, 20), regardless of whether the annuitant lives to end of period.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Describe the following types of annuities. g. refund
One type pays specified amount to estate or to beneficiary if annuitant dies shortly after payments commence.
Another type guarantees certain number of payments, whether annuitant lives or dies.
Installment refund annuity provides for annuity payments for the annuitant’s life but guarantees a payment total at least equal to the purchase price of the annuity.
Cash refund annuity provides for annuity payments for the annuitant’s life but, upon death of the annuitant, guarantees that if total annuity payments are not equal to the purchase price, a cash payment equal to the difference will be made in one lump sum.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

Describe the following types of annuities. h. variable
Variable during accumulation period.
May be variable or fixed during payout, at annuitant’s option (election made at annuitization).
If variable benefit is selected, the dollar amount of each periodic benefit payment is based on the value of a unit that is invested at the discretion of the annuity owner. Newline Attempt to cope with impact of inflation on retirement incomes.
No guarantee regarding number of dollars to be paid out.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

What are the advantages and disadvantages of a pure life immediate fixed annuity?
Advantages:
Guaranteed stream of income.
Annuitant cannot outlive principal.
No residual value at death that would be subject to estate taxes.

Disadvantages:
Does not increase with inflation.
Usually cannot reach principal in case of emergencies. Newline Annuitant may die before return of principal is realized; nothing left for beneficiaries.
6–10 Distinguish between types, uses, and limitations of various types of annuities.

What are the advantages and disadvantages of deferred annuities?
Advantages:
Tax-deferred accumulation.
Competitive interest rates (fixed).
Choice of investment funds (variable).

Disadvantages:
Tax penalties for early withdrawal; company charges on surrender.
No guarantee of investment return (variable).
May not be able to respond quickly to economic conditions.
6–11 Explain how pricing factors interact.

What is the primary purpose of life insurance policy reserves?
The reserves are maintained primarily to pay all future benefits: death benefits or nonforfeiture values.
6–11 Explain how pricing factors interact.

If mortality rates increase, what must happen for premiums to remain stable?
Investment returns must increase and/or expenses must decrease.
6–12 Distinguish between policy illustration factors to select the most appropriate insurance product.

What points should be checked before the planner proceeds to evaluate the numbers on a policy illustration?
Does the illustration go out to AGE 95 OR BEYOND?
IS THE INSURER THE ONE INTENDED?
Is the illustration RECENT?
Is the information for AGE, TOBACCO USER STATUS, AND RATING ACCURATE?
DOES THE ILLUSTRATION CORRESPOND CORRECTLY TO THE CONTRACT under consideration?
6–12 Distinguish between policy illustration factors to select the most appropriate insurance product.

Why should the company’s actual investment yield be compared with the interest rate underlying the dividend scale?
If the interest rate underlying the dividend scale is too close to, or significantly higher than, the rate of return actually being earned by the company, there is a reasonable question as to whether the company can actually pay the dividends shown on the illustration.
6–12 Distinguish between policy illustration factors to select the most appropriate insurance product.

Why should the company’s actual dividend history be compared with past projections?
The comparison can give the planner an idea of whether the company over-projects expected results. It should be noted that a number of companies have gone to a direct recognition dividend scale, which is generally used to provide equity among policyowners. The dividends paid on a policy recognize when a loan is taken against the policy, taking into consideration whether the loan interest rate is fixed or variable.
6–13 Recommend an appropriate type of insurance policy.

For each of the following types of insurance, give a description that would reflect a client’s needs that would be met by that type of policy. A. WHOLE LIFE
CLIENT WANTS PREDICTABILITY AND GUARANTEES regarding cost, death benefit, and cash accumulation. Client may recognize lifetime insurance needs or needs lasting well beyond 10 years and wants lowest net cost over time.
6–13 Recommend an appropriate type of insurance policy.

For each of the following types of insurance, give a description that would reflect a client’s needs that would be met by that type of policy.b. 20-year level term
Client wants PREDICTABLE COST WITH A FINITE NEED. Currently DISPLAYS GOOD SAVING AND INVESTING HABITS.
6–13 Recommend an appropriate type of insurance policy.

For each of the following types of insurance, give a description that would reflect a client’s needs that would be met by that type of policy.c. annually renewable term
Client has SUBSTANTIAL NEED WITH LIMITED FUNDS or a relatively SHORTTERM NEED AND WANTS TO MINIMIZE CASH FLOW to insurance.
6–13 Recommend an appropriate type of insurance policy.

For each of the following types of insurance, give a description that would reflect a client’s needs that would be met by that type of policy.d. life paid up at 65
Client WANTS LIFETIME COVERAGE and wants ASSURANCE THAT PREMIUMS WILL STOP BY THE DATE OF RETIREMENT.
6–13 Recommend an appropriate type of insurance policy.

For each of the following types of insurance, give a description that would reflect a client’s needs that would be met by that type of policy.e. modified whole life
Client NEEDS TO MINIMIZE CASH FLOW NOW BUT WANTS PREDICTABILITY OF PREMIUM, DEATH BENEFIT, AND CASH ACCUMULATION FOR LONG-TERM needs. Also expects income and cash flow limitations to be reduced substantially within three to five years.
6–13 Recommend an appropriate type of insurance policy.

For each of the following types of insurance, give a description that would reflect a client’s needs that would be met by that type of policy.f. variable universal
Client is NOT RISK AVERSE, LIKES THE IDEA OF BUYING TERM AND INVESTING THE DIFFERENCE, BUT NEEDS LONG-TERM INSURANCE COVERAGE. Income fluctuates. Has very good history of saving and investing.
6–13 Recommend an appropriate type of insurance policy.

Penny Franklin realizes that her insurance needs will change over time. Currently she considers her primary need to be providing for her children’s well being. She can afford any type of life insurance, but wants to be able to change her premiums and death benefits as time goes on. She’s not looking to her insurance as a risk-taking purchase. Which type of policy is most likely to meet all of her needs?
A UNIVERSAL LIFE POLICY provides the flexibility required. It is a form of permanent insurance she can keep as long as she wants. By using a reasonable premium, she can assure its presence throughout her life.
6–2 Identify types, uses, and limitations of various types of individual life insurance policies.

What are the disadvantages of using term insurance?
The premium cost increases as the policyowner gets older. newline It may often be reduced to meet changing needs. newline At the end of the specified term, policyowner may be declined for renewed coverage.