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29 Cards in this Set

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Group Life Insurance?
Purchased by a group sponsor (ex. employer) and is designed to cover all group members under one policy. The group sponsor is the policyowner, and each group member is an insured under the group plan.
Individual Life Insurance?
Purchased by an individual who needs life insurance. The person who purchases the policy is the policyowner and the person covered by the policy is the insured.
Term Life Insurance?
Designed to provide temporary protection for someone who needs life insurance for a specific period of time. It provides pure insurance protection, with no cash value.
Permanent Life Insurance?
Designed to provide permanent protection for someone who needs life insurance for a longer period of time. It provides a cash value in addition to the insurance protection.
Fixed Life Insurance?
Policies pay an interest rate on any cash value in the insurance policy. The insurance company takes responsibility for investing the money, and bears all risk for fluctuations in market and economic conditions.
Variable Life Insurance?
Policies allow the policyowner to invest the cash value in mutual funds. The policyowner takes responsibility for investing money, and bears all risk for fluctuations in market and economic conditions.
Level Term Life Insurance?
The premium and death benefit remain level during the term of coverage.
Types of Level Term Life Insurance?
1. Annually renewable term: sets the term of coverage as one year. Every year, the policyowner may renew the policy w/out having to provide evidence of insurability. However, premiums are subject to change upon renewal.

2. Level Premium Term: insurance sets the term of coverage as longer than one year. The premium remains level during the initial term of coverage. When the initial term ends, the policy may be renewed without having to provide evidence of insurability. Premiums are subject to change upon renewal.

3. Option to convert: The right to exchange the term policy for a permanent life insurance policy during a specific period of time. No proof of insurability is required to exercise this option, but premiums are subject to change upon conversion.
Decreasing Term Life Insurance?
Premium remains level during the term of coverage, but the death benefit decreases with time. Also known as "mortgage protection insurance" or "credit life."
Whole Life Insurance?
Permanent insurance protection until agee 100. Provides cash value in addition to insurance protection.

- Premiums remain level for the life of the insured.

- Policy endows when the insured reaches age 100.

- Policyowner may borrow up to the full amount of the cash value. Interest is deferred for 6 months.
Whole Life Insurance Premium Options:
Straight Life: policyowner pays the same annual premium until the insured dies or reaches age 100.

Single Pay: policyowner makes single, lump-sum payment that pays for the policy in full.

Limited Pay (10 pay, 20 pay): policyowner makes premium payments for the first several years the policy is in force. Once premiums have been paid for the set # of years than the policy is paid in full.
Universal Life Insurance?
Permanent insurance protection and cash value. Key difference between whole and universal life is that it provides the policyowner with additional flexibility.

- Insurer pays a target interest rate that varies with the market and economic conditions.

- If the policyowner always pays the target premium, the policy will endow at age 100.

- If the target interest rate increases, than the target premium will decrease.

-If the target interest rate decreases, than the target premium will increase.

- Insurer guarantees a minimum interest rate that will be paid on the cash value regardless of market and economic conditions.

- When insured dies insurer will pay face amount (death benefit) of the policy.
Death Benefit Equation
Death Benefit = Cash Value + Pure Insurance
Adjustable Life Insurance?
Policyowner may:

- Change between term and permanent coverage as needed w/out having to issue a new policy.

- Borrow the cash value.

- Increase the death benefit (but proof of insurability is required).
Joint Life Insurance? (First to Die)
Policy written for two or more people that pays when the first one dies. Only "ONE" life is insured.
Survivorship Life Insurance? (Second to Die)
Policy written on more than one person that pays when the last person dies. (Estate Planning)
Juvenile Life Insurance?
Permanent life insurance purchased on the life of a child. Parent is the policyowner and the child is the insured.

When the child reaches 18/21:

- Face amount jumps to 5 times the original amount.

- Child takes over ownership of the policy.
Accidental Death and Dismemberment Coverage?
Principal Sum: amount paid when insured dies in an accidental death.

Capital Sum: amount paid when insured suffers an accidental dismemberment.

Qualifying Dismemberment:

- Loss of limb AT or ABOVE the wrist or ankle.

- Loss of sight in ONE or BOTH eyes.
Industrial Life Insurance?
(Rare) Used to provide a small benefit to cover burial expenses.

- no suicide exclusion

- no incontestability clause

- Grace Period:
- Weekly Premium = 4 Weeks
- Monthly Premium = 31 days
Are premiums tax deductable?
NO
How does cash value grow?
Tax-Deferred Basis
What happens if a policyowner borrows the cash value?
There is no tax liability as long as the policy remains in force.

If the policyowner cancels the policy during the life of the insured, part of the cash value will be taxed:

1. Any contribution to the cash value will be returned TAX FREE.

2. Any interest in excess of premiums paid will be TAXABLE as INCOME!
What happens if the policy endows?
Part of the cash will be taxed:

- Any contribution to the cash value will be returned TAX FREE.

- Any interest in excess of premiums paid will be TAXABLE as INCOME!
What happens if insured dies?
- The death benefit is ALWAYS passed TAX FREE to the beneficiary.

- If the insured is also the policyowner the death benefit will be included in their estate for the purposes of calculating estate taxes.
Modified Endowment Contract? (MEC)
A policyowner intentionally overfunds the cash value of their life insurance policy, and their policy can be classified as a MEC and lose many of the tax advantages of life insurance.
7-Pay Test?
Federal tax regulations state that premiums paid during the first seven years of the policy exceed the net level premiums for a 7-pay whole life policy than it will be classified as a MEC.
Tax Consequences of a MEC?
- Policy loans are taxed as income.

- Any loans taken prior to 59 1/2 are subject to an additional 10% penalty.

- It remains a MEC forever!
Section 1035 Exchange?
Allows the policyowner to roll the accumulated cash value of one insurance policy into another insurance policy without having to pay taxes.
Cash value rollovers that are eliible for tax-deferred status:
1. Life insurance to another life insurance policy.

2. Life insurance to an annuity.

3. Annuity to another annuity

Rolling an annuity into a life insurance policy is not eligible for tax-deferred treatment.