Chapter 3 Health Insurance

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Cash Value-

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money accumulated in a permanent whole life policythat is considered a living benefit which the policy owner may borrow againstor receive if the policy is surrendered before the insured dies

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Face Amount/ Limit of Liability-

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death benefit amount payable or coverage providedon a life insurance policy

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Endow (Mature)-

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a. date on which the whole contract ends.

A whole life policy is expected to have cashvalue= to the face amount on the endowment date, and the policy value is paidto the owner

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Rider-

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an added benefit attached to the policy thatsupplements an existing coverage (added at the time of the application, matresult in an increase in premium)

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Term Insurance

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- considered PURE insurance (w. PURE death benefit)

- no cash value benefits

temporary LI for a specificed period of time

-premium is level for the duration of the stated term

- Face amount is paid out to the named beneficiary onlyif the insured dies during the specified term of the policy

- As insured gets older, policy becomes more expensive

-Rates are based upon underwriting class, the age andgender of insured upon the length of time protection is provided.

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TYPES OF POLICIES in term insurance

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Level- death benefit remains LEVEL during policy term. 3 type of level term:

1. guaranteed level premium- policy premium guaranteed to be levelthroughout term of the policy

2. Non- Guaranteed level premium- premium can increase to a new premium level for theremainder of the term

3.Indeterminate premium term- premium may fluctuatebetween current charge and maximum rate based on insurers mortality, expenses,and investment returns

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. guaranteed level premium

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type of level term. policy premium guaranteed to be level throughout term of the policy

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Non- Guaranteed level premium

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type of level term. premium can increase to a new premium level for theremainder of the term

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Indeterminate premium term

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type of level term... premium may fluctuate between current charge andmaximum rate based on insurers mortality, expenses, and investment returns

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Decreasing

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-deathbenefit decreases, but premiums remain level for the policy terms (mortgageprotection).

-Premiums paid fordecreasing terms are lower than the premiums payable for level term since thebenefit decreases throughout the term policy

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Credit Life Insurance-

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special form of decreasing term. creditoras the beneficiary. Policy cant be written for more than the outstandingdebt.

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Increasing-

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the deathbenefit increases over the life of the policy while the premiums remain level.Normally written as a rider for the return of premium on a term policy over aset number of years

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Annually Renewable Term-

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simplestform of term life insurance is fro 1 year. Death benefit remains level and the premiums increase yearly as thepolicy renews up to a specified age. It is initially inexpensive, but becomesmore expensive over time. Death benefitis paid by the insurer if the insured dies while the policy is in force

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All of the different types of term policies

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1. level (guaranteed, non guaranteed, indeterminate)

2. decreasing

3. Credit Life

4. Mortgage Redemption

5. Increasing

6. Annually Renewable Term

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Uses of Term

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a. - term insurance might be used to cover loans,business, or personal obligations

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Renewable-

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a benefit that will renew the contract on the renewaldate without evidence of insurability. Policy must be 1,5,10, 20 yr renewable contract up to specified age withpremiums increasing at the beginning of each renewal period. Renewal premium isbased on attained age

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include “reentry” provision-

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1. Some policies include “reentry” provision- offersinsured an opportunity to obtain a new policy at a reduced premium based on newunderwriting

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Convertible-

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1. right to convert the existing term policy to apermanent policy without evidence of insurability during the conversion periodof the specified contract. Premiums base don attained age OR original issueage. Premiums will be higher than theoriginal policy bc the permanent policy will provide a cash value and coveragecan last to age 100 or beyond

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Renewable and convertible term policy will cost ______ then a level term policy

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more

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Permanent Insurance

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Traditional Whole Life

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Traditional Whole Life

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designedto provide coverage for an entire lifetime. Whole Life is PERMANENT protection that matures at the insured’s age 100when the cash value= the face amount at maturity. If still living at 100, insurer pays the faceamount to the owner (more recent years, policies may mature at 121). Traditional Whole Life policies have a LEVELpremium and LEVEL face amount. To keepthe premium rate level, the premium at younger ages exceeds the actual cost ofprotection. The extra premium builds areserve (cash value) which helps pay for the policy in later years as the costof protection rises above the premium. Traditional policies earn a specified guaranteed rate of return. ii. Unliketerm insurance, whole life policy CANT be convertible or renewable

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Type of Permanent Traditional Whole Life Policies

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1. Ordinary Whole Life (Straight Life or Continuous Premium, Limited Payment, Single Premium)

2. Adjustable Life

3. NontraditionalWhole Life (Interest/ Market Sensitive) (Universal Life)

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Ordinary Whole Life-

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1. - provides insurance protection to age 100, cashvalue accumulation to age 100, and fixed level premium payments. The premiumpayments may be constructed as follows:

1. straight life of continuous Premium

2. Limited Payment

c. Single Premium

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Straight Life or Continuous Premium-

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a. premium is level and payable to age 100 or death ofthe insured, whichever comes first. Face amount level throughout life ofpolicy. Policy has the highest total premium outlay.

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Limited Payment-

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a. premium payments are for a specified time or to aspecified age. The face amount (death benefit) remains level and cash valuecontinues to earn interest and mature at age 100. Annual Premium is higher than straight life,it is paid for a shorter period of time and will have lower total premiumoutlay

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Single Premium

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entire premium is paid in a lump sum at the time ofpurchase and creates immediate cash value. This policy has the lowest totalpremium

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Adjustable Life

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1. type of permanent life insurance combines featuresof term and whole life coverage, giving policies owners option to change thecharacteristics of their policies. Good for ppl w/ fluctuating incomes or havea change in needs. Can be exercised annually. Changes can only be made on policyanniversary date

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NontraditionalWhole Life

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Interest/Market Sensitive include:

1. UniversalLife (Flexible Premium Adjustable Life Insurance)

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UniversalLife

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a. FlexiblePremium Adjustable Life Insurance)- insurance protection and savings element that growson tax deferred basis. “unbundled policy”. Built in guarantees. Features: i. Adjustableface amount

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a. Universal Life allows for 2 death benefit options:

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i. Option Aà pays face amount of policyand provides a level death benefit. Thisminimum separation between cash value and risk benefit is called the “riskcorridor” (greater cash value accumulations) ii. Option Bà pays the face amount incontract plus cash values accumulated over the years (allows for increasingdeath benefit)

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Guaranteed Universal Life/ Universal Life with no LapseGuarant

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guarantees term insurance for life

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Variable Life

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1. whole life policy with benefits that vary based onmarket conditions (fixed premium) a. General Account (guaranteed values)- provides a fixed rate of interestand the cash value in the general account provides for a guaranteed minimumdeath benefit to age 100 b. Separate Account (non guaranteed values)

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VariableUniversal Life

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(non guaranteed values) 2. Variable Universal Life – same as universal life but cash value put ininvestment vehicles is chosen by policy owner (stocks, bonds, munis) cash valueNOT guaranteed. Owner bears all the investment risk

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MEMORIZE

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Joint Survivorship Life (Last to die) Policy-

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1. WL policy covering 2 or more lives but ONLY payableupon death of last insured, generally low premium but high death benefit (married couples worried about estate taxes)

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Policies Linked to Indexes

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1. offer potential for increasing death benefits thatare linked to the CPI; increase to keep pace with inflation

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Joint Life (first to die) policy

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1. WL policy covering 2 or more insureds but payableupon death of FIRST insured, after which policy ends

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Juvenile Life (aka Jumping Juvenline) Policy

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1. any policy written on the life of a minor;automatic increase in face amount at given age without proof of insurability;fixed premium but death benefit increases by 5 times at age 18 or 21. Willnormally increase the face amount of insurance by a factor of 5 with no changein premium at the next anniversary after the child turns anywhere from age21-25 (depending on policy)

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Family Plan (Family Protection Plan) Policy-

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Family Plan (Family Protection Plan) Policy- 1. - covers entire family with WL for breadwinner and(convertible) Level term for spouse and children (until certain age- up till25)

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Family Maintenance-

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1. Same as whole life insurance with a level termrider; upon death, pays monthly income for FULL term AFTER which pays fulldeath benefit

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Disability Income Rider-

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pays a percentage of the death benefit as monthlyincome to the insured when totally disabled

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What does a long term care rider do that a LivingNeeds (Terminal Illness) Rider does not?

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1. Provides up to 100% of the death benefit iin adaily or monthly amount for the non-hospital expenses of a chronically illperson who cant perform any 2 of 6 of the actives of daily living

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Aviatical settlement is made between a purchaser of a person’s life insurance policy and____________________.

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11. The terminally ill insured who must receive atleast as much as would be available from the insurance company under any fullcash surrender or living needs rider

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Single Premium-

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1. entire cost of policy paid in lump sum at time orpurchase

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Limited Payment-

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1. premium is payable for specified time

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Modified Preimum-

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1. premium is payable for the first few years of thepolicy (3-5). Lower than an ordinary WL policy to make it more affordable

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Flexible Premium

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1. - premium can fluctuate at the policy ownersdiscretion

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Adjustable Premium-

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premium can fluctuate at the policy ownersdiscretion

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Life Insurance Policy Riders

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modifies the polocy by expanding its benefits and are at the option of the insured. Avaliabel for additonal premium cost. Provided for specified period of time. Once rider frops from policy, additional premium will also drop.

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Waiver of Premium

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Type of Disability Rider. If the insured becomes totally disabled, the insurer will waive premiums for the duration of the disability or the end of the policy, whichever occurs first. Must be disabled for 3-6 to qualify. During the disability, the insurer will credit the premiums to the policy and all benefits, such as cash value accumulation and dividend payments, will continue. Unless the insured is disabled, the Waiver of Premium rider drops at age 65.

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Payor Benefit (Waiver of Payor's Premium)

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Type of Disability rider. If the payor (policyowner) dies or becomes disabled and is unable to make the premium payments, the insurer will waive the premiums payments for a specified period of time.

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Disability Income Benefit

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Type of Disability rider. In the event of total disability and after an initial waiting period (such as 6 months), premiums are waived and the insured is paid a monthly income. The monthly disability income benefit is typically limited to a percentage of the face value (for example, $10 per month for each $1,000 of face amount). The benefit paid from the rider does not reduce the death benefits paid out upon death.

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Waiver of Cost of Insurance

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Type of disability Rider. rider that waives the deduction of the monthly cost of insurance and expense charges associated with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability. The disability must occur prior to 65, and if disabled, the rider typically terminates at age 65.

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Child Rider

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Provides level term coverage on life of all insured's kids. Offered at one premium rate. Cover newborns after 14 days and adopted kids. Kids have coverage till specified age (21-25) given option to cnonvert to permenate policy w/o evidence of insurability

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Family Rider

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Combination of coverage on spouse and kids. Sold in units of protection.

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Additional Insured Rider

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Gives coverage for another person (other then kids of wife) like a busniess partner. Insurable interst must exist

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Accidental Death Benefir (Double or Triple Indemnity)

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In the event of a claim, the policy normally pays double or triple the face amount only if the insured's death was a result of an accident (may be called multiple indemnity rider, paying multiple times the face amount). Must be within 90 days of accident. expires at 65

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Indemnity

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plans allow you to direct your own health care and visit almost any doctor or hospital you like. The insurance company then pays a set portion of your total charges. Indemnity plans are also referred to as "fee-for-service" plans.

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Guaranteed Insurability

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Allows the insured to purchase stated amounts of additional insurance every 3 years based on certain ages (specifically 25, 28, 31, 34, 37, and 40), events, or specified dates without evidence of insurability up to a maximum age, usually 40. The premiums are based on attained age. The events which will allow for the insured to obtain additional insurance in between the specified ages include marriage and the birth or adoption of a child, when the need for insurance coverage may increase.

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Return of Premiumrider

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uses Increasing Term insurance to provide coverage equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount of the policy plus the benefit of the rider equaling the total amount of premiums paid.

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Guaranteed No-lapse Rider

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This rider is attached to a universal life insurance policy and ensures the policy will not lapse if the cash value is reduced to zero. It relieves the policy owner of responsibility to monitor cash value and comes with a required payment schedule, effectively hybridizing the universal policy with whole life insurance.

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Accelerated Death Benefit

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provide for an early payment of a portion of the face amount prior to death. This rider provides tax free access to policy benefits based on an insured qualifying as terminally ill or chronically ill. Accelerated benefits can be received as a lump sum or in periodic payments provided for a certain period only. Accelerated death benefits do not have to be repaid if the insured’s health improves but the amount received reduces the remaining death benefit..

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terminally ill

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physician has certified that person has a condition which would is expected to result in death within 24 months.

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chronically ill

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health care professional has determined within the last 12 months that person is unable to perform at least 2 activities of daily living for at least 90 days without substantial assistance.

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Two riders that Provide Accelerated Death Benefits (1 of 2) Living Needs

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1. Living Needs Accelerated Benefit Rider – Allows the early payment of a portion of the face amount before death should the insured become terminally ill with less than 24 months to live. This rider is not designed to provide services to the insured.

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Two riders that Provide Accelerated Death Benefits (2 of 2) Long Term Care

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2. Long-Term Care Rider- Provides up to 100% of the policy benefits if the insured qualifies for long term care benefits based on being chronically ill as defined in the rider. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary. The amount of protection is determined at the time of policy purchase. Long term care benefits are paid income tax free after the insured meets the qualifying requirements. A long-term care rider provides an advance payment of the death benefit for the covered expenses of long-term care a chronically ill person may incur.

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Effect on the Death Benefit

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After the accelerated benefits are paid and any lost interest to the insurer is deducted, the insurer must pay the balance of the face amount to the beneficiary.

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Exclusions and Restrictions on the Death Benefit

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The accelerated death benefit cannot contain exclusions or restrictions that are not also exclusions or restrictions in the policy. Typical exclusions apply to suicide, intentional self-inflicted injury, war, or engaging in illegal occupations or activities.

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Viatical Settlement

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An agreement between a policyowner and a third-party buyer to purchase the life policy covering a person who is diagnosed as terminally ill with less than 24 months remaining life expectancy.

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Life Settlement Contract

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A financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than the cash surrender value and less than the face value. A written agreement is entered between a life settlement provider and the owner of the policy. The contract establishes that compensation is paid in return for the owner’s assignment of an insurance policy.

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Fraudulent Life Settlements

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Presenting or preparing false material information, or concealing material information, with respect to: life settlement solicitations, applications, underwriting, premiums, claims, and change of ownership. Entering into stranger-originated life insurance (STOLI). Employing any device to defraud in the business of life settlements

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Privisions

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Benefits Provided in a contract without an additional charge. May be reffered to as a claue

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Options

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Privisons that provide choices which must be specified by the policy owner

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Credit life insurance is a special form of what type of term life insurance?

AIncreasing

BDecreasing

CLevel

DAnnually renewable 30 year

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Credit life insurance is a special form of decreasing term

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Which of the following best describes the return of premium rider?

AAn increasing term benefit that matches the cash value accumulation

BA benefit similar to waiver of premium, but is free of charge

CA level term rider in the amount of 20 annual premiums

DAn increasing term benefit that matches the cumulative premiums paid

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D An increasing term benefit that matches the cumulative premiums paid

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The face amount of an Ordinary Whole Life Policy _________ over the life of the policy.ADecreasesBVariesCRemains the sameDIncreases

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The face amount is the same as the death benefit and is the amount payable to the beneficiary upon the insured's death. Over the life of the policy it remains level.

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What type of term life insurance policy has a policy premium that can fluctuate between the current charge and a maximum rate stated in the policy based on the insurer's mortality, expenses, and investment returns?AFlexibleBAdjustableCIndeterminateDIncreasing

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Indeterminate premium term can have the premium fluctuate between the current charge and a maximum rate stated in the policy based on the insurer's mortality, expenses, and investment returns.

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A life insurance premium is paid each month. The insurer then subtracts a mortality and expense charge from the policy's cash value. This best describes which of the following life insurance policies?

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Universal Life All premiums paid to a Universal Life Policy are placed in the policy's cash value account. The mortality charge (cost of protection) and expenses are then deducted from the cash value account.

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Frieda wants coverage until she has paid back her business loan in 10 years. The ideal life insurance policy with the least expense would be:AUniversal LifeBDecreasing Term LifeCVariable Universal LifeDParticipating Permanent Life

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Decreasing Term reduces in death benefit as the loan obligation reduces in balance. Term insurance is the least expensive form of insurance as it is temporary and does not build any cash values. The death benefit reduces over the period of the note or loan.

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When the life insurance policy's cash value equals the face amount of the policy and the proceeds are paid to the policyowner, this is known as the policy's _________.AEndowmentBReinstatementCRenewalDConversion

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a. endownment- When the life insurance policy's cash value equals the face amount, the policy is said to endow.

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Which of the following policies requires a producer to have both a life and securities license to sell?AIndeterminate PremiumBVariable UniversalCEquity-IndexedDUniversa

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B. VARIABLE UNIVERSAL- Both Variable Life and Variable Universal Life require a securities and life license to sell. A securities license is not required for Adjustable Life, Universal Life, or Equity-Indexed Life.

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What is the maximum amount of credit life insurance that can be written on an insured?A$250,000B$100,000C$50,000DNo more than the outstanding debt

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D. Credit life insurance cannot be written for more than the outstanding debt, since that is the limit of the creditor's insurable interest.

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A Return of Premium Term policy provides for a full refund of premiums under what situations and circumstances?AIf the insured is not completely satisfied at any timeBIf the insured is still living at the end of the termCIf the insurer does not deviate from the current illustrated rates at the time the policy was issuedDIf the insured's health has not changed and the beneficiaries sign-off on the appropriate document

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B A Return of Premium Term policy provides for a full refund of premiums if the insured is still living at the end of the term.

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A Life Settlement Contract is a financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for how much?A80% of the face value of the policy if the insured is between the ages of 65 and 70B3 times the cash valueCMore than the cash surrender value and less than the face valueD2 times the premium paid into the policy

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A Life Settlement Contract is a financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than the cash surrender value and less than the face value.

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A Guaranteed Universal Life policy is also referred to as a(n):ATraditional whole lifeBUniversal Life with a No-Lapse GuaranteeCFlexible premium adjustable life insuranceDPermanent term life insurance

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B A Guaranteed Universal Life policy is also referred to as 'Universal Life with a No-Lapse Guarantee

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A married couple wants to have funds available so that the heirs to their estate have the funds necessary to pay the estate taxes. Which of the following would be the most economical and effective way to accomplish this?ABuy a Whole Life policy on each spouseBHave one spouse buy a whole life policy and the other one a Universal Life policyCBuy a Joint Life policyDBuy a Joint Survivorship Life policy

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D. Buy a Joint Survivorship Life policy ; pays upon the death of the last to die, and for this reason it is a popular policy with couples who want to defer estate taxes until both are deceased. It is also more economical to buy this one policy than to buy two separate policies.

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If Jon dies with an outstanding policy loan of $10,000 on his $100,000 policy that has $15,000 of cash value, what will his beneficiary receive at the time of claim?A$100,000B$115,000C$105,000D$90,000

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D. 9,000 Upon death, the insurance company recovers any outstanding loan prior to paying out a claim to the beneficiary.

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The net amount at risk in an Ordinary Whole Life Insurance Policy _________ over the life of the policy.ARemains the sameBDecreasesCIncreasesDVaries

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B. DECREASES- As the cash values build, the net amount at risk for the insurer declines since the face amount is the benefit paid out upon the death of the insured. It is a way to keep the premiums affordable as the insured ages and the risk of death increases.

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Quentin, age 65, has a life insurance policy he no longer needs and no longer can afford but he does have a need for cash. XYZ Inc. purchased his policy for less than the face amount but more than the cash value and is now the policyowner and premium payor. This was which of the following transactions?ALife SettlementBViatical Trust Settlement AgreementCLiving Needs TransactionDBuy/Sell Agreement

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A. LIFE SETTLEMENT A Life Settlement is like a Viatical Settlement except it does not involve a terminally ill insured.