Texas Life, Accident, and Health Insurance


chance of loss

speculative risk

-involves the chance of gain or loss and is NOT insurable
-ex: gambling

pure risk

involves only the chance of loss and is insurable


being subject to the possibility of loss because of an activity, location, or characteristics
-second hand smoke
-no control on exposure


cause of loss

natural peril

lightning, hail, hurricane, and so forth

human peril

theft, murder, auto accidents, industrial accidents, and illness


accidental/unexpected death or injury to a person or any reduction in quality, quantity, or value of property


situation that introduces or increases the probability of loss
-triggers the event
-overloaded light switch

elements of an insurable risk

-Affordable (premiums have to be affordable)
-Noncatastrophic (not war, nuclear)
-Homogenous (similar in nature; how many 31-yr-old males die each yr)
-Accidental and definite (not on purpose)
-Measurable (have to be able to put a $ a

insurance vs. gambling

insurance is a pooling of funds and sharing the cost of losses.
the insured transfers risk away from themselves to another entity

what is buying insurance?

a transfer of risk
-risk management

personal uses of life insurance

1. final illness and funeral expenses
2. liquidity for immediate expenses
3. income for ongoing expense
4. survivor protection (loan spouse $ if you die, or recoup loss if spouse dies & you are sole provider)
5. estate creation (life ins. creates an estat

what could ownership of life insurance cause in an estate?

estate tax, only if over 3.5 million


the legal agreement between the insurer and the policyowner.

What are the essential elements of all enforceable contracts?

1. competent parties
2. legal purpose
3. agreement
4. consideration

competent parties

a). insurance agency--certificate of authority
b). applicant

requirements of competent party applicant

1. of lawful age (usually 18; for the purchase of life insurance, 14 in Texas)
2. mental competence
3. not acting under duress

what does the contract agreement consist of?

offer and acceptance (counteroffer)
-counteroffers are NOT required

What is cash value life insurance good for?

all except emergency fund


equitable terms are not required

what is not considered an element of an enforceable contract?



-not considered an element of an enforceable contract
-occurs when the offeree rejects the offer, amends the offer and submits a different offer back to offerer
(e.g. the insurer rejects the applicant's offer as a standard risk and counteroffers a policy

no consideration =

no coverage

insurable interest

the applicant/policyowner has an insurable interest (emotional and financial) in his own life and can name any beneficiary he chooses

when is insurable interest required?

a). when the proposed owner/applicant is to be someone other than the proposed insured (third-party insured)
b). at the time of ISSUE, not at time of LOSS in life insurance (e.g. not at time of claim)

insurable interest is NOT on...

next door neighbor

types of insurable interest

-emotional interest (i.e., blood or marriage)
-financial interest--for someone to whom you owe a debt or with whom you have a business relationship

insurable interest & co-signing a loan

if you co-sign a loan, you now have insurable interest on person getting a loan, by that person does not have insurable interest on you

law of large numbers

1. when you increase the number of units exposed to loss in a study, the accuracy of predictions of future losses also increases
2. the larger the number of events observed, the greater the accuracy of the prediction


business professional who analyzes the financial consequences of risk

who uses the law of large numbers

-come up with raw numbers

two methods to determine how much insurance you need

1. salary
2. economic worth

determining amounts of life insurance

1. human life value approach
2. needs approach
3. planning for income needs
4. liquidation vs. retention of capital
5. social security blackout period
6. face value vs. death benefit

human life value approach

an individual's economic worth, measured by the sum of his or her future earnings that is devoted to his or her family

needs approach

a method for determining how much insurance protection a person should have by analyzing a family's or business's needs and objectives should the insured die, become disabled, or retire
-whether you need money for mortgage credit cards NOW

liquidation vs. retention of capital

-pay off lower
-the proceeds (capital) will be used up either at or slightly after the end of the surviving spouse's life expectancy.
-your family's life insurance proceeds should last just through the 4 ongoing income periods:
1. readjustment
2. dependen

social security blackout period

period following the death of a family breadwinner during which no Social Security benefits are available to the surviving spouse
spouse gets check until/when youngest child turns 16
18/19 if still in high school spouse will get a check
then they get noth

face value vs. death benefit

loans do NOT change face value
loans DO change death benefit
a). face value is the death benefit stated on the first page of the policy
b). a death benefit is the amount paid upon the insured's death and may be slightly more or less than the face value

face value

the death benefit stated on the first page of the policy

death benefit

the amount paid upon the insured's death and may be slightly more or less than the face value

classifications of insurers

(where company is located vs. where they do business)
1. domestic
2. foreign
3. alien


domiciled in Texas


home office in another state or possession--Colorado for example


located outside the borders of the United States--another country

resident agent

live in state where you do business

nonresident agent

do business in a state where they do not live

types of insurers

1. stock company
2. mutual company
3. fraternal associations/societies
4. reciprocal exchanges
5. Lloyd's associations

Stock company

owned by the shareholders/stockholders
a). nonparticipating policies
b). dividends--taxable (paid on stock--not policies owned; taxable income in year paid--ROI)
often referred to as a nonparticipating company bc policyholders do not participate in divide

Mutual company

-owned by the policyowners
-participating/policy dividend (participate in dividends)
-owner chooses policy dividend
-policy dividends usually not taxable income (they are considered a return of unused premium)
-policy dividends are not guaranteed

policy dividend options (mutual company, owner chooses)

1. paid-up additions (policyowner can use dividends to buy additional coverage)
2. reduce premiums (policyowner can use dividends to pay premiums)
3. one-year term insurance (policyowner can use dividends to buy term coverage)
4. paid-up option (policy ow

who owns the mutual company?


dividends in a mutual company are___________


T/F: Mutual companies can guarantee dividends


who rule the insurance contract?


in mutual company, owners receive____________

nontaxable dividends

fraternal associations/societies

a). nonprofit
b). organized for the mutual benefit of its members and their beneficiaries
c). have a lodge system and representative form of government
d). association/society authorized to do business in Texas may provide:
-death benefits in any form

fraternal association/society authorized to do business in Texas may provide the following:

-death benefits in any form
-annuity benefits
-temporary or permanent disability benefits
-hospital, medical, or nursing benefits
-monument or tombstone benefits not to exceed statutory amount
-funeral benefits

reciprocal exchanges

a). unincorporated insurer operating through an attorney-in-fact to provide insurance for its subscribers
b). not rate regulated
c). members share profits and losses

Lloyd's asociations

Texas Lloyd's association have no connection with underwriters at Lloyd's of London
-individuals, partnerships, or associations (underwriters) can join together to provide insurance
-co. operates through an attorney-in-fact, who has power of attorney for


company receiving premiums and accepting responsibility for fulfilling the policy contract.
company employee who decides whether or not the company should assume a particular risk.
the agent who sells the policy

how does the Lloyd's association company operate?

through an attorney-in-fact, who has power of attorney for the underwriters

How many underwriters must the Lloyd's association company have?

minimum of 10

What regulation are Lloyd's associations subject to?

same as other companies EXCEPT for forms and rates

What is the maximum book of business Lloyd's associations can write?

10 times their net assets

What types of insurance can Lloyd's associations write?

all forms except life

Where does shared risk underwriting come from?

a Lloyd's company

independent rating services

evaluate insurers.
ratings are assigned to each insurer on the basis of such factors as:
-financial strength
-claims paying ability
-investment performance
-surplus requirements
the more A's, the higher the rat

independent rating services (companies)

1. A.M. Best, Inc
2. Standard & Poor's Rating Services
3. Moody's Investors Service (rate bonds)
4. Duff & Phelps Credit Rating Company
5. Weiss Research

when insurance companies come in and look at ratings, they look at everything except what?

length of time in business


the insurer buys insurance from another insurer for part of the risk
AKA insurance for insurance companies
1. ceding company
2. assuming company
3. reinsurance is provided by the terms of automatic treaties or by facultative arrangements (facultative = a

ceding company

-in reinsurance
-direct writer
-issues the policy for total amount
-responsible for all death claims

assuming company

(reinsuring company)
assumes all or part of the risk

all reinsurance is done on what basis?

facultative basis--case by case, application by application


selection of risk by the insurer

classification of risk

ensures that each person pays the correct premium for the risk they bring to the insurance pool
4 classes of risk

4 classes of risk

1. preferred--below average risk pays discounted premium
2. standard--average risk; majority of policies are issued
3. substandard--above average risk pays an increased premium (based on type of job w/ great risk)
4. declined--unacceptable risk (rejected)

adverse selection

selecting against the insurance company to get the best benefit at the lowest premium

sources of information for underwriting

a). the application (main source of underwriting info. truthful statement)
b). agent's report (field underwriters. are you related to insured)
c). Medical Information Bureau (MIB) -- (info from MIB cannot be the sole basis for declining an application) (m

What goes on MIB?

info on applications and claim

who are field underwriters?


What is involved in field underwriting?

agents' observations

The Fair Credit Reporting Act

federal law
Requires the following:
-at the time of application, the applicant is given notice that credit will be pulled
-the applicant has a right to know; if credit is denied, the company must send the applicant the name & address of the credit ag

once the credit report is received & __ creditor record....

do not send explanation to underwriter

underwriting substandard applications

-substandard life policies
-substandard health policies
-complete application

underwriting substandard life policies

a). Rated policy (rate up) (percentage method, flat extra premium, rated-up age)
b). modified life policy (not standard) any premium that is altered from the regular premium for a similar life policy

life insurance ____% morbidity charge for health reasons


Substandard health policies may be underwritten using the following:

-Extra premium--rate up
-modified health policy--any premium that is altered from the regular premium for a similar health policy
-waivers--impairment--exclusion to an impatient for life of policy (ex: heart cord)

completing the substandard application

a). delay if questions are not all answered on the application
b). agent's responsibilities--The agent is the agent of the insurer; info or money obtained by agent is considered to be received by the insurer
c). changes on the application must be initiale

key persons to have sign underwriting application

beneficiary does not sign application

Representation vs. Warranties

warranties are absolutely true & representations are true to the best of the applicant's knowledge


statements that must be absolutely true
-of absolute fact
-affect the contract

What could breach of warranty result in?

a void contract of denial of coverage


with life policies statements that are true to the best of the applicant's knowledge
answers to questions on an insurance application are considered representations


misstatements of fact (i.e. false statements, untruthful answers), usually not serious enough to affect coverage

material misrepresentation

false statement that is so serious that if the insurer had knowledge of the truth, it would have affected the underwriting decision (i.e. not issued policy or charged an additional premium)

how much time do you have to discover material misrepresentations?

2 years
if discover within 2 years, can cancel & return premiums, has to do with health issues
after 2 years you are clean
-discover person misstated their age within 2 years. can send letter to adjust the premium for original insurance

What is the purpose of providing coverage with a conditional receipt?

to insure the person before the effective date of the policy
-breach of warranty could result in void contract or denial of coverage

conditional receipt

given to the policyowners when they pay a premium at time of application.
such receipts bind the insurance company if the risk is approved as applied for, subject to any conditions stated on the receipt

what is coverage in effect under?

a conditional receipt on the date the requirements (conditions) of the receipt are satisfied

4 requirements that must be met for coverage under conditional receipt:

1. Application is fully completed and signed before death
2. Medical examination (if one is required), by the age or amount of insurance, completed before death
3. Premium (full mode) has been paid, before death (need to collect the standard premiu

When does conditional receipt prevent coverage?

if comes back from underwriting as substandard or unstated--?


allowed by Texas law for life insurance policies up to six months from date of application, to preserve age-related premium

law of agency

knowledge of the agent is knowledge of the principal; payment to the agent is payment to the principal


a person or entity who acts on behalf of another
-agents are producers


the party for whom the agent acts (the insurer)

types of authority

-express authority
-implied authority
-apparent authority

express authority

granted in an agent's contract; it is the written authority to the agent
written authority
an appointment--work for someone
gets me paid--employment contract

implied authority

authority an agent needs to carry out the express authority.
does not conflict with the express authority; not written out in detail in the agent's contract
not written
doing the job that is not in writing
going on appointments not on books
use of busines

apparent authority

created when the action or inaction of the insurer creates the impression that the authority exists
clients assumption on messing up--the agent screws up paying a claim insurance company does not ...?
client's assumption

what is the best way to prove you work for an insurance company?

use of company forms and paperwork

Producer responsibilities


producer fiduciary responsibilities

the producer has a fiduciary responsibility to the insurer
the producer must always protect the insurer's interests and follow any lawful instructions from the insurer
the producer may disobey instructions that are illegal

producer ethical responsibilities

the producer must adhere to high standards of ethical conduct when dealing with an applicant
the product must always act fairly and honestly, disclosing all information the applicant needs to make a well-informed decision when buying insurance

waiver and estoppel

when a provision of an insurance contract is waived (not enforced by the insurance company), the provision cannot subsequently by enforced by the insurance company to justify denial of a claim; the insurer is "(e)stopped" from denying the claim


agreement waiving the company's liability for a certain type or types of risk ordinarily covered in the policy; a voluntary giving up of a legal, given right
voluntarily giving up/relinquishing a known right


legal impediment to denying the consequences of one's actions or deeds if they lead to detrimental actions by another
insurance company plays fast to keep from paying a claim (cannot enforce a rule at their convenience)

Marketing systems: how insurance policies are sold

1. full-time career (captive agents)
2. independent agents (brokers)
3. direct response insurers (no agent involved)

captive agents

full-time career--represent one company


independent agents--represent several companies

direct response insurers

no agent involved
direct mail solicitations instead of agents

delivering the policy

duties of the agent
-everything in person

Duties of the agent

1. explain the policy, benefits, riders, and so forth in person
2. if a counteroffer, explain and have applicant sign acceptance form
3. if collection on delivery (COD [initial premium not paid with application]), get a health statement from the insured;

when does coverage begin?

when premium is accepted

when does free-look period begin?

when policy delivery receipt is signed
if he cancels can receive all premium back

If insured suffered a serious accident or illness prior to delivery, can agent accept money or deliver the policy?



Collection on delivery

unique features of insurance policies

1. unilateral
2. adhesion
3. conditional
4. aleatory
5. executory
6. personal contract
7. utmost good faith


the insurer is bound to the contract; the policyowner is not bound and is not considered to have breached the contract if he does not pay the premium
-1-way enforcement
-nonpayment of premiums are not considered to be a breach of contract


take it or leave it"
contract is designed and written by the insurance company, and the insured adheres to the terms of the contract
if there is any ambiguity in the contract terms, the ruling will be in favor of the insured or beneficiary


an insurance policy is a conditional contract
the performance of the contract is conditional upon the occurrence of an uncertain event
if no claim occurs during the policy period, no money is paid
dependent upon chance or outcome


unequal consideration between premium and benefit
uneven between risk and reward premium has then paid benefit


obligations remain to be executed at a later date
in the future

personal contract

many policies are personal contracts between the policyowner and the insurer
insurance is generally not transferable to another person
life insurance policies are an exception
they can be assigned, sold, given away, or transferred
Premiums will remain the

are property and casualty policies personal contracts?


are life insurance policies personal contracts?


utmost good faith

insurance is based on the applicant's honest and complete answers in the application and on the insurer's promise to pay benefits after some possible future event
the public relies on the honesty and integrity of the agent and insurer
the applicant and in

reinsurance is________

an insurer placing some of the risk with another insurer

life and health insurance policies explain that the answers to questions on the application will be interpreted as_______


An application for life insurance was taken on a COD basis. When the agent returned with the policy, the applicant had suffered a heart attack. The agent should__________

not accept any premium or deliver the policy

The agent wrote the application on Aug 1, and the medical examination was done on Aug 4. The insurer approved the application on Aug 18, and the policy was issued on Aug 20. The agent delivered the policy on Aug 24 and collected the initial premium. When

Aug 24

All of the following will normally be acceptable reasons for buying life insurance EXCEPT
a. survivor protection
b. key employee insurance
c. accumulation of funds for education expenses
d. speculation on a neighbor's life

d. speculation on a neighbor's life

Which of the following would prevent the coverage provided by a conditional receipt from being effective?
-the medical questionnaire form was completed by a nonmedicallly trained person
-the policy was issued after underwriting was completed as a rated po

the policy was issued after underwriting was completed as a rated policy
(substandard above standard)

There are 3 types of authority involved in the relationship between the agent and the insurance company: express, implied, and apparent. If an agent misrepresents a policy benefit and obligates the insurer to pay a claim they would not otherwise owe, whic


In delivering a new policy to the client, an agent should
-thank the client for buying the policy
-explain any benefits or provisions not already covered with the policyowner
-offer to provide service and info as needed
-all of the above

all of the above

An insurance policy is an example of a contract of adhesion, which means that it was written by only one of the parties to the contract and if there is any ambiguity, courts will generally rule in favor of__________

the policyowner or beneficiary rather than the insurer

An actuary says that she uses a principle in her work that makes her job of predicting losses more accurate when she increases the number of exposures to loss in her studies. This principle is called___________

law of large numbers

The have a valid insurance contract, all of the following must be present EXCEPT:
-equitable terms

equitable terms

An agent took an application for life insurance, received a full premium in cash, and had the medical examination done on the same date. He spent the cash and turned the application in as a COD. He was surprised when the applicant died suddenly before the

-when the agent took the ash, it was as if the money had been placed in the hands of the insurer, even though the cash was not received by the insurer
law of agency
knowledge of agency = knowledge of company

An insured has been careless about paying her term policy premium on time for several months. The insurer has not enforced the contract condition that allows them to lapse the policy but has waived policy terms by accepting the late premiums without comme


Which of the following are costs associated with death?
-doctor and hospital bills from a final illness or accident
-paying off credit cards, loans, and other debts
-all of the above

all of the above

A top producer at ABC Insurance Company has analyzed D's life insurance needs, taking into account D's salary, his expenses, his current age, and the depreciation of the dollar over time. The producer was using the
-analytical approach to needs analysis

human life value approach to needs analysis

B, an insurance producer, analyzed C's life insurance needs, taking into account the number of money C anticipated needing for her funeral, the amount of income that would be required to maintain her family's standard of living in the event of her death,

needs approach to needs analysis

A wealthy businessman has asked you if he should consider buying life insurance. If he dies, his family will be well cared for through his will and his accumulated wealth. What is a possible motive for his purchase of life insurance?
-survivor protection

estate conservation

what is life insurance?

a contract that pays an income tax-free death benefit to a named beneficiary upon the death of the insured

what is life insurance used for?

to provide cash to meet financial obligations left behind when the insured dies

what does life insurance do?

protection against dying too soon and creates an estate

Gross premium =

mortality + expense (outgoing) - intererst

Net premium =

mortality - interest or investments


(claim costs)
1980 Commissioner's Standard Ordinary (CSO) Mortality Table--stops at age 100

3 premium calculation factors that make up the gross annual premium

1. mortality (claim costs)
2. expenses (loading)
3. interest/earnings on investments
4. premium

mode of premium payment

the mode of premium payment is the schedule of payment: monthly, quarterly, semiannually, or annually

single premium

one-time payment of the present value of all future policy benefits
a single premium mode is often used when a person purchases life insurance to pay estate taxes (estate conservation)

when is single premium mode often used?

when a person purchases life insurance to pay estate taxes (estate conservation)

When are adjustments made to the gross annualized premium amount?

when the mode is other than annual

gross premium is

net premium + expenses

types of life policies

-term insurance
-whole life, ordinary life, straight whole life, or continuous premium
-limited-pay whole life
-family life policy or family plan policy
-juvenile policy
-adjustable life policy
-indeterminate premium whole life insurance
-joint life polic

term insurance

pure protection (policy or rider)
pure death protection
1. temporary--coverage for a set number of years of to a certain age
designed for a temporary need
2. low premium (no cash value)
3. renewable to a set age (if stated) with no proof of insur

term insurance renewable ART YRT

-renew with no proof of insurance
-premium increases, renew annually based on increase in age


a fact or piece of info which shows that something exists or is true


one or more reasons for believing that something is or is not true

level term

the death benefit remains level during the term of the policy
premium stays the same

decreasing term

commonly used to cover the unpaid balance of a mortgage, pay for the rearing of children, or both
the benefit decreases during the term of the policy
rider or stand alone policy

increasing term

death benefit increases over the term
available as a rider only

level premium term

the premium remains stable during the term of the policy.
in this instance the insurer averages the premium over the term (e.g. 5, 10, or 20 years). additionally, the death benefit remains level
rider or stand alone policy


to pay off a debt

Whole life (WL), ordinary life (OL), Straight Whole Life, or continuous premium

1. insurance for whole life of the insured and premiums are payable for life (to age 100); aka ENDOWMENT at age 100
2. permanent insurance
3. the most important factor in building the reserve (cash value) is the level premium; cash value grows tax deferre

When is whole life endowment?

payable for life aka age 100

What is the most important factor in building the reserve (cash value) in whole life insurance?

the level premium; cash value grows tax deferred

What is the death benefit for whole life made of?

made up of the cash value (reserve) plus the amount at risk

Limited-Pay Whole Life

shorter premium paid than whole life; examples are 7-pay life, 10-pay life, and 20-pay life, and life paid up at age 65
coverage until age 65

in limited-whole pay life, what is cash value at age 65

less than face value amount

cash value =

face value - pays at face value

term is NEVER considered _________


Family Life policy or Family Plan Policy

1. designed to cover all family members under one policy
2. whole life on a parent
3. Level term
-on spouse to age 65
-on children from 15 days of age to 19th birthday
fixed premium, stays the same
4. family policies are usually sold in units
5. Child lif

Under WCFP premium payments are derived mainly on _______

breadwinners (WL)

50 yr old buys 10 pay policy (pay for 10 years). at what age does cash value = face amount?

age 100

child life rider

the term insurance on dependents is convertible to a permanent policy without evidence of insurability at age 19

Juvenile policy

juvenile estate builder or jumping juvenile
1. juvenile is the owner of the policy at age 18-21. Death benefit increases by up to five times at age 21 without evidence of insurability and no change of premium. Coverage is until age 100
2. payor provision

payor provision

(rider) a life and disability rider on the adult premium payor of a juvenile policy; if anything happens to the payor, the premium will continue to be paid until age 21 (when the child becomes the owner)


owner of policy at age 18-21

What is adjustable life policy

a combination of whole life and term that can be adjusted to fit changing needs of the insured

Adjustable Life Policy

1. combo of whole life & term that can be adjusted to fit changing needs of the insured
2. allows policyowner to adjust:
-premium and/or premium paying period
-face amount and/or period of protection
(death benefit)
3. policyowner cannot decrease cash val

What does adjustable life policy allow policyowner to adjust?

-premium and/or premium-paying period
-face amount and/or period of protection
cannot decrease cash value though

what can't the policyowner do in adjustable life?

cannot decrease cash value

What is the only type of WL policy you can increase or decrease death benefit (face amount) through the use of term insurance?

adjustable life

evidence of insurability

any statement or proof regarding a person's physical condition, occupation, and so forth, affecting acceptance of the applicant for insurance

Indeterminate Premium Whole Life Insurance

1. a whole life policy with guaranteed premium for some initial period (usually 3 years)
2. after the initial period, the premium can increase or decrease depending of the investment and mortality experience of the insurer
if company does good, premiums c

What is the only cash value life insurance policy where you cannot access the cash?

adjustable life policy

Joint life policy

first to die (JLP =FTD)
1. insures two people and pays when the first person dies
2. the advantage is a lower premium than with two policies

Survivor or Survivorship Life Insurance Policy

last to die (second to die)
1. Policy is written on 2 people
2. pays only when the last person dies
3. lower premium than two separate policies
4. used in estate planning; ideal way to provide each cash to pay federal estate taxes
buy for estate planning

What makes up death benefit makeup of ord life or WL

at risk + cash value

Universal Life (UL)

accum. cash values
1. flexible premiums; can pay varying premiums and skip a premium payment occasionally
cash value grows taxed deferred when you take money out pay tax on gain
2. interest sensitive
-minimum interest guaranteed
-pays a current

who takes on the risk in WL?


Unbundled premium (UL)

-premium is credited to the cash account
-interest is credited to cash account
-cost of pure protection (i.e. term insurance) is charged to cash account
-expenses (e.g. loading & administrative costs) are charged to cash account

UL policy offers 2 options:

Option A--designed to provide a level death benefit
Option B--designed to provide an increasing death benefit
can switch from A to B--have to prove insurability

UL option A

designed to provide a level death benefit
cash value grows
= death benefit = face amount - face amount + cash value

UL option B

designed to provide an increasing death benefit

parital surrender

(partial withdrawal) allows the policyowner to surrender part of the cash value; death benefit and cash value will be reduced by that amount
not subject to interest

Variable Whole Life (VL)

1. the cash value is invested in a separate account or in subaccounts with different investment objectives, usually equity securities
ex: common stock
2. VL is sold in units
3. The policyowner has opportunity to achieve high investment returns
4. the poli

what is the federal regulator of the securities industry?

The Securities and Exchange Commission (SEC)

escape clause

VL to WL can go back & change premium from age of inception only or you can change with VL to WL

Variable Life Insurance (VUL)

1. blends features of Universal life (UL) and variable life (VL)
2. policy is a combination of cash value and rterm insurance
3. two death benefit options--level and increasing
-option A
-option B
4. flexible premium/variable adjustable death benefit
5. c

VUL death ben option A

level death benefit; may provide an increased death benefit. The actual death benefit may be greater than the guaranteed minimum death benefit, depending on performance of the investments in the separate accounts

VUL death ben option B

increasing death benefit; insured selects a specific amount of pure insurance coverage. This remains the same and the death benefit changes as the value of the separate account changes.
There is no guaranteed minimum death benefit

VUL flexible premium/variable adjustable death benefit

a). within limitation, the policyowner can increase, decrease, or skip premium payments as long as there is adequate cash value
b). death benefit increases may cause the amount charged for insurance to increase and may require proof of insurability
c). fa

VUL cash value is invested in equity and other securities through separate accounts and subaccounts

a). investment control retained by policyowner who selects one or more separate investment options; these funds function independently of insurance company assets
b). no guaranteed earnings; policyowner bears the investment risk--may be low, medium, or hi

what type of insurance policy is classified as buying term and investing the difference?

VUL insurance

interest sensitive

(current assumption whole life)
vanishing premium
1. characterized by premiums that vary to reflect the insurer's changing assumptions with regard to mortality, investment returns, and expense factors
2. premium--based on the annual performance of the com

life policies with fixed premium

-whole life
-interest sensitive whole life
-variable life

life policies with fixed face amount

-whole life

life policies with guaranteed minimum death benefit

-whole life
-interest sensitive whole life
-variable life
-option A only on variable universal life

life policies with fixed interest rate

whole life

life policies that are interest sensitive

-interest sensitive whole life
-variable life ROI
-universal life
-variable universal life ROI

life policies with cash value and death benefit based on subaccount value

-variable life
-variable universal life

life insurance policy cost comparison methods

1. traditional net cost method
2. interest-adjusted cost method

traditional net cost method

this is a method comparing the net cost of various life insurance policies
the expected cash value + any estimated dividends are subtracted from the total premium paid at any given point (10 years, 20 years, or age 65 in the future life of a policy)
= tot

interest-adjusted cost method

the expected cash value + any estimated dividends are subtracted from the total premium paid a given point
The calculation is adjusted for the interest that could have been earned if the premiums had been invested elsewhere
= Total premium paid - (expecte

insuring clause

states the legal purpose of the contract; the company's promise to pay or perform
names the face amount, the insurer, the insured, the policyowner (if different from insured), and the beneficiary
does not state the premium

entire contract clause

(mnemonic PAR)
1. Policy
2. Application
3. Riders
Note: agent cannot change the contract. Executive officer of the insurer has to approve any changes
keeps policyowner from depending on oral statement from agent not expressed in the policy

What does an insurance company use as its defense?

if it's not written it is not covered

free-look provision

goes by type of policy
1. notifies the policyowner of the right to examine and surrender the policy if not satisfied for any reason
2. 10 days or longer (30 for senior products) from the date the policy is delivered to the owner and delivery receipt is si

The entire contract clause always consists of the _______

policy and copy of the policy

who is the only person who can request changes in the policy?

the owner has to request to insurance company

who is the only person who can change the contract?

the insurer (insurance company)

consideration provision

must pay something"
money +/- application
premium +/- application
1. equal to the premium + application
2. states that the policyowner promises to pay all premiums due under the policy and that all representations made on the application are true
3. incl

March 5th paid died 33 days later full death benefit

grace period 31 days for premium due date

grace period

1. 31 days from when the premium is due; policy remains in force during this time; any claim in the grace period is payable as face amount less earned premium
2. Ex: Premium is due Jan 15. Any claim between Jan 16 & Feb 15 will be paid. Any claim after Fe

What insurance is the only one that can deduct 1 month premium from death benefit if premium is past due?

term insurance

When is it adjustable? (idk what "it" is)

if you lied about age or gender

policy loan

an advance of part of the cash value
interest is charged and benefits are reduced by the debt

automatic premium loan (APL)

prevents unintentional lapse of a cash value policy by taking premium from cal value to pay the premium automatically on the last day of the grace period
a nonforfeiture option
trigger a sm. loan on the last day of the grace period to pay premium

nonforfeiture options

owner decides (owner can request/choose nonforfeiture)
ways to obtain cash value when a cash value policy lapses
1. cash surrender--surrendering the policy; company has 6 months to write check
2. reduced paid-up policy--cash value of the reduced policy co

incontestable clause

life insurance policies are contestable during the first 2 yeras
the insurer can rescind a policy for a material misrepresentation
if policy is rescinded, the company will refund all submitted premiums

1 year extended term policy is__________

stand alone policy
all riders go away

If policyowner does not choose, what happens?

default option is chosen by the insurance company

suicide clause (specified period of time)

first 2 years, return of premium;
after 2 years, death benefit is payable
doesn't matter who paid premiums

life insurance policy exclusions

1. war exclusions
-states if insured dies as direct result of war, death benefit will not be paid
2. aviation exclusion
-if insured is pilot or member of aircrew, death ben will not be paid if die in aviation accident
both of these are seldom included

misstatement of age or sex

does not void the policy; results in an adjustment of benefit at the time of a claim

18 months insured commits suicide, what is paid?

return of premiums

passenger on commercial airline goes down

death benefit paid out
regular word fare paying passenger --?

paying 15 cents per $1000 of co. should be paying 18 cents per $1000 of co

adj would be 15/18


the right of the policyowner up to 3 years (or 36 months) from the lapse of the policy. The insured must satisfy the following requirements:
-proof of insurability required
-past due premiums must be paid (caught up)
-interest must be paid on past due pre

For reinstatement do you have to pay back dividends?


beneficiary provision

1. primary beneficiary
2. contingent/secondary beneficiary
3. contingent/tertiary beneficiary
(any beneficiary other than primary is "contingent")
4. estate--the owner can choose the estate of the insured also, when there is no beneficiary or no living be

spendthrift clause

a clause in most life insurance policies that prevents creditors of a beneficiary from claiming any of the benefits paid to beneficiary before the money is actually received
protects beneficiary from creditors

common disaster clause

simultaneous death act (120 hours/5 days ciary are killed in the same accident)
designed to protect the contingent beneficiaries
-beneficiary has to live 120 hours to collect

joint beneficiary per capita

pays each named person

joint beneficiary per stirpes

pays to the primary beneficiary's branch of the family before moving down the line to the contingent beneficiary

policyowner's rights

incidence of ownership
1. change the beneficiary
2. select a settlement option
3. request a policy loan
4. select a dividend option
5. assign the policy; absolute assignment will allow the policyowner to transfer the policy out of the owner's estate
6. el

Paying premium or being insured are NOT incidents of ownership


settlement options

1. lump sum--one cash payment
2. proceeds held at interest--could pay interest to the beneficiary with the principal payable to the payee or some other entity later
3. installment options
-fixed amount installment--receives benefit in fixed dollar amounts

life income

income is payable during the entire lifetime of the beneficiary. Payments stop at time of death--no rights of survivorship; nothing to heirs; all factors being equal, this will produce the highest income

if owner has not selected a settlement option, who chooses?


100,000 settlement option elect payout over 10 yr period every yr you get a payment of 13500, how much is taxable and how much is tax free?

3500 is taxable
10000 is tax free

life income (with a period certain)

guarantees payment for life with a minimum period of time, generally 10 or 20 years; if beneficiary dies before the period ends, then someone will receive payments for the remaining period of time

refund life income

guarantees payment for life with a promise to pay someone at least the original amount until fully refunded

joint and survivor life income

two people jointly receive income; when the first person dies, the survivor receives income for life at a full or reduced amount


transfer of benefits
1. collateral (to guarantee loan) using cash value of a cash value policy to secure a loan
2. absolute (complete, irrevocable, and total)--transfer all ownership rights from former policy owner to the person named in the assignment

viatical statements

a transaction in which the policy owner sells a life insurance policy to an investor or group of investors. If the insured is terminally ill or requires long-term care, selling the policy provides immediate funds. The investor will continue to pay premium

accelerated death benefit (acceleration of life insurance benefits)

if the insured has a terminal illness (less than 2 yrs to live)
1. terminal illness, catastrophic illness, or confinement in a long-term care facility
2. reduces the amount payable to the beneficiary at the death of the insured
3. amount received before d

life insurance policy riders

additional benefits for additional premium

term riders

protection on the insured or other persons
1. level throughout the term and premium stays the same
2. decreasing or increasing
3. child(ren)
-newborns--covered at 15 days of age
-adopted children--covered as of the date petition for adoption is filed with

guaranteed insurability

guarantees the insured can buy additional insurance without evidence of insurability at standard rates but based on the premium for the attained age

waiver of premium (WP) or Premium Waiver (PW)

1. a disability rider on a life insurance policy--pay premium if person is disabled
2. has a six-month waiting period but is retroactive and refunds premiums for the six-month waiting period
3. the insurer pays the entire premium for the remainder of the

payor benefit

disability and death rider on the adult on a policy insuring a child, commonly called payor provision
parent & child initially proof of insurability

cost-of-living adjustment (COLA)

inflation rider: automatically increases the death benefit; based on the consumer price index (CPI); an increasing amount of term insurance to age 65

return of premium

an increasing amount of term insurance, usually for 20 years; pays death benefit plus returns all premiums paid to death, if death occurs within 20 years
ride to term insurance
death ben = death ben + premium payments

accidental death benefit (AD or ADB)

1. double or triple indemnity may be called multiple indemnity or can be other amounts; pays double or triple the face amount if death occurs as a result of an accident and death occurs within 90 days of the accident
2. exclusions:
-aviation, oth

how many days must death occur to get accidental death benefit?

within 90 days

accidental death and dismemberment (AD&D)

1. pays in addition to the face of the policy
2. maximum benefit is called the principal sum
3. loss of one member pays 50% of the principle sum
4. loss of 2 or more members or life pays 100% of the principal sum
loss of sight in bot

A policyowner names her son and daughter as joint beneficiaries of her $50,000 while life policy. She names her sister as contingent beneficiary. How will the death benefit be paid if the son dies before the insured?
-$50,000 to the daughter
-$25,000 to t

$50,000 to the daughter

An agent is advising a young couple on the type of policy to buy. They want to be sure there will be enough insurance to pay off the mortgage. They do not have much money for premiums. The agent is to recommend a policy that will pay off the balance of $7

$70,000 20-yr decreasing term

A middle-aged couple wants to be sure the surviving spouse will have the funds available to pay off the mortgage on their home if one spouse dies prematurely. Which of the following would be the most practical way to provide the money when the first perso

a joint life policy

All of the following are ways for a policyowner to take money out of a universal life policy and have the immediate use of those funds EXCEPT:
-a policy loan
-a cash surrender
-a partial surrender
-a change to an annuity

a change to an annuity

All of the following are nonforfeiture options EXCEPT
-extended forms
-automatic premium loans
-reduced paid-up
-cash surrender

automatic premium loan

Which of the following is a policy provision intended to keep the policyowner from depending on some oral statement of the agent to provide a benefit not expressed in the policy?
-entire contract
-grace period
-policy loan
-insuring clause

-entire contract

Life income with 20 years certain means
-the person gets paid for life
-the person gets paid for life and someone else gets paid for an additional 20 years after the first person dies
-the person gets paid for life and if they die before receiving payment

the person gets paid for life and if they die before receiving payment, someone else gets paid for the remainder of the 20 years

T had $50,000 life insurance with triple indemnity. He suffered a fatal heart attack and died while driving. He crashed into a highway sign. The insurer will pay


A universal life policy normally allows all of these choices or features EXCEPT
-policy loans
-a fixed rate of interest that will be paid on the cash value
-settlement options
-the right to get partial withdrawal of some of the cash value

a fixed rate of interest that will be paid on the cash value

A prospective client has asked an agent to recommend a policy that provides a set amount of life insurance and will accumulate some cash value. She has emphasized that she is interested in the lowest possible premium in a policy that will be available for

whole life

Term insurance provides
-cash values
-the ability to take a loan against a policy
-pure insurance protection
-life-long protection

pure insurance protection

D wants an insurance policy designed to cover the mortgage on his house if he should die before paying it off. The most suitable policy is
-convertible term
-renewable term
-increasing term
-decreasing term

decreasing term

C owns a one-year term policy. At the end of the year, she may purchase another, identical policy without showing proof of insurability; however, her premium may increase. C's policy is
-convertible term
-renewable term
-increasing term
-decreasing term

renewable term

C agrees to pay premium on his policy every year for 20 years. After that he will no longer have to pay premiums but his insurance protection will continue for the remainder of his life. C has a
-whole life policy
-limited pay policy
-single premium polic

limited pay policy

B has a policy that pays dividends, which are used to purchase additional insurance to increase the face value and cash value of the policy. B has probably purchased the policy from a
-stock insurer
-Lloyd's insurer
-mutual insurer
-reciprocal insurer

mutual insurer

J, a 20-year-old salesperson, enjoyed a windfall commission this year and purchased an insurance policy with one premium payment. The producer advised her that the policy is classified as a modified endowment contract. J has
-an increasing term policy

a single premium universal life policy, option A

D tells his friend that he purchased an insurance policy that will cover him until he is 100 years old or until he dies, whichever comes first. However he must pay the premium every month, and his monthly premium will never go up or down. D has a
-whole l

whole life policy

M has a life insurance policy that does not build any cash value but will allow her to switch to a whole life policy during the first 10 years without proof of insurability. What type of policy does M have?
-level term insurance
-renewable term insurance

convertible term insurance

Which of the following is an advantage of term insurance?
-low initial cost
-increasing death benefit
-lower cost over time
-increasing cost over time

low initial cost

Which of the following is NOT an advantage of whole life policies?
-low initial cost
-protection for the whole of life
-guaranteed cash values
-nonforfeiture options

low initial cost

Peter and Paul are twins who work as teachers at the same school. They live next door to each other. They both purchase a $150,000 whole life policy at the same time. Peter chooses continuous premium whole life, while Paul chooses a 20-pay whole life poli

paul is paying more

S purchases a life insurance policy that offers a low premium for the first 2 years. After 2 years, the premium will be adjusted to reflect the insurance company's experience with regard to mortality, investment return, and expenses. The premium can go up

-an indeterminate premium life insurance policy

S purchases a $100,000 life insurance policy. Over time, S hopes to receive dividends and apply these dividends to reduce her future premium costs. S has probably purchased her policy from a
-stock insurer
-mutual insurer
-Lloyd's insurer
-term insurer

mutual insurer

Fred has a general lines life and health insurance license, but no other training or licenses. Fred can sell any of the following EXCEPT
-adjustable life insurance policy
-universal life insurance policy
-indeterminate premium life insurance policy

variable universal life insurance policy

D and J want to buy a single single policy that will provide a death benefit upon the death of either of them. They want to be able to provide funds for their 12-year-old daughter's education. The type of policy that will be most suitable for this need is

joint life policy

B wants to purchase a policy that will cover his grandson until the grandson reaches the age of 21, to help his grandson start out on the right foot in terms of insurance. The type of policy that might be the most suitable is a
-juvenile policy
-minimum d


Which type of rider is actually increasing amount of term insurance that always equals the total premiums paid during the time the rider is in effect?
-guaranteed insurability
-return of premium
-accidental death
-waiver of premium

return of premium

for which of the following may triple payment of the death benefit be made?
-guaranteed insurability
-return of premium
-accidental death
-waiver of premium

accidental death

which of the following is a guarantee that at specified ages, dates, or events, the insurer may buy additional insurance without a medical exam?
-guaranteed insurability
-return of premium
-accidental death
-waiver of premium

guaranteed insurability

Which of the following riders will require proof of insurability of the policyowner, as well as the insured?
-payor rider
-guaranteed insurability rider
-waiver of premium rider
-return of premium rider

payor rider

which clause contains the basic promise of the life insurance company to pay a specified sum of money to a beneficiary upon the death of the insured?
-consideration clause
-insuring clause
-execution clause
-payment clause

insuring clause

how long is the typical grace period in Texas?

31 days

which of the following is NOT a condition of policy reinstatement?
-the policyowner must pay all back dividends plus interest on the amount
-the insured must show proof of insurability
-the policy must have lapsed for less than 3 years
-the owner must pay

the policyowner must pay all back dividends plus interest on the amount

Which of the following statements about an automatic premium loan provision is TRUE?
-it applies only to term policies
-it is automatically included in all life insurance
-it is designed to keep the policy in force when it would otherwise lapse because of

it is designed to keep the policy in force when it would otherwise lapse because of nonpayment of premium

the incontestable clause is usually in effect after
-1 year
-2 years
-3 years
-4 years

2 years

T wants to purchase a policy on his life plus some temporary insurance on his family. A suitable solution for T would be
-a family plan policy with whole life on T plus term rider covering the family members
-an adjustable life policy
-a universal life po

a family plan policy with whole life on T plus term rider covering the family members

A and K are in a fatal car crash that kills them both. A is the primary beneficiary of a policy on K's life. What will probably happen to the policy proceeds?
-the proceeds are retained by the insurance company
-the proceeds are paid to A's estate
-the pr

the proceeds are paid to any contingent.....

A leaves her $300,000 estate to her 3 children as primary beneficiaries to split equally according to a per capita distribution. Her sister S is the contingent beneficiary. One of the children dies before A does. Upon A's death, which of the following is

the proceeds are split 2 ways, between the remaining children only

Walter is the beneficiary of this mother's life insurance policy. He wants to make sure the proceeds will last not only as long as he lives, but also as long as his wife is alive. Walter should select the
-straight life settlement (income) option

joint and survivor settlement (income) option

fixed amount

payments until account is drained


a contract between an owner and an insurer for the liquidation of a principal sum and interest/gain earned on that sum
prior to 1974, no such thing


the person who has all rights to an annuity and can change a beneficiary select a settlement option and select or change the annuitant


the person on whom the contract is based and who will receive the income; the annuitant can be the owner or someone else

3 parties in annuities

1. owner
2. annuitant
3. beneficiary

What happens if you take money out of an annuity before you are 59 1/2?

10% penalty

annuity premiums

-single premiums
-flexible premiums
-level (fixed) premiums

single premium (annuity)

one-time premium: minimum is normally $5,000

flexible premium (annuity)

different premium amounts permitted each time the owner makes a payment; minimum payment can be as low as $50

Level (fixed) premium (annuity)

same premium each month

accumulation (annuities)

PAY-IN period
the period when premiums and interest/gain build in the annuity
putting money in

annuity period

PAY-OUT period
aka annuitization;
when the payments come out and are received by the annuitant; the day the annuity period begins, the accumulation period ends
-no more money goes in when money comes out

single premium immediate annuity (SPIA)

this type of annuity could be attractive to a lottery winner or someone receiving proceeds from insurance settlement. The standard payout mode is monthly, quarterly, semiannually or annually. Therefore, the first payment will be received following the per

single premium deferred annuity (SPDA)

payments are deferred longer than 12 months from contract date
don't want the account

flexible premium deferred annuity (FPDA)

payments are deferred longer than 12 months from the contract date. During the accumulation period, varied amounts can be paid at varying times (i.e. $50 minimum payment)

structured settlement

receive/payments over time monthly check/single premium immediate annuity


withheld over a certain period postponed (a deferred payment)

cash value

1. grows tax deferred
2. death benefit

what happens if the annuitant dies before annuitization?

the company will pay back premiums or cash value, whichever is greater.
NOTE: annuities have death benefits but there is no life insurance component

death benefit of annuities

the beneficiary received the same tax treatment as the annuitant. Proceeds are subject to the exclusionary ratio. There is no stepped-up basis

stepped-up basis

the heirs' basis in assets is the value as of the date of death or alternate valuation date, rather than the basis the deceased had in the property

annuity payout options

1. lump sum
2. fixed
3. annuity options
4. exclusion ratio
5. early withdrawal

lump sum payout

one cash payment

fixed payout

payments for a fixed period of time or fixed amount

life annuity options

-life annuity
-life annuity with period certain
-refund life annuity
-joint and survivor life annuity

life annuity

guarantees income for life and payment to stop at death; nothing to heirs (highest income)

life annuity with period certain

(10 or 20 years)
first payee is guaranteed income for life; if the annuitant dies before the period (10 or 20 years), someone receives payment for that certain period of time

refund life annuity

(cash or installment)
first payee is guaranteed income for life and someone receives payment until original amount is refunded
guarantees payback

joint and survivor life annuity

(full or reduced)
two people jointly receive payments; when first person dies, survivor receives full or reduced payments for life
23 years to get more ben
full: 1200/1200
reduced: 1500/1200

exclusion ratio

the percentage of the payment that is excluded from taxation, only the gain is taxed (considered a return of premiums, which is paid with "after-tax" dollars in a standard annuity)

early withdrawal

owner takes money out too early
a). surrender charges
b). tax on the gain
c). 10% penalty on the gain if withdrawal is prior to age 59 1/2
d). exceptions: death, disability, and annuititzation

mutual funds

eligible for a step up in cost basis--no tax on gains

what part of annuities do you pay tax on?

gains only

annuity product designs

1. fixed annuity
2. variable annuity
3. equity-indexed annuity

fixed annuity (general accounts)

a). interest sensitive--can go up or down but will never go below minimum
b). guaranteed or market rate of interest, whichever is higher
c). all guaranteed products are placed in the company's general account
general asset

variable annuity (separate account)

a). sold in units
b). under supervision of TDI, SEC, FINRA
c). owner assumes investment risk; selects sub accounts usually invested in mutual funds
separate accounts
d). agent is required to give the buyer a prospectus
e). agent must have life insurance a

equity-indexed annuity

these are considered FIXED annuities because they offer a guaranteed minimum rate of return and a guarantee against loss of principal.
The money is based on a stock index (S&P 500 is the most popular); if the index goes up, the annuity goes down or the in

annuity nonforfeiture options

similar to life insurance in that the owner can do the following:
-surrender the contract and receive the cash value less any surrender charges
-reduce the ultimate benefit by discontinuing contributions; the insurer will continue to pay interest

who has the ultimate authority over variable products?


uses of annuities

-lump sum settlements
-employer-sponsored qualified or nonqualified retirement plans
-individual uses

individual uses of annuities

1. individual retirement annuities
2. tax-deferred growth
3. retirement income--primary purpose
4. education funds

corporate-owned annuities

a). interest earned (or any increased in cash value) in any contracts issued or to which contributions were made after February 28, 1986, will be taxable in the year paid or credited

corporate-owned annuities rule does not apply to contracts that are:

-immediate annuities held in qualified pension plans (i.e. 403(b) or IRA)
-purchased to pay out benefits to an employee in a qualified plan; or
-purchased as qualified funding assets to pay damages awarded in personal injury lawsuits

If the corporation puts money into an annuity (in their name)...

do not get tax deferred growth
still have to pay tax on annuity
but protects against law suits

what guarantees the annuitant will continue to receive a monthly check when they far outlast their life expectancy?

insurers general assets

the annuitant is the the annuity as the insured is to the life

life insurance

mortality is based on ____________

the annuitant

variable annuity death benefit guaranteed


death benefit with annuity

do not have to be insurable to purchase variable annuity

During the accumulation period, an annuity will increase in value from the payment of
-a single premium
-interest earnings
-premium payments and interest

premium payments and interest

annuities are generally bought to
-provide a death benefit
-accumulate funds for a down payment on a first-time home purchase
-supplement retirement benefits
-provide a cash fund for sudden emergencies, such as replacing a car that wears out

supplement retirement benefits

a single premium immediate annuity is a contract between an insurer and a contract owner that is
-paid for a period of years, with the payback starting at age 65
-bought with a single premium, with the annuitization starting before age 70 1/2
-bought with

bought with a single premium, with the payback starting in the next payment period

The annuity period is the span of years during which
-an insurer will make annuities available for sale, normally limited to ages 45 through 75
-the period of time during which premiums can be paid into an annuity
-a period certain, a set period of time i

-the time payments are made to the annuitant by the insurer

D and J are receiving annuity payments of $1200 per month. D dies. J continues to receive $1200 per month for life. The payments stop when J dies. Which payment option had they selected?
-life annuity
-period certain
-joint and full survivor
-life and a 2

joint and full survivor

An annuity contract owner who withdraws some of the cash value soon after purchase of an annuity could expect to incur
-some surrender charges, taxes on the gain in the amount withdrawn, and a 10% tax penalty if he is under age 59 1/2
-federal income tax

some surrender charges, taxes on the gain in the amount withdrawn, and a 10% tax penalty if he is under age 59 1/2

An annuity contract gives which of the following the right to select the settlement option?


When an annuity owner elects to receive benefits under a life annuity with 20 years certain payout option, which of the following guarantees are made by the insurer?
-the annuitant will get an income for life and a refund of the total value in the contrac

the annuitant will get an income for life, and someone will be paid for at least 20 years

M has an annuity for which she is the annuitant. On the basis of this information, which of the following is TRUE?
-M is the person who is paying into the annuity
-Annuity payments will be based, in part, on M's life expectancy
-M is the owner of the annu

annuity payments will be based, in part, on M's life expectancy

F is paying money into an annuity he hopes will support his retirement. What period is his contract currently in?
-the accumulation period
-the nonforfeiture period
-the payout period
-the annuity period

the accumulation period

L purchased an immediate annuity. What about the annuity contract is TRUE?
-It is a fixed annuity
-it is a variable annuity
-it is a deferred annuity
-it is a single premium annuity

it is a single premium annuity

which of the following types of annuities are regulated as securities?
-fixed annuities
-flexible premium annuities
-variable annuities
-structured annuities

variable annuities

which of the following is NOT used to determine annuity premiums?
-annuitant's retirement date
-assumed interest rate
-income amount and payment guarantee
-annuitant's gender

annuitant's retirement date

what is true about variable annuities that is NOT true about fixed annuities?
-variable annuities can be paid for with a single premium
-variable annuities can provide a life-long income
-variable annuities may be paid for with a level or flexible premium

variable annuities growth may vary according to investment performance

M has an annuity that offers a guaranteed interest rate, and guarantees loss of principal if held to term. Additionally, if a stock index experiences some upward movement, M may get credited in an amount above the interest guarantee. M most likely has wha

equity index annuity

an annuity might be called the flip side of
-life insurance
-retirement planning
-social security

life insurance

A has purchased an annuity that will pay him a monthly income for the rest of his life. If A dies before the annuity has paid back as much as he has put into it, the insurance company has agreed to pay the difference to A's daughter. A has purchased a

refund life annuity

an annuity that guarantees a minimum rate of return is
-an immediate annuity
-a deferred annuity
-a variable annuity
-a fixed annuity

a fixed annuity

annuities are a mechanism for transferring to an insurance company the risk of
-poor investment returns
-becoming uninsurable
-outliving financial resources
-outliving a spouse or child

outliving financial resources

The term used to describe the individual who is covered by the insurance is


which of the following is a risk?
-a car may need to have new brakes installed
-an individual may need medical attention

individual need medical attention

The application of the law of large numbers enables actuaries to
-estimate the future losses of a class or group of people
-predict the future losses of specific individuals

estimate the future losses of a class or group of people

the estimation of future losses is more accurate when information is from a

large group

which type of policy is designed to protect against the risk of living too long?


which of the following is a type of insurance company owned by its shareholders?


The ZYX Insurance Company is incorporated in Alabama. While doing business in Texas, it is a(n)

foreign insurer

The ZYX Insurance Company is incorporated in Mexico. While doing business in Texas it is a(n)

alien insurer

self-insurance is an example of which method of handling risk?


which of the following terms is used to denote insurance companies?


a social device for spreading the change of financial loss among a large number of people is the definition of


which of the following risks is most likely to insurable?
-G is concerned about the financial impact his premature death would have on his family
-T is concerned about the financial impact large betting losses at the horse track
-J is concerned about the

G is concerned about financial impact his premature death would have on his family

R refuses to travel by airplane. R is managing the risk of being in a plane crash by

avoiding the risk

C becomes injured in a car accident caused when she took her eyes off the road to answer her cell phone. This is an example of
-physical hazard
-moral hazard
-morale hazard
-legal hazard

morale hazard

Mathematicians who study and compile statistical data regarding exposure and risks for insurance companies are called


which of the following is NOT an example of insurable interest?
-J wishes to take out a life insurance policy on his own life to provide for his family in the event of his death
-A wishes to take out a life insurance policy on her mother to ensure that fu

J wishes to take out life insurance policy on his neighbor bc his neighbor is careless driver

K is injured in a house fire. When the bills come, the insurance company pays 80% of the cost, and K pays the rest. This is an example of
-a deductible
-extraneous insurance
-policy limits


Hoosier Insurance Company is owned by the policyholders. Hoosier Insurance Company is a
-stock insurer
-mutual insurer
-nonprofit insurer
-fraternal insurer

mutual insurer

Which of the following people represents several insurance companies but owns the policy expirations?
-independent agent
-exclusive agent
-direct writing agent
-general agent

independent agents

which of the following can bind an insurance company by oral or written agreement?
-property and casualty producer
-life producer

property and casualty producer

Which of these cases first defined insurance as interstate commerce?
-South-Eastern Underwriters decision
-McCarran-Fergusen Act
-Paul v. Virginia

South-Eastern Underwriters decision

Pretext interviews are
-alway illegal
-not permitted without a warrant sworn by a sitting judge
-generally accepted practice in the industry
-not permitted unless some evidence of criminal activity exists

not permitted unless some evidence of criminal activity exists

a customer is
-anyone about whom a company collects information
-anyone with whom a company has an ongoing relationship
-anyone who prohibits the sharing of nonpublic personal information
-anyone who permits the sharing of nonpublic personal information

anyone with whom a company has an ongoing relationship

the federal government
-is the primary authority for regulating the business of insurance
-does not get involved in regulating the business of insurance
-has the right to regulate the business of insurance to the extent that such business is not regulated

has the right to regulate the business of insurance to the extent that such business is not regulated by state law

insurance laws generally are written by
-the federal government
-the state legislature
-the state Department of Insurance
-the Commissioner

the state legislature

The head of the state Department of Insurance (usually called the Commissioner) is responsible for all of the following EXCEPT
-examining individual insurance policies before issuance
-administering and enforcing state insurance laws
-imposing penalties f

administering and enforcing state insurance laws

The nonfinancial regulatory activities of an insurance department fall under the broad heading of
-company conduct
-regulatory conduct
-market conduct
-producer conduct

market conduct

to become licensed as an insurance producer, an individual must be at least age


Which of the following individuals would NOT be exempt from a producer licensing requirement?
-A works in an insurance office conferring directly with or offering advice to prospective purchasers about the benefits, terms, and conditions of insurance poli


An insurance producer who permits her license to lapse may reinstate the license within
-3 months from the due date of the renewal
-6 months from the due date of the renewal
-9 months from the due date of the renewal
-12 months from the due date of the re

12 months

producers may act as
-agents represents the insurance company
-brokers representing the individual seeking insurance
-either agents representing the insurance company or brokers representing the individual seeking insurance
-neither agents representing th

either agents representing the insurance company or brokers representing the individual seeking insurance

most insurance regulation takes place at the
-international level
-national level
-state level
-local level

state level

applicants for insurance must be given advance notice including all of the following types of information EXCEPT
-the persons who are collecting info
-the kind of info to be collected
-the sources of info
-the persons with access to personal info

the persons who are collecting info

which of the following acts does NOT contain provisions protecting individual privacy?
-Gramm-Leach-Bliley Act
-Privacy Act of 1974
-McCarran-Ferguson Act
-Fair Credit Reporting Act

McCarran-Ferguson Act

consumer reporting agencies are prevented from putting info in their reports about all of the following EXCEPT
-bankruptcies less than 10 years old
-suits and judgments less than 7 years old if the statute of limitations has not expired
-arrests, indictme

arrests, indictments, or conviction of crime reports

Under the Financial Modernization Act, an individual about whom a financial institution collects information is a


Under the Financial Modernization Act, an individual with whom a financial institution has an ongoing relationship is a


The Commissioner of Insurance has all of the following powers EXCEPT
-conducting investigations and examinations
-making reasonable rules and regulations
-promulgating insurance law
-approving insurance policy forms sold within the state

promulgating Insurance law

Nonfinancial regulatory activities of an insurance department fall under the broad heading of
-market regulation
-conduct regulation
-market conduct
-insurance conduct

market conduct

Death benefits are ____________ from federal income tax.

they are tax free

Are premiums tax deductible? (individual life insurance)

not even for business uses

Tax treatment of individual life insurance policies

1. death benefits are exempt from federal income tax (tax free)
2. premiums are not tax deductible (even for business uses)
3. cash value increases are tax deferred, not tax free
4. Any profit from a cash surrender is taxable as ordinary income
5. policy

estate taxes

1. The spousal exemption is limited
2. year of death 2006 and 2007: personal exemption = $2
3. incidents of ownership of a life insurance policy; exceptions are either being the insured or paying the premium

taxation of annuities

1. increase in value is tax deferred (annuities grow)
2. exclusion ratio--the percentage of payment that is excluded from taxation
(excluded from taxation)
(return of premium (principal))

all transfers can be done & money can continue to grow tax deferred using section 1035 except

taxable annuity to nontaxable life insurance,
life to life--ok
annuity to annuity--ok
not table life to taxable annuity ok

section 1035 exchanges

1. allows the tax-deferred transfer of cash values in life policies and annuities
2. transfer options
-annuity to annuity
-life policy to life policy
-life policy to annuity
-CANNOT transfer from annuity to life policy

section 1035 transfer options

annuity to annuity
life policy to life policy
life policy to annuity
CANNOT transfer from annuity to life policy


Modified Endowment Contract
-a cash value life insurance policy that fails the 7-pay test because too much premium is paid during the first seven years
-Tax law changes in 1988 limited premiums to only the amounts that would fully pay a life policy in sev

Once an MEC,___________________

always an MEC

Distribution from an MEC

Last in, First out (LIFO)
-profits come out first. profits are subject to income tax.

MEC Distribution before age 59 1/2 is subject to ___________________

tax on the profit, plus a 10% early withdrawal tax penalty

Note on distributions from MEC

1. a policy loan is a distribution and taxable to the extent of the profit
2. a dividend distribution is taxable
3. a partial withdrawal (partial surrender) is taxable
4. there is a significant exception; death claims from life insurance policies, even fr

partial surrender what do I pay taxes on?

interest and/or gain

how does life insurance policy become a MEC

fails the 7 pay test by over funding it
or by reducing the face amount
don't even want to do a MEC by accident

if partial surrender premium is -18,000 no taxes reduce death ben:

100,000-18,000 = 82,000

tax treatment of employer-paid premiums for group insurance to employer

premiums are paid by the employer for employee group insurance; premiums are a deductible expense to the employer

tax treatment of employer-paid premiums for group insurance to employee

-medical expense policies--dental plans, AD&D, and health plans; no tax on benefits, no tax on premiums
-disability income--claim dollars received are taxable to the extent the employer paid the premium
EX: employer pays 50% of premium; therefore, 50% of

tax treatment of employer-paid premiums for group insurance to sole proprietors and partners

-premiums paid are taxable income to the proprietor or partner
-premiums paid can be excluded from income up to the amount of profit of the business

only type of insurance premiums that are tax deductible are _________________

group policies