Part 2: Life Insurance Basics, Primerica. Questions with accurate answers. Graded A. 2022/2023

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Part 2: Life Insurance Basics, Primerica. Questions with accurate answers. Graded A. 2022/2023 Insurable Interest - ✔✔To purchase insurance, the policy owner must face the possibility of losi ... ng money or something of value in the event of loss. True or False In life insurance, insurable interest must exist between the policyowner and the insured at the time of application. - ✔✔True True or False Once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists. - ✔✔True A valid insurable interest may exist between the policy owner and the insured when the policy is insuring any of the following: - ✔✔1. Policy owner's own life 2. The life of a family member - a spouse or close blood relative 3. The life of a business partner, key employee, or someone who has a financial obligation to the policy owner -such as debtor to a creditor True or False Insurable interest is not required of beneficiaries. - ✔✔True Since the beneficiary's well-being is dependent upon the insured, and the beneficiary's life is not the one being insured, the beneficiary does not have to show an insurable interest for a policy to be purchased. True or False No life or disability contract upon an individual can be made, unless at the time of application, this individual is of competent legal capacity. - ✔✔True The following cases are exempt from this provision: -a spouse may procure insurance upon the other spouse; and -a person with an insurable interest in a minor, or anyone a minor is dependent upon, may also procure insurance. What is the age a minor must be to contract life and or disability insurance on their own lives, and the lives of their immediate family? - ✔✔At least 15 years old Define Stranger - Originated Life Insurance (STOLI) - ✔✔Arrangement in which a person with no relationship to the insured purchases a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies. They are purchased solely with the intent of selling them for life settlements. Are STOLI's Stranger - Originated Life Insurance Legal? - ✔✔No. They violate the principle of insurable interest. What is insurable interest? - ✔✔This is in place to ensure that a person purchasing a life insurance policy is actually interested in the longevity rather than the death of the insured. Because of this, insurers take an aggressive legal stance against policies they suspect are involved in STOLI transactions. Do lawful settlement contracts constitute STOLI's? - ✔✔No, they do not. Life settlement transactions result from existing life insurance policies; STOLIs are initiated for the purpose of obtaining a policy that would benefit a person who has no insurable interest in life of the insured at the time of policy origination. What are some personal uses of Life Insurance? - ✔✔1. Survivor Protection 2. Estate Creation and Conservation 3. Cash Accumulation 4. Liquidity 5. Viatical Settlements Define Survivor Protection - ✔✔The death of the primary wage-earner will usually stop the flow of income to a family. The death of the non-earning spouse who cares for minor children can also cause great financial hardship for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. What does planning for survivor protection require? - ✔✔It requires careful examination of current assets and liabilities as well as determining what survivor's needs may be. Explain Estate Creation and Conservation - ✔✔A person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and a significant period of time. Explain "an immediate estate" - ✔✔Estate creation is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases life insurance policy, he/she will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost. True or False? Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell off the assets. - ✔✔True How does "Cash Accumulation" play into life insurance? - ✔✔Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed. What is this an example of? Some life policies - those that provide permanent protection, such as whole life - accumulate cash value that is available to the policy owner during the policy term. - ✔✔Cash Accumulation Define "Liquidity" as it relates to insurance - ✔✔As a result of the cash accumulation feature, some life insurance policies provide liquidity to the policyowner. That means the policy's cash values can be borrowed against at any time and used for immediate needs. What are "Viatical Settlements"? - ✔✔They allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed, before their death. Are viatical settlements policy options? - ✔✔No, they are not. They are separate contracts in which the insured sells the death benefit to a third party at discounted rate. There are several important concepts you need to understand about viaticals. What are they? - ✔✔-The insureds are referred to as viators -Viatical settlement provider means a person, other than a viator, that enters into a viatical settlement contract -Viatical producers represent the providers -Viatical producers represent the insureds What does a viator usually receive? - ✔✔They receive a percentage of the policy's face value from the person who purchases the policy. The new owner continues to maintain premium payments and will eventually collect the entire death benefit. What does the term "life settlement" refer to? - ✔✔any financial transaction in which the life insurance policyowner sells a policy that is no longer needed to a third party for some form of compensation, usually cash. While viatical settlements are still used for persons who are terminally ill, most states regulate policies that are sold to a third party for compensation under the term Life Settlements. What are the details of life settlement? - ✔✔The seller or in other words, the policy owner could have a life expectancy of more than one year. Policy owners may choose to sell their policies because they feel they no longer need their coverage, or the premium costs have grown too high to justify continuation of the policy. How is the amount of a person's life insurance determined? - ✔✔Individuals seeking to buy life insurance may need assistance trying to establish how much coverage is appropriate, based on their ability to pay the premium, serve their needs, and protect their survivors. What are the 2 basic approaches insurance companies have developed to help producers and buyers to determine the needed amount of protection: - ✔✔1. Human Life Value Approach 2. Needs Approach Describe the "human life value approach" - ✔✔This approach gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual's life value by looking at the insured's wages, inflation, the number of years to retirement, and the time value of money. Let's assume that a 40 year old insured earns $50,000 a year and is expected to earn the same amount until he retires at age 65. Out of his annual income, ($40,000 a year spent on family needs x 25 years to retirement). Based on this assumption, and taking interest and inflation into consideration, the insurance company will be determine the right amount of insurance to produce the same annual amount of income for the family if insured were to die. - ✔✔The Human Life Value Approach Define the "needs approach" for selecting a life insurance policy value - ✔✔This is based on the predicted needs of a family after the premature death of the insured. Some of the factors considered by the needs approach are income, the amount of debt -including mortgage, investments, and other ongoing expenses. How does one determine lump-sum needs? - ✔✔ Insurance proceeds paid in a lump-sum may be needed for any of the following expenses: - ✔✔Costs Associated with Death (Post Mortem) Debt Cancellation (as an alternative to Estate Liquidation) Emergency Reserve Funds Education Funds Retirement Fund Bequests What are costs associated with Death or in other words - postmortem? - ✔✔One should take into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance when considering the costs associated with Death - postmortem. What is debt cancellation - as an alternative to Estate Liquidation? - ✔✔Debt Cancellation is paying off debts of the insured such as home mortgage, or auto loans. It is important to note that most lenders require a collateral assignment of life insurance as a condition for a loan. What are emergency reserve funds? - ✔✔Paying for children's education expenses so they can remain in school, or for a surviving spouse who my need additional education or training in order to re-enter the job market. What is a retirement fund? - ✔✔A source of retirement income Define "bequests" - ✔✔leaving funds to insured's church, school, or charity Besides taking care of immediate expenses after the death of the insured, the family may need to plan for an income source long term. So consequently, the needs approach to life insurance will factor in the following concerns: - ✔✔1. The replacing insured's salary or lost services 2. The social security income "blackout" period 3. The liquidation vs. retention of capital Explain "replacing insured's salary or lost services" - ✔✔The surviving spouse who was the caregiver of the children may have to train to enter the job market. If the spouse works outside of the home, a new expense for day care must be considered. Explain "social security income 'blackout' period" - ✔✔the time during which the surviving spouse and/or children do not receive any social security survivor benefits. They begin when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. How does the social security black-out period work with children/minors? - ✔✔Unmarried children under the age of 18 or up to 19 if they are attending secondary school full time can also receive benefits. Technically, the social security check will be made payable to the surviving spouse until the youngest child is 16, and directly to the child between the ages of 16 and 18. Describe "liquidation vs. Retention of Capital" - ✔✔Under the retention of capital approach, enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing the insured's principal asset - such as a home. How do businesses use life insurance? - ✔✔They use life insurance for the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured. What is the most common use of life insurance by businesses? - ✔✔It is used as an employee benefit which serves as a protection for employees and their beneficiaries. Describe other forms of life insurance that can serve business owners and their survivors, and even protect the business itself. - ✔✔These include funding business continuation agreements, compensating executives, and protecting the business against financial loss resulting from the death or disability of key employees. Define a "buy-sell" agreement - ✔✔It is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement. List the several types of buy-sell agreements: - ✔✔The buy-sell agreements that can be used for partnerships and corporations include: 1. cross purchase 2. entity purchase 3. stock purchase 4. stock redemption Define cross purchase - ✔✔Used in partnerships when each partner buys a policy on the other Define Entity Purchase - ✔✔Used when the partnership buys the policies on the partners Define Stock Purchase - ✔✔Used by privately owned corporations when each stockholder buys a policy on each of the others Define Stock Redemption - ✔✔Used when the corporation buys one policy on each shareholder [Show More]

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