LATEST INDIANA LIFE & HEALTH INSURANCE REVISION QUESTIONS

INDIANA LIFE & HEALTH INSURANCE Participating Insurance Policy - RIGHT ANSWER -may pay dividends to the policyowner Material Misrepresentation - RIGHT ANSWER -misstatement to a question asked in the application process; death benefit claim will likely be denied Law of Large Numbers - RIGHT ANSWER -the larger a group becomes, the easier it is to predict losses; used to predict certain types of losses and set appropriate premiums Substandard Risk - RIGHT ANSWER -results in higher premium Standard Risk - RIGHT ANSWER -results in standard premium Preferred Risk - RIGHT ANSWER -results in lower premium Expense Loading - RIGHT ANSWER -combined with premiums to spread the operating costs of a business to all insureds Net Premium - RIGHT ANSWER -premiums without expense loading Concealment - RIGHT ANSWER -occurs when a person withholds a material fact that is crucial to making a decision; in insurance, this involves withholding information that would be crucial to underwriting decisions Warranty - RIGHT ANSWER -a statement guaranteed to be true Representation - RIGHT ANSWER -a statement true to the best of an applicant's knowledge 3 Basic Types of Term Life Insurance - RIGHT ANSWER -level, increasing, and decreasing Level Term - RIGHT ANSWER -death benefit doesn't change throughout the life of the policy Annually Renewable Term (ART) - RIGHT ANSWER -premium increases annually according to attained age; policy may be guaranteed to be renewable each without proof of insurability Re-entry Option - RIGHT ANSWER -the insured, upon the end of a term policy with guaranteed renewable option, may qualify for a discounted premium rate with proof of insurability Decreasing Term - RIGHT ANSWER -death benefit decreases each year over duration of the policy term; typically used when the amount of needed protection is time sensitive, or decreases over time Increasing Term - RIGHT ANSWER -death benefit increases each year over duration of the policy term (usually by specific amount or percentage of original amount); often used by insurance companies to fund certain riders that provide a refund of premiums of a gradual increase in total coverage, such as the cost of living or return of premium riders Convertible Term - RIGHT ANSWER -provides the policy owner with the right to convert the policy to a permanent insurance policy without evidence of insurability; premium will be based on the insured's attained age at the time of conversion Continuous Premium (Straight Life or Ordinary Life) - RIGHT ANSWER -basic whole life policy; will typically have the lowest annual premium Limited Payment - RIGHT ANSWER -premiums for coverage paid-up before age 100; higher premium and cash value builds up faster; 20-pay life, life paid-up at 65 (LP-65); Single Premium Whole Life (SPWL) - RIGHT ANSWER -provides level death benefit to the insured's age 100 for a one-time, lump-sum payment; policy completely paid-up after one premium and generates immediate cash Modified Life - RIGHT ANSWER -lower premium in first few policy years (3 to 5 years) and higher level premium for remainder of insured's life Graded-premium Whole Life - RIGHT ANSWER -premiums start low, gradually increase each year (for about 5 to 10 years), and remain level thereafter Interest Sensitive Whole Life (Current Assumption Life) - RIGHT ANSWER -provides same benefits as traditional whole life policies with added benefit of current interest rates which may allow for either greater cash value accumulation or a shorter premium-paying period Equity-Indexed Whole Life - RIGHT ANSWER -cash value is dependent upon the performance of the equity index (S&P 500) although there is a guaranteed minimum interest rate; policy's face amount increases annually to keep pace with inflation Adjustable LIfe - RIGHT ANSWER -insured determines how much coverage is needed and the affordable amount of premium; as insured's needs change, policy owner may make adjustments such as increase or decrease the premium or the premium paying period, increase or decrease the face amount (requires proof of insurability for increasing the death benefit or changing to a lower premium type policy), or change the period of protection; policy owner also has option of converting from term to whole life or vice versa Universal Life (flexible premium adjustable life) - RIGHT ANSWER -policy owner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again; interests sensitive policy with a guaranteed contract interest rate (usually 3 to 6%) and opportunity to get the current interest rate; two components: insurance (always annually renewable term insurance) and cash account; option A (level death benefit) and option B (increasing death benefit) Fixed Life Insurance and Annuities - RIGHT ANSWER -contracts that offer guaranteed minimum of fixed benefits that are stated in the contract Variable Life Insurance and Annuities - RIGHT ANSWER -cash values accumulate based upon a specific portfolio of stocks without guarantees of performance; keep pace with inflation, and are determined by the value of securities backing it Variable Whole Life Insurance - RIGHT ANSWER -level, fixed premium, investment-based product; guaranteed minimum death benefit; cash value is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer; policy owner bears investment risk in variable contracts Variable Universal Life Insurance - RIGHT ANSWER -securities version of universal life insurance Joint LIfe - RIGHT ANSWER -insures two or more lives; term or permanent; premium based on a joint average age and the death benefit is paid upon the first death only Buy-Sell Agreement - RIGHT ANSWER -business continuation agreement that determines what will be done with the business in the event that an owner dies or becomes disabled Survivorship Life - RIGHT ANSWER -premium based on joint age; pays on the last death; lower premium than joint life; used to offset the liability of the estate tax upon the death of the last insured Juvenile Life - RIGHT ANSWER -any life insurance written on the life of a minor; "jumping juvenile" is a common type where the face amount increases at a predetermined age, often age 21; premium remains level throughout Family Protection Policy - RIGHT ANSWER -combines whole life with term insurance to cover family members in a single policy; whole life on breadwinner (permanent life insurance) and convertible term insurance (term riders) on the other family members Credit Life - RIGHT ANSWER -written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor; usually decreasing term insurance; individual policy or group plan (if group policy, creditor is owner of the master policy and each debtor receives a certificate of insurance); creditor is owner and beneficiary of the policy and premiums usually paid by debtor; cannot pay out more than the balance of the debt Cost Recovery Rule - RIGHT ANSWER -the amount of cash value that exceeds the sum of the total premiums will be taxed as ordinary income when cash withdrawn or policy surrendered for cash value Policy Loan - RIGHT ANSWER -loan from cash value of life insurance policy; not income taxable to the policy owner; individual cannot receive a deduction for interest paid on life insurance policy loan Estate Taxation - RIGHT ANSWER -death benefit of life insurance policy may be included in the insured's taxable estate at death and can be subject to the federal estate tax Settlement Options - RIGHT ANSWER -interest portion of the payments received is taxable as income; immediate annuity is purchased with the face amount at death or with the cash value at surrender 7-Pay Test - RIGHT ANSWER -cumulative premiums paid during the first 7 years of the policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest; new test required any time there is a material change to a policy (increase in death benefit); essentially, determines if policy is "overfunded" or if it's a MEC Modified Endowment Contract (MEC) - RIGHT ANSWER -any life insurance policy that fails a 7-pay test; loses the standard tax benefits of a lifer insurance contract; death benefit received by the beneficiary is tax free; cash value: tax-deferred accumulations; any distributions are taxable, including withdrawals and policy loans; distributions are taxed are taxed on LIFO basis - known as "interest-first" rule; distributions before age 59 1/2 are subject to a 10% penalty Owner Privileges of Adjustable Life - RIGHT ANSWER -increase/decrease the premium, change the premium-paying period, increase/decrease the face amount of coverage, change the period of protection Straight Life - RIGHT ANSWER -charge a level annual premium for the lifetime of the insured and provide a level, guaranteed death benefit Dividends (policy) - RIGHT ANSWER -non-taxed returns of unused premiums Family Income Policy - RIGHT ANSWER -principle wage earner is the only family member insured Annuity - RIGHT ANSWER -contract that provides income for a specified period of years, or for life; protects person against outliving his or her money; vehicle for accumulation of money and the liquidation of an estate; deferred grows tax free Accumulation Period - RIGHT ANSWER -the pay-in period; the period of time over which the owner makes payments (premiums) into an annuity; period during which payments earn interest on a tax-deferred basis Annuity Period - RIGHT ANSWER -known as annuitization period, liquidation period, or pay-out period; time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant; may last for the lifetime of the annuitant or for a specified period, which could be longer or shorter Single Premium Immediate Annuity (SPIAs) - RIGHT ANSWER -purchased with a single lump sum payment and provides income payments that start within 1 year from the date of purchase (typically makes first payment as early as 1 month from purchase) Annuity Income Amount Based On - RIGHT ANSWER -amount of premium paid or cash value accumulated; frequency of payment; interest rate; annuitant's age and gender Deferred Annuity - RIGHT ANSWER -purchased with single lump sum (single premium-deferred annuities) or is purchased thought periodic payments (flexible premium-deferred annuities); grow tax free; income payments begin sometime after one year from purchase; used to accumulate funds for retirement; owner receives current interest rate or guaranteed interest rate, whichever is higher; if surrendered prior to age 59 1/2, income tax must be paid on gain, and 10% penalty will be imposed on the taxable portion Single Premium Deferred Annuities (SPDAs) - RIGHT ANSWER -annuity is purchased with single payment, but benefit isn't paid until after one year or more has elapsed Flexible Premium Deferred Annuity (FPDAs) - RIGHT ANSWER -annuity is purchased with multiple payments that can vary from year to year (e.g. portion of each paycheck), and the benefit payments begin sometime after one year from the date of purchase (e.g. payouts start at age 65) Surrender Charges - RIGHT ANSWER -purpose is to help compensate the company for loss of the investment value due to an early surrender of a deferred annuity; levied against cash value, and generally a percentage that reduces over time; at surrender, owner gets premium plus interest (the value of the annuity) minus the surrender charge (the value of the annuity at surrender); waiver of surrender charges if annuitant is confined to a Long-term Care facility for at least 30 days Bail-Out Provision (Annuity) - RIGHT ANSWER -allows the contract holder, in the event that interest rates drop a specified amount within a specified time frame, to surrender the contract without charge Pure Life (Annuity) - RIGHT ANSWER -known as life-only or straight life; payment ceases at annuitant's death; provides highest monthly benefits for an individual annuitant; no guarantee that all proceeds will be fully paid out Life with Guaranteed Minimum (Annuity) - RIGHT ANSWER -if annuitant dies before the principal amount has been paid out, remainder of principal amount will be refunded to the beneficiary; also called refund life; guarantees that the entire principle amount will be paid out Life with Period Certain - RIGHT ANSWER -annuity payments are guaranteed for the lifetime of the annuitant and for a specified period time for the beneficiary Installment Refund (Annuity) - RIGHT ANSWER -when annuitant dies, beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out Cash Refund (Annuity) - RIGHT ANSWER -when annuitant dies, the annuitant's beneficiary receives a refund of the principal, or the original amount paid into the annuity minus benefit payments already made to the annuitant; guarantees the return of the amount to purchase the annuity but it does not guarantee to pay any interest; only difference between cash refund and installment refund is that cash refund is a lump-sum payment Fixed-Period Installments - RIGHT ANSWER -annuitant selects the time period for the benefits, and insurer determines how much each payment will be, based on the value of the account and future earnings projections; pays for a specified amount of time only, whether or not the annuitant is living Fixed Amount Installments - RIGHT ANSWER -annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings; pays a specific amount until funds are exhausted, whether or not the annuitant is living Fixed Annuity - RIGHT ANSWER -guaranteed minimum rate of interest to be credited to the purchase payment(s); income (annuity) payments that do not vary from one payment to the next; the insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant Level Benefit Payment Amount - RIGHT ANSWER -amount of each payment received from the annuity during the annuity period General Account - RIGHT ANSWER -comprised mostly of conservative investments like bonds; these investments are secure enough to allow the insurance company to guarantee a specified rate of interest, as well as assure the future income payments that the annuity will provide; fixed annuity premiums are deposited into this Equity Indexed Annuities - RIGHT ANSWER -fixed annuities that invest on a relatively aggressive basis; have guaranteed minimum interest rate; interest rate often tied to familiar index such as the S&P 500; generally, insurance companies reserve the initial returns for themselves but pay the excess to the annuitant Variable Annuity - RIGHT ANSWER -serves as a hedge against inflation; annuitant may receive different rates of return on the funds that are paid into the annuity; 3 main characteristics: underlying investment (separate account), interest rate, and license requirements Suitability - RIGHT ANSWER -how well a recommended product will meet the applicant's needs an resources Exclusion Ratio (Annuity) - RIGHT ANSWER -total investment divided by total amount expected to be paid out over the life of the contract Accumulation Phase - RIGHT ANSWER -period after an annuity has been purchased but before distributions begin Provisions - RIGHT ANSWER -stipulate the rights and obligations of an insurance contract and are fairly universal from one policy to the next Riders - RIGHT ANSWER -modify provisions that already exist; used to increase or decrease policy benefits and premiums Options - RIGHT ANSWER -offer insurers and insureds ways to invest or distribute a sum of money available in a life policy Absolute Assignment - RIGHT ANSWER -transferring all rights of ownership to another person or entity; new policy owner doesn't need to have insurable interest in the insured Collateral Assignment - RIGHT ANSWER -transfer of partial rights to another person; usually done to secure a loan or some other transaction; partial and temporary assignment of some of the policy rights; once debt/loan repaid, assigned rights returned to the policy owner Entire Contract - RIGHT ANSWER -provision that stipulates that the policy and a copy of the application, along with any riders or amendments, constitute the entire contract Insuring Clause (insuring agreement) - RIGHT ANSWER -sets forth the basic agreement between the insurer and the insured; states the insurer's promise to pay the death benefit upon the insured's death; usually located on the policy face page, and also defines who the parties to the contract are, the premium to be paid, how long coverage is in force, and the amount of the death benefit Right to Examine (Free Look) - RIGHT ANSWER -allows policy owner a specified number of days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium; starts when policy owner receives policy Premium Mode - RIGHT ANSWER -manner or frequency that the policy owner pays the policy premium; if other than annual, there will be an additional charge to offset the loss of earnings since the company does not have the entire premium at once, and there are additional administrative costs Application of State Law - RIGHT ANSWER -provision that states that no matter what the home state of the insurance company or the applicant is, the law of the state in which the policy is sold would be considered the law under which the policy will be enforced Common Disaster Clause - RIGHT ANSWER -provided under the Uniform Simultaneous Death Law; assumed that the primary beneficiary died first in a common disasters; most insurers specify a certain period of time, usually 14 to 30 days, in which death must occur for this provision to apply; as long as the beneficiary dies within this specified period of time following the death of the insured, it will still be interpreted that the beneficiary died first Spendthrift Clause - RIGHT ANSWER -protects beneficiaries from the claims of their creditors; designed to protect life insurance policy proceeds that have not yet been paid to a named beneficiary from the claims of the creditors of the beneficiary of policy owner Automatic Premium Loans - RIGHT ANSWER -loan that prevents the unintentional lapse of a policy Payor Benefit Rider - RIGHT ANSWER -if the payor becomes disabled for at least 6 months or dies, insurer will wave the premiums until the minor reaches a certain age, such as 21; primarily used with juvenile policies (written on the life of a minor); also used when the owner and the insured are two different individuals Accidental Death Rider - RIGHT ANSWER -pays some multiple of the face amount if the death is the result of an accident as defined in the policy; death must usually occur within 90 days of such an accident Straight Life - RIGHT ANSWER - - RIGHT ANSWER -