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Life Insurance Exam 2 Study Guide: Understanding the Basics of Life Insurance - Prof. Eliz, Study notes of Economics

This study guide provides an in-depth exploration of life insurance, including the contract between an insurer and policyholder, the purpose of life insurance, how it works, determining need, cost factors, and types of life insurance. Learn about term life, whole life, universal life, and variable life insurance, as well as annuities and clauses.

Typology: Study notes

Pre 2010

Uploaded on 10/25/2009

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COA 4131
Exam 2 Study Guide
Chapter 10
1. Life Insurance
a. Contract between an insurer and policyholder specifying a sum to be paid to a
beneficiary on the insured’s death
i. 70% of American adults have life insurance
ii. More than 25% of policies go uncollected
b. Face amount: Stated sum of money on a policy
c. Beneficiary: recipient of policy proceeds if insured dies
2. Purpose of Life Insurance
a. Most people buy life insurance to protect those who depend on them from financial loss
b. Cash Value: accumulated savings that provide a refund to the owner of the policy if the
contract is terminated prior to death.
3. How Does Life Insurance Work?
a. Life insurance is based on the pooling of risk
b. Preferred risks: people whom insurance companies prefer to insure
c. The Underwriting Process
i. Underwriting: Insurance company process of evaluating a policy application
ii. Underwriter: Person who conducts a policy application review
d. Lapsed Policies and Grace Period
i. Lapsed policy: termination of a policy because of non-payment
ii. Grace period: time allowed for overdue payment without penalty or the policy
lapsing
4. Life Insurance and Families
a. Determining Need
i. Life insurance should be considered if any of the following situations apply:
1. You have a dependent spouse
2. You have dependent children
3. You have an aging or disabled relative who depends of you for support
4. You own a business
5. Your savings and retirement pensions are not enough to support a
spouse against cost –of-living increases.
6. You want to leave a large amount of money to an organization or a
cause
b. College Students and Life Insurance
i. Don’t really need it
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COA 4131

Exam 2 Study Guide Chapter 10

  1. Life Insurance a. Contract between an insurer and policyholder specifying a sum to be paid to a beneficiary on the insured’s death i. 70% of American adults have life insurance ii. More than 25% of policies go uncollected b. Face amount: Stated sum of money on a policy c. Beneficiary: recipient of policy proceeds if insured dies
  2. Purpose of Life Insurance a. Most people buy life insurance to protect those who depend on them from financial loss b. Cash Value: accumulated savings that provide a refund to the owner of the policy if the contract is terminated prior to death.
  3. How Does Life Insurance Work? a. Life insurance is based on the pooling of risk b. Preferred risks: people whom insurance companies prefer to insure c. The Underwriting Process i. Underwriting: Insurance company process of evaluating a policy application ii. Underwriter: Person who conducts a policy application review d. Lapsed Policies and Grace Period i. Lapsed policy: termination of a policy because of non-payment ii. Grace period: time allowed for overdue payment without penalty or the policy lapsing
  4. Life Insurance and Families a. Determining Need i. Life insurance should be considered if any of the following situations apply: 1. You have a dependent spouse 2. You have dependent children 3. You have an aging or disabled relative who depends of you for support 4. You own a business 5. Your savings and retirement pensions are not enough to support a spouse against cost –of-living increases. 6. You want to leave a large amount of money to an organization or a cause b. College Students and Life Insurance i. Don’t really need it

c. Women and Life Insurance i. If you are the sole support for your family, then yes you need it. ii. If you are a homemaker you should get life insurance based on the size of your family d. Children and Life Insurance i. Children don’t need life insurance e. How Much Is Needed? i. 5 to 7 times your annual income f. What Does Life Insurance Cost? i. Pay more per year than any other insurance

  1. Things that effect the cost a. The face value b. The type of insurance c. The company you buy it from d. The commission the agent gets e. How long the company thinks you will live f. The premiums (the amount you pay and for how long) g. Fees h. Whether your employer provides free or reduced rate life insurance
  2. As a general rule the least provides free or reduced rate life insurance g. How is the beneficiary paid? i. When the insured dies, the beneficiary may:
  3. Receive a lump-sum settlement of the face value (98 out of the 100 policyholders choose this)
  4. Receive proceeds over a given period
  5. Leave the money with the insurer temporarily and draw interest on it
  6. Use it to purchase an annuity guaranteeing regular payments for life ii. Annuity: Contract in which the insurer promises the insured a series of periodic payments iii. Variable annuities: investments that fluctuate with those of underlying securities
  7. What annuities and life insurance have in common is that they are both purchased from life insurance companies
  8. Four Basic Types of Life Insurance a. Term Life Insurance i. Term life insurance: policies that offer pure protection, no savings features, over a specified period of time ii. Renewable: a clause that allows for renewing the policy iii. Convertibility: a provision that allows the conversion of a term policy to whole life

ii. Review upon

  1. Marriage or divorce
  2. An adoption of the birth of a child
  3. A significant change in your health or your spouse’s
  4. Buying a new house or refinancing an existing one
  5. A promotion, an inheritance, winning the lottery
  6. Retirement
  7. Children have left the nest Review Questions 70% of Americans have life insurance TRUE Cash value and face value are the same thing FALSE Term insurance is usually more expensive that whole life insurance FALSE College students need life insurance more than they need any other kind of insurance FALSE The main purpose of life insurance is to provide security and protection for loved ones. TRUE A standard contract specifies that upon the death of a person whose life is insured, a stated sum of money (face amount) is paid to the person(s) or organization(s) designated in the policy as the _______. C. Beneficiary Using the 5 to 7 times rule, how much life insurance does a 45 year old father of two school-age children need? His annual income is $30,000. B. $150,000-$210, An _________ is a contract in which the insurer promises the insured a series of periodic payments. A.annuity Which of the following is not one of the four types of insurance? D. Indenture

Trying to persuade a policyholder to switch policies in a transaction that would do little or nothing more than generate commissions for the insurance agent is called ____________. C. Churning