Life Insurance Basics
25%of exam
RiskInsurable InterestContractsUnderwritingReceipts
Policy Types and Provisions
45%of exam
Annuities
15%of exam
Fixed vs VariableImmediate vs DeferredPayoutExclusion Ratio
Taxation and Regulation
15%of exam
MECQualified vs NonqualifiedGroup LifeProhibited PracticesReplacement
Quick Facts
- Questions
- 100-125
- Pass
- 70%
- Time
- 2-3 hours
- Fee
- $50-75
- Study
- 30-50 hours
- Provider
- Pearson VUE / PSI
- Pre-license
- 20-40 hours
Conditional vs Binding Receipt
Conditional
- If insurable
- Most common
- Backdated coverage
Binding
- Immediate coverage
- Set period
- Regardless of insurability
Conditioned vs immediate
Underwriting and Risk
- Insurable interest
- At application only
- Field underwriting
- Producer first-line screening
- Conditional receipt
- Coverage if found insurable
- Binding receipt
- Immediate temporary coverage
- Preferred / standard
- Risk class, sets premium
- Substandard
- Rated, extra premium
- MIB
- Shared coded risk info
Settlement Options
Lump | Interest | Period | Amount | Life
Lump: tax-freeInterest: principal heldFixed period: years setFixed amount: dollars setLife income: until death
Whole vs Universal Life
Whole life
- Fixed premium
- Guaranteed values
- Insurer risk
Universal life
- Flexible premium
- Adjustable benefit
- Can lapse
Guarantees vs flexibility
Which Policy Type?
- Lowest cost, temporary→Term(No cash value)
- Need guarantees→Whole life(Fixed premium)
- Need flexible premium→Universal life(Adjustable)
- Want investment control→Variable life(Subaccounts)
- Flexible plus investing→VUL(Security)
- Index upside, no loss→IUL(Cap and floor)
- Cover a mortgage→Decreasing term(Falling benefit)
- Add future coverage→Guaranteed insurability(No underwriting)
Policy Types
- Term
- Pure protection, no cash value
- Whole life
- Fixed premium, guaranteed values
- Universal life
- Flexible premium permanent
- Variable life
- Subaccount investing, fixed premium
- VUL
- Variable plus flexible premium
- IUL
- Index-linked, cap and floor
Nonforfeiture CRE
CRE = Cash | Reduced paid-up | Extended
Cash: surrender valueReduced paid-up: smaller faceExtended term: same faceDefault: extended term
Term vs Permanent
Term
- Temporary
- No cash value
- Lowest premium
Permanent
- Lifetime
- Builds cash value
- Higher premium
Protection vs protection plus savings
Nonforfeiture or Settlement?
- Stop, take cash→Cash surrender(Coverage ends)
- Keep some permanent→Reduced paid-up(Smaller face)
- Keep full face briefly→Extended term(Default)
- Want all at once→Lump sum(Tax-free)
- Preserve principal→Interest only(Interest taxable)
- Income for set years→Fixed period(Amount varies)
- Set dollar each period→Fixed amount(Time varies)
- Income for life→Life income(Stops at death)
Term and UL Options
- Level term
- Constant death benefit
- Decreasing term
- Falling benefit, mortgage cover
- Increasing term
- Rising death benefit
- UL Option A
- Level death benefit
- UL Option B
- Face plus cash value
- APL
- Auto premium loan
Dividend Options
Cash | Reduce | Accumulate | Paid-up
Cash: to ownerReduce: next premiumAccumulate: interest taxablePaid-up adds: more coverage
Revocable vs Irrevocable
Revocable
- Change anytime
- No consent
- Owner control
Irrevocable
- Vested interest
- Consent required
- Cannot change freely
Changeable vs vested
Policy Provisions
- Grace period
- 30-31 days, stays inforce
- Incontestability
- 2 years, no contest
- Reinstatement
- Restore lapsed, proof insurability
- Free-look
- 10-30 days full refund
- Entire contract
- Policy plus application only
- Misstatement age
- Benefit adjusted, not voided
- Suicide clause
- 2 years, refund premiums
- Policy loan
- Borrow against cash value
Permanent Types
Whole | Universal | Variable | VUL | IUL
Whole: guaranteedUniversal: flexibleVariable: subaccountsIUL: index-linked
Riders
- Waiver of premium
- Disability excuses premiums
- ADB
- Double indemnity, accident only
- Guaranteed insurability
- Add coverage, no underwriting
- Accelerated death benefit
- Early payout, terminal illness
- Term rider
- Temporary added coverage
- Child rider
- Covers children, convertible
- Return of premium
- Refund if survive term
Beneficiaries
- Primary
- Receives benefit first
- Contingent
- Receives if primary dies
- Revocable
- Changeable, no consent
- Irrevocable
- Vested, consent required
- Per stirpes
- Share to descendants
- Per capita
- Equal among survivors
- Spendthrift
- Protects from creditors
Dividend Options
- Cash
- Paid directly to owner
- Reduce premium
- Applied to next premium
- Accumulate interest
- Held, interest taxable
- Paid-up additions
- Buys small paid coverage
- Dividend source
- Return of overcharged premium
Nonforfeiture Options
- Cash surrender
- Take value, coverage ends
- Reduced paid-up
- Smaller paid permanent policy
- Extended term
- Same face, limited time
- Default option
- Extended term if unchosen
- Taxable gain
- Value above basis
Settlement Options
- Lump sum
- Full benefit, tax-free
- Interest only
- Principal held, interest taxable
- Fixed period
- Set years, amount varies
- Fixed amount
- Set dollars, time varies
- Life income
- For life, stops at death
- Period certain
- Guaranteed minimum years
Accumulation vs Annuitization
Accumulation
- Pay in
- Tax-deferred growth
- Can withdraw
Annuitization
- Pay out
- Income stream
- Generally irreversible
Saving vs income
Annuity Types
- Fixed
- Guaranteed rate, insurer risk
- Variable
- Subaccounts, owner risk, security
- Indexed
- Index-linked, cap and floor
- Immediate
- Income starts now
- Deferred
- Accumulates, income later
- Exclusion ratio
- Tax-free basis portion
Qualified vs Nonqualified Annuity
Qualified
- Pre-tax funds
- Fully taxable
- RMDs apply
Nonqualified
- After-tax funds
- Earnings taxable
- Basis tax-free
Pre-tax vs after-tax
Taxation
- Death benefit
- Lump sum income tax-free
- MEC
- Fails 7-pay test
- MEC taxation
- LIFO, gains taxed first
- 59 1/2 penalty
- 10% early withdrawal
- Qualified annuity
- Pre-tax, fully taxable
- Nonqualified annuity
- After-tax, earnings taxable
- 1035 exchange
- Like swap, no tax
Regulation and Ethics
- Twisting
- Misrepresent, replace other insurer
- Churning
- Replace, same insurer commission
- Rebating
- Unstated value induces sale
- Replacement
- Notices, extended free-look
- Group life
- Master contract, certificates
- Conversion privilege
- 31 days, no insurability
Common Traps
Twisting vs churning
Twisting = other insurer ≠ Churning = same insurer
Suicide vs incontestability
Suicide refunds premiums ≠ Incontestability pays claim
Conditional vs binding
Conditional if insurable ≠ Binding immediate coverage
Reduced paid-up vs extended
Reduced cuts face ≠ Extended cuts time
Revocable vs irrevocable
Revocable changeable ≠ Irrevocable needs consent
Option A vs Option B
Option A level ≠ Option B increasing
Qualified vs nonqualified
Qualified fully taxed ≠ Nonqualified earnings taxed
Last Minute
- 1.Grace 30-31 days; incontestability 2 years
- 2.Suicide 2 years refunds premiums
- 3.Free-look 10-30 days full refund
- 4.Insurable interest at application only
- 5.Term has no cash value
- 6.UL flexible premium; whole life fixed
- 7.Nonforfeiture CRE; default extended term
- 8.Settlement: lump sum is tax-free
- 9.Death benefit lump sum income tax-free
- 10.MEC fails 7-pay; taxed LIFO
- 11.Annuity 10% penalty pre-59.5
- 12.Twisting other insurer; churning same
- 13.Variable products need securities registration
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