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

Download Life Insurance Exam 2 Study Guide: Understanding the Basics of Life Insurance - Prof. Eliz and more Study notes Economics in PDF only on Docsity! 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: 1. Receive a lump-sum settlement of the face value (98 out of the 100 policyholders choose this) 2. Receive proceeds over a given period 3. Leave the money with the insurer temporarily and draw interest on it 4. 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 1. What annuities and life insurance have in common is that they are both purchased from life insurance companies 5. 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