Traditional Life cheat sheet

Life insurance provides a death benefit to named beneficiaries in exchange for premium payments; it also accumulates cash value in permanent policies.

Insurable interest must exist at the time of application; the beneficiary must suffer a financial loss if the insured dies.

Term life provides coverage for a specified period and pays a benefit only if the insured dies during that term; no cash value.

Whole life is permanent coverage with guaranteed premiums, guaranteed death benefit, and guaranteed cash value growth.

Universal life is flexible premium permanent insurance with a cash value that earns interest; it has cost-of-insurance charges and expense loads.

Variable life and variable universal life cash values are invested in separate accounts (subaccounts) and fluctuate with market performance; these are securities.

Endowment policies pay the face amount if the insured dies during the endowment period or if the insured survives to the end of the period.

Group life insurance covers a group under a master policy; individual certificates are issued to participants; typically term insurance.

Incontestability clause: after two years from policy issue, the insurer cannot contest the policy for misrepresentation (except fraud or nonpayment of premium).

Suicide clause: if the insured dies by suicide within two years of policy issue, the insurer refunds premiums paid rather than paying the death benefit.

Grace period: typically 30 or 31 days after premium due date; coverage remains in force during this period.

Reinstatement: allows a lapsed policy to be restored within a specified period (usually 3-5 years) upon evidence of insurability and payment of overdue premiums with interest.

Nonforfeiture options for whole life: cash surrender, reduced paid-up insurance, extended term insurance.

Dividend options: cash, reduce premium, accumulate at interest, paid-up additions, one-year term.

Waiver of premium rider: waives premiums if the insured becomes totally disabled for a specified period (usually 6 months).

Accelerated death benefit rider: allows the insured to receive a portion of the death benefit early upon diagnosis of a terminal illness.

Net premium = present value of future benefits minus present value of future premiums; gross premium includes net premium plus expense loading.

Premium factors: mortality (age, sex, health), interest (assumed rate), expenses (loading), and policy features (riders, dividends).

Mode of payment: annual, semiannual, quarterly, monthly; more frequent payments increase total annual premium due to interest loss and administrative costs.

Beneficiary designations: primary, contingent, revocable (can be changed by owner) or irrevocable (requires beneficiary consent to change).

Per capita (by head) distribution pays surviving beneficiaries equally; per stirpes (by branch) pays a deceased beneficiary's share to their heirs.

Common disaster clause: if beneficiary and insured die simultaneously, beneficiary is presumed to have died first, so proceeds go to contingent beneficiary.

Spendthrift clause: protects proceeds from creditors of the beneficiary; insurer pays in installments rather than lump sum.

Settlement options: lump sum, interest only, fixed period, fixed amount, life income (with or without period certain).

Whole life: level premiums for life; cash value grows tax-deferred; guaranteed death benefit; policy loans available against cash value.

Limited-pay whole life: premiums paid over a limited period (e.g., 20 years, to age 65); coverage remains for life.

Single-premium whole life: one lump-sum premium; immediate cash value; modified endowment contract (MEC) rules apply.

Ordinary (straight) life: premiums paid to age 100 (or 121); cash value equals face amount at maturity.

Universal life: unbundled components (premium, cost of insurance, expenses, interest); flexible premiums and adjustable death benefit.

Indexed universal life: cash value credited based on an index (e.g., S&P 500) with a floor and cap; not a security.

Variable life: fixed premiums; cash value in separate accounts; death benefit may fluctuate; requires securities license.

Policy loans reduce cash value and death benefit if unpaid; interest accrues; if loan plus interest exceeds cash value, policy lapses.

Term insurance: pure protection, no cash value; pays only if insured dies during the term.

Level term: face amount and premium remain constant for the term (e.g., 10, 20, 30 years).

Increasing term: face amount increases over time; decreasing term: face amount decreases (often used for mortgage protection).

Annual renewable term (ART): one-year term, renewable without evidence of insurability; premium increases each year with age.

Convertible term: can be converted to permanent insurance without evidence of insurability; conversion must occur before a specified age or time.

Renewable term: can be renewed for additional terms without proof of insurability; premium increases at renewal.

Return of premium term: refunds premiums if insured survives the term; higher premium than level term.

Re-entry term: allows renewal at a lower premium with evidence of insurability; otherwise renews at guaranteed higher rate.

Annuity: contract that pays an income stream; accumulation phase (saving) and annuitization phase (payout).

Immediate annuity: purchased with a single premium; income begins within one payment period (e.g., one month).

Deferred annuity: accumulates cash value; income begins at a future date; can be fixed or variable.

Fixed annuity: guarantees a minimum interest rate; insurer bears investment risk; not a security.

Variable annuity: cash value invested in subaccounts; value fluctuates; requires securities license; insurer does not guarantee principal.

Indexed annuity: credited interest based on an index with floor and cap; not a security; insurer guarantees minimum.

Surrender charges: apply to early withdrawals from deferred annuities; typically decline over 7-10 years.

Annuitization options: life only, life with period certain, joint and survivor, installment refund, cash refund.

Underwriting classifies risk: preferred, standard, substandard, or declined; based on health, occupation, hobbies, lifestyle.

Field underwriter (agent) gathers information on application; must report known facts to insurer.

Application parts: Part I (general info), Part II (medical info), and sometimes Part III (agent's report).

Attending physician statement (APS) may be ordered for large policies or health issues.

Medical Information Bureau (MIB) provides coded information; cannot be sole basis for denial.

Conditional receipt: coverage effective when application and initial premium are submitted, provided proposed insured is insurable.

Temporary insurance agreement: provides coverage for a specified period while underwriting is pending.

Policy delivery: agent must deliver policy and collect any outstanding premium; effective date is policy issue date unless otherwise stated.

Death benefit paid to beneficiary is generally income tax-free.

Cash value growth inside a life policy is tax-deferred.

Policy loans are not taxable as long as policy remains in force; if policy lapses with outstanding loan, gain may be taxable.

Surrender of policy: taxable gain = cash surrender value minus basis (premiums paid minus dividends and withdrawals).

Dividends from participating policies are considered a return of premium and are not taxable until they exceed basis.

Modified endowment contract (MEC): fails 7-pay test; withdrawals and loans are taxed LIFO (gain first) and 10% penalty before age 59½.

Premiums for personal life insurance are not tax-deductible; premiums for business-owned policies may be deductible under certain conditions.

Estate taxation: proceeds included in insured's estate if insured owned the policy or incidents of ownership; irrevocable life insurance trust (ILIT) can remove proceeds from estate.

State insurance departments regulate insurance; the Commissioner enforces insurance laws and examines insurers.

Agents must be licensed in the state where they sell; license requires prelicensing education, exam, and background check.

Fiduciary duty: agent must act in the client's best interest; disclose commissions and conflicts of interest.

Twisting: misrepresenting a policy to induce replacement; churning: replacing policies to generate commissions; both are illegal.

Rebating: offering part of commission or anything of value to induce purchase; illegal in most states.

Unfair trade practices: misrepresentation, false advertising, boycott, coercion, and unfair claim settlement practices.

Continuing education: agents must complete required hours (e.g., 24 hours every 2 years) including ethics.

Commissioner's powers: issue licenses, conduct hearings, impose penalties, and adopt regulations.