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Life & Health Insurance Exam: Colorado, Exams of Advanced Education

West Virginia Wesleyan CollegeAdvanced Education

A comprehensive overview of life and health insurance concepts, including various types of policies, riders, and provisions. It covers traditional whole life, universal life, variable life, term life, and annuities, explaining their features, benefits, and drawbacks. The document also includes exercises and questions that can be used for study purposes.

Typology: Exams

2024/2025

Available from 01/10/2025

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Life & Health Insurance Exam Colorado
Traditional Whole Life -Ordinary (Straight) Life
-Limited-Pay & Single-Premium Whole Life
-Adjustable Whole Life Ordinary (Straight) Life -Until 100 or Death, whichever comes first
-Permanent Protection
-Rates & benefits based on law of large numbers (Mortality Rate)
-Guaranteed, tax-deferred interest rate
-Premium level, company's risk goes down as cash value goes up
-Insurer keeps the cash value if death to offset risk
-Lowest net cost in long run
-Client has access to cash through cash surrender or policy loan
-Rates are per unit of protection (1,000 is 1 unit)---TEST
-Cash value is guaranteed
-Cash value will equal face amount at policy maturity Limited-Pay & Single-Premium Whole Life -
Premium paying period is shorter
-Cash value still equals face amount at age 100
-20 pay life will be paid up in 20 years PL
-Life Paid up at age 65, will be paid up at 65 LP
-A single premium policy will have an immediate cash value (1-pay life)---TEST Adjustable Whole Life---
-TEST -Sold to clients with fluctuating incomes----TEST
-Combination of term and whole life----TEST
-Coverage may not be increased without physical exam---TEST Interest/Market Sensitive Whole Life
Products -Universal Whole life
-Variable Whole life
-Variable/Universal Whole life
-Equity-Indexed Life Universal Whole life -Guaranteed minimum interest rates
-Extreme flexibility regarding premium PMTs----TEST
-Most flexible product
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Life & Health Insurance Exam Colorado

Traditional Whole Life - Ordinary (Straight) Life

  • Limited-Pay & Single-Premium Whole Life
  • Adjustable Whole Life Ordinary (Straight) Life - Until 100 or Death, whichever comes first
  • Permanent Protection
  • Rates & benefits based on law of large numbers (Mortality Rate)
  • Guaranteed, tax-deferred interest rate
  • Premium level, company's risk goes down as cash value goes up
  • Insurer keeps the cash value if death to offset risk
  • Lowest net cost in long run
  • Client has access to cash through cash surrender or policy loan
  • Rates are per unit of protection (1,000 is 1 unit)---TEST
  • Cash value is guaranteed
  • Cash value will equal face amount at policy maturity Limited-Pay & Single-Premium Whole Life - Premium paying period is shorter
  • Cash value still equals face amount at age 100
  • 20 pay life will be paid up in 20 years PL
  • Life Paid up at age 65, will be paid up at 65 LP
  • A single premium policy will have an immediate cash value (1-pay life)---TEST Adjustable Whole Life---
  • TEST - Sold to clients with fluctuating incomes----TEST
  • Combination of term and whole life----TEST
  • Coverage may not be increased without physical exam---TEST Interest/Market Sensitive Whole Life Products - Universal Whole life
  • Variable Whole life
  • Variable/Universal Whole life
  • Equity-Indexed Life Universal Whole life - Guaranteed minimum interest rates
  • Extreme flexibility regarding premium PMTs----TEST
  • Most flexible product
  • Target premium based on projected earnings
  • Option A UL has level death benefits
  • Option B UL will pay beneficiary both face amount + cash value Variable Whole life - Cash value deposited into a separate account
  • Requires FINRA series 6 or 7 to sell
    • Used to be called NASD
  • Regulated by SEC
  • Regulated by FINRA (Financial Industry Regulatory Authority)
  • NYSE license not required
  • Minimum death benefit (face amount) is guaranteed---TEST
  • Has fixed premium---TEST Variable/Universal Whole life - Requires Finra(series 6 or 7) licenses to sell
  • Allows client to self-direct cash values into sub-account---TEST
  • Flexible premium Equity-Indexed Life - cash value, where minimum death benefit is guaranteed as well as the minimum earning on the cash value in the general account
  • Securities license is not required
  • Fixed Premium Term Life - Level Term
  • Decreasing Term
  • Increasing Term General Features of Term Insurance - Premium goes up every year
  • May be converted to whole life at current attained age regardless of health
  • May be renewable up to certain age without physical Level Term Both premium and face amount are level for period of time Decreasing Term - Face amount goes down but premium remains the same
  • Usually convertible to whole life regardless of health
  • Premium stays the same but cost increases as face amount decreases Increasing Term - Face amount goes up instead of down
  • Allows beneficiary to receive the face amount + premiums or cash values
  • Also known as Universal Life option B Special features of Term Insurance - Renewable/Convertible to whole up to certain date or age regardless of health
  • Conversion based on current age
  • May only convert to more expensive option
  • Cannot convert to term
  • Beneficiary may choose cash refund or installment refund
  • Will pay as long as annuitant lives Joint Life Annuity - Type of Annuity Pay-out option
  • Pays only until first annuitant dies Joint and Survivor Annuity - Pays until the last party dies
  • Payment often adjusted upon the death of the first party because of age difference Types of Annuities
  • Single Premium Deferred Annuity (SPDA)
  • Level Premium Annuity
  • Flexible Premium Annuity
  • Immediate Annuity
  • Fixed Annuity - Regular
  • Variable Annuity
  • Indexed Annuity Immediate Annuity - No accumulation period
  • Pays in single premium
  • Annuitizes right away Variable Annuity - Goes into separate accounts
  • Valued in annuity units---TEST
  • Buyer bears risk
  • Need FINRA/securities license and annuity course
  • Subject to state and federal regulation
  • Insurance under state law Indexed Annuity - Pays 2% on cash value
  • Securities license not required
  • Cash accumulation usually linked to an index (S&P)
  • If index outperforms guaranteed interest rate, difference credited to cash value
  • Premiums do not change Combination Plans & Life Insurance Policy Variations - Joint Life Policy
  • Survivorship Life Policy Joint Life Policy (First to Die) - Type of Combination Plans & Life Insurance Policy Variations
  • Covers 2+ on same policy
  • No further coverage for remaining party Survivorship Life Policy (Last to Die) - Usually used to pay estate taxes
  • Used in estate planning--TEST Life Insurance Policy Riders - Waiver of Premium & Waiver of Premium with Disability Income(WP)
  • Guaranteed Insurability Rider(GIR)
  • Payor Benefit Rider
  • Accidental Death Benefit Rider
  • Term Insurance Rider
  • Long-Term Care Rider
  • Other Insured Rider
  • Return of Premium Rider Waiver of Premium & Waiver of Premium with Disability Income (WP) - Type of Insurance Rider=Add on to coverage
  • Disability income insurance added to a life policy
  • 6 - month waiting period; if satisfy waiting period insurer will reimburse insured for paid premiums within that period
  • Premiums waived, and policy still enforced as long as insured is disable
  • If added with disability income, policy pays insured's net income during disability Guaranteed Insurability Rider(GIR) - Type of Insurance Rider
  • Enables insured to increase coverage later regardless of health
  • Option dates usually occur at 2 or 3 year intervals, if skipped the date is lost
  • At each increase, rates are based upon current age Payor Benefit Rider - Type of Insurance Rider
  • Added to policy on child
  • Waives premium if payor dies or becomes disabled
  • Expires when child reaches age 18-----TEST Accidental Death Benefit Rider - Type of Insurance Rider
  • Death must occur within 90 days of accident or it is assumed to be form of natural causes
  • Doesn't cover death due to sickness only accidents Term Insurance Rider - Type of Insurance Rider
  • Often added to whole life policy to increase coverage
  • Some whole, some term
  • Term portion will not cover unless insured dies within the term period Other Insured Rider---TEST - Type of Insurance Rider
  • Added to whole life policy under certain circumstances
  • Adds coverage for new spouse on whole life
  • Subject to insurability (Physical Exam)
  • Could be used to add coverage on newborn, on current policy, term insurance rider on child Long- Term Care Rider - Type of Insurance Rider
  • Promise can be legally enforced Free Look - Enables insured to examine policy after delivery
  • May return policy and get full refund if not satisfied---TEST
    • 15 days to do so Consideration Clause - An exchange of values
  • Pays first premium then answers questions on application
  • Representation is truth to the best of your knowledge
  • Company agrees to provide coverage in exchange
  • No coverage unless premium is paid Owner's Rights---TEST - Must pay premium-usually
  • May designate beneficiary, may also change beneficiary
  • Can assign ownership rights to others
  • May select dividend options and nonforfeiture options Beneficiary Designations - Primary beneficiary receives proceeds when insured dies
  • Can have as many primaries as wanted
  • Guardian must be appointed for children
  • Company may designate irrevocable beneficiary
  • Common disaster clause
    • Applies if insured and primary beneficiary both day as a result of the same accident
    • Insured always dies last even if not the case
  • Primary beneficiary must die within 10 days for clause to be enacted Premium Payment Provisions - Mode of payment
  • The more frequent the mode, the higher the premium
  • Annual mode of payment has lowest cost
  • Grace periods
    • 30 day grace period for individual life insurance
    • 31 day grace period for group life
  • Automatic Premium loan rider
    • Will automatically borrow the amount of the premium if insured does not pay by end of grace period
    • Creates a policy loan Policies with Level Premiums - Ordinary whole life
  • Limited-pay whole life
  • Single premium whole life
  • Variable whole life
  • Equity indexed whole life
  • Term insurance - could be 1 year or more Policies with Flexible Premiums - Adjustable whole life
  • Universal whole life-Target premium
  • Variable/universal whole life
  • Interest sensitive whole life Reinstatement Provision - Applies when a policy lapses at the end of the grace period
  • Allows insured to apply for reinstatement for up to 5 years after lapse
  • Insured maintains original age
  • A policy surrendered for cash may not be reinstated Policy Loan Provisions - Applies only to polices with cash value-not term
  • Maximum fixed interest rate usually 8% might have dropped
  • Loans need to be paid back while insured is still alive
    • Interest will accrue if loan is not paid---TEST Nonforfeiture Provisions or Options - 3 options
    • Cash Surrender; most up front---TEST
    • Tax on profit only
    • Amount received in excess of premiums paid is taxable
    • Extended Term--Best death benefit--TEST
    • Don't break-even until 10 years
    • Reduced Paid-up--Most Years---TEST Dividend and Dividend Options - Stock vs. Mutual
  • Own insurance in stock, no dividend
  • Own insurance in mutual, yes dividend
  • Dividends paid by a mutual insurer are not taxable because it is a return on an over payment of a premium
  • Dividend options may be changed at any time by owner Types of Dividend Options - Cash
  • Interest--the interest is taxable
  • Paid-up Additions
  • Apply to premium when due
  • One-year term insurance
    • New additional term policy expires in 1 year
  • Fraud- lying, intent to deceive the company Collecting Initial Premiums & Issuing Conditional Receipts
  • Producers gives applicant a conditional receipt
  • C.O.D. Collect on delivery submittal applications
    • No coverage exists since no premium has been paid
    • Producer delivers policy and collects premium, now the coverage begins
    • Producer also obtains a statement of good health
  • Life and health producers never use binders-verbal agreement, they are not allowed Disclosures at Point of Sale - HIPAA
  • HIV-Must have written informed consent and can only be disclosed to applicants doctor
  • Credit Report - Must have written informed consent HIPAA - The privacy rule protects all individually identifiable health information, Protected health information includes:
    • Health data
    • Name
    • Address
    • Social Security Number
    • Birth Date USA PATRIOT Act/Anti-Money Laundering - 2001
  • Amends bank security act
  • Requires every financial institution to file a currency transaction report (CTR) with the Financial Crimes Enforcement Network (FinCEN) within the department of the treasury, for each cash transaction that exceeds $10,
  • Requires the reporting of wire transfers in excess of $3,000 Insurable Interest - Must exist at the time of application
  • May be based on economics or kinship Medical Information and Consumer Reports - Verifies finances, credit history, and character
  • Verifies medical history through ordering Medical Information Bureau (MIB) report
  • Insurers who are MIB members report adverse health information to them
  • MIB procedures require a disclosure to the applicant of data in MIB files upon written request of applicant Fair Credit Reporting Act---TEST - Federal law protecting applicants privacy
  • Applies when ordering consumer reports on applicants
  • Must give applicant pre-notification
  • Obtain applicant's written consent
  • If insurer takes adverse action based on report:
  • Post notification must be given to applicant
  • Must state specific reason
  • State where a copy can be found
  • Insurer cannot give applicant copy of form
  • If report wrong, applicant may sue to have it corrected Risk Classification - Average client known as standard risk
  • Nonstandard or substandard pay higher rate
  • Preferred risk client receives a lower than standard rate
  • Most risk classification is done by adding premium surcharges
  • May not use marital status as an underwriting factor--TEST Stranger-Originated Life Insurance (STOLI)/ Investor-Originated Life Insurance (IOLI) - Both illegal in Colorado because of insurable interest does not exist Coverage Begins When - When all conditions have been satisfied or when the underwriter approves the application ; whichever occurs first
  • Never any coverage unless premium has been paid COAL - Four elements required to have a legal contract
  • C=Consideration
  • O=Offer
  • A=Acceptance
  • L=Legal Offer & Acceptance - Offer made by applicant
  • Paying premium and completion of application or applicant's offer to buy insurance
  • Acceptance made by underwriter
  • Occurs when application is approved
  • Producer does not make acceptance
  • Also known as mutual agreement
  • A meeting of minds has occurred between applicant and insurer
  • Producer not a party to actual contract, even tho they sign Consideration - Required for legal contract
  • Applicant's consideration is the premium paid + applicant's statements on application
  • Insurer's consideration is their promise to provide coverage in return Legal Purpose and Capacity - Must be of legal age and sound mind
  • Must be purchased for a legal purpose Explaining the Policy to the Client - Producer should personally deliver the policy to the client
  • 401K IRA; Individual Retirement Account - Available to anyone with earned income---TEST
  • If you have a non working spouse a Spousal IRA is allowed--TEST
  • ROTH IRA's are always funded with after tax dollars, exception to pre-tax of qualified plans; tax free when taken out Keogh Plan (HR-10) - For self-employed, partners and their employees --TEST TSA; Tax Sheltered Annuity - Only annuity that is considered qualified
  • 2 types of eligible employees
    • IRC 403b, employees of school teachers, administrators, and staff
    • IRC 501c-3, employees of religious affiliated organizations & non-profits Non-Qualified Retirement Plans - Usually no vesting until retirement-often discriminatory
  • Usually set up as deferred compensation by small companies Personal Insurance Needs - Capital Needs approach - Make sure client has enough insurance to meet needs should they die tomorrow for things like paying off the house, putting kids through college, funeral expenses, etc.
  • Human Value approach - Deals with what would be the loss, income wise, generally results in higher needs Types of Business Insurance Needs - Key Employee Life Insurance
  • Partnership Life Insurance
  • Split Dollar Life Insurance Key Employee Life Insurance - Benefits company not person
  • Business is beneficiary
  • Premiums paid are not tax deductible
  • Proceeds paid are not taxable
  • In the event that the key employee no longer works for the company, yet premiums are still paid, and they die, policy proceeds would go to company--TEST Partnership Life Insurance - Requires buy-sell agreement drafter by lawyer
  • Each partner buys policy on the life of the other
  • If partner dies, policy pays proceeds to the surviving partner
  • Sometimes called a cross purchase buy-sell agreement
  • If there are 3 partners a total of 6 policies would have to be sold Split Dollar Life Insurance A type of non-qualified plan Social Security Benefits - Small death benefit-only $
  • Has survivors' benefits
  • Benefits indexed for inflation
  • Some benefits are based upon the Primary Insurance Amount (PIA)- The amount a person would receive if they elect to begin receiving retirement benefits at normal retirement age Tax Treatment of Individual Life Insurance - Premiums are not tax deductible
  • Proceeds are included in the value of the deceased's estate Tax Treatment of Group Life Insurance - Tax deductible as business expense Tax Treatment of Modified Endowment Contracts (MEC) - Can't make profit for first 7 years
  • Requires company to have a certain amount of risk
  • Lose favored tax treatment
  • If cash value exceeds the sum of all premiums paid; failed the 7-pay test Types Disability Income Insurance - Individual Disability Income Policy
  • Business Overhead Expense Policy (BOE)
  • Business Disability Buyout Policy
  • Group Disability Income Policy
  • Key Employee/Partner Disability Policies Individual Disability Income Policy - Insures net earned income only; 70% of it
  • Premiums not tax deductible
  • Usually has elimination period
  • Benefits begin to be paid at 7,30,60,90, or even 180 days
  • The longer the period the lower the premium
  • Total disability - disabled if cannot perform job for first 2 years after that must prove that you can't work
  • Has right to ask for physical
  • Benefits must be paid monthly--TEST
  • Two perils covered: sickness and accident Business Overhead Expense Policy (BOE) - Includes on going business expenses ex. rent, wages, utilities
  • Premiums tax deductible Business Disability Buyout Policy - Utilizes buy-sell agreement
  • Lump Sum
  • Paid to able partner
  • Premiums not tax deductible
  • Proceeds not taxable Group Disability Income Policy - Employee received certificate of insurance
  • Benefits based on employees gross income
  • Premiums paid by employer are tax deductible
  • Benefits paid are taxable