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RMI3011 Test 3 Study Guide• Life Insuranceo Perils affecting income- premature death, disability, old age, poor health, unemployment.o Premature death- death with unfulfilled financial obligations Costs- families’ portion of earning’s (how much your family is relying on you), additional expenses of death, reduction of standard of livingo Financial impact based on different families: Single- low need, very little obligations besides outstanding debt. Single parent- very high need, who will care for kids? Where will the money come from to care for kids? DINKS (Dual Income, No Kids)- moderate need for life insurance to uphold their standard of living. Married with children- • If only one parent supplies income: the one providing the income has a high need, the one staying home has a replacement cost based on housecleaning, daycare, etc.• Two incomes- higher need for life insurance than DINKS Blended families- step children. What’s his goes to his kids, what’s hers goes to her kids. Sandwich families- mom and dad, kids, and grandparents. o How much life insurance is needed?  Based on final expenses, estate liquidity, survivor(s) income needs, mortgage, education, and legacy giving (provides funds for organizations to perpetuate what you believe in).  Other sources of income- OASDI (social security), savings and investments, inheritance.o Characteristics of life insurance: Purpose is to replace income (tax-free). ONLY unique figure of life insurance. Not a contract of indemnity- cash payment contract Claims of creditors- protected.  Proceeds are income tax free  ADB- Advanced Death Benefit- if you’re going to die soon (terminal illness) you can receive up to half your money up front. o Human Life Value Approach- estimates the family’s share of breadwinner’s earnings. Crude measurement of economic worth, major defects are that it doesn’t consider other sources of income and the discount rate chosen is crucial. Based on the present value of all future earnings. o Needs Approach- measures existence and extent of need- estate clearance, readjustment period, dependency period, life income to surviving spouse, specialneeds (mortgage redemption, education, emergency fund), retirement (financial profiles software.) o Capital Retention Approach- assumes the retention of capital, prepare personal balance sheet, determine income-producing capital, determine needs, determine additional capital needed (investment income/interest income). o Yearly Renewable Term- there’s a pure premium calculated at each attained age. Early on there’s a low cost because it’s based on mortality tables. High cost later on because there’s adverse selection. Premium exponentially increases over time. o Level Premium- financing plan to level mortality costs. Probability of death increases with age, term system produces adverse selection, overpayment in early years, but prepayments create policy reserves and supplement inadequate premiums in later years. The purpose is for lifetime protection and the by-product creates cash values. • Life Insurance Contract Provisionso Parties to a life insurance contract: Owner- applies for contract, responsible for premiums, exercises contractual rights, names beneficiary, must have insurable interest of insured at policy inception, can be person, company or trust.  Insured- person whose death causes payment of the proceeds, not necessarily the owner of the policy. Beneficiary- entity who receives the proceeds after death of insured, interest is contingent until death.o Types of beneficiaries: Primary- the beneficiary who is first entitled to receive the policy proceeds on the insured’s death. Contingent- entitled to the proceeds if the primary beneficiary dies before the insured Revocable- the policyowner reserves the right to change the beneficiary designation without the beneficiary’s consent.  Irrevocable- one that cannot be changed without the beneficiary’s consent. Specific- the beneficiary is specifically named and identified. Class- a specific person is not named but is a member of a group designated as beneficiary, such as “children of the insured”o Dealing with Ownership and Premiums-  Annual payment vs Modal Factors- if premium is paid anything other than annually, a carrying charge will be charged into the premium. Grace period for late premiums is usually 30 days Reinstatement can occur if there’s evidence of premiums paid and a 3-5 year window. Policy loans- borrow cash value from the contract Automatic premium loan- beneficiary protection- if cash value in contract and premium is not paid, they’ll take cash out and it’ll be as if the premium was paid (not in term insurance) Entire contract clause- the contract gets matched with application and the two become the entire contract. Incontestable clause- if anything is discovered up to 2 years after the contract starts, the contract may be voided. After 2 years, the carrier must pay the claim regardless.• Exceptions- beneficiary commits murder, someone else takes the medical exam, no insurable interest at policy inception Suicide clause- 2 year period of time Misstatement of Age or Sex clause- for age/sex mistakes, they’ll recompute and make the adjustment to the premium Change of plan provision- term to level premium Assignment clause(s)- life insurance is payable to bank for loans Exclusions and Restrictions- suicide clause, war clause (act of duty exclusion), aviation exclusion (a flight- private passenger), excluded activities.o Life Insurance Companies Mutual vs Stock Insurance Company- Mutual is owned by policyholders, earns money by selling life insurance. Stock companies have investors, shares, etc. Participating vs non-participating- participating pays dividends. Mutual funds are participating, rarer for a stock company to pay dividends to policyholders, they pay them to stockholders. Dividend options- level premium policy with participating company, every year they pay dividends. You can choose to receive them as cash (pay taxes), reduction of premium (pay taxes), accumulation at interest (pay taxes), paid-up additions (most popular and useful, accumulates dividends as additional coverage, no taxes.), one-year term policy.  Nonforfeiture options- if you don’t want the policy anymore. Can take the policy as cash value, reduced paid-up (face


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FSU RMI 3011 - Test 3 Study Guide

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