AFK Insurance Fundamentals Flashcards

A variable annuity differs from a fixed annuity primarily because its value is:

Answer: Linked to the performance of underlying investment sub-accounts

Variable annuities allow the contract holder to allocate premiums among investment sub-accounts (similar to mutual funds), so the account value fluctuates with market performance.

What does 'insurable interest' mean in the context of life insurance?

Answer: The requirement that the policy owner must have a legitimate financial or personal interest in the continued life of the insured at the time of application

Insurable interest requires that the applicant would suffer a financial or personal loss upon the death of the insured, preventing life insurance from being used as a wagering contract.

Which rider on a life insurance policy waives future premium payments if the insured becomes totally disabled?

Answer: Waiver of premium rider

The waiver of premium rider waives all required premium payments if the insured becomes totally disabled, keeping the policy in force without cost to the policyholder.

What is an irrevocable life insurance trust (ILIT) primarily used for in estate planning?

Answer: To keep life insurance death benefits out of the taxable estate, thereby reducing estate taxes

An ILIT owns a life insurance policy so that the death benefit is excluded from the insured's gross estate, helping high-net-worth individuals reduce federal estate tax liability.

The 'benefit period' in a long-term care insurance policy refers to:

Answer: The maximum length of time the policy will pay benefits

The benefit period defines the maximum duration—such as 2, 3, 5 years, or lifetime—that the long-term care policy will pay covered benefits.

What is the primary purpose of a 1035 exchange in insurance planning?

Answer: To exchange one insurance or annuity contract for another of like kind without triggering a taxable event

A 1035 exchange (under IRS Code Section 1035) allows the tax-free exchange of one life insurance policy, annuity, or long-term care contract for a similar product, deferring any embedded gains.