Life Insurance Basics
What is the primary purpose of life insurance?
To provide financial protection for survivors after the insured’s death.
What life insurance type offers lifetime coverage and cash value buildup?
Whole life insurance.
What is the grace period required by NY for life policies?
31 days.
What is a policy loan?
A loan from the insurer using the policy’s cash value as collateral.
Are death benefits from life insurance subject to income tax?
No, they are generally tax-free to the beneficiary.
What is insurable interest, and when must it exist in NY?
A financial or emotional relationship that would cause loss at death; must exist at policy inception.
What type of policy offers both insurance protection and an investment component with separate accounts?
Variable life insurance.
What rider pays part of the death benefit while the insured is alive if diagnosed terminally ill?
Accelerated death benefit rider.
Which nonforfeiture option provides the longest period of protection?
Reduced paid-up insurance.
What is a Section 1035 exchange?
A tax-free transfer of cash value between like-kind policies (e.g., life to life or annuity).
What’s the difference between a participating and a non-participating life insurance policy?
Participating policies pay dividends; non-participating do not.
What policy provides a death benefit when both insureds have died?
Survivorship life (second-to-die insurance).
What provision protects the policy from being voided after a certain time, except for fraud?
Incontestability clause (after 2 years in NY).
What happens if unpaid policy loans and interest exceed the cash value?
The policy lapses.
What disclosures are required in NY before a life settlement?
Alternatives to selling, tax consequences, and effect on public assistance eligibility.
Scenario: A 35-year-old buys a $250,000 term policy for 20 years. What happens at the end of the term if no additional option is chosen?
Coverage ends; no cash value or benefit remains.
In universal life, how are premiums treated?
They are flexible and can be adjusted by the policyowner within limits.
Scenario: The insured forgot to pay the premium on time. What provision prevents immediate lapse?
Grace period or automatic premium loan (if elected).
Scenario: The insured misses a premium, but the policy has a cash value. How does the automatic premium loan help?
It uses cash value to pay the premium and keep the policy in force.
Scenario: A variable life policyholder in NY wants to change fund allocations. Who regulates this?
Both NY State Department of Financial Services and the SEC (federal).
Explain the “human life value” approach to determining coverage need.
It calculates the present value of future income that would be lost if the insured dies prematurely.
What key feature distinguishes adjustable life insurance from other types?
The policyholder can adjust face amount, premium, and coverage duration without a new policy.
What is the reinstatement provision, and what conditions must be met in NY?
Allows a lapsed policy to be restored (within 3-5 years) by proving insurability and repaying overdue premiums plus interest.
Explain how extended term insurance works as a nonforfeiture option.
It uses the cash value to buy term insurance for the same face amount for as long as the cash value will cover.
Describe the NY replacement regulation requirement for replacing an existing life policy.
Insurer must provide a policy summary comparing old and new coverage, costs, and values, and both agent and applicant must sign replacement disclosure forms.