Introduction to Life Insurance
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Questions and Answers

The death benefit from a life insurance policy is typically subject to taxes.

False (B)

Policy gains can affect the adjusted cost basis (ACB) of a life insurance policy.

True (A)

Taxation does not apply to dividends received from life insurance policies.

False (B)

A full surrender of a life insurance policy does not involve any calculation for policy gain.

<p>False (B)</p> Signup and view all the answers

Partial surrenders of life insurance policies can lead to reduced coverage amounts.

<p>True (A)</p> Signup and view all the answers

Policy loans typically incur interest charges that can affect their repayment.

<p>True (A)</p> Signup and view all the answers

Group life insurance provides the same benefits as individual life insurance.

<p>False (B)</p> Signup and view all the answers

The adjusted cost basis (ACB) is determined only by the policyholder's last acquired date.

<p>False (B)</p> Signup and view all the answers

Participating whole life policies allow policyholders to receive dividends.

<p>True (A)</p> Signup and view all the answers

Non-participating policies do not provide dividends to policyholders.

<p>True (A)</p> Signup and view all the answers

The cash surrender value (CSV) is a feature exclusively found in term life insurance.

<p>False (B)</p> Signup and view all the answers

Limited payment whole life policies require premiums to be paid for the entire life of the insured.

<p>False (B)</p> Signup and view all the answers

Term-100 life insurance provides coverage until the insured reaches age 100.

<p>True (A)</p> Signup and view all the answers

Automatic premium loans (APL) ensure that a policy remains active if premium payments are missed.

<p>True (A)</p> Signup and view all the answers

Paid-up additions (PUA) can only be purchased through a cash payment.

<p>False (B)</p> Signup and view all the answers

The mortality charge is included in traditional whole life policies but not in universal life insurance.

<p>False (B)</p> Signup and view all the answers

Dividends from participating whole life policies can be used to reduce premiums.

<p>True (A)</p> Signup and view all the answers

There are no investment options available for the accumulation of dividends in participating policies.

<p>False (B)</p> Signup and view all the answers

Flexibility for policyholders is a defining feature of universal life insurance.

<p>True (A)</p> Signup and view all the answers

Death benefits and cash values are unaffected by dividend illustrations in participating policies.

<p>False (B)</p> Signup and view all the answers

Premium offset policies allow policyholders to use dividends to cover premiums.

<p>True (A)</p> Signup and view all the answers

A level death benefit plus account value is one of the death benefit options available.

<p>True (A)</p> Signup and view all the answers

Collateral for third-party loans is not a feature included in universal life (UL) insurance.

<p>False (B)</p> Signup and view all the answers

Indexed death benefit is a type of death benefit option.

<p>True (A)</p> Signup and view all the answers

The guaranteed insurability benefit (GIB) rider allows additional insurance to be purchased without proof of insurability.

<p>True (A)</p> Signup and view all the answers

Policy loans are an option available in the accumulating fund segment of universal life insurance.

<p>True (A)</p> Signup and view all the answers

Accidental death riders are provided for permanent policies only.

<p>False (B)</p> Signup and view all the answers

Cumulative premiums can be included in the level death benefit option.

<p>True (A)</p> Signup and view all the answers

Premium offsets are an option in the accumulating fund section of universal life insurance.

<p>True (A)</p> Signup and view all the answers

Dread disease (DD) benefit is included in the supplementary benefits section.

<p>True (A)</p> Signup and view all the answers

Open-ended increases are a type of death benefit option.

<p>False (B)</p> Signup and view all the answers

Investment choices in universal life insurance include daily interest accounts.

<p>True (A)</p> Signup and view all the answers

Level death benefits always provide higher payouts than indexed death benefits.

<p>False (B)</p> Signup and view all the answers

Guaranteed investment accounts are one of the available investment components.

<p>True (A)</p> Signup and view all the answers

Surrendering the policy is a part of the death benefit options.

<p>False (B)</p> Signup and view all the answers

The family coverage rider is a part of supplementary benefits.

<p>False (B)</p> Signup and view all the answers

Private corporations can have a capital gains exemption.

<p>True (A)</p> Signup and view all the answers

A key person's life insurance is irrelevant when obtaining loans.

<p>False (B)</p> Signup and view all the answers

Criss-cross insurance is a type of buy-sell agreement.

<p>True (A)</p> Signup and view all the answers

An incomplete insurance application does not affect the underwriting process.

<p>False (B)</p> Signup and view all the answers

Standard risk classes are associated with the highest premiums.

<p>False (B)</p> Signup and view all the answers

Riders and supplementary benefits can be included in an insurance policy.

<p>True (A)</p> Signup and view all the answers

Group life insurance does not provide any additional coverage options.

<p>False (B)</p> Signup and view all the answers

The Medical Information Bureau (MIB) helps insurance companies assess risk.

<p>True (A)</p> Signup and view all the answers

Attained age is the same as chronological age in life insurance.

<p>False (B)</p> Signup and view all the answers

Policies may be issued without any medical examination for certain applicants.

<p>True (A)</p> Signup and view all the answers

Hazardous occupations have no impact on life insurance premiums.

<p>False (B)</p> Signup and view all the answers

Permanent residents are treated the same as Canadian citizens for life insurance purposes.

<p>True (A)</p> Signup and view all the answers

Cross-purchase agreements guarantee a buyer during the sale of a business.

<p>True (A)</p> Signup and view all the answers

Administration costs have no effect on insurance premiums.

<p>False (B)</p> Signup and view all the answers

Everyone will eventually experience the risk of _____.

<p>True (A)</p> Signup and view all the answers

Taxable income will affect the probability of a person's death at a specific age.

<p>False (B)</p> Signup and view all the answers

Mortality rate refers to the average number of years a person can expect to live.

<p>False (B)</p> Signup and view all the answers

Factors like age and health can influence an individual's risk of _____.

<p>True (A)</p> Signup and view all the answers

Life insurance companies classify individuals based solely on their income level.

<p>False (B)</p> Signup and view all the answers

One reason for delaying life insurance is the perception that death is far away.

<p>True (A)</p> Signup and view all the answers

Life expectancy is measured by the probability of dying at a certain age.

<p>False (B)</p> Signup and view all the answers

Risk management strategies are used to address the risk of _____.

<p>True (A)</p> Signup and view all the answers

The claims process includes proof of age and gender documentation.

<p>True (A)</p> Signup and view all the answers

Surrendering a policy means retaining all its benefits.

<p>False (B)</p> Signup and view all the answers

Churning and twisting refer to the practices related to replacing life insurance policies.

<p>True (A)</p> Signup and view all the answers

New mortgage acquisition is not a factor in monitoring changing client needs.

<p>False (B)</p> Signup and view all the answers

Incontestability clauses protect the insurance company from providing benefits after a policy has been in effect for a specified period.

<p>False (B)</p> Signup and view all the answers

Beneficiaries can be designated as revocable or irrevocable in a life insurance policy.

<p>True (A)</p> Signup and view all the answers

Administrative changes to an insurance policy do not require underwriting.

<p>True (A)</p> Signup and view all the answers

Misstatement of age can affect the payment upon death in a life insurance policy.

<p>True (A)</p> Signup and view all the answers

Grace periods are related to policy renewal processes.

<p>False (B)</p> Signup and view all the answers

Claim forms must be completed before any death benefits can be processed.

<p>True (A)</p> Signup and view all the answers

Leaving Canada does not affect life insurance policies at all.

<p>False (B)</p> Signup and view all the answers

Tax treatment of death benefits is a consideration in life insurance planning.

<p>True (A)</p> Signup and view all the answers

Group life insurance claims are processed in the same way as individual life insurance claims.

<p>False (B)</p> Signup and view all the answers

A policy can be assigned as collateral to secure a loan.

<p>True (A)</p> Signup and view all the answers

Contingent beneficiaries are paid first in the event of a claim.

<p>False (B)</p> Signup and view all the answers

Flashcards

Participating whole life policies

Whole life insurance policies that allow policyholders to share in the profits earned by the insurer, often through dividends.

Shortfalls or Surpluses (Participating Policies)

Differences in the actual mortality experience and the expected mortality experience used in pricing the policy.

Non-participating policies

Whole life insurance policies that do not allow policyholders to share in the profits earned by the insurer.

Identifying the difference between participating and non-participating policies

The difference between participating and non-participating policies is that participating policies allow policyholders to share in the insurer's profits, while non-participating policies do not.

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Dividend payment options for participating policies

The options available to policyholders for receiving dividends earned on participating whole life insurance policies.

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Cash (Dividend payment option)

Withdrawing dividends in cash.

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Premium Reduction (Dividend payment option)

Using dividends to reduce premium payments.

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Accumulation (Dividend payment option)

Accumulating dividends within the policy, allowing them to grow tax deferred.

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Investment Options (Dividend payment option - Accumulation)

Investments offered within the policy for accumulated dividends. Options might include mutual funds, fixed interest accounts, or other investments.

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Upon death (Dividend payment option - Accumulation)

The accumulated dividends are paid out upon the policyholder's death, adding to the death benefit.

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Paid-up additions (PUA) (Dividend payment option)

Using dividends to purchase additional permanent life insurance coverage, increasing the death benefit.

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Term insurance (Dividend payment option)

Using dividends to purchase temporary term insurance coverage.

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Non-forfeiture benefits

These benefits are guaranteed by the insurer and ensure that policyholders have options even if they stop paying premiums.

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Cash surrender value (CSV)

The cash value that can be withdrawn from a whole life insurance policy if it is surrendered.

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Surrender charges (Cash surrender value)

Fees charged by the insurer when surrendering a policy. They can vary depending on the insurer and policy duration. These fees are typically deducted from the CSV.

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Tax-free death benefit

The death benefit paid to the beneficiary is not taxable income.

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Policy Dispositions

When you sell or surrender your life insurance policy, you may have a taxable gain.

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Policy Gains

The difference between the proceeds from a policy surrender and the adjusted cost basis (ACB).

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Adjusted Cost Basis (ACB)

The total amount you've paid for the policy, adjusted for certain deductions.

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Last Acquired Date

The most recently acquired shares or units of a policy are assumed to be the first ones sold, reducing your ACB.

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G1 Policies

Policies issued before 1990. Usually have a higher adjusted cost basis, which is beneficial.

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G2 & G3 Policies

Policies issued after 1990. These have lower ACB, which may result in higher taxes.

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Taxation of Policy Dividends

Dividends received from life insurance policies are generally taxed as investment income.

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Adjustable Mortality Deductions

The death benefit of a universal life insurance policy can be adjusted based on various factors like the policyholder's age, health, or changes in the policy itself. This flexibility enables the policy to adapt to the individual's needs over time.

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Death Benefit Options

A universal life insurance policy allows for different options for the death benefit payout. Each option offers distinct characteristics and potential benefits for the policyholder.

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Level Death Benefit

A level death benefit in a universal life insurance policy remains constant throughout the policy's term. This ensures a fixed amount will be paid to your beneficiaries upon your death, regardless of any market fluctuations.

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Level Death Benefit Plus Account Value

In this option, the death benefit of a universal life insurance policy includes a fixed level amount plus the value of the policy's accumulated account. This means the death benefit can grow with your investments over time.

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Level Death Benefit Plus Cumulative Premiums

This option combines a fixed level death benefit with the total amount of premiums paid into the policy. This means the death benefit will increase over time as premiums are paid, offering potential for a larger payout.

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Indexed Death Benefit

The death benefit in an indexed universal life insurance policy is linked to the performance of a specific market index, such as the S&P 500. This allows the death benefit to potentially grow with the market, offering a chance for higher returns.

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Net Premiums

Net premiums represent your total premiums paid minus the expenses charged by the insurance company. This calculation helps determine how much of your money is actually invested.

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Exemption Test

The Exemption Test determines if your net premiums (premiums minus expenses) are sufficient to cover the policy's cost of insurance. If not, your policy might face issues like policy lapses or cash value depletion.

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Tax Deferral

A key feature of universal life insurance is the ability to defer taxes on the investment gains within the policy. You only pay taxes when you withdraw money or receive the death benefit.

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Investment Choices

Universal life policies offer various investment options, allowing you to customize your investment strategy based on your risk appetite and financial goals.

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Guaranteed Investment Accounts

These accounts provide a guaranteed return on your investments, though often at a lower rate than other options. They offer a level of safety and stability.

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Index Fund Investments

These accounts offer the potential for growth through investing in a specific market index. You can benefit from market trends while managing your risk.

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Mutual Fund Investments

This option involves investing in a pool of assets managed by a professional fund manager. It offers diversification and potential for higher returns, but carries more risk.

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Policy Illustrations

Policy illustrations provide projections of how your policy might perform in different scenarios, based on assumed interest rates and policy fees. They offer insights into the potential growth and value of your policy.

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Accumulating Fund

The accumulating fund refers to the money that builds up within your universal life insurance policy due to premiums paid and investment growth. This fund represents the value of your policy and can be accessed for various purposes.

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What is the mortality rate?

The chance of dying at a specific age.

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What is life expectancy?

The average number of years a person of a certain age and group is expected to live.

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What factors influence mortality risk?

Factors like age, gender, health, smoking, and job can impact how likely a person is to die.

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How do life insurance companies group people for risk?

Life insurance companies categorize people into groups based on their risk of death.

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Why is the risk of death important to consider?

The risk of death is always present, even if it seems far away. It's important to acknowledge and address it.

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What are some strategies for managing the risk of death?

Strategies to manage the financial risks associated with death, such as purchasing life insurance.

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What are the financial implications of death?

The financial consequences that arise when someone dies, such as unpaid debts and loss of income.

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Why do people delay buying life insurance?

People often delay buying life insurance because they don't want to think about their own death.

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Premiums

The amount of money paid to the insurance company for coverage.

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Spouse or Dependant Coverage

Policies that cover the insured's spouse or dependents in case of death. This provides financial protection for beneficiaries.

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Making the Recommendation

The process of recommending a suitable life insurance policy to meet the client's needs.

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Type of Coverage

The type of life insurance chosen, including term, whole, universal, and variable life insurance. Each type has different characteristics and benefits.

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Death Benefits

The amount of money paid to the beneficiary upon the death of the insured. This provides financial support to the chosen beneficiary.

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Life Insurance Premiums

The cost of the life insurance policy, determined by factors such as age, health, coverage amount, and policy type.

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Beneficiaries

The individuals or entities who receive the death benefits upon the insured's death. This can include spouses, children, charities, or trusts.

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Primary and Contingent Beneficiaries

Primary beneficiaries receive the death benefits first, while contingent beneficiaries receive them if the primary beneficiaries are no longer alive.

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Revocable or Irrevocable Beneficiaries

Beneficiaries are either included in the policy with the right to change them, meaning the insured person can change the beneficiary later, or excluded from the policy with the right to change them.

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Probate Implications

The process of changing the beneficiaries of the policy. This can have implications for how the death benefits are distributed.

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Exclusions

Specific exclusions or conditions that limit coverage, such as pre-existing health conditions or dangerous activities. These are important for understanding the limits of the policy.

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Incontestability

A period of time after the policy is issued where the insurer cannot contest the validity of the policy, even if there were errors on the application. This ensures protection for the insured.

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Grace Period

A period of time where premiums can be paid late without cancelling the policy. This gives the policyholder some flexibility.

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Reinstatement

The process of reviving a lapsed policy, which might require proof of health and the payment of overdue premiums. This provides a second chance to regain coverage.

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Right of Rescission

The right of the policyholder to cancel their policy and receive a refund within a specific period, usually 10 days. This provides a cooling-off period to consider the purchase.

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Expiry

The expiration date of the policy, marking the end of coverage. This is important for understanding the duration of protection.

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Buy-Sell Agreement

An arrangement where two or more parties agree on the terms of buying or selling a business interest in the event of a certain trigger event like death or disability.

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Cross-Purchase Agreement

A type of buy-sell agreement where each owner agrees to buy the deceased owner's interest in the business. Each owner will purchase a life insurance policy on each of the other owners.

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Business-Owned Insurance

An agreement that uses a life insurance policy owned by the company to fund the purchase of a deceased owner's share.

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Capital Gains Exemption

A key person life insurance split-dollar arrangement where a corporation owns the policy and the employee pays premiums until the employee retires or leaves the company.

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Criss-Cross Insurance

A buy-sell agreement that uses a life insurance policy on each owner to fund the purchase of the deceased owner's interest, with each owner being the beneficiary and the insured.

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Key Person Life Insurance

A type of life insurance policy where the business beneficiary receives the death benefit, and the premiums are paid by the employer and employee using a split-dollar arrangement.

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Underwriting

The process of the insurance company assessing the risk of issuing a policy based on the applicant's information.

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Split-Dollar Arrangement

An agreement where the employee and employer split the cost of a life insurance policy.

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Taxation of Key Person Split-Dollar Arrangements

An agreement where the life insurance policy is owned by the company, but they share the premiums with the deceased employee's family.

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Key Person Life Insurance as a Requirement for Borrowing

A life insurance policy that guarantees that a loan can be repaid if the borrower dies, often used for business financing.

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Temporary Insurance Agreement (TIA)

A temporary agreement that provides coverage while the insurance company underwrites the policy, usually for a short period of time.

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Financial Ability

A section of the life insurance application that captures the applicant’s financial status, justifying the need for insurance coverage.

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Medical Information

A section of the life insurance application where the applicant discloses their medical history, including pre-existing conditions.

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Insurable Interest

An agreement where the insurer pays a death benefit to the beneficiary that has an insurable interest in the deceased.

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Underwriting by the Insurance Company

The process by which the insurance company gather information about the insured to make a decision about whether to approve coverage.

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Risk Classes and Premium

A system that categorizes applicants into different risk classes based on factors like health and lifestyle, affecting the premium.

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Study Notes

Introduction to Life Insurance

  • Life insurance addresses the financial implications of death.
  • Everyone faces the risk of death, though its probability changes with age.
  • Mortality rates are used to estimate an individual's risk of death.
  • Factors influencing mortality risk include: age, gender, health, lifestyle, occupation.
  • Insurers categorize individuals based on these factors for mortality data compilation.
  • Life expectancy is the average remaining lifespan of a group or individual.
  • Probability of death is the likelihood of dying at a specific age.

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Description

This quiz explores the fundamentals of life insurance, focusing on the financial implications of death and the factors that affect mortality risk. You'll learn about mortality rates, life expectancy, and how insurers categorize individuals based on various risk factors. Prepare to enhance your understanding of how life insurance works and its significance in financial planning.

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