Chapter 11 & 12: Life Insurance
Grace Period
Period of time which allows policyholder to pay overdue premium
Reinstatement Clause
Permits the owner to reinstate a lapsed policy
Common Individual Life Insurance Underwriting Factors
- Age - Gender - Health Status - Medical Information Bureau - Prescriptions - Examination - Family medical history - Driving record - Alcohol and tobacco - Hobbies / activities
Variable Life Insurance
- Fixed premium policy - Death benefit and cash values determined by underlying investments - Cash surrender values are not guaranteed, and there are NO minimum guaranteed cash values
Universal Life Insurance
- Flexible premium policy - Two creditable interest rates - current v. guaranteed - Two forms of universal life insurance death benefits - Option A and Option B
Ordinary Life Insurance
- Level Premiums - overcharged in early years; undercharged in later years - Net amount at risk - difference between legal reserve and face mount of life insurance - Cash surrender value
Common Life Insurance Contractual Provisions
- Ownership Clause - Entire-Contract Clause - Incontestable Clause - Suicide Clause - Grace Period
Settlement options
- cash - Interest option - policy proceeds are retained by the insurer, and the interest is periodically paid to the beneficiary -Fixed-Period Option -Proceeds are paid to a beneficiary over some fixed period of time (blackout, dependency, readjustment) -Fixed-Amount Option -A fixed amount is periodically paid to the beneficiary
Types of whole life insurance
- ordinary whole life - variable life - universal life - variable universal life
What is the purpose of life insurance ?
- premature death (the death of a family head with outstanding unfulfilled financial obligations)
Variations of Whole Life insurance
- variable life insurance - universal life insurance - variable universal life insurance
Types of Term Insurance
- yearly renewable term - premiums increase with renewable - renewable - issued for one-year period - convertible - 5-, 10-, 15-, 20- 25-, or 30-year term: premiums paid during the period are level, but increase upon renewal - term to age 65 - decreasing term insurance: face amount gradually declines each year but premium is level - reentry term - return of premium insurance: returns the premiums at the end of the term period provided the insurance is still in force (includes only base premiums)
Additional Life Insurance Benefits
-Guaranteed Purchase Option -Permits policy owner to purchase additional amount of life insurance at specified times without further proof of insurability -Accidental Death Benefit Rider -Doubles face amount of life insurance if death occurs as a result of an accident -Accelerated Death Benefits -Part or all of the life insurance face amount is paid to a chronically or terminally ill policyholder before death.
Life-Income Options (Annuities)
-Life Income -Payments made only while the beneficiary is alive - cease once beneficiary dies -Life Income with Guaranteed Period -If primary beneficiary dies before receiving guaranteed number of years of payments, the remaining payments are paid to a contingent beneficiary -Life Income with Guaranteed Total Amount -If the beneficiary dies before receiving installment payments equal to the total amount of insurance placed under the option, the payments continue until the total amount paid equals the total amount of insurance
Policy Loan Provision
-Policy-owner can borrow the cash value on the policy -Variable or fixed interest rate
Life Insurance Tax Treatment
-Premiums -Individual life premiums generally not tax deductible -Death Benefits -Depends on whether or not received as a lump sum -Cash Value
Beneficiary Designation
-Primary and contingent beneficiary -Revocable and irrevocable beneficiary -Specific and class beneficiary
Uses of Term Insurance
1. Limitations on spending for insurance 2. Temporary protection 3. Guarantee future insurability
Limitations of Term Insurance
1. Premiums eventually reach prohibitive levels 2. Inappropriate if you wish to save money for a specific need
2 types of life insurance
1. Term Insurance - temporary protection 2. Whole Life Insurance - protection + savings component (cash value)
Term Insurance
Renewable - can renew policy without providing evidence of insurability Convertible - can convert the policy from a term to a whole life policy no cash or savings element
Costs of premature death
1. the family's share of the deceased's earnings is lost forever 2. expenses incurred because of funeral expenses, uninsured medical bills, estate settlements costs, and federal estate taxes 3. reduction in standard of living 4. noneconomic costs
Where do the dividends come from?
1.Difference between expected and actual mortality experience 2.Excess interest earnings 3.Difference between expected and actual operating expenses
Suicide Clause
Face amount not paid if insured dies due to suicide within two years of policy issuance
What is nonforfeiture?
Insurers must provide a minimum nonforfeiture value to policy owners who surrender their policies
Uses of Ordinary Life Insurance
Ordinary life insurance is appropriate when: 1. lifetime protection is needed 2. additional savings are desired
Variable Universal Life Insurance
Similar to UL with 2 exceptions: 1. The policyowner determines how the premiums are invested 2. The policy does not guarantee a minimum interest rate or minimum cash value
Incontestable Clause
The insurer cannot contest the policy after it has been in force two years during the insured's lifetime.
Entire-Contract Clause
The life insurance policy and attached application constitute the entire contract between the parties.
Ownership Clause
The policyholder possess all contractual rights in the policy while the insured is living.
Viaticals and Life Settlements
Viatical Settlements -Terminally ill Life Settlements -No longer need policy
What is a participating policy?
a policy that pays dividends
Dividend options
Cash Apply to premiums Dividend accumulations -The dividend is retained by the insurer and accumulated at interest Paid-up Additions -The dividend is used to purchase a small amount of paid-up whole life insurance
Nonforfeiture Options
Cash Value Reduced Paid-Up Insurance -The cash-surrender value is applied as a net single premium to purchase a reduced paid-up policy. -Whole life policy with lower face amount than the original policy Extended Term Insurance -The net cash-surrender value is used as a net single premium to extend the full face amount of the policy into the future as term insurance for a certain number of years and days.
What is whole life insurance?
Cash value policy with lifetime protection
Limitation of ordinary life insurance
the major limitation of ordinary life insurance is that some people are still underinsured after the policy is purchased
What are settlement options?
ways that the policy proceeds can be paid