Chapter 3 - Life Insurance Policies

1. Straight life

this is basic whole life insurance with a level face amount and fixed premiums payable over the insured's entire life. Premium payments made until death of insured or age 100 (maturity of policy)

K pays on a $20,000 20-Year Endowment policy for 10 years and dies from an automobile accident. How much will the insurance company pay the beneficiary?

$20,000 death benefit Because: if the insured dies before the endowment's maturity, the policy's face value- also known as the "death benefit"-is paid in a lump sum to any beneficiaries.

Adjustable life insurance allows you to vary your coverage as your needs change without requiring evidence of insurability

* Consequently, no new policy needs to be issued when changes are desired * Adjustable life has all the usual feature of level premium cash value life insurance

Advantages of whole life Insurance

* Covers the entire life of the insured *living benefits - cash value and policy loans *Fixed premiums

Drawbacks (Han che) of whole life insurance

*Protection is more expensive because of living benefits *Premium paying period may extend beyond the income-earning years

Whole life

- Called permanent life insurance Insurance that provides death benefits for the entire life of insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium. - Provides lifetime protection and includes a savings element known as cash value -Whole Life policies endow at the age 100, which means the cash value created by the payment premiums is scheduled to equal the face amount of the policy at age 100 - Premiums for whole life policies usually are higher than those for term insurance

most term policies are

- Renewable - Convertible - Renewable and Convertible

Convertible term

-A term life policy has a provision that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. -The premium for the new whole life permanent policy will be based only on the insured's current attained age. - Convertible Term provides temporary coverage that may be changed to permanent coverage without evidence of insurability. For example: If you take out term insurance policy when you are young to take advantage of your good health and the policy;s lower premium, but want the option convert the policy to a permanent one for final expense benefits once your dinances improves, you would want a convertible term life policy. The conversion provilege of a group term life policy allows an individual to leave the group term (temporary) plan and convert his or her insurance to an individual (permanent) policy without providing evidence of insurability. The most important factor to consider when determining whether to convert term insurance at the insured's attained age or the insured's original age is the premium cost. The number one factor which impacts life insurance premium cost is the insured current or attained age. For example: a $25,000 policy on a healthy 7 year old boy will cost substantially less than a $25,000 policy on a 47 year old man. Whether converting an individual or group term insurance policy, although your insurability is guaranteed, your age is rypically reevaluted to your current (attained) age, not left at the age you were when yoy applied for original term policy. Convertible Term would allow you to take your temporary converahe and change it to permanent converage without evidence of insurability or good ealth, but your premiums will insurease due to using your attained age

2. Limited Pay Whole Life

-The premiums for the coverage will be completely paid up well before age 100 This is whole life insurance where the insured is covered for his entire life, but premiums are paid for a limited time. As the premium payment period shortens, cash values increase faster and the fixed premiums are higher. For example, under a life paid-up at 65 policy, premiums are only paid until the insured 65 years old. With a 20-pay life policy, the insured only pays for 20 years. These policy are in effect until the insured's death or they reach age 100f

decreasing term policy

-feature a level premium and death benefit that decreases each year. -Decreasing term policies are primarily used when the amount of protection needs to decrease over a period of time. -The death benefit will be zero dollars at the end of the policy term Term life insurance that provides an ANNUALLY DECREASING FACE AMOUNT OVER TIME WITH LEVEL PREMIUMS. These policies are usally ofr mortgage protection. - A decreasing term policy is a type of life policy which has a death benefit that adjust periodically (according to a schedule) and is written for a specific period of time. - Decreasing term policies are usually written for a mortgage or other debt that typically decrease over time until it is paid off. For example, a 15 year decreasing term policy could protect a 15-year mortgage. As the mortgage balance reduces each year, the face value of the insurance policy will adjust accordingly to math. After the mortgage is paid off, the insurance policy will expire.

Increasing term

-feature level premiums and a death benefit that increases each year. Term life insurance that provides AN INCREASING FACE AMOUNT over time based on specific amounts or a percentage of the original face amount or percentage

Level term

-is the most common type of temporary protection. -The word "LEVEL" refers to the death benefit that does not change throughout the life of the policy also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. Life insurance written to cover a need for a specified period of time at the lowest premium is called LEVEL TERM INSURANCE. - Term insurance always expires at the end of the policy period. For example, if D needs life insurance that provides coverage for the remainder of her working year and wants to pay as little as possible, D would need Level term. Level term provides a fixed, low premium in exchange for coverage which last a specified time period

3 types of term coverage

1. Level 2. Increasing 3. Decreasing

Types of whole life insurance include:

1. Straight whole life 2.Limited pay whole life 3.single-premium whole life 4.modified whole life 5.graded whole life

which of the following types of Life policies most likely contains a Renewability feature?

10 Year cinvertible Term A 10 year convetible Term life policy contains a Renewability provision

A potential client, age 40, would like to purchase a whole life policy that will accumulate cash value at a faster rate in the early years of the policy. which of these statements made by the producer would be correct?

20-pay Life accumulates cash value faster than Straigh Life Because:

what types of policy would offer a 40-year old the quickest accumulation of cash value

20-pay life

N is a 40-year old applicant who would like to retire at age 70. He is looking to buy a life insurance policy with level premiums, permanent protection, and be paid-up at retirement. Which of these should N purchase?

30 Pay Life Limited pay whole life policies have level premiums that are limited to a certain period

Equity Index Universal Life insurance (EIUL)

A permanent life insurance policy that allows policyholders to tie accumulation values to a stock market index, like the S&P 500. Indexed universal life insurance policies typically contain a minimum guaranteed fixed interest rate component along with the indexed account option. Indexed policies give policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns. Potential extra interest based on the investments of the company's general account.

Joint Life Policy

A policy that covers two or more people. The age of the insureds are "averaged" and a single premium is charged. It uses permanent insurance (as opposed to term) and pays a death benefit when one of the insureds dies. The survivors then have the option of purchasing an individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies. One policy covers two. Think "Joint Accounts" with a bank. One account, two people.

Modified Endowment Contract (MEC)

A policy that is overfunded, according to IRS table, is classified as a Modified Endowment Contract. Policies that do no meet the 7-pay test are considered MEC's and will lose favorable tax treatment. The 7-pay test is a limitation on the total amount you can pay into your policy in the first seven years of its existence. The test is designed to discourage premium chedules that would result in a paid-up policy before the end of a seven-year period. For example. if yearly premium is $500, in a seven year period a total amount paid would equal $3,500. If you paid $3,501, it has now exceeded the 7-pay test and is no longer a life insurance contract. It will now be taxed as an investment * If withdraw prior to age 59 1/2, there is a 10% penalty * Taxation only occurs when cash is distributed *Funds withdrawn from a MEC are subject to last-in first-out (LIFO) tax treatment, which assumes that the investment or earning portion of the contracts' values is withdrawn first (making these funds fully taxable as ordinary income) *Penalty taxes on premature distributions from a modified endowment contract (MEC) normally apply to policy loans

Term-Rider

A term rider is a type of life insurance product which covers children under their parent's policy. Family plan policies usually cover family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is always level term. This is cheaper than every family getting their own policy. For example, the main policy may be on Dad, then mom and the children are riding on (attached to) to dad's policy as term riders. Term riders allow for additional family members to be covered under one policy by attaching everyone to a main policy. Term riders can also allow an applicant to have excess coverage by adding an additional term rider for them rider for them to main policy

Note

A variation of the joint life policy is the joint and survivor policy, or a "survivorship life policy" (it can also be known as a "second to die" policy). This plan also covers two lives, but the benefit is paid upon the death of the last surviving insured Compared to the combined premium for separate life insurance policies on two individuals, the premium for a survivorship life policy is lower

2 Types of Policy Assignment

Absolute Assignment Collateral Assignment

3. Single premium whole life

Allows the insured to pay the entire premium in one lump-sum (tra mot lan) and have coverage for the insured's entire life * An immediate non-forfeiture is created *An immediate cash value is created * A large part of the premium is used to set up the policy's reserve

Straight Whole Life

Also called Continuous Premium Whole Life, is basic whole life policy, where the policy owner pays a fixed premium for the time the policy is issued until the insured's death or age 100.

What kind of life insurance starts out as temporary coverage but can be later modified to permanent coverage without evidence of insurability?

COnvertible Term Because: Convertible Term provides temporary coverage that may be changed to permanent coverage without evidence of insurability

A company that owns a life insurance policy on one of its key employees may do all of the following EXCEPT

Change the policy's interest rate The company may do all of these things with a Key Person Insurance:Borrow against cash value, change beneficiary, cancel policy.

A Univesal Life policy is sometimes referred to as an unbundled Life Policy because the owner can see the interest earned, expense charge, and the

Cost of insurance because: The Universal Life Policy is called an unbunded Life Policy because the policyholder can see the expense charge, the interest earned, and the cost of the insurance

A(n) ........... term life policy is normally used when covering an insured's mortgage balance

Decreasing because: Decreasing term life policy is normally used when covering an insured's mortgage balance

Which of these types of policies may NOT have the Automatic Premium Loan provision attached to it?

Decreasing Term because: The automatic premium Loan provision can be incorporated into all of these policies except Decreasing term

S is close to retiring and would like to purchase a policy that will yield greater gains than bonds, but will still protect the principal with a minimum level or risk. Which product would S be advised to purchase?

Equity Index Insurance

Family Plan Policy Example:

Husband - Whole life Policy Wife (Spouse) - Term Policy - convertible without proof of insurability Children - Term Policies - convertible usually at age 18-21 without proof of insurability; premium remains same regardless of the number of children

Absolute Assignment

Involved transferring all rights of ownership to another person or entity (to chuc khac) - it is a permanent and total transfer of all the policy rights -The new policy owner does not need to have an insurable interest in the insured

Ordinary life

Is made up of several types of individual life insurance, such as temporary (term), permanent (whole).

which if these would be considered a Limitted-Pay Life policy?

Life Paid Up at Age 70

Juvenile Insurance

Life insurance which is written on the lives of a minor is called juvenile insurance. The adult applicant is usually the premium payor as well, until the child comes of age and is able to take over the payments. A payor provision is typically attached to juvenile policies. It provides that, in the event of death or disability of the adult premium payor, the premiums will be waived until the child reaches a specified age (such as 18, 21, or 25). Py or Provision protects the insured in the event the PAYOR dies or is disabled

4. Modified whole life

Low premiums in the early years and jumps into higher premium in the later years and remains fixed thereafter. Premiums increase just once.

All of these insurance products require an agent to have proper FINRA securities registration in order to sell them EXCEPT for

MOdifies Whole Life Because: an agent must have proper FINRA securities registration to sell all of these products: Variable Life, Universal Variable Life, Variable Annuity

Which type of policy is considered to be overfunded, as stated by IRS guidelines?

Modified Endowment Contract Because: A policy that is overfunded to where it does not meet the 7 pay test is considered a MOdified Endowment Contract

When a life insurance policy exceeds certain IRS table values, the result would create which of the following?

Modified Endowment Contract (MEC)

Whole Life insurance policies are contractually guaranteed to provide each of the following EXCEPT

Partial withdrawal features beyond a surrender charge period BEcause : whole life insurance accept: cash value that will ultimately replace the death benefit, nonforfeiture benefit options, premiums that remain fixed for the life of the policy.

Multiple Protection Policies

Pays a benefit of double or triple the face amount if death occurs during a specified period. If death occurs after the period has expired, only the policy face amount is paid. The period may be for a specified number a years - 10,15, or 20 years or to specified age such as 65. These policy are combinations of permanent insurance and level insurance.

Whole life Insurance

Provides both living and death benefits. Provides permanent life insurance protection for the insured's entire life. It also provides living benefits such as cash value and policy loans

What type of life insurance are credit policies issued as?

Term because: the type of insurance used is decreasing term, with the term matched to the length of the loan period (though usually limited to 10 years or less) and the decreasing insurance amount matched to the declining loan balace.

What kind of life insurance product covers children under their parent's policy?

Term Rider

Annual renewable term

Term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability

Renewable term

Term insurance that guarantees the insured the right to continue term converage after expiration of the initial policy period wihthout evidence of insurability - The premium for the new term policy will be based only on the isured's current attained age

All of these statements about Equity Indexed Life Insurance are correct EXCEPT

The premiums can be lowered or raised, based on investment performance because: Equity Indexed Life Insurance is permanent life insurance that allows policyholder to tie accumulation values to a stock market index. -COntains: Cash value has a minimum rate accumulation, of the gain on the index goes beyond the policy's minimum rate of return, the cash value will mirror that of the index, Ties to an equity index such as the S&P 500

Family Plan Policies

These are designed to insure all family members under one policy. Usually the family head os covered by permanent (whole life) insurance and the spouse/ children are included on the same policy as level term life riders (family term riders) The term coverage on the souse and children are normally convertible to permanent coverage without evidence of insurability. If "attached" to someone else's policy. Think side car on motocycle. Riders must Ride on somehting

5. Graded whole life

Under a typical graded premium life insurance policy, the premium increases yearly for a stated number of years, then remains level. Premiums continue to stay level for thr remainder of the policy. For example, a policy can start out low in a graded whole life and increase a small amount every year up until the fifth year, then levels off (giam dan) for the remainder of the policy.

Which of the following Life insurance policies combine term insurance with an investment element?

Universal Life

The Cash Value in a (n)............Life policy may fluctuate to changing assumptions regarding mortality cost, interest, and expense factors.

Universal Life Policy

A life policy with a death benefit and cash value that can fluctuate according to the performance of its underlying investment portfolio is referred to as:

Variable Life

Life insurance immediately create an estate upon the death of an insured. Which of the following policies is characterized by an guaranteed minimum death benefit?

Variable Life because: The variable nature whole life is its death benefit. However, if invesment performance is poor, the death benefit will not go lower than the policy's guaranteed minimum

S owns a life insurance policy with cash values that fluctuate according to the underlying investment performance of common stocks. Which of these policies does S own?

Variable whole life because is a insurance policy in which the cash values are determined by the performance of the underlying securities in the policy

A life insurance policy that provides a policyowner with cash value along with a level face amount is called:

Whole Life because: whole life provides the insured with a cash value as well as a level face amount

Family Income Policies

Whole life and decreasing term insurance (begins date of purchase). Provides monthly income to a beneficiary if death occurs during a specified period after date of purchase. If the insured dies after the specified period, only the face value is paid to the beneficiary since the decreasing term insurance expired. Income this concern typically DECREASE over time because the household shrinks. They use decreasing term instead level. With decreasing term the benefit begins to decrease as soon as the policy begins

Family Maintenance Policy

Whole life and level term (begins date of death). Provides income to a beneficiary for a selected period of time if an insured dies during that period. At the end of the income- paying period, the beneficiary also receives the entire face amount of the policy. If an insured dies after the end of the selected period, the beneficiary receives only the face value of the policy. Maintenance "maintains" the family using level term. This term the family will receive a benefit for so many years after the insured's death

Adjustable life policies

are distinguished by their flexibility that comes from combining term and whole life insurance into a single plan * The policyowner determines how much face amount protection is needed and how much premium the policyowner wants to pay

Credit policies

are typically purchased using a decreasing term life insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining (giam dan) loan balances. Since Credit life insurance is designed to cover the life or debtor and pay amount due on a loan of the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding. For example, if you wanted an insurance policy protect a $20,000, 5 year auto loan, you would use 5 year decreasing term life insurance policy with an initial face amount $20,000. You will pay the same level premium every month for the 5 year term of the policy. The face value will start out at $20,000 and change according to a schedule (the decreasing balance of the auto loan). After 5 years, the car will be paid for and the insurance policy will no longer be needed.

Term Life

insurance gives you the greatest amount of coverage for a limited period of time. -Term insurance is only good for limited period of time because it has a TERMINATION date. -Term insurance is an inexpensive type of insurance, making it an attractive option for large policies. -Term life is the CHEAPEST type of pure life insurance, and due to having a termination date and not having any cash value. it will ALWAYS be cheapest than whole life policy with the same face amount. It provides a pure death protection since it only pays a death benefit if the insured dies during the policy term. - Term is often renewal and convertible. For example, if you have 10-year renewable and convertible term; After 10 years are up, the policy terminated or you can renew it. If you renew it the premium price will go up, and you will have the policy for another 10 years. This cycle continues until you are too old to renew or it's too expensive. - All TERM insurance has final TERMINATION date where you can no longer renew it. IF the policy is CONVERTIBLE, you can CONVERT it to whole life (think rent to own) at any time. Any time you can renew or convert ANY type of insurance, you do not have to worry about your health, is your insurability is locked in. However, the price will always go uo, because your attained (or current) age for your new policy. Term is typically thought of as "renting" - you have a roof over your head, but they're going to raise the price and until it no longer makes sense for you to keep it or at some point they TERMINATE the contract and kick you out

Individual Life

insurance issues very small face amount, such as $1,000 or $2,000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage

Group Life

insurance written for members of a group, such as place of employment, association, or a union. Coverage is provided to the members of that group under ONE MASTER CONTRACT. The group is underwritten as a whole, not on each individual member. One of the benefits of group life coverage is usually there is no evidence of insurability (kha nang bao hiem) required.

Collateral Assignment

involves a transfer of partial rights to another person, this is usually done in order to secure a loan - this is a temporary assignment -Once the debt or loan is repaid the rights are returned to the policy owner

Variable Universal Life (VUL)

is a type of life insurance that build cash value. It combines all the characteristics of a universal life and variable life. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available seperate accounts to use is entirely up to the contract owner The "variable" component in the name refers to the ability to invest in seperate accounts whose values vary-they vary because they are refers to the ability to invest in stock and/or bond markets. The "universal" component in the name refers to the flexibility the owner has in making premium payments. This provides the policyowner with flexible premiums, adjustable death benefits, a guaranteed minimum death benefit and gives the insured growth potential for higher returns, but also potential for loss. Evidence of insurability can be required for an individual covered by a variable universal life policy when the death benefit is increased

Universal Life

is a variation of whole life insurance, characterized by considerable flexibility *Changes may be made with relative ease by the policyowner with these flexible-premium policies * Investment Gains go towards cash value * Unlike whole life (with its fixed premiums, fixed face amounts, and fixed cash value accumulations) universal life allows its policyowners to determine the amount and frequency of premium payments which will adjust the policy face amount * Basic characteristics of a universal life policy are flexible premiums, flexible benefits, no minimum death benefit, and cash value withdrawals *Cash value accumlations are subject to a minimum interest guarantee * Any surrender charges of a universal policy must be disclosed

Cash Value

is also referred to as Nonforfeiture values

Credit life insurance

is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. It is normally issued in an amount not to exceed the outstanding loan balance and is usually paid entirely by the borrower. A decreasing term policy is most often used.

3 basic types of whole Life Insurance

straight whole life, limited pay whole life and single-premium whole life

Right of owner ship

the assignment provision specifies the policy owner's right to transfer ownership of the policy

The amount of coverage on a group credit life policy is limited to:

the insured's total Loan Value. Because: with group credit life policy, the amount of insurance on the life of a debtor is limited to the total amount of the insured's loan.

when os the face amount paid under a Joiny Life and Survivor policy

upon death of the last insured

A term life insurance policy matures:

upon the insured's death during the term of the policy Because: Term life policies can only mature (pay out the face amount) if death occurs during the term of the policy

Which of these types of life insurance allows the policyowner to have level premiums and to also choose from a selection of investment options?

variable Life Because: A Life Insurance policy that has a level premium but allows the policy owner to choose from a selection of investment options is known as variable Life

Variable Whole Life Insurance

was created to help offset the effects of inflation on death benefits. It's permanent life insurance with many of the same characteristics of traditional whole life insurance. The main difference is the manner in which the policy's values are invested. With traditional whole life, these values are kept in the insurer's general accounts and invested in conservative investments selected by the insurer to match its contractual guarantees and liabilities. With variable life insurance policies, the policy values are invested in the insurer's separate accounts which house common stock, bond, money market, and other securities investment options. Values held in these separate accounts are invested in riskier, but potentially higher yielding, assets than those held in the general account. The basic characteristics of a variable life policy are: fixed premiums, a guaranteed minimum death benefit which fluctuates over the minimum, and cash values which fluctuate and are not guaranteed.

A policy that becomes a Modified Endowment Contract (MEC)

will lost many if its tax advantage Because When a policy becomes a Modified Endowment (MEC), many of the tax advantage are lost