Chapter 8 Types of Life Insurance

Universal Life

developed in response to the relatively low interest rates (generally 3.5-5%) earned by traditional whole life insurance cash values, which made the whole life product less attractive during periods of high inflation. In order to be more competitive, insurers introduced universal life policies that might pay higher interest rates (such as 8%, 10%, or 12%) during inflationary times. These policies also provide greater flexibility because they allow policyowners to adjust the death benefits and/or premium payments.

Advantages and Uses of Whole Life

*The principal advantage of whole life is that it is permanent insurance and can be used to satisfy permanent needs such as the cost of death, dying, and final burial expenses. *The level premium allows the policyowner to know exactly what the cost of insurance will be and offers a form of forced savings. *Whole life builds a living benefit through its guaranteed cash value, which enables the policyowner to use some of this cash for emergencies, as a supplemental source of retirement income, and for other living needs.

Current assumption whole life policies (also known as interest-sensitive whole life)

offer flexible premium payments that are tied into current interest rate fluctuations. The insurance company reserves the right to increase or decrease the premium within a certain range depending on interest rate fluctuations. During a period of relatively high interest rates, premiums could be reduced. During periods of low interest rates, premiums could be increased within certain limits. Usually, premium adjustments are made on an annual basis. There are two rates of return received on the cash value, either a guaranteed rate or a current rate, whichever is higher. Interest-sensitive policies can receive a rate of return other than just a fixed (guaranteed) rate

economatic policy

whole life-type policy with a term rider that uses dividends to purchase additional paid-up insurance. As policy dividends are declared, they are used to purchase additional paid-up insurance. As the paid-up insurance is added, an equal amount of term insurance is removed from the policy, thus maintaining the full face amount at no additional cost.

Flexible Policies

offer the policyowner the opportunity to change one or more of these components in response to changing needs and circumstances

Types of Flexible Policies

*Adjustable Life Insurance *Universal Life

Types of Whole Life Policies

*Continuous premium whole life *Limited-payment whole life *Single Premium Whole Life *Current assumption whole life policies (also known as interest-sensitive whole life) *economatic policy

Disadvantages of Whole Life Insurance

*The premium-paying period may last longer than the insured's incomeproducing years. *It does not provide as much protection per premium dollar as term insurance does.

Face Value of Whole Life

Assume the face value of the above policy is $100,000. The first day the policy is in force, the insured has $100,000 of protection. If the insured should die one week, one month, one year, 10 years, or 50 years later, the insured's beneficiaries would be paid $100,000 at the time of death. The face amount of the policy remains the same throughout the life of the policy (and the insured).

Whole vs. Flexible

Ordinary whole life policies offer premiums, cash values, and face amounts that are determined at the time the policy is purchased and, unless the policyowner takes out a loan or partial withdrawal, generally do not change over the life of the policy.

universal life policies have these characteristics.

Premium payments are separated and paid toward the insurance protection; the loading cost and the remaining balance is used to build the cash value (with interest). The policyowner may increase or decrease the death benefit during the policy term, subject to any insurability requirements. Premium amounts may be changed as long as enough premium is paid to maintain the policy. The interest earned by the cash account will vary, subject to a guaranteed minimum.

Level Premiums

Premiums for permanent insurance policies are designed to remain level during the entire period the policy is in force. In the early years of the contract, the insured actually pays in more premium than is needed to provide the current year's insurance protection, whereas in later years less than is needed is paid in. The net result is that the premium remains the same for the entire life of the contract. In addition, the company has the opportunity to invest the money at a favorable return, which helps reduce the cost of insurance.

Nonforfeiture Value

The cash value in the policy belongs to the policyowner. If the policyowner wishes, some or all of the cash value may be withdrawn from the policy. Any withdrawal of cash value will reduce both the face value of the policy and the amount of cash value available.

Level Face Amount

The face amount of the policy (the amount payable upon death at any age) is fixed and will not change while the policy remains in effect.

Guaranteed Cash Value

Usually, the policy has little or no cash value during the first couple of policy years (due to the way front end expenses are allocated). In the third year, cash values begin to accumulate.

Interim Term

When a person wants immediate protection and is thinking of starting a permanent insurance policy in the near future, interim term may be used to cover the period before permanent protection is to begin. Many companies write interim term on an automatically convertible basis—that is, they provide the insured with temporary term protection that will convert automatically at some future date, usually no later than 11 months. The premium for the interim term is based on the age at application. The premium for the permanent coverage is also based on attained age when permanent protection begins.

Limited-payment whole life

allow the policyowner to pay for the entire policy in a shorter period of time or to a specific age. Common forms of limited payment whole life are 20-payment life (meaning payments spread out over 20 years), 30-payment life, and life paid-up at age 65. Although the policy is fully paid-up at the end of this period, it has not yet matured. It will continue to provide protection and cash value accumulation until the scheduled maturity date at age 100, or death.

Adjustable Life Insurance

is a policy that offers the policyowner the option to adjust the policy's face amount, premium, type of protection, and/ or length of protection, without having to complete a new application or actually exchange policies. The flexibility of adjustable life is accomplished by allowing conversion from one form of insurance to another, and by making appropriate premium adjustments, if necessary.

Advantages and Uses of Term Insurance

most common uses for term is to provide a substantial amount of coverage at a minimum cost. Since term insurance provides pure protection, it allows a person with a limited income to purchase more coverage than might otherwise be affordable. This is particularly important when there is a clear need for additional protection.

Whole life is also called

permanent insurance because the maturity date is beyond the life expectancy of most individuals. However, a whole life policy actually consists of a combination of a savings element (the advancing cash value) and a decreasing amount of net insurance. When a whole life policy reaches its maturity date (age 100), the cash value would equal the face amount.

Whole vs. Universal

similar to a whole life policy in the sense that it has the same two components: death protection and cash value. However, instead of being fixed and guaranteed amounts, the death protection resembles one-year renewable term insurance and the cash account grows according to current interest rates. Generally, universal life policies have these characteristics.

Continuous premium whole life

the most common type of whole life insurance sold. These policies stretch the premium payments over the whole life of the insured (to age 100). This type of policy is often referred to as straight life insurance.

cash in a policy

any time by surrendering it in exchange for its cash value. An insured may also borrowed a portion of the cash value in the form of a policy loan, but this must be paid back (with interest) in order to restore policy values.

Decreasing term policies

are issued for an initial face amount that declines during the term period and reaches zero at policy expiration. For example, a 20-year decreasing term policy issued for $100,000 may only provide a death benefit of $50,000 after 10 years. This type of policy is ideal for many types of insurance needs that decrease over time (such as protecting the unpaid balance of a mortgage).

20-payment life (meaning payments spread out over 20 years)

policyowner will pay a higher premium in a 20-pay whole life policy than the policyowner would have in a 30-pay whole life. The shorter the payment period, the higher the premium.

Disadvantages of Term Insurance

Over time, renewable term insurance becomes more and more expensive. Although initially the level term premium is low, it increases with each renewal on the basis of the increased age of the insured and the increased risk of mortality for the insurance company. Thus, a relatively low premium at age 35 becomes an expensive premium at age 55 or 60. Because term insurance provides temporary protection for a limited time, the insured can be left without insurance at a time (older age) when protection is needed the most. Term insurance is pure death protection only. It offers no living benefits such as guaranteed cash values. Even if the term policy is renewable, it generally is not renewable beyond a certain age, such as age 65 or 70.

Increasing term

policies begin with little or no insurance protection, and the face amount grows over time. Although not very common, increasing term insurance is sometimes sold as a rider to another type of policy in order to provide an additional death benefit equal to total premiums paid or some other value.

Single Premium Whole Life

simply a whole life policy with one premium payment (a lump sum amount which, together with the interest it will earn, will be sufficient to cover all future premium payments). The entire cost of this policy is paid up at the time of purchase. Single premium whole life policies accumulate immediate cash value.

policyowner takes a cash value loan

the amount borrowed and any accumulated interest due on the loan become an indebtedness against the policy. If the insured dies before the loan has been repaid, any indebtedness will reduce the face amount of the policy accordingly: it will be subtracted from any death benefit.