Life insurance Chapter 10

interest only

policyowner may leave policy proceeds with the insurer to earn interest. The proceeds are left with the insurer, and the interest is paid to the beneficiary on an installment basis.

Nonforfeiture options

protect a policyowner from losing her entire investment when a life insurance policy is cancelled, surrendered, or when premium payments stop. (Nonforfeiture options are available only for life policies that accumulate cash value.)

Extended Term Option

provides extended term insurance in place of the cash value policy. Under this option, the policyowner may request that the insurance company use the existing cash value to purchase term insurance equal to the face amount of the original policy with a single net premium. This term insurance will remain in effect for as long a period of time that can be purchased with the cash value available. Extended term is not available for rated policies. Cash value is used as a single premium to purchase the same amount of coverage as the original policy, but it is now a term policy.

Life income with period certain

(e.g., a specified number of years), occurs where installments are payable as long as the primary beneficiary lives, but should this beneficiary die before a predetermined number of years, the insurer will continue the installment to a second beneficiary until the end of the certain period.

Assumed interest

A life insurance company estimates that invested money will earn a given rate over the long run, usually around 4%. If a company assumes its investments will earn 4% but the invested premiums actually earn 8%, the company has earned excess interest.

a Waiver

A waiver is a type of rider that is used to exclude benefits and for which no premium is charged. For example, a waiver may be attached to a policy that excludes benefits for death by a specified cause such as a particularly hazardous hobby.

There are three nonforfeiture options:

Cash surrender value Extended term insurance Reduced paid-up insurance

Types of Riders

Cost of Living Additional Insured Return of Premium Return of Cash Value Guaranteed Insurability Payor Rider/payor clause disability income waiver of premium Accidental Death( double indemnity) Substitute Rider Accelerated Benefits Living Benefits Provision

Additional Insureds

Coverage for a spouse may be obtained to cover the extra expenses of child care and home-related costs by purchasing some sort of family term insurance. This insurance may also be used to protect dependent parents. A term policy can be added to policy to provide this coverage. Spouse/other-insured term riders are used to purchase insurance on a spouse or someone other than the original person. Examples include: a child term rider—used to purchase term insurance on a life of a child; and a family term rider—combines the spouse and the children's rider for temporary coverage on the family.

Paid-Up Additions Option

Dividends may be used to purchase additional amounts of insurance which are added to the face amount of the contract. Paid-up additions are actually single premium purchases of as much life insurance as the amount of the dividend will purchase at the insured's attained age.

Operating expenses or loading—

Past experience tells a company that it will cost so many dollars per $1,000 coverage to keep the company going. Such costs as accounting, rent, office equipment, and so forth are relatively predictable. Any savings realized will help reduce operating expenses or loading.

Payor Rider

Payor Rider

Cash Surrender Value

The cash surrender value increases each year that the policy remains in force. Therefore, the cash surrender value forms the basis of all the other surrender or nonforfeiture values. When an insured exercises the cash surrender value option, the policy is returned to the insurer and the company has up to six months to pay the cash surrender value to the insured.

Mortality—

The mortality tables tell us that a certain number of insureds in each age group will probably die during the next year. If fewer people die than predicted, the life insurance company experiences a mortality savings.

joint and survivorship life income

The option occurs when, if at the death of the first party the second party is still living, installments are continued during the latter's lifetime.

Accumulation at Interest Option

The policyowner may leave dividends with the insurer to accumulate at interest in much the same fashion as a savings account. The interest earned will be at a rate no less than the minimum rate specified in the contract. Dividends left with an insurer may be withdrawn at any time.

Waiver of Premium

The waiver of premium rider found in a life insurance contract states that if an insured becomes permanently and totally disabled during the term of the policy, premium payments will be waived during the period of disability. The contract will remain in force just as if the premiums were paid. An additional premium is charged for this benefit, and it is subject to a waiting period (typically, three to six months). If the insured is still totally disabled after this period, premiums are waived retroactively from the date of disability. (Usually the insured and the policyowner are the same.)

disability income

This rider waives premium payments while the policyowner is totally disabled and pays a specified amount each month (income) to the policyowner while the disability continues. Under the disability income rider, the company guarantees the insured policyowner a regular monthly income for as long as the insured remains totally and permanently disabled. The amount of the income is usually based on the face amount of the policy—for instance, $X per month per $1,000 of coverage.

Substitute Insured Rider

actually does permit a change of insureds. This rider is also known as an exchange privilege rider.

Guaranteed Insurability

allows a policyholder to purchase specified amounts of additional insurance without evidence of insurability. The new insurance is issued at standard rates on the basis of the insured's attained age when the option is exercised.

Riders

are special policy provisions that attach to the policy, or "ride" it. A rider also can refer to a term policy that is attached to a permanent policy to provide additional coverage. Riders can be used to enhance or add benefits to the policy, or they can be used to take benefits away from the policy.

Reduced Paid-Up Insurance Option

insurance company uses the cash value of the contract to purchase a single premium insurance contract of the same form (e.g., 20-pay life, ordinary life, and modified life) as the original policy. The amount of coverage will be much less than the original policy, but no more premium payments will be required. Thus, the policyowner/insured will receive a policy that is paid in full for life.

fixed period option

involves liquidating the proceeds and interest over a period of years, without reference to a life contingency (paid even if the beneficiary dies). It provides for the payment of policy proceeds in equal installments over a definite period of months or years.

Life Income Options

joint and survivorship life income pure life income option Refund life income Life income with period certain

Payor Rider

may be added to a life insurance contract which provides for the continuance of insurance coverage on the life of a juvenile in the event of the death or total disability of the individual responsible for the payment of the premiums (a parent or guardian). This benefit may be added for an additional premium and is also referred to as the payor clause.

Refund life income

options may take the form of a cash refund annuity or an installment refund annuity.

pure life income option

provides installment payments for as long as the primary beneficiary lives, with no return (refund) of principal guaranteed.

Living Benefits Provision

reimburses health and social service expenses incurred in a convalescent or nursing home facility, can be marketed as a rider to life insurance policies. LTC rider benefits are similar to those found in a LTC policy. The benefit structure includes the following. There are elimination periods of 10-100 days. Benefit periods are three to five years or longer. Prior hospitalization for at least three days may be required. Benefits may be triggered by impaired activities of daily living. Levels of care include skilled, intermediate, custodial, and home health care.

Return of Cash Value

rider is similar to the return of premium rider in that it is merely an additional amount of term insurance that is equal to the cash value at any point while effective. Buying it, the policyowner is simply getting additional term insurance. In reality, this rider does not return the cash value; it pays an additional amount of insurance equal to the cash value.

Accelerated Benefits

are standard in most individual and group life insurance policies. Through these provisions, people who are terminally or chronically ill have tax-free access to policy death benefits. People suffering from AIDS, cancer, heart disease, Alzheimer's disease, or other terminal or severe chronic illnesses often experience devastating financial hardship. These funds are usually used for such necessities as rent, food, and medical services.

Accidental Death( double indemnity)

benefit is sometimes referred to as double indemnity because it provides double the face amount of the policy if the insured dies due to an accident. An additional premium will be charged for this benefit. To be covered, death must occur within 90 days of an accident. The basic purpose of this restriction is to make sure that the accident is the only cause of death.

Dividends

credited to a policyowner may be paid in cash to that individual and the insurer simply sends a check to the policyowner. Dividends paid in cash are not considered taxable income because it is a return of unused premium.

Life Income Option

distributes policy proceeds and interest with reference to life contingencies. Life income options are a form of life annuity and serve the same functions. The amount of each installment paid depends upon the type of life income selected, the amount of the proceeds, the rate of interest assumed, the age of the beneficiary when the income begins, and the sex of the beneficiary.

Waiver of Cost of Insurance (Universal Life Policies)

found in universal life insurance policies, will pay the minimum amount of premium to keep the policy in force if the insured becomes permanently and totally disabled. When the average premium payment is calculated, there would be enough premiums to not only cover the cost of insurance, but also to contribute, in part, towards cash value accumulation.

Fixed Amount Option

the amount of income is the primary concern rather than a period of time (e.g., fixed-period) during which policy proceeds and interest earned are to be liquidated. Under this option, a fixed amount of income is designated to be paid at specific intervals (e.g., $2,000 per month). This amount is continued until the proceeds and any interest earned are exhausted.

A cost of living (COL) or cost of living adjustment (COLA)

A cost of living (COL) or cost of living adjustment (COLA) rider can provide increases in the amount of insurance protection without requiring the insured to provide evidence of insurability. The amount of increase is tied to an increase in an inflation index, most commonly the Consumer Price Index (CPI). Depending on the type of base policy, these riders can take several forms. The purpose of a cost of living rider is to increase the death benefit to keep pace with inflation, tied to the CPI. No proof of insurability is required. Premium is based on attained age.

Return of Premium

rider was developed primarily as a sales tool to enable the agent to say, for example, "In addition to the face amount payable at your death, we will return all premiums paid if you die within the first 20 years." The rider is simply an increasing amount of term insurance that always equals the total of premiums paid at any point during the effective years. In reality, the rider does not return premium but pays an additional amount at death that equals the premiums paid up to that time, as long as death falls within the time specified in the rider. By purchasing this rider, the policyowner is buying term insurance and is charged for it accordingly.