Life Insurance Policies
Universal Life
-AKA flexible premium adjustable life -implies that the policy owner has the flexibility to increase the amount of premium going paid into the policy and to later decrease it again -can skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance -interest-sensitive policy
Two components of a Universal Life policy
-Insurance component: always annually renewable term insurance -cash account
Term and Permanent Life insurance
-Term life insurance is temporary life insurance provided for a specific period of time. AKA Pure life insurance -Permanent Life is a general term used to refer to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid. Provides lifetime protection, and includes a savings element (or cash value)
Interest-sensitive whole life
-aka current assumption life -fixed premium whole life policy that provides a guaranteed death benefit to age 100 -credits the cash value with the current interest rate that is usually comparable to money market rates. -provides for a minimum guaranteed rate of interest. -added benefit of current interest rates may allow for greater cash value accumulation or a shorter premium paying period
Juvenile Life
-any life insurance written on the life of a minor. -jumping juvenile: face amount increases at a predetermined age often 21. face amount jumps but the premium remains level
3 basic types of term coverage available
-level -increasing -decreasing
Variable Whole life insurance
-level, fixed premium, investment-based product. -fixed premiums and guaranteed minimum death benefit but cash value is not guaranteed and fluctuates with the performance of the portfolio -company not sustaining the investment risk, the assets of the contract cannot be kept in the general account but rather held in a separate account
Equity-indexed whole life
is that the cash value is dependent upon the performance of the equity index such as the S&P 500 although there is a guaranteed minimum interest rate -premium is fixed and the death benefit is guaranteed
Statutory definition of life insurance
-applies to all life insurance contracts issued after december 31 1984 -must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy
Whole life Insurance
-provides lifetime protection and includes a savings element or cash value. -premiums for whole life policies usually are higher than term insurance
Level Insurance
is the most common type of temporary protection purchased -term level refers to the death benefit that does not change throughout the life of the policy
Straight life (continuous premium whole life)
-basic whole life policy. -policy owner pays the premium from the time the policy is issued until the insureds death or age 100. -of the common whole life policies straight life will have the lowest annual premium
Policy loans, with interest, can be repaid in any of the following ways
-by the owner while the policy is in force -at policy surrender or maturity; subtracted from the cash value -at the insureds death; subtracted from the death benefit
Family protection policy
-combines whole life with term insurance to cover family members in a single policy, providing coverage on every member of a family -spouse has the opportunity to convert his or her term coverage to permanent coverage up until age 65 -children are automatically covered after birth for a specified period of time 30 or 31 days.
Regulation of Variable Products (SEC and FINRA)
-dually regulated by the State and Federal Government -due to the element of investment risk, the federal government has declared that variable contracts are securities thus regulated by the SEC, FINRA (NASD) and or federal bodies. -also regulated by the insurance department as an insurance product -agents selling must be registered with FINRA, have a securities license and be licensed by the state to sell life insurance
Seven-Pay Test
-established by the IRS to determine if an insurance policy is overfunded -cumulative premiums paid during the first 7 years of the policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest
Increasing Term
-features level premiums and a death benefit that increases each year over the duration of the policy term. -amount of increase is usually expressed as a specific amount or a % of the original amount -often used by insurance companies to fund certain riders that provide a refund of premiums or a gradual increase in total coverage such as the cost of living or return of premium riders
Survivorship Life (Second to Die)
-pays on the last death rather than first -the joint life expectancy in a sense is extended resulting in a lower premium than that which is typically charged for joint life. -often used to OFFSET THE LIABILITY OF THE ESTATE TAX upon the death of the last insured
Modified Endowment Contracts (MECs)
-single premium life insurance remained as one of the few financial products offering significant tax advantages
Level Premium Term
provides a level death benefit and a level premium during the policy term. -if policy renews at end of term, the premium will be based on the insureds attained age at the time of renewal
Decreasing term
-feature a level premium and a death benefit that decreases each year over the duration of the policy. -primarily used when the amount of needed protection is time sensitive, or decreases over time -commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. -therefore the amount of coverage thereby decreases as the outstanding loan balance decreases each year. -usually convertible; however, it is usually not renewable
Limited Payment
-premiums for coverage will be completely paid-up well before age 100. -common ones are 20 pay life and life paid up at 65. -shorter premium-paying period than straight life so the annual premium will be higher -well suited for those insured who do not want to be paying premiums beyond a certain point in time.
Term Policies
-provide for the greatest amount of coverage for the lowest premium. -provides pure death protection -if death happens, beneficiary is payed -if policy is canceled or expires prior to death nothing is payable at the end of the term -no cash value or other living benefits
Convertible Term
-provides the policy owner with the right to convert the policy to a permanent insurance policy WITHOUT EVIDENCE OF INSURABILITY.
Joint Life (first to die)
-single policy that is designed to insure two or more lives. -can be in the form of term insurance or permanent -premium would be less than the same type and amount of coverage on the same individuals -benefit is paid upon the first death only -premium is less than the sum of 2 premiums based on individual age
Adjustable Life
-type of flexible premium policy that was developed in effort to provide the policy owner with the best of both worlds (term and permanent) -insured typically determines how much coverage is needed and the affordable amount of premium -insurer then determines the appropriate type of insurance to meet the insured's needs -insured can + or - the premium or paying period, + or - the face amount, or change the period of protection
Characteristics of Whole life insurance (4)
1. Level Premium 2. Death benefit: guaranteed and remains level 3. Cash value: created by the accumulation of premium, and scheduled to equal the face amount of the policy when the insured age reaches 100 and paid to policy owner 4. living benefits: policy owner can borrow against the cash value while the policy is in effect or can receive the cash value when the policy is surrendered. Cash value also called nonforfeiture value and does not usually accumulate until the 3rd policy year and it grows tax deffered
Graded Premium Whole life
-somewhat similar to modify life in that premiums start off relatively low and then level off at a point in the future. -typically starts with a premium that is approximately 50% or lower than the premium of a straight life policy. -then the premium gradually increases each year for a period of usually 5-10 years then remains level thereafter
Taxation of Personal Life Insurance
-premiums: personal expense and are not tax deductible by the individual -Death Benefit/Policy proceeds: not subject to income tax even if it exceeds the premiums paid -Cash Value: policy owner is not taxed on the annual increase in cash value as this accumulates on a tax deferred basis. The amount of cash value that exceeds the sum of the total premiums paid will be taxed to the policy owner as ordinary income (cost recovery rule) -Policy Loans: not taxable -Estate Taxation: may be included in the insureds taxable estate at death and can be subject to the federal estate tax
Credit Life insurance
-special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor. -usually written as a decreasing term insurance and may be written as a group plan or an individual policy.
Taxation rules that apply to MEC's Cash value
-tax-deferred accumulations -any distributions are taxable, including withdrawals and policy loans -distributions are taxed on LIFO basis known as interest first rule -distributions before age 59 1/2 are subject to a 10% penalty
Single Premium
-to provide a level death benefit to the insureds age 100 for a one-time lump sum payment -completely paid up after one premium and it generates immediate cash -most companies require a minimum premium for a single premium policy
Annually renewable term
is the purest form of term insurance -death benefit remains level and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as probability of death increases
Modified Life
-type of whole life policy that charges a lower premium in the first few years usually 3-5 years then a higher premium for the remainder of the insureds life. -the higher subsequent premium typically is higher than a straight life premium would be for same age and amount of coverage
Re-entry Option
-upon the end of a term policy with guaranteed renewable option may answer medical questions to prove insurability and qualify for a discounted premium rate
