Chapter 05: Life Insurance Policies

Features of Whole Life

1. Cash Value 2. Maturity at age 100 3. Living benefits

Options to Renew

1. Guaranteed Renewable Policy 2. ART (Annually Renewable Term), also known as YRT (Yearly Renewable Term) 3. Re-entry option

Features of Term Life

1. Option to renew 2. Option to convert

Partial Withdrawals

A fact that distinguishes universal life from whole life policies; can be made without a policy loan or complete surrender.

Variable Universal Life Insurance

A policy that blends many of the features of whole life, universal life, and variable life; these offer premium flexibility, cash value investment control, and death benefit flexibility. After an initial premium establishes the plan, these policies offer uniquely responsive plans for policyowners. Cash value is maintained separately from the rest of the plan.

Living Benefits

A ready source of funds that may be borrowed at a reasonable interest rate that is built up through the cash value accumulation of a whole life policy

UL Option One

A specified amount of UL insurance; Cash value plus remaining pure insurance (decreasing term), federal law mandates that an additional amount of pure insurance (called a "corridor") is added to maintain the minimum death benefit

Guaranteed Renewable Policy

Allows the policyowner to renew the term policy before its termination date, without having to provide evidence of insurability (i.e. not having to prove good health). The premiums for the renewal period will be higher than the initial premium, reflecting the insurer's increased risk and typically provide for several renewals or until a specified age.

Term Life Premiums

Based on the risk involved; the more likely that death may occur the higher the premium. The cost of insurance increases as we get older, therefore, premiums may increase each year or may be level for a fixed period such as 10 years or until age 60, etc

Group Insurance

Benefits that may insure many people under one contract. Underwriting is based on the group, not the individual. Ex- employer-employee, associations, creditors, and unions

Endowment Policies

Characterized by cash values that grow at a rapid pace so that the policy matures on a specific date at which point it is paid out as a death benefit to a beneficiary if the insured has died or as a living benefit to the insured if they are still living. No longer common because of changes to the tax code.

UL Option Two

Death benefit equals the face amount (pure insurance) plus the cash value (level term plus increasing cash values). to comply with Tax Code, the cash value cannot be disproportionately larger than the term portion.

Industrial Insurance

Defined by comparatively small amounts (such as $1k) with premiums collected on a weekly or monthly basis. Often marketed and purchased as burial insurance; today this has to declined to less than 1% of market share.

Graded Premium Whole Life

Distinguished by premiums that are lower than typical whole life premiums during a preliminary period (typically 5-10 years) and increase each year until leveling off, though actuarially they are exactly the same.

Modified Whole Life

Distinguished by premiums that are lower than typical whole life premiums during the first few years of the policy (typically 5) to make the initial purchase of permanent insurance more attractive, though actuarially they are exactly the same.

Option to Convert

Gives the insured the right to convert or exchange a term life insurance policy for a whole life (permanent) plan without evidence of insurability.

Corridor

In a VUL policy with a level death benefit, the death benefit amount is specified, remains constant, and does not fluctuate as the cash value increases or decreases. The cash values will build up until they reach this point, at which point the death benefit will begin to increase to corresponding increases in cash value.

Ordinary Life

Individual life insurance that can be temporary (term) or permanent (whole life, endowment, universal life, variable life, etc) with premiums paid monthly, quarterly, semi-annually, or annually. This is the principal type of life insurance purchased in the US.

Juvenile Insurance

Insurance written on the lives of children where the application is granted to, owned and paid by, an adult such as a parent or guardian until the child comes of age and is able to take over the premium.

VUL Death Benefit Options

Level death benefit- provides for a fixed death benefit, (until policy values reach the corridor levels) and potential higher cash value accumulation Variable Death Benefit- provides a death benefit fluctuates in response to the performance of investments

Categories of Life Insurance

Many companies offer all; some specialize in one or another. Distinguished by types of customers, amounts written, underwriting standards and marketing practices. 1. Ordinary Life 2. Industrial Insurance 3. Group Insurance

Single Premium Whole Life

Most extreme form of limited pay policy; involves a large one-time-only premium at inception, from which point the policy is completely paid for.

Universal Life

Non-traditional Life Policy. A variation of whole life insurance that is characterized by its considerable flexibility that allow policyholders to determine the amount and frequency of premium payments and to adjust the face value of policies to reflect changes in needs by "unbundling" the basic components of a life insurance policy (insurance, savings, and expense). A specific percentage of all premiums must be used to purchase death benefits of this type of policy will not receive favorable tax treatment on its cash value.

Interest- Sensitive Whole Life

Non-traditional Life Policy. Characterized by premiums that vary to reflect the insurer's changing assumptions with regard to its death, investment and expense factors. In some ways similar to indeterminate premium whole life, except that cash values may be higher that the guaranteed level if things go favorably and, in that case, policyowners will get either lower premiums or higher cash values. If things do not go favorably, the policyowner would either have to pay a higher premium or accept a lower face value.

Adjustable Life

Non-traditional Life Policy. Distinguished by their flexibility that comes with combining term and whole life insurance into a single plan that may change from one type of policy to another and/or back again, may contain limits to changes that may be made, may require evidence of insurability and is usually more expensive than conventional or term life policies. The policyowner can make adjustments to the coverage such as: 1. Increasing or decreasing the premium, the premium-paying period, or both... or 2. Increasing or decreasing the face amount, the period of protection, or both.

Re-entry Option

Offered by some renewable term plans; policyowner is guaranteed to be able to renew coverage at the end of the term at the rate specified but also allows for periodic admissions of evidence of insurability that may qualify them for rates lower than what the contract states.

Decreasing Term

One of the three basic forms of life insurance; offers a fixed face amount that reduces in value each year, eventually to zero at policy expiration. (Often purchased by creditors or by means of satisfying a mortgage contact in the event of the breadwinner's death)

Level Term

One of the three basic forms of life insurance; offers a fixed face amount which stays the same during the benefit period

Increasing Term

One of the three basic forms of life insurance; offers little or no face amount in the beginning but grows over time

Withdrawal

One of two ways a partial cash value distribution may be classified; no presumption of repayment and is treated as permanent, immediately reducing the future benefit and, of course, the cash value. It does not accrue interest interest against future policy values but is the same as a loan from an actuarial standpoint.

Loan

One of two ways a partial cash value distribution may be classified; withdrawn either with the presumption that it will be paid back (with accrued interest) or that the amount of future benefits will be reduced by the amount PLUS accrued interest.

UL Death Benefit Options

Option One- a specified amount of insurance Option Two- face amount plus the cash value

Attained Age Method

Option to convert a policy from term to whole life that bases premium rates at the time of the exchange.

Original Age Method

Option to convert a policy from term to whole life that bases premium rates at the time when the original term policy was taken out. Naturally, this will make the premium lower but the policyowner might have to pay an additional amount to make up the difference; by doing this, the policy has a lower cost and builds cash value more rapidly than if it had been at the attained age.

Variable Life Insurance

Permanent life insurance that is similar to traditional whole life; the main difference is how the policy's value are invested. In Variable Life the policy values are invested in the insurer's separate accounts in riskier, but potentially higher yielding, assets than those that would be held in the general account.

Limited Pay Whole Life

Policies with level premiums that are limited to a certain period (less than life) and can be of any duration. Ex- A "20-pay life policy" is one in which premiums must be paid for 20 years from inception, after which no more policies are owed but protection still extends to time of death, or until age 100.

Modified Endowment Contract

Policy in which the amount a policyowner pays in during the first 7 years exceeds of the net level premium that should have been paid to provide future benefits in that time (i.e. 7500 for 7 years for a $100k policy means that you CAN put 7 in one year, 8 the next but could not exceed 7500 the next- cannot exceed that level). Because of how policy loans and income are taxed, these must be carefully watched to make sure they do not become an MEC and remain life insurance policies.

Indexed Whole Life

Policy in which the face amount automatically increases as the Consumer Protection Index (CPI) rises. Two basic pricing methods are used: 1. The policyowner assumes the risk of future increases and must pay additional premium with each face amount increase; or 2. The insurer assumes the risk and thus the policyowner does not pay increased premiums

Variable Insurance Products

Provide the opportunity for policyowners to achieve higher-than-usual investment returns on their policy cash values by accepting the risk of the policy's performance.

Straight Whole Life

Provides permanent level protection with level premiums from the time the policy is issued until age 100.

Whole Life

Provides permanent protection for the whole of life- from the date of issue to the date of death, provided premiums are paid. The benefit payable is the face amount of the policy which, along with the premium, remains constant throughout the policy's life. (aka permanent or cash value insurance)

Prospectus

Required to be furnished by the company, reviewed by the SEC, and must precede or accompany the sales presentation of any variable insurance sales presentation; it contains all pertinent information and is a significant source of information for the prospect.

Term Life Insurance

Simplest type of life insurance plan; provides insurance for a specified period of time (aka "term") and pays a benefit only if the insured dies during that period and does not accumulate cash value or provide a cash value (if the insured cancels the policy or fails to pay, nothing is payable)

Last Survivor Policy

Special Use Policy. A variation of a joint life policy that covers two lives and the benefit is paid upon the death of the second.

Credit Life Insurance

Special Use Policy. 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. The beneficiary is usually the lender and the type of loan is usually decreasing term, with the term matched to the length of the loan and the amount of the insurance is based on the declining loan balance. Most often sold to a bank or other lending institution as group insurance to cover all of the institution's borrowers.

Family Plan Policy

Special Use Policy. Designed to insure all family members under one policy; usually at a significantly higher rate for the breadwinner (usually a whole life plan) and then a lower amount for the spouse and lower still for the children (usually a level or decreasing term)

Joint Life Policy

Special Use Policy. One policy that covers more than one person; uses some type of permanent insurance (as opposed to term) and pays the death benefit when one of the insureds' dies and the survivor(s) then have the option of purchasing an individual policy without evidence of insurability. The premium is less than one for separate, multiple plans as the ages are "averaged" and a single premium charged.

Multiple Protection Plan

Special Use Policy. Pays a benefit double or triple the face amount if death occurs in a specific time period; combinations of permanent insurance and, for the multiple protection period, level term insurance

Payor Provision

Special Use Policy. Typically attached to juvenile policies; in the event of the death of the parent or guardian, the premium will be waived until the juvenile reaches a specified age (such as 25) or until the date of maturity of the policy, whichever comes first.

Cash Value

The accumulation or savings element of a whole life policy that builds over the life of the policy because there is a certain guaranteed amount of interest which is credited to the policy on a regular basis. It depends on a variety of factors including the face value of the policy, the duration and amount of premium payments, and how long the policy has been in force.

Cash Surrender Value

The amount that the policyowner will receive if a whole life policy is ever cancelled.

ART

The most basic form of life insurance; provided coverage for one year and allows the policyowner to renew coverage each year, without evidence of insurability but typically limit the number of times or a specified age that the policy though it is not uncommon to be renewable past 65. Also known as YRT.

Non-Traditional Life Policies

The most notable of these are: 1. Interest-Sensitive Whole Life 2. Adjustable Life 3. Universal Life 4. Variable Life 5. Variable Universal Life

Maturity at age 100

The point at which a whole life contract has been completed; from an actuarial standpoint, everyone is assumed to be dead by then and those who do live longer and are considered statistically insignificant.

Jumping Juvenile

Typically written on children aged 1-15 in units of $1k that automatically increase to five times the face value at age 21. Also known as junior estate builders (aka as things rich people buy). The face value increases automatically but the premium remains the same and no evidence of insurability is required.

Securities Contracts

Variable insurance products are considered to be these because that transfer investment risk from the insurer to the policyowner and are regulated by both the state and the SEC.

General Account

Where an insurer invests the premiums in a traditional whole life policy; an investment account that is composed of investments that are carefully selected to match the liabilities and and guarantees of the contracts they back and are usually quite conservative.

Minimum Deposit

Whole life insurance that begins building cash value immediately upon payment of the first premium. From that point, the policyowner systematically borrows from the cash value to pay for some or all of the premium

Indeterminate Premium

Whole life policies in which the premium rate can be adjusted based on the insurer's projected expenses and mortality. The maximum premium is stated in the contract though it usually fixed at a lower rate for a specified period (typically 2-3 years) and after that period it may be raised, kept the same, or lowered.