Kinds of Life Insurance Policies and Annuity Contracts (Life) *STUDY*

fixed annuities

guaranteed minimum rate of interest to be credited to the purchase payment -income annuity payments that do not vary from one payment to the next -the insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant.

cash value

created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policy owner. Cash values are credited to the policy on a regular basis and have a guaranteed interest rate.

single premium whole life (SPWL)

designed to provide a level death benefit to the insured's age 100 for a one time, lump sum payment. the policy is completely paid up after one premium and generates immediate cash.

decreasing term polices:

feature a level premium and a death benefit that decreases each year over the duration of the policy term.

indexed annuities

fixed annuities that invest on a relatively aggressive basis to aim for higher returns. like a fixed annuity, the indexed annuity has a guaranteed minimum interest rate. the current interest rate that is actually credited is often tied to familiar index like the standard and Poor's 500.

death benefit

guaranteed and also remains level for life

limited pay whole life is designed so that:

(such as SINGLE PREMIUM LIFE / 20 PAY LIFE / 30 PAY LIFE or LIFE PAID-UP AT AGE 55 or LIFE PAID-UP AT AGE 65) -the premiums for coverage will be completely paid up well before age 100. Some of the more common versions of this are 20-pay life where coverage is completely paid in 20 years, and life paid up at 65 (LP-65) where coverage is completely paid up for by the insured's age 65. -this type of policy has a SHORTER PREMIUM PAYMENT PERIOD than straight life insurance, so the annual premium will be higher. Cash value builds up faster for the limited pay policies.

whole life insurance

*Also referred to as STRAIGHT LIFE INSURANCE and ORDINARY LIFE INSURANCE* 1. It provides a level amount of life insurance until AGE 100 2. PREMIUMS STAY THE SAME (LEVEL) during the life of the policy. 3. Cash values equal the face amount at age 100 a. the POLICY OWNER CAN BORROW against the cash values during the life of the policy. b. TAX DEFERRED INTEREST AND/OR EARNINGS. There is no tax on the cash value interest until the policy is terminated, surrendered to the insurance company and cash is withdrawn (tax-deferred). Cash values are taxable at withdrawal only to the extent that they exceed premiums that have been paid (GAIN). e. when the interest and/or earnings are paid to the beneficiary as part of the life insurance benefits, there will be no tax on the interest and/or earnings (TAX FREE).

level term insurance

-IT PROVIDES A FLAT, LEVEL AMOUNT OF LIFE INSURANCE PROTECTION FOR A LIMITED SPECIFIED PERIOD OF TIME (TERM) -the most common type of temporary protection purchased. The word level refers to the death benefit that does not change throughout the life of the policy.

variable universal life insurance, like universal life itself, has the following features and characteristics:

-a flexible premium that can be increased, decreased, pr skipped as long as there is enough value in the policy to fund the death benefit -increasing and decreasing the amt of insurance -cash withdrawals or policy loans.

agents selling variable life insurance products must:

-be registered with FINRA -have a securities license and -be licensed by the state to sell life insurance

Term insurance provides what is known as pure death protection:

-if the insured dies during this term, the policy pays the death benefit to the beneficiary; -if the policy is canceled or expires prior to the insured's death, nothing is payable at the end of the term; and -there is no cash value or other living benefits

annuity income amount is based on

-the amount of premium paid or cash value accumulated -the frequency of the payment -the interest rate -the annuitant's age and gender

Modified Whole Life (sometimes graded premium whole life)

1. It provides a level amount of coverage until age 100 maturity 2. THE PREMIUM IS REDUCED FOR AN INITIAL PERIOD and then is level thereafter.

Adjustable Life**

1. It provides flexibility in premium amount, face amount, and amount of cash value accumulation. The face amount can be increased or decreased within limitations specified in the policy. 2. Premium payment can be increased or decreased as long as it equals or exceeds minimum premium stated in the policy.

Endowment

1. it has a level amount of life insurance coverage until MATURITY WHICH IS PRIOR TO AGE 100

joint life is the same as whole life policy except 2 major exceptions

1. premium is based on a joint average age that is between the ages of the nsured's 2. the death benefit is paid upon the first death only

2 ways to pay for annuitied

1. single payment ( lump sum) 2. periodic oayments in which the premums are paid in installments over a period of time.

ROP policies are structured to consider the low risk factor of a term policy but at a significant increase in premium cost, sometimes as much as _____________ more.

25% to 50% more

example of ROP

A healthy, 30 year old male pays $380 annually for a $250,000, 30 year term policy. At the end of the 30 years, he has paid a total of $11,400 in premiums which will be returned to him if he is still alive. The insurance company has determined that $250 per year, or $7,500 0ver 30 years, will cover the actual cost of protection. The excess funds, which the insurer invests, provide the cash for the returned premiums.

Universal Life

A. the premium charge for life insurance protection is called the "mortality cost" which increases each year with age. The policy owner can pay any premium he/she chooses as long as it equals or exceeds mortality cost. E. the cash value interest rate varies from year to tear, but is guaranteed to not drop below a minimum guaranteed rate. F. to sell universal life, a person is required to have only a life insurance producer license.

level premium term example

a $100,000 10-year term policy will provide $100,000 death benefit if the insured dies at any time during the 10-year period. The premium will remain level during the entire 10 year period. If the policy renews at the end of the 10-year period, the premium will be based on the insured's attained age at the time of renewal.

renewable: the premium for the new term policy will be based on the insured's current age. For example:

a 10 year term policy that is renewable can be renewed at the end of the 10 year period for a subsequent 10 year period without evidence of insurability. However, the insured will have to pay the premium that is based on his or her attained age. If an individual purchases a 10 year term policy at age 35, he or she will pay a premium based on the age of 45 upon renewing the policy.

ex. of joint life

a married couple is purchasing a house and use joint life policy for mortgage protection is both spouses work and earn close to the same amount of income. If one dies, he insurance pays the mortgage for the surviving spouse.

license requirments

a variable annuity is considered a security and is regulated by the securities exchange commission (SEC) in addition to state insurance regualtions. an agent selling variable annuities must hold a securities license in addition to a life insurance license. agents or companies that sell variable annuities must also be properly registered with FINRA.

an annuitant whose life expectancy is longer will have smaller income installments. for example

all other factors being equal, a 65 year old male will have higher annuity income payments than a 45 year old male (because he is younger), or than a 65 year old female (because women statistically have a longer life expectancy)

deferred annuity

an annuity in which the income payments begin sometime after one year from the date of purchase. these can be funded with either single premium deferred annuities or flexible premium deferred annuities -the longer the annuity is deferred the more flexibility for payment of premiums it allows.

return of premium (ROP) life insurance

an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid. The return of the premium is paid if the death occurs within a specified period of time or if the insured outlives the policy term.

limited pay policies are well suited for those insured who do not want to be paying premiums beyond a certain point in time. For example:

an individual may need some protection after retirement, but does not want to be paying premiums at that time. A limited pay (paid up by 65) policy purchased during the persons working years will accomplish that objective.

Upon selling, renewing, or converting the term policy, the premium is figured at _______________

attained age (the insured's age at the time of transaction

variable life insurance***

b. the life insurance death benefit and cash value growth rate varies according to the performance of either a portfolio of securities manages by the insurance company or a security market index or another economic index. 1. plans that are based on the performance of stock market investments are often referred to as equity investments. c. The purpose of Variable life insurance is to keep both the insured and the policyowner at least equal to, if not head of, the annual increase in cost of living (inflation)

Although adjustable life policies contain most of the common features of the other whole life policies, the ______________ of an adjustable life policy only develops when the premiums paid are more than the cost of the policy.

cash value

annuity

contract that provides income for a specified period of years or for life. An annuity protects a person against outliving his or her money. -vehicle for the accumulation of money and the liquidation of an estate.

with adjustable life, the policy owner also has the option of converting from term to whole, or vice versa.

however, increases in the death benefit or changing to a lower premium type of policy will usually require proof of insurability. In the case of converting from a whole life policy to a term polciy, the insurer may adjust the death benefit. the policy owner may also pay additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash value or to shorten the premium paying period.

mortality tables

indicate the number of individuals within a specified group (males, females, smokers, non smokers etc) starting at a certain age, who are expected to be alive at a succeeding age.

a universal life policy has two components

insurance component and cash account

Joint life

insure two or more lives. can be term or permanent. Premium would be less than for the same type and amount of coverage on the same individuals.

Permanent life insurance

is a general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid. The most common type of permanent insurance is whole life.

target premium

is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.

variable universal life insurance

is a type of insurance that combines many features of the whole life with the flexible premium of universal life and the investment component of variable life, making it a securities version of the universal life insurance.

straight life (aka ordinary life or continuous premium whole life) :

is the basic whole life policy. The policy owner pays the premium from the time the policy is issued until the insured's death or age 100 (whichever comes first). Of the common whole life policies, straight life will have the lowest annual premium.

interest rate

issuing insurance company does not guarantee a minimum interest rate.

with fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period. This is called ______________

level benefit payment amount. a disadvantage to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation.

three basic types of term coverahe available, based on how the face amount (death benefit) changes during the policy term:

level, increasing, and decreasing

Regardless of the type of term insurance purchases, the premium is level throughout the term of the policy;

only the amount of the death benefit may fluctuate, depending on the type of term insurance.

underlying investment

payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account. the sep. account is not part of the insurance company's own investment portfolio, and is not subject to the restrictions that are applicable to the insurer's own general account.

accumulation period

period of time over which the owner makes payments (premiums) into an annuity. period of time in which the payments earn interest on a tax-deferred basis

annuitant

person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written -the annuitant must be a natural person

decreasing term coverage is commonly purchased to insure the payment of a mortgage or other debts if the insured dies ___________

prematurely

level premium term

provides a level death benefit and a level premium during the policy term.

the convertible provision:

provides the policy owner with the right to convert the policy to a permanent insurance policy without evidence of the insurability. The premium will be based on the insured's attained age at the time of conversion.

immediate annuity

purchased with a single, lump sum payment and provides income payments that start within one year from the date of purchase. -known as a single premium immediate annuity

owner

purchaser of the annuity contract but no necessarily who receives the benefit. -they have all of the rights, could be a corporation, trust, or other legal entity

Traditional term policies offer a low cost, simple death benefit for a specified term but have no investment component or cash value. When the term is over, the policy expires and the insured is without coverage. An ROP policy offers.....

pure protection of the term policy, but if the insured remains healthy and is still alive one the term limit expires, the insurance company guarantees a return of premium. However, since the amount returned equals the amount paid in, the returned premiums are not taxable.

a decreasing term policy is usually convertible; however, it is usually not _____________ since the death benefit is $0 at the end of the policy term

renewable

Most term insurance policies are -----

renewable, convertible, or renewable and convertible (R&C).

why are annuities purchased?

retirement income college education structured settlements

unlike universal life, most of the investment vehicles in variable universal life policies do not guarantee _____

return

survivorship life aka second to die or last survivor policy

same as joint in that it insures two or more lives for a premium that is based on a joint age. Major difference is that survivorship life pays on the last death rather than the first. Since the death benefit isnt paid until the last death, the joint life expectancy in a ense is extended, reulsting in a lower premium than hhat which is typically charged for joint life, which pays upon the first death.

because the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract have to be kept in --------

separate accounts, which invests stocks, bonds, and other securities investment options. each sep. account must maintain assets with a value at least equal to the reserves and other contract liabilities.

variable investment

serves as a hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity.

this type of policy is often used to offset the liability of the estate tax upon the death of the last insured

survivorship life

term insurance

temporary protection bc it only provides coverage for a specific period of time. also known as pure life insurance. Term policies provide for the greatest amt of coverage for the lowest premium as compared to any other form of protection.

minimum premium

the amount needed to keep the policy in force for the current year. Paying the minimum premium will make the policy perform as an annually renewable term product.

decreasing term is primarily used when...

the amount of needed protection is time sensitive, or decreases over time.

whole life policies endow at the insured's age 100, which means...

the cash value created by the accumulation or premium is scheduled to equal the face amount of the policy at age 100. The policy premium is calculated assuming that the policyowner will be paying the premium until that age. Premiums for whole life policies usually are higher than for term insurance.

Increasing death benefit option

the death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expenses of this option are much greater than those for option a, thereby causing the cash value to be lower in the older years.

beneficiary

the person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out.

liviing benefits

the 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. The cash value, also called the nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred.

level premium

the premium for whole life policies is based on the issue age; therefor, it remains the same throughout the life of the policy

annually renewable term (art)

the purest form of term insurance. the death benefit remains level (in that sense, its a level term policy), 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, ad the probability of death increases.

Variable life insurance products are dually regulated by

the state and fed. government. due to the element of investment risk, the fed. govt. has declared that variable contracts are securities, and are thus regulated by the securities and exchange commisiion (SEC), and the financial industry regulatory authority (FINRA).

"statutory definition of life insurance"

there must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy.

annuity period

time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. -this period may last for a lifetime of the annuitant or for a specified period, which could be longer or shorter.

periodic payment annuities can be either level premium, in which the annuitant / owner pays a fixed installment, or flexible premium, in which the amount and frequency of each installment varies.

true

the renewable provision allows the policy owner the right to renew the coverage at the expiration date ____________

without evidence of insurability.