Life and Health Insurance - Chapter 4

Current Assumption Whole LIfe Insurance

(also called interest-sensitive whole life) is a nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience. However, interest sensitive products also provide that the cash values may be greater than the guaranteed levels. If the company's underlying death, investment, and expense assumptions are more favourable than expected, polown will have two options: lower premiums or higher cash values. Underlying assumptions could also turn out to be less favourable than anticipated, which would call for higher prem than that at pol issue. The polown may then either pay the high prem or choose to reduce the pol's face amount and continue to pay the same prem.

Ordinary life insurance

- Individual life ins - Term, Whole Life, Universal Life, Endowment - The most common

Incontestable clause

A clause that protects a policy owner from a misrepresentation caused by his or her own innocent mistake.

Annually Renewable Term (ART)

A form of renewable term insurance that provides coverage for one year and allows the policy owner to renew coverage each year without evidence of insurability. Also called yearly renewable term (YRT).

Accidental Death Benefit Rider

A life insurance policy rider providing for payment of an additional benefit when death occurs by accidental means. The amount paid is a multiple of the policy face amount such as double or triple the original benefit.

Whole life - modified

A policy where the preimum stays fixed for the first 5 years, and then increases in year 6 and stays level for the remainder of the policy. Modified whole life has all the same features of any other whole life except the ins com cuts you a break on premium for the first few years. Modified whole life describes a whole life policy with a premium that increase once after the first few years and then remains level for the remainder of the policy.

Long-term care rider

A type of accelerated benefit which is used to pay long-term care costs.

Accelerated Benefit Rider

Allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness and expected to die within 1-2 years. Whatever amount is withdrawn in an accelerated death benefit will decrease the death benefit when death occurs.

Misstatement of age or sex provision

Allows the insurer to adjust the pol benefits if the insured's age or sex is misstated on the pol app.

Universal Life vs. Whole Life

Another factor that distinguishes UL from WL is the fact that partial withdrawals can be made from the pol's cash value account. (WL allos a polown to tap cash values only through a pol loan or a complete cash surrender of the pol's cash values, in which case the pol terminates.) Also, the polown may surrender the UL pol for its entire cash value at any time. However, the company probably will assess a surrender charge unless the pol has been in force for a certain number of years. The comp must disclose the pol's surrender charges.

Collateral Assignment

Assignment of a policy to a creditor as security for a debt. The creditor is entitled to be reimbursed out of policy proceeds for the amount owed. The beneficiary is entitled to any excess of policy proceeds over the amount due the creditor in the event of the insured's death.

Whole life - Modified Endowment Contract (MEC)

Best described as a policy that exceeds the max amount of premium that can be paid into a pol and still have it recognized as a life ins contract. A MEC does not meet the 7-pay test and is considred over-funded, according to the IRS. For that reason, the pol will lose favorable tax treatment. The test is designed to discourage premium scheduls that would result in a paid-up pol before the end of a seven-year period. Ex: if your annual prem for a pol was $1000 and you paid $20,000 in the first five years, you will have failed the 7-pay test by exceeding $7000 (7- years times one year of premium). Said differently, you have exceeded the max amount of prem that can be paid into a pol and still have it reg as a life ins contract. A MEC receives different tax treatment on pre-death distributions than other life ins pol because it tends to be an investment vehicle.

Limited payment insurance

Characterized by prem that are fully paid up within a stated period, afterwhich no further prim are required.

Face amount plus cash value policy

Contract that promises to pay at the insured's death the face amount of the policy plus a sum equal to the policy's cash value

Equity Index Universal Life Insurance

EIULI or Equity INdexed LIfe combines most of the features, benefits and security of traditional life ins with the potential of earned interest based on the upward movement of an equity indes. Unlike, a traditional whole life plan, this plan allows pol holders to link accumulation values to an outside equity index like S&P 500. 80% or 90% of the prem is invested in traditional fixed income securities and the remainer of the prem is invested in contracts tied to a stipulated stock index. These pol are characterized by a guaranteed minimum interest rate, tax deferral of interest accumulations, and policy loan access. The equity index returns are designed to keep pace with or beat inflation which protects the pol holders against downside market risk. Equity indexed life ins contracts combine term life ins with an investment feature, similar to a UL plan. Death benefit amoutns are based upon the coverage amount selected by the contract owner plus the acc value.

Discretionary provision

Gives discretionary authority to the insurer when determining the eligibility of an insured for benefits under the policy; designed to protect the insurance company

Term Life Insurance

Gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period of time because it has a terminated Date. Term life insurance is an inexpensive type of insurance, making it an attractive option for large policies. Term life is the CHEAPEST type of pure life insurance, and due to having a termination date and not having any cash value, it will ALWAYS be cheaper than a whole life policy with the same face value. It provides a pure death protection since it only pays a death benefit if the insured dies during the policy term.

Hazardous Occupation or Hobby

If the insured dies as a result of a hazardous occupation or hobby, the insurer will not pay the claim.

Alcohol/Narcotics

If the insured dies or is injured as a result of alcohol or narcotics, the insurer will not pay the claim.

Commitement of a Felony/illegal occupation

If the insured dies or is injured while commiting a crime of participating in an illegal occupation, the insurer will not pay the claim.

Ordinary Life Insurance

Life insurance of commercial companies not issued on the weekly premium basis. It is made up of several types of individual life insurance, such as temp (term), permanent (whole)

Mature or endow

Means that the cash value accumulations are equal to the face amount. The Cash value and endowment (or maturity) are the main features distinguishing whole life ins from term life ins and combine to produce additional living benefits for the policy owner.

Waiver of Premium rider

Optional rider that requires an insurer to assume payment of premiums should the insured become totally disabled for six months for the duration of the disability.

Waiver of monthly deductions rider

Pays all monthly deductions while the insured is disabled, after a 6-month waiting period.

Guaranteed Insurability Rider

Permits Insured to buy specific amounts of additional insurance at specified intervals (usually 3 years) without evidence of insurability.

Absolute assignment

Policy assignment under which the assignee (person to whom the policy is assigned) receives full control over the policy and also full rights to its benefits. Generally, when a policy is assigned to secure a debt, the owner retains all rights in the policy in excess of the debt, even though the assignment is absolute in form.

With whole life-Straight Life ins

Premiums are payable throughout the insured's lifetime, and coverage continues until the unsured's death. Said differently, premiums are payable as long as coverage is in force. Straight whole life allows you to maintain coverage throughout your entire lifetime and spread the cost out over your entire life.

Family term insurance rider

Provides a death benefits if the spouse of the insured dies.

Payor Provision Rider

Provides waiver of premiums if the adult premium-payor should die or, with some policies, become totally disabled. Available under certain Juvenile Life Ins.

6 common exclusions in ins

Suicide clause, aviation, war or military service, commitment of a felony/illegal occupation, alcohol/narcortics, and Hazadous Occupation or Hoppy.

Annual renewable term

Term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability.

Renewable term

Term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having to prove insurability. All Term ins has a final termination date where you can no longer renew it. A renewable term life ins pol can be renewed at a predetermined date or age, regardless of the insured's health

Decreasing term

Term life insurance that provides an annually decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. A decreasing term policy is a type of life policy which has a death benefit that adjusts periodically (according to a schedule) and is written for a specific period of time. Decreasing term policies are usually written for a mortgage or other dept that typically decrease over time until it is paid off. Ex: a 15 year decreasing term policy could protect a 15-year mortgage. As the mortgage balance reduces each year, the face value of the ins pol will adjust accordingly to match. After the mortgage is paid off, the ins pol will expire.

Increasing Term

Term life insurance that provides an increasing face amount over time based on specific amounts or a percentage of the original face amount.

Type of Ins used for key employee indemnification

Term, whole, and universial life ins

Cash value or cash surrender value

The cash value buildup is not paid to a beneficiary in addition to the death benefit when the insured dies unless a specific benefit rider is added to the policy known as return of cash valude rider. The pol's cahs value is available to the polown at any time. The polown may surrender the pol there by canceling coverage and receive the amount of the cash value. In addition the polown may borrow against the cash value and receive some of this equity while keeping the pol in force. This is considered a loan and interest is charged for it.

With whole life - limited pay

The coverage remains on the limited -pay life policy until age 100 or death, whichever happens first. Even though the premium payments are limited to a certain period, the ins protection extends until the insured's death, or to age 100. A limited pay life ins pol covers an insrued's whole life with level premiums paid over a limited time.

Cash value

The equity amount or "savings" accumulation in a whole life policy.

Aviation

The insurer will not pay the claim if the insured dies due to involvement with aviation, such as a military pilot flying a jet aircraft.

War or military service

The insurer will not pay the claim if the insured dies while in active military service or due to an act of war.

Nonforfeiture Options

The options available to the policyholder upon termination of a permanent life insurance policy with accumulated cash value

Non-medial life insurance

Typically does not require a med exam and tends to be more expensive than medically underwritten pol. The insurer will average out everyone's risk and charge accordingly. Although insurers typically will not require a med exam, they will still inquire about the applicant's medical history and lifestyle.

Credit policies

Typically purchased using a decreasing term life ins pol, with the term matched to the length of the load period and the decreasing ins amount matched to the declining loan balance. Since credit life ins is 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, credit policies can only be purchased for up to the mount of the debt or loan outstanding.

Investor (or stranger) orginiated life ins pol S(I)OLI

When the insured dies, the polown (investor) benefits. In normal circumstances, it is a beneficiary with insurable insurable interest who benefits from the death of an insured. An investor originated life ins pol is when an investor purchases a pol on life of someone else to profit upon that person's death. The investor is typically the polown, payor, and names themselves as beneficiary. Usually, this is in exchage for a monetary living benefit for the insured. S(I)OLI policies are illegal, as they are designed to circumvent the insurable interest requirements of an insurance contract and position the polown to benefit upon the death of the insured.

Juvenile Insurance

Written on the lives of children who are within specified age limits and generally under parental control.

Endowment policy

a contract providing for payment of the face amount at the end of a fixed period, at a speficied age of the insured, or at the insured death before the end of the stated period.

Grace period

a period after the due date of a prem during which the pol remains in force without penalty. If an insured dies during the Grace period of a life ins pol before paying the required annual prem, the beneficiary will receive the face amount of the pol minus any required prem. For life ins the grace period is typically 1 mo. For health ins, remember Aunt Grace's Birthday 7 (makes payemts more than once a month) - 10 (makes prem payments once a month) - 31 (makes prem payents less than monthly (quarterly, semi, etc..).

Convertible term

a provision that allows policyowners to convert their term ins into permanent pol without showing proof of insurability. Convertible term provides temp coverage that my be changed to permanent coverage without evidence of insurability. Convertible Term would allow you to take your temp coverage and change it to perm coverage without evidence of insurability or good health, but your premium will increase due to using your attained age.

Target premium

a suggested prem used in UL pol. It does not guarantee there will be adequate funds to maintain the pol to any time, especially to life. It may give an indication of what will be needed (under conservative estimates), to maintain the pol.

Term rider

a type of life ins product which covers children under their parent's policy. Family plan policies usually cover the family head with perm ins, and the coverage on the spouse and children is term ins in the form of a rider. A term rider is always level term. This is cheaper than every family member getting their own policy.

Other insureds

aka Dependent riders may be added to a prim pol to cover a spouse or "another insured", children or adopted children.

Reduction of premium dividend option

allows a policy owner to use the dividends to pay all or part of the next premium due on the policy

Assignment clause

allows the right to transfer pol rights to another person or entity.

Joint Life policy

covers the life of 2 individuals and save on prem cost by averaging the ages of the two. Joint life policies pay the face amount after the first person covered on the pol dies. This is similar to a joint checking account. The policy is shared between the two ppl, and when one person dies, the other receives the entire account. A pol that promises to pay the face amount on the death of the first of 2 lives covered by the pol is called a joint life pol.

Joint Survivor or Last Survivor LIfe policies

covers the lives of two indi and saves on prem costs by average the ages of the two. only pays the death benefit upon the death of the last insured person.

Guaranteed issue insurance policy

has no medical underwriting

Universal Life Insurance

incorporates flexible prems and an adjustable death benefit. The investment gains from the UL pol usually go toward the cash value. The polown can use the cash value to manipulate the flexible aspects of a UL ins pol. A customer who wants a pol that gives them the most options and the most control would be looking for a UL. UL uses gains to fund the cash value and give the polown options for flexible prems and adjustable death benefits.

Group Life Insurance

insurance written for members of a group, such as an employer-employee group, association, union or creditor-debtor group. Coverage is provided to the members of the group under one master contract. The group is underwritten as a whole, not on each individual member. One benefit is usually there is no evidence of insurability required.

Industrial Life Insurance

issues very small face amounts ($1000-2000). Premiums are paid weekly and collected by debit agents. They were designed for burial coverage.

Adjustable life pol

ower is usually looking for a pol offering flexible prems. As financial needs and objective change, the polowner can make adjustments to the prem and/or face amount of an Adjustable Life ins pol. Adjustable LIfe policies are able to provide these features by combining whole life and term life into a single plan. IF a polowner was looking for a pol in which they could control the amount and frequecy of payments with a death benefit that can be adjusted as their life need change, they would want an adjustable life pol. There typically are no dividends involve. Increasing the face amount may require a pol owner to provide proof of insurability.

Family income policy

pay an income beginning at the insured's death and continues for a period specified from the date of pol issue.

Family Maintenance policy

pays a monthly income from the date of death of the insured to the end of the preselected period. The payment of the face amount of the policy is payable at the end of such preselected period.

Return of Premium Rider

pays the total amount of premiums paid into the policy in addition to the face value, as long as the insured dies within a certain time period specified in the policy. It also returns premiums to the living insured at the end of a specified period of time, as long as the premiums have been paid.

Policy Loan Provision

policies that have cash value also have pol loan and withdrawal provisions. These pol must begin to build cash value after a certain number of years. In most states, this is 3 years. These loans, with interest, cannot exceed the guaranteed cash value or the pol is no longer in force. Pol is not taxable.

Whole life insurance

provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium. All whole life has the same type of benefits. The only diff in "types" of whole life is how the policy is paid. Some will be paid straight until death or age 100, some will be paid for after a few years or by a specific age, some may give you a little disccount in the early years to help you get started, etc. All whole life last until death or age 100, has a fixed premium, and level benefit with cash value accumulation, regardless of how it is paid. Whole life is often compared to BUYING; like BUYING a house. When a WL pol is surrenderd, income taxes may be owned.

Cost of Living Rider

provides increases in the amount of insurance protection without requiring the insured to provide evidence of insurability and is designed to keep up with inflation.

Free Look

state the polown is permitted a certain # of days once the pol is delivered to look over the pol and return it for a refund of all prem paid.

Consideration clause

states a polown must pay a prem in exchange for the insurer's promise to pay benefits. A polown's consideration consists of completing the app and paying the intial prem. The amount and freq of prem payments are contained in the consideration clause.

Common disaster provision

states if an insured and the beneficiary die from the same accident, the insurer will continue as if the insured outlived the beneficiary. This allows the proceeds to got to the contingent beneficiary.

Entire Contract

states the insurance policy itself, any riders and endorsements/amendments, and the application comprise the entire contract between all parties. Insurance producers cannot make changes to a pol. The entire contract provision is found at the beginning of every ins pol issued. Only an authorized officer of the insurer is permitted to make changes to the contract. We can't send you additional paperwork later. The ENTIRE POL and APP is sent to you and that makes up your ENTIRE CONTRACT>

Insuring clause/provision (aka Insuring Agreement)

the insurer's basic promise to pay specified benefits to a designated person in the event of a covered loss. States the scope and limits of coverage "We ensure to insure you for..."

Dividend Options

the options a polown has when receiving dividend payments from an ins pol. Participating pol pay dividends to polown if the comp operations result in a divisible surplus. Cash option, reduced prem, accumulate interest (charged tax on interest), paid-up additions (purchase single payment WL coverage), and one-year term option.

Suicide clause

the pol will be voided and no benefit will be paid if the insured commits suicide within 2 years from pol issuance. To protect the insurer against the purchase of a pol in contemplation of suicide.

Reduced Paid-Up Option

the policyowner pays no more premiums but the face amount is decreased.

Extended Term Option

use the policy's cash value to purchase a term insurance policy in an amount equal to the original policy's face value for as long a period as the cash value will purchase.

Interim Term Insurance

a type of convertible term ins written on a person wanting protection immediate, but who is not able to afford permanent protection immedicate. It provides interim coverage between now, and the the eventaul conversion to permanent protection. Interim term ins is typically written to auto convert to permanent protection at some point within the first year. While insurability is guaranteed, the prem for the temp protection is based on the origirnal app age and the prem for permanent protection is based on the age at the time permanent protection begins (the attained age).

Automatic Premium Loan Provision

allows the ins comp to deduct overdue prem from an insured's cash value by the end of the grace period if a payment is missed on a life pol.

Cash Surrender

allows the policyowner to receive the policy's cash value. Policyowner no longer has coverage at this point. Normally, the maximum length of time a life insurance company may legally defer paying the cash value of a surrendered policy is 6 months (Delayed Payment provision).

Level Term

also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. Life ins written to cover a need for a specified period of time at the lowest premium is called Level Term Ins. Term ins always expires at the end of the policy period. Ex: if D needs life ins that provides coverage for the remainder of her working years and wants to pay as little as possible, D would need Level term. Level term provides a fixed, low premium in exchange for coverage which lasts a specified time period.

Exchange Privilege Rider

permits a polown to exchange a life ins pol for another in the future if desired. As more advantageous products are developed in the future, this rider allows a polown to take advantage of a pol that may be more suitable.

Incontestability period

provides that, for certain reasons such as misstatements on the app, the comp may void a life ins pol after it has been in force during the insured's lifetime, usually one or two years after issue. After that period, the pol is considered incontestable.

Variable LIfe insurance policy

requires the producer to have proper FINRA and National Association of Security Dealers (NASD) securities registration prior to selling any varibale pol contract, whether it be life ins or an annuity, as they include regulated securities. These pol are also known as interest sensitive pol. The pol usually have a fixed level prem, but the cash value and death ben of a variable life pol can fluctuate according to the perfomance of its underlying investment portfolio. A typical VL pol grows through mutual fund, stocks and bonds. This includes VL, UVL, VWL, and Variable Annuity. If a polown or applicant was looking for a pol to offset inflation, they would want to look into a variable policy. Since the polown is assuming all of the investment risk and the rate of return is not guaranteed, a person must have proper FUNRA securities registration in addition to an ins license to sell any VL contracts.

Variable Universal Whole LIfe (VUL)

the polown controls the investment of cash values and selects the timing and amount of prem payments. VUL pol give a polown the best of both variable life and UL. If a polown was looking for a pol that allowed them to control how much and when premium was due, what investment accounts were used for funding, and where the returns from those investment acc went, they would be looking for A VUL pol.