[Life/Health License] - CH 4 - Life Insurance Policies
Categories of Life Insurance
1. Ordinary Life 2. Industrial Life 3. Group Life
Annual Renewable Term
Annual renewable term (ART) or yearly renewable term (YRT) provides a level face amount with an increasing premium. ART is guaranteed renewable annually without proof of insurability. ART usually has a maximum age at which the policy is no longer renewable.
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.
Level Term
Level term insurance provides a level face amount throughout the policy period. There are two types of level term: 1. annual renewable term 2. level premium term.
Ordinary Life Insurance
Encompasses several types of individual life insurance, such as... - temporary (term) - permanent (whole) - universal - variable - other interest-sensitive plans. Premiums are paid monthly, quarterly, semiannually, or annually. Term life insurance provides only a death benefit within a specified period of time, while whole life insurance provides death and living benefits.
Universal Life Cash Value
Universal life insurance is often described as a policy that lets the policyowner "buy term and invest the difference." Two premiums are quoted to the policyowner: - target premium - minimum premium. Paying the target premium will build cash value in the policy, and the policy will resemble whole life. Paying the minimum premium will keep the policy in force by paying the cost of death protection, and the policy will resemble term life. The cash value in the policy must continually cover the cost of death protection (cannot reach zero); - otherwise, the policy will expire after its grace period lapses. In this way, universal life policies are simply annual renewable term with a cash value account. Policy reserves are usually invested in long-term securities.
Flexible Premium Policies
Also known as non-traditional life insurance policies. Offer Life Insurance policies w/ - flexible cash values - face amounts - premium paying period & period of protection
Level Premium Term
Level premium term, sometimes referred to as level premium level term, provides a level face amount with level premiums during the policy term. If the policy is renewed after the term expires, the policy premiums will be based on the insured's attained age, or the insured's present age at the time the policy is renewed. In order to provide a level premium, the policy must have a premium that is on average higher in early policy years in order to offset the lower premium in the policy's later years. This is best illustrated by comparing term insurance in its purest form, ART, with level premium level term insurance.
Index Linked Whole Life
- Have face amounts that increase with respect to inflation without requiring the insured to undergo a medical exam or provide proof of insurability. The Consumer Price Index (CPI) is used to determine the inflationary effect on policies. Insurers provide index-linked policies with annually increasing premiums or offer a premium that is level, but higher, to estimate and account for expected index changes.
3 Types of Life Insurance
1. Level 2. Decreasing 3. Increasing In all these types of policies, the premium is usually level (constant) throughout the policy term. The element that varies in each of these types of term life insurance is the face amount. If the policy is renewed or converted, the premium is increased because the insured is older, requiring a higher premium. Term policies that increase premiums upon renewal are called step-rate because the initial premium literally steps up to a higher amount each time the policy is renewed. Term policies that are renewable or convertible also require a higher premium upon these events.
Joint-Life
Insure the lives of two or more people. Premiums for joint life policies are less expensive than if each life was insured on a separate policy. A first-to-die joint life policy pays the face amount upon the first person's death. After the first person dies, the contract does not provide any further life insurance coverage. Example: If Jonas, Melvin and Veronica are insured under a $100,000 joint life policy where the policy proceeds are to be split between the survivors and Veronica dies first, then Jonas and Melvin each receive $50,000 and the policy is terminated. - If Jonas dies shortly after Veronica, Melvin will not receive any more proceeds. - First to die joint life policies are often used for business continuation arrangements. With a second-to-die, or survivorship life policy, two lives are insured on one policy, and the policy pays out only upon the death of the second insured. - Survivorship life policies are frequently used for estate planning. - The policy proceeds are used to pay estate taxes.
Seven-Pay Test
Premium Paid first 7 years < Total Amt of Level Annual Premiums that would pay up the policy in 7 years. the IRS developed the seven-pay test under TAMRA, the Technical and Miscellaneous Revenues Act. - To pass the test, the premiums paid during the first seven years of the policy may not exceed the total amount of level annual premiums that would pay-up the policy in seven years. - If the policy fails the seven-pay test, it is considered a modified endowment contract. If the policy death benefits are increased, the policy undergoes an additional seven-pay test.
Variable Whole Life
Provides permanent protection; - it has fixed level premiums and a guaranteed minimum death benefit just like ordinary whole life... - but offers higher interest rates, defending the policyowner against the effects of inflation. Premiums are paid at regular intervals. If the policyowner does not pay a premium after the policy grace period, the policy will lapse. The policy cash value is not guaranteed.
Decreasing Term
Provides a face amount that decreases to zero over the policy period. The face amount equals zero on the day the policy expires. The premiums are level. Some decreasing term insurance is convertible, but is usually not renewable upon policy expiration because the face amount is zero at the time of policy expiration. The convertibility feature in a decreasing term policy allows the policyowner to convert the term coverage to permanent coverage at any point during the policy period at the amount of the coverage at that point in time. A common use for decreasing term insurance is mortgage protection to pay off the mortgage in the event that the debt is outstanding when the insured dies. - As the mortgage is paid off, the amount of the term coverage decreases to match the balance of the mortgage. Decreasing term insurance is not suitable for clients interested in purchasing life insurance to fund an investment.
Variable Universal Life
VUL is universal life insurance with a separate account. Variable universal life (VUL) is a mixture of whole life, universal and variable life insurance. VUL policies provide flexible premiums, control of where cash value is invested, and a flexible death benefit. These policies have the flexible features of universal life and the investment choices of variable life. Variable universal life policies are regulated as variable products. Features of Variable Universal Life: - Flexible premiums - Cash value based on investment in separate account - Policyowners choose sub-account investments - Access to cash values (policy loans and withdrawals) - Death protection deducted from cash value - Death benefit Option 1 or Option 2 - Variable life has fixed premiums; whereas, universal life and VUL have flexible premiums. - Flexible premiums allow the policyowner to vary the amount of the premium payment. - VUL policies are issued with a minimum scheduled premium based on the policy's initial death benefit. This minimum amount covers the cost of death protection. As long as there is enough cash value to cover the cost of insurance protection, the policyowner can decrease or skip premium payments. The coverage will then resemble term insurance. VUL policies have a level death benefit until the policy's cash values reach the corridor, at which point the variable death benefit applies, providing a variable death benefit according to investments in the separate account. - The policyowner designates a death benefit amount that will remain constant. Growing cash values will replace a corresponding amount of pure death protection until the corridor is reached. Once policy cash values reach the corridor, the death benefit will increase to keep the policy tax-sheltered. With the variable death benefit, the policyowner chooses an amount of pure death protection which remains constant. The death benefit is comprised of the policy's cash value and the amount of pure insurance specified by the policyowner. With universal life, sales, administrative, and loading charges are deducted from the policy's cash value along with the cost of death protection. The interest rate is credited to the cash value. Insurers are required to provide policyowners with an annual statement itemizing the charges and interest earned.
Universal Life Death Benefit Options
Two death benefit options for universal life policyowners. Option 1 (Designated amount) - pays a designated amount specified by the policyowner. - the policy will pay a specified amount designated by the policyowner. - Death benefit is level, consisting of the policy's cash values and pure insurance until the corridor kicks in, which allows for an increasing death benefit so the policy does not fail the seven-pay test, turning into a MEC. - The corridor is an additional amount of pure life insurance in the form of decreasing term, which is used to increase the policy's death benefit so the policy does not exceed a certain maximum ratio of cash value to death benefit set by the IRS. Option 2 (policy face amount plus cash value) - pays an increasing death benefit. - Pays the policy face amount plus cash values, which consists of level term and increasing cash values. - Per compliance with TAMRA, policy cash value must not be excessively larger than the level term insurance protection in order to keep the policy's classification as life insurance.
Variable Insurance Products
Provides a way for policyowners to earn higher investment returns on life insurance policy cash values. With variable life insurance, on the other hand, policyowners have the opportunity to earn higher interest rates. The interest rate is variable because it is linked to the insurer's separate account, which fluctuates according to its investment performance. Since the separate account is not insured by the insurance company, the investment risk is borne upon the policyowner. Variable life insurance products are securities contracts and are regulated by the Securities and Exchange Commission (SEC). Agents selling variable products must have a life insurance and a FINRA representative license
Pre-Need Insurance
Life insurance used specifically to pay for the cost of a funeral and burial. An individual purchasing pre-need usually buys the policy on himself and the funeral home is the named beneficiary. The face amount increases to accommodate the rising costs of burial.
Increasing term insurance
Provides an increasing face amount with level premiums. The increase occurs at certain intervals over the policy period. Increasing term insurance is not as common as other types of term insurance.
Changes the Policyowner can make to a Universal Life Policy:
- Increase or decrease premiums - Skip premium payments - Increase or decrease policy face amount Allow the policyowner to increase (with proof of insurability) and decrease the death benefit without having to replace or purchase another life insurance policy or have another policy issued.
Endowment
An endowment policy will pay the face amount under one of two situations: 1.) if the insured is alive at the contract maturity date, or 2.) if the insured dies during the policy period. The policy cash value must equal the face amount by the end of the policy period. Premiums for endowment policies tend be higher to build cash value more quickly for an earlier policy maturation date. The endowment policy provides a death benefit upon the death of the insured. If the insured is alive at the end of the premium-paying period, then the insurer pays the face amount to the policyowner. Endowment contracts mature on a particular date or when the insured reaches a certain age, such as 20 years from the date of purchase or until the insured reaches the age of 65. - The cash value in an endowment policy must accrue very quickly, demanding a significantly higher premium. Endowment insurance is similar to level term insurance because it pays a death benefit only if the insured dies during a designated period of time. - With a pure endowment contract the policy only pays a stated amount if the insured is alive at the end of the designated period of time. In this case, a death benefit is not paid. - an endowment policy combines level term insurance with pure endowment. The earliest age at which a life insurance policy may endow is age 95. The new 2001 CSO tables increase that age to 120. TAMRA restricts the payout on endowment policies issued after January 1, 1985. If a life insurance policy matures prior to the insured reaching age 95, the contract is not treated as life insurance and loses its tax-favored status - the death benefit would be taxable. As a general rule, life insurance death benefits are not taxable, so it is in the policyowner's best interest to avoid these consequences.
Family Income Insurance
Combine whole life and decreasing term. The whole life coverage insures the entire life of the primary breadwinner while the decreasing term coverage provides income payments to the family if the primary breadwinner dies within the income period. Family income policies may be issued as a special policy, or simply term coverage added to a permanent life insurance policy. Family income policies are issued on the life of the primary breadwinner, not the entire family. The income period is chosen by the policyowner, and reflects the period of time that the family would be most vulnerable to financial instability if the insured died prematurely. Typical income periods are 10, 15, or 20 years and coincide with the period of time that the children are young and dependent. If the insured dies during the income period, then the decreasing term coverage pays out monthly installment income to the family for the remaining number of years in the income period. The income period clock starts "ticking" once the policy is issued. - so if the income period is 15 years and the insured dies seven years after the policy is issued, then the family will receive eight years worth of income installments. - This is why the decreasing term coverage is used for the income period benefit - the longer the insured is alive, the less coverage is needed. The whole life portion of the policy pays out a lump-sum death benefit in the amount of the face value regardless of when the insured dies.
Equity Indexed Universal Life
Equity indexed universal life works the same way as universal life insurance except the interest rate is tied to the stock market index, which has the potential to offer greater cash value growth. Equity indexed universal life policies have a fixed guaranteed interest rate and a nonguaranteed indexed rate which can reach yields of 15-20% or more. - Allows policyowners to reap the benefits of indirectly participating in the stock index. Typically, insurers use the S&P 500 Index
Graded Premium Whole Life
Graded premium insurance is very similar to modified whole life in that the premiums start out low and increase in later years. - graded premium insurance has several premium increases that occur annually during each year of the step-rate premium period, which is usually the first five or ten years of the policy. - After this period, the premiums level off for the remainder of the policy. Similar to modified whole life, graded premium policy cash value accrues more slowly than straight life, and cash values are typically not available until the tenth policy year. Graded premium whole life is suitable for a young person who wants to purchase whole life insurance, but cannot initially afford the higher premiums characteristic of straight life.
Modified Endowment Contract
Modified endowment contracts are over-funded life insurance policies in which proceeds are subject to taxation. To determine whether a life insurance policy is a modified endowment contract.. - the IRS developed the seven-pay test under TAMRA, the Technical and Miscellaneous Revenues Act. - To pass the test, the premiums paid during the first seven years of the policy may not exceed the total amount of level annual premiums that would pay-up the policy in seven years. - If the policy fails the seven-pay test, it is considered a modified endowment contract. If the policy death benefits are increased, the policy undergoes an additional seven-pay test.
Juvenile Policies
Provide life insurance protection on the lives of minors. In the insurance industry, minors are those under age 15. The purpose of juvenile policies is to protect the insurability of children. - Some childhood diseases or disabilities may make a child uninsurable later in life. - Juvenile policies solve this problem. Juvenile policies can be whole or term life insurance, depending on an applicant's needs. Usually parents purchase juvenile policies for their children. The parent is the policyowner, applicant and pays the premiums on the policy. The insured's signature is not required on a juvenile policy because he is a minor. If the policyowner dies or becomes disabled and cannot pay the premiums, the policy may lapse. - For this reason, juvenile policies often include a payor rider stating that if the policyowner becomes disabled or dies before the insured reaches a certain age, in most cases age 21, the policy premiums are waived until the insured reaches such age. There is a special kind of juvenile policy that can multiply the face value of the policy by five when the child reaches majority. An example of juvenile insurance is jumping juvenile, sometimes referred to as estate builder insurance. - Typically a parent buys the policy on the life of a child. - The face amount can be as small as $1,000 and the premiums are level. - When the child reaches the age of 21, the face amount increases fivefold the original without a premium increase or proof of insurability.
Other Types of Term Insurance
Reentry Term Indeterminate Premium Term Interim Term Return of Premium ROP Term Reentry Term - permits the policyowner to renew a term life policy at the end of the policy period by providing evidence of insurability so the insured can obtain a lower premium than the renewal premium that is offered without evidence of insurability. In essence, the insured is applying for renewal coverage as if he was a new applicant. Indeterminate premium policies have premiums that fluctuate between the current rate and maximum rate, as stated in the policy. - The fluctuating premiums account for the insurer's actual mortality expense and investment experience. - Premiums are typically lower in the early policy years. Interim term coverage provides instantaneous coverage and is intended for people who plan on purchasing permanent life insurance coverage within a year. - frequently offered to automatically convert to permanent coverage at a specified date in the future. - The premium for interim term is based on the insured's age upon application. - The premium for permanent coverage is based on the insured's attained age upon conversion to permanent protection. Return of premium (ROP) Term Policy - A new kind of policy is called the return of premium term policy. - ROP term policy premiums are generally higher than a conventional term policy. - The longer the term, the lower the premium. - Premiums are returned to the insured if no death benefit has been paid and are not taxable.
Whole Life Insurance
Provides life insurance protection for the insured's entire life, or until age 100. It provides living benefits. Synonymous with permanent life insurance. In contrast to term insurance, whole life insurance provides permanent life insurance protection for the entire life of the insured in addition to living benefits. Permanent life insurance policies are issued based on the insured's original, or issue age. The premiums remain level for the life of the insured. In most cases, the face amount of whole life insurance is level. The living benefits referred to in permanent insurance is cash value. Insured can borrow against the policy cash value at any time, up to the amount of the cash value. - The [amt of policy loan + interest is deducted from death benefit] if not paid back prior to the insured's death. - The cash value of a whole policy is affected by interest rates, which are determined by a set formula by the insurer. The cash value in a permanent life insurance policy is a nonforfeiture value; the policyowner is guaranteed and fully entitled to it. - may withdraw the cash value in part or in whole. - If the policyowner stops paying premiums, he has the option of cashing out the policy for its cash surrender value. - If the cash value is depleted and premium payments are no longer paid, the policy will lapse. The cash value in permanent policies grows (accrues interest) tax-deferred. - do not accrue cash value until the third policy year. The insured is considered statistically dead at the age of 100, so if the insured is alive at the age of 100, the face amount will be paid out to the policyowner. Mathematically, insurers determine a premium that must be charged which will earn interest so that the amount of cash value in the policy equals the face amount when the insured is 100. Advantages: - Covers the entire life of the insured - Living benefits - cash value - Level premiums help the policyowner plan investment Drawbacks: - Protection is more expensive because of living benefits - Premium paying period may extend beyond the income-earning years
Regulation of Variable Products
Variable products are inherently more risky because the policyowner bears the risk of the choice of investment, and nonguaranteed cash value. Because of these risks, variable products are federally regulated by the SEC. Insurance producers selling variable products must be registered with FINRA by passing the series 6 or 7 examinations. State insurance departments also regulate variable products. - In some states, producers are required to have not only a life and securities license, but also a variable license. Applicants for variable products must receive a prospectus at the time of policy application, which describes the investments, any charges imposed on the contract owner, and policy features to help the applicant make an appropriate purchase. Variable life insurance is regulated by three pieces of legislation: 1. Securities Act of 1933: applicants must receive a prospectus, and defines a security product 2. Securities Act of 1934: requirement for sales representatives to have a Series 6 license and regulates the duties of sales representatives 3. Investment Company Act of 1940: requirement for insurers to maintain a separate account for variable investments and establishes a cap for sales fees Another regulation regarding Variable Life Policies is the 12% Rule - This rule states that when soliciting a new policy, the producer may not use an interest rate greater than 12%.
Indeterminate Premium
Provide a lower initial premium that can fluctuate up to a maximum premium as stated in the policy. The lower initial premium is guaranteed to the policyowner for a specified period of time. - After such period, the insurer has the liberty to charge up to the maximum stated premium. Insurers are required to include a statement in the policy that the policy's nonguaranteed premium is lower than a fixed premium whole life policy with the same amount of coverage and for the same risk class. Applicants are required to sign a separate form affirming that they understand the elements of the indeterminate premium whole life policy including the following: - premium is variable - a lower premium is not guaranteed and the maximum premium as stated in the policy may be charged - dividends in participating policies are only paid to policyowners if the insurer declares a dividend.
Straight Whole Life (Continuous Premium)
Straight whole life, sometimes called "ordinary life," is the basic whole life insurance policy, as outlined above. This is the most common type of whole life insurance policy sold. The face amount and premiums are level and payable over the entire life of the insured, up to the age of 100. If the insured reaches the age of 100, the policy face amount is paid out to the policyowner. - The policy is said to mature or endow if this occurs. Cash values must accrue by the end of the third policy year. - The cash value and death benefit are guaranteed by the insurer. - Compared to limited payment and single premium policies, straight life has the lowest premium.
Variable Product Death Benefits and Cash Value
The death benefit fluctuates based on the investment experience in the insurer's separate account. Within the insurer's separate account, policyowners have a choice of sub-accounts in which to invest funds. An insurer's general account is for non-variable products, in which premium dollars are invested in conservative funds such as bonds and certificates of deposit; whereas, variable products premiums are invested in more aggressive investments such as stocks and securities. Variable life policies have a guaranteed minimum death benefit, which is the policy face amount, but the policy cash value is not guaranteed since it is tied to the separate account. - the death benefit will increase or decrease over time according to the investment performance; however, - it will never drop below the guaranteed minimum face amount. Cash value is figured daily and varies based on the investment in the separate account. - may be borrowed or withdrawn at any time. Policy loans are subject to interest. If policy loans are not repaid, the death benefits are reduced by the amount of the loan plus interest. Policy loans are typically limited to 75-80% of the policy's cash value.
Modified Whole Life Insurance
Modified whole life insurance is straight life with lower initial premiums during the policy's early years, and increase after that period to a level that is slightly higher than straight life. For example, a whole life policy has $1,000 annual premiums for the first five years, which increase to a level $1,600 from the sixth year onward. Modified whole life policies build cash value slower as compared to straight life. Modified whole life policies are often constructed with convertible term and whole life.
Family Maintenance
Combine whole life and level term. Just like the family income policy, the whole life coverage insures the entire life of the primary breadwinner. - However, instead of decreasing term, level term is used to provide income payments which are paid from the date of the insured's death as long as the insured dies by a certain age or time. Family maintenance policies are issued on the life of the primary breadwinner, not the entire family The income payments are provided to the family for a number of years, usually 10, 15, or 20 years. Example: A man purchases a family maintenance policy at the age of 25. The policy states that if he dies before the age of 40, then income payments will be paid to his family for 10 years. If the man dies at the age of 36, then the level term coverage pays out monthly income installments to the family for 10 years. Whole life portion of the policy pays out a lump-sum death benefit in the amount of the face value regardless of when the insured dies. Depending on the policy terms, the death benefit will be paid at the insured's death, or after the family maintenance payout period.
Special Uses Policies
- Endowment - Current Assumption Whole Life - Economatic Whole Life - Modified Whole Life - Graded Premium Whole Life - Index-Linked - Family Income - Family Maintenance - Family Plan Policy (Protection Plan) - Joint Life - Juvenile Policies - Pre-need - Multiple Protection Policies - Credit Life Insurance - Industrial Life Insurance
Basic Types of Whole Life Insurance
1. Straight Whole Life 2. Limited Payment Whole Life 3. Single Premium Whole Life Each type is based on how the premium is paid. While there are numerous types of permanent insurance, the basic principles of traditional whole life insurance described above are applicable to all specializations and varieties.
Single Premium Whole Life (SPWL)
Allows the policyowner to pay the entire premium in one large sum at the outset of the policy, and have coverage for the insured's entire life. The face amount is level. If the insured lives to the age of 100, the policy endows and the face amount is paid to the policyowner. The interest on a single premium whole life policy is a guaranteed minimum as stated in the policy. The Internal Revenue Code requires single premium policy face amounts be at least 100 to 250% of the cash value, contingent upon the insured's age. Single premium whole life policies are suitable for people who have a large amount of liquid capital to fund a relatively conservative investment. Considerations for the applicant: one large sum premium is less overall compared to the premium installments over the course of the insureds life due to less administrative costs - only one payment needs to be processed. - On the downside, if the insured dies soon after the single premium is made then the cost of the protection is extremely high for the policyowner compared to if premiums had been paid in installments over the course of the insured's life. Differences with Straight Life and Limited Payment: - Immediate cash value - Single premium policy is not "front-end loaded." This means that costs of administering the policy are not deducted from the initial premium. Instead, a surrender charge is levied if the policy is surrendered during its first 10 years.
Current Assumption Whole Life
Also known as interest-sensitive whole life. Provides flexible (varying) premiums based on a changing current interest rate. The insurer may raise or lower the premium within a specified range stated in the policy. Higher interest rates allow the insurer to reduce the premium, and lower interest rates require the insurer to raise the premium. If the insured does not want to pay higher premiums, the policy face amount can be reduced. Premium changes usually occur annually.
Economatic Whole Life
Also referred to as Enhanced Ordinary Life or Extra Ordinary Life. Combines a whole life policy with a term rider in which dividends are earned and used to buy paid-up coverage. Typically, a decreasing term rider is used. Economatic whole life allows an individual to purchase whole life insurance at a lower cost.
Adjustable Life
Considered a 'policy of the past' Mixture of whole and term insurance, consisting of a whole life base with a term rider. The policyowner chooses the amount of coverage needed and how much premium he can pay. The insurer takes that information and determines what mix of term and whole life is most appropriate. Advantage: the policyowner can adjust several policy features as his needs change w/o applying for new policy. Changes the policyowner can make: - Raise or lower premium - Raise or lower face amount - Change coverage period - Change premium-paying period - Based on the changes the policyowner is entitled to make, an adjustable life policy could be entirely whole or term, or a mix of both. As with whole life, adjustable life policies allow the policyowner to take out policy loans, reinstate the policy, and utilize nonforfeiture and settlement options. However, cash value in an adjustable life policy only accrues when the amount of the premium paid is greater than the cost of coverage. Suitable for people w/ varying incomes, or those who simply want greater flexibility than a traditional whole life policy can provide. Young family w/ a need for large amt of coverage @ low cost would have primarily term coverage. - When the children are grown up and larger premiums are more affordable, coverage can be converted to permanent life insurance.
Features of Term Policies
Convertible term - allows term life policyowners to convert their term insurance into permanent policies without showing proof of insurability. The conversion option must be specifically noted in the contract including the terms and conditions upon which it can be exercised. - When an insured converts his term policy, the permanent policy's premiums will be based on the insured's attained age or original age. - The attained age is the insured's age upon conversion. - The original, or issue age, is the age of the insured upon purchase of the term policy. - Depending on the terms of the conversion option, the policyowner may choose which age to use. - If the original age is used, the premiums will be lower than if the attained age is used. Most policies use the attained age upon conversion. Regardless, premiums under the converted policy will be higher than under the term coverage because the insured is older, and permanent life insurance policies are more expensive than term policies. Renewable Term Renewable term insurance allows the policyowner to renew the term policy after the designated term expires without having to prove insurability. - The renewal premium will be based on the insured's attained age, so the premium will be higher. - Because of this, renewable term insurance is sometimes said to have step-rate premiums. - Typically, renewable term policies have an age limit to which the term policy can be renewed, such as 75 or 85. This is stated in the policy.
Industrial Life Insurance
Industrial life insurance is sold to factory and industrial workers typically in face amounts of $5,000 or less. The policy face amount is based on the amount of premium the insured can afford to pay on a weekly basis. Industrial policies have higher premiums than ordinary policies that can be paid as often as weekly premium payments. Unlike ordinary policies, the agent may collect premiums in person from the industrial life policyowner. Industrial life insurance is primarily intended to pay the insured's final expenses and cost of burial. Because industrial life policy face amounts are so small, the policy typically doesn't have a suicide provision, cash value or settlement options. Multiple industrial life policies can be combined to form a single ordinary life insurance policy. - However, in order to accomplish this, the face value of the combined industrial life insurance policies must be at least $3,000.
Credit Life insurance
Insurance that is issued on the life of the person who has the debt (debtor) and the creditor owns and is the beneficiary of the policy. Credit life insurance is usually issued as decreasing term life. The debtor usually pays all premiums. Group credit policies must maintain a minimum number of insureds at all times, which is typically 100 people. - New debtors may not be insured if the participation falls below the required minimum.
Family Plan Policy (Protection Plan)
Sold in proportioned units and insures each member of a family. The primary breadwinner is insured with whole life coverage in an amount usually fourfold that of his spouse, and fivefold that of the children. Example: If Ann is the primary breadwinner her coverage may be $100,000, her husband's coverage would be $25,000 and each child would have $20,000 worth of coverage. The spouse and children's coverage are added to the primary breadwinner's coverage as term riders. Term coverage on the children expires when each child reaches a certain age, such as 21. When children are born or adopted after the family policy is issued, they are added to the policy under term coverage without paying an additional premium. Many family policies stipulate that children's term coverage is convertible without proving insurability.
Universal Life
Sometimes referred to as... - flexible premium adjustable life insurance - unbundled insurance ... and is a spinoff of whole life insurance. Similar to whole life in that they both provide death protection and cash value. Primary difference between adjustable life and universal life: policyowner can skip premium payments as long as there is enough cash value in the policy to cover the cost of death protection. Allow for adjusting the premium up or down and increasing the face amount up or down. Policy Loans and Cash Withdrawals - Universal life policies allow the policyowner to take out policy loans and withdraw cash. - As long as there is cash value in the account, a policyowner can do either. Policy loans are subject to interest. If loans are not repaid, the amount of the loan plus interest will reduce the policy face amount. - Partial withdrawals or cash value surrenders are not subject to interest, but the insurer charges a small service fee. - If partial withdrawals are repaid, the amount is considered a new premium payment and will be charged loading expenses. Full surrender of a policy's cash value can be made at any time, and a small service fee is charged.
Limited Payment
The insured is covered for his entire life, but premiums are paid for a limited time. The face amount and premiums are level. The cash values and death benefit are guaranteed by the insurer. If the insured lives to the age of 100, the policy matures and the policyowner is paid the face amount. - Suitable for clients who do not want to pay premiums for their entire lives or people who are nearing retirement with liquid capital who don't already have permanent life insurance. Common examples of limited payment policies are 20-pay life or 25-pay life, where premiums are paid for 20 or 25 years, respectively. Another example is life paid up at 65, in which case all premiums are paid by the time the insured reaches age 65. Differences with a Straight Life Policy: - Policy is paid-up prior to the age of 100 - Premiums tend to be higher - Premium-paying period is shorter - Cash value accumulates more quickly
Term Life Insurance
The simplest form of life insurance. Provides pure death protection if the insured dies within the policy period. - term life insurance is often called temporary protection because it provides a death benefit only if the insured dies within the policy period. If the insured outlives the policy period, fails to renew the policy, or the policy is canceled or expires, no death benefit is paid. By "pure death protection" it is meant that the policy does not have living benefits such as cash accrual and policy loans. Advantages: For Insurers - For most people term insurance is temporary protection which cannot be renewed beyond a certain age, such as 75. - Insurer is betting the insured will live beyond the policy period, so the death benefit will not be paid out. For Consumers - Term insurance provides the largest amount of coverage for the least amount of premium. Term insurance is appropriate for... - a person wanting to insure a short-term or long-term debt, such as a car loan or mortgage, respectively. - young families or young professionals who require a large amount of coverage but, cannot afford the larger premiums of permanent insurance until later on when their financials are more established. Drawbacks - No living benefits. - As a long-term life insurance tool, term insurance can be increasingly expensive. Each time a term policy is renewed, the premium increases. - Term renewals use the attained age of the insured to assess mortality, not the original age at policy application. As a person ages, the likelihood of death is greater, and term insurance accounts for this by increasing premiums. - If term insurance must be discarded due to expense or the insured has surpassed the maximum age limit, then the insured may be left without any life insurance protection when it is needed most. - Term life insurance is issued based on the face amount, sometimes referred to as the face value, which is the amount of coverage the policy provides. In most cases, the death benefit (policy proceeds) is equivalent to the face amount. However, as you begin to learn about more complex life insurance policies you will see that this is not always the case.
Multiple Protection Policies
These policies pay double or triple a policy's face amount if the insured dies during a certain period, as specified in the policy. At the end of the specified period, only the face amount is paid upon the insured's death. Multiple protection policies are whole life and level term insurance. The level term insurance funds the multiple protection.
Interest Earnings and Cash Accrual (Universal Life)
Universal life policies offer higher yields than ordinary whole life insurance. - interest rates range from 8-12%; whereas, ordinary whole life may earn 3-6%. - Universal life policies have a guaranteed minimum rate, typically around 5%, that the policy is guaranteed to earn. The higher nonguaranteed rate the policy cash value may earn is called the current rate and is comprised of the minimum rate and the excess interest experienced by the insurer. The first policy year does not build much cash value because the producer earns a large commission for selling new policies. Cash value is assessed monthly: the insurer deducts the cost of death protection in addition to a small amount for loading expenses. Cash value accrues in the policy when premiums paid cover more than the minimum amount required to pay the death protection and loading. There are two adjustments made to the policy's cash value each month: 1. cost of death protection deducted and current interest rate credited. 2. The cash value may not always earn the current interest rate, in which case the minimum interest rate would be credited. Insurers establish the current interest rate quarterly or annually.