Personal Finance--Ch. 12
Net Cost Formula
= premiums paid minus interest/dividends accrued but unpaid plus the Accumulated cash value
"Second-to-Die" Life Insurance
A life insurance policy that only pays when the second party dies. Also referred to as "Survivorship Joint Life" insurance.
Waiver of Premium
Sets certain conditions under which an insurance policy would be kept in full force by the company without the payment of premiums. It usually applies when a policyholder becomes totally and permanently disabled, but it may also apply under other conditions, depending on the policy provisions.
Grace Period
You usually have 31 days after a premium due date to get the payment in and avoid having the policy lapse; you usually have 61 days after a premium due date to the payment in and avoiding having a policy lapse for Universal Life and Variable Life Insurance.
Automatic Premium Loan Provision
a feature that authorizes the insurer to use a policy loan to make the premium payment
Interest-Sensitive Life Insurance
is cash-value life insurance where the rate of return on the cash-value varies according to the success of the investments made; was developed in response to customer desires for a higher level of earnings on the cash values; The three types of this are: Universal Life Insurance, Variable Life Insurance, Variable Universal Life Insurance.
Group Term Life Insurance
issued by the employer; premiums paid are reflected as OI; the first $50,000 is tax deductible.
Cash Surrender Value =
the accumulated Cash-Value (including accrued but unpaid interest/dividends), minus any loans and accrued but unpaid interest, minus any surrender charges
Variable Universal Life Insurance ("VUL")
the most popular form of cash-value life insurance; usually no guaranteed minimum rate of return; fees and commissions are likely to be higher than for Variable Life (2% - 5%); primary difference from Variable Life; after the first year, you CAN vary the premium on most of these policies (something you cannot do with Variable Life) and adjust the face amount and cash-value buildup rate; based on the results of the cash-value portion after the first year and succeeding years, the insured may never have to pay another premium if he or she decides not to; however, there is a guaranteed minimum death benefit like Variable Life Insurance has; death benefit depends on which option the policy owner chooses (same as Universal Life Insurance); you choose the investment vehicle(s)
IRC Section 1035 Exchanges
these are certain exchanges can be made without the recognition of a gain. The gain at the time of the transaction is deferred rather than forgiven. Examples: 1.) A life insurance contract that is exchanged for another life insurance contract. 2.) A life insurance contract that is exchanged for an endowment contract. 3.) A life insurance contract that is exchanged for an annuity. 4.) An endowment contract that is exchanged for another endowment contract where the regular payments begin at a date no later than the date payments would have been received under the contract exchanged. 5.)An endowment contract that is exchanged for an annuity contract. 6.) An annuity contract that is exchanged for an annuity contract.
Term Life Insurance
this is known as "pure protection" insurance and is less expensive than "permanent" life insurance. Used for death protection only.
Endowment Life Insurance
this life insurance is designed to pay the face amount at death or some pre-set time, whichever comes first; the date of payment ("endowment date") is commonly specified for xxx number of years, such as 20 or 30 years; because of tax law changes, new _______life insurance policies are no longer available.
Decreasing Term Insurance
usually written for terms of 10 or 20 years; face amount of insurance declines each year down to zero at its expiration date; premium remains level each year; usually written as convertible to "permanent" insurance".
IRC Section 1035 Exclusions
where an exchange increases the possibility of eliminating tax by extending the period of life insurance protection; because of this part, some tax accountants argue that exchanging a term life insurance policy for a whole life insurance policy does not qualify.
Level Premium Term Life Insurance
A term policy with a long time period (perhaps 5, 20, or 10 years). Under such a policy, the premiums remian constant, possibly throughout the entire life of the policy. Premiums charged in the earlier years are higher than necessary to balance out the lower than necessary premiums in later years covered by the policy.
Modified Life
A type of whole life insurance; reduced premiums in the early years and then higher premiums in the later years; early years are covered by term life insurance
Incontestability Clause
After 2 years have passed since the policy's issuance date, claims cannot be denied for errors or misstatements. This has been upheld in court.
Automatic Premium Loan Provision
Allows any premium not paid by the end of the grace period to be paid automatically with a policy loan if sufficient cash value or dividends have accumulated. In the first few years of a policy, this provision may not offer much benefit, because cash-value and dividends accumulate slowly. Eventually, these funds may grow enough to pay premiums for a considerable length of time, thereby, effectively preventing the lapse of the policy.
Variable Life Insurance
Allows you to choose the investments made with your cash-accumulations and to share in any gains or losses. The face amount of your policy and the cash-value of your policy may raise or fall based upon changes in the rates of return on the invested funds. The face amount of the policy usually will not drop below the originally agreed upon amount, however. Instead, the cash value will fluctuate. Because you pay premiums on an ongoing basis, the cash-value may increase, but it may grow slowly if investments perform poorly.
Adjustable Life Insurance
Allows you to modify any one of the three components of life insurance (the premium, the face amount of the policy, and the rate of cash-value accumulation), with corresponding changes occurring in the other two. These changes can be made without providing new proof of insurability. Was created to provide more flexibility to customers.
Single-Premium Life Insurance
An extreme form of limited-pay life insurance; the entire premium is paid up-front
Single-Premium Life Insurance
An extreme version of limited-pay life insurance; the premium is paid once in the form of a lump sum.
Assignments
Are transfers of ownership.
Contingent Beneficiary
Becomes the beneficiary if the original beneficiary dies before the insured. Although the owner and the insurer are often the same person, it is possible for four different people to play these roles.
Collateral Assignment
Designation of a policy's death benefit or its cash-surrender value to a creditor as security for a loan. If the loan is not repaid, the creditor receives the policy proceeds up to the balance of the outstanding loan, and the beneficiary receives the remainder.
Interest-Sensitive Life Insurance
Employs rates of return that vary according to changing interest rate s and investment returns. Pressures for such changes in life insurance have come from investors who have criticised the low yields paid on traditional cash-value life insurance and who advised buyers to "buy term and invest the difference" in ways that would pay a better rate of return.
Suicide Clause
If the insured commits suicide within 2 years of the policy date, only the premiums are returned; beneficiary receives the full face value after the first 2 years.
Cash-Value Life Insurance
Is a combination of decreasing term insurance and an investment account; often called permanent insurance as policies do not need to be renewed as long as the premiums are paid
Whole Life Insurance
Is a form of cash-value life insurance that provides lifetime life insurance protection and expects you to pay premiums for life. "Straight life" and "Ordinary Life" are labels sometimes used interchangeably with this.
Variable Universal Life Insurance ("VUL")
Is a form of universal life insurance the gives the policyholder some choice in the investments made with the cash-value accumulated by the policy. This is the most popular form of cash-value life insurance, and most closely embodied the philosophy "buy term and the invest the difference."
Vanishing- Premium Life Insurance
Is designed to allow policyholders to cease making preimum payments after just a few years. In these plans, cash-value accumulations are supposedly used to pay premiums. These policies contain significant hazard.
Life Insurance
Is insurance that protects against financial losses resulting from death.
Group Term Life Insurance
Is issued to people as members of a group rather than individuals. Most such policies are written for a large number of employees, with premiums being paid in full or in part by the employer.
Term Life Insurance
Is often described as "pure protection" because it pays benefits only if the insured person dies within the time period (term) covered by the policy. The policy must be renewed if coverage is desired for another time period.
Modified Life
Is whole life insurance for which the insurance company charges reduced premiums in the early years and higher premiums thereafter. The premiums are lower in the earlier years because some of the protection during the early years is provided by term insurance. The period of reduced premiums can vary from one to five years. These are primarily designed for people whose life insurance needs are high (for example, young parents).
Limited-Pay Life Insurance
Is whole life insurance that allows premium payments to cease before you reach the age of 100. Two common examples are 20-pay life policies, which allow premium payments to cease after 20 years, and paid-at-65 policies, which require payment of premiums only until the insured turns 65.
Cash Surrender Value =
Represents the cash value minus any surrender charges. In reality, the true measure of the cash value of a policy is this (the amount received when the policy is cancelled).
Convertible Term
Offers the policy the option of exchanging a term policy for a cash-value policy without evidence of insurability. Usually, this is available only in the early years of the term policy. Some policies exchanges the policies automatically after a certain amount of years.
Lapsed policy
One that has been terminated because of non-payment of premiums.
Cash-Value Life Insurance
Pays benefits at death and includes a savings/investment element that can provide benefits to the policyholder prior to the death of the insured person. Thus, it includes a cash-value representing the value of the investment element in the life insurance policy.
Endowment Life Insurance
Pays the face amount of the policy either upon death of the insured or at some previously agreed-upon date, whichever occurs first. The date of payment is commonly some specified number years after the issuance of the policy (for example, 20 or years) or some specified age (such as 65). These policies are no longer be written and this policy will be phased out as existing policies are converted to cash.
Guaranteed Insurability
Permits the cash-value policyholder to buy additional stated amounts of life insurance at stated times in the future without evidence of insurability.
Guaranteed Renewable Term Insurance
Protects against the possibility of becoming uninsurable. The number of times you can do this without proving insurability may be limited, and a maximum age may be specified for these renewals. Unless you are positive that you will not need a renewal, this is recommended.
Universal Life Insurance
Provides both the pure protection of term insurance and the cash-value buildup of whole life insurance, along with variability in the face amount, rate of cash-value accumulation, premiums, and rate of return. Essentially, this combines annual term insurance with an investment program.
Multiple Indemnity
Provides for the doubling or tripling of the face amount if death results from certain specified causes; often included in the policy at no extra cost but sometimes a charge is assessed.
Limited-Pay Life Insurance
Provides life-time insurance coverage; Premiums are paid for a specified number of years; e.g, 20-pay Life Insurance or paid-at-65 Life Insurance
Decreasing Term Insurance
The face amount of coverage declines annually, while the premiums remain constant. The owner chooses an initial face amount and a contract period, after which the face amount of the policy gradually declines (usually each year) to some minimum in the last year of the contract.
Delay in Insurance Payment
The insurer can delay payment for up to 6 months; this prevents a run on an insurance company.
Policy Loans
The owner of a cash-value policy may borrow all or a portion of the accumulated cash value. Interest rates charged for the loan will range from 2 to 8 percent, depending on the terms of the policy. In addition, the interest rate earned on the remaining cash value typically reverts to the guaranteed minimum rate while the loan remains outstanding. As a result, the cash value ultimately accumulated may be significantly reduced.
Beneficiary
The person or organization named in the life insurance policy that will receive the life insurance or any other payment in the event of the insured's death.
Absolute Assignment
The transfer of all ownership rights of a life insurance policy to another individual or entity.
Ownership of Life Insurance
You retain all of the rights and privileges granted by the life insurance policy including the right to amend the policy and the right to name the primary beneficiary. This is not necessarily the person paying the premiums.
Net Cost Method
This method is also calculated for a given point in time; it does not take into account the time value of money, understates the total cost, is inaccurate, and ignores net cost comparisons with other insurance companies.
Interest-adjusted Cost-Index Method
This method measures the cost of life insurance, taking into account the interest that would have been earned had the premiums been invested rather than used to buy the insurance. Takes into consideration forfeiture fees, and assumes that a policy is cashed in at some forecasted point of time (5, 10, 20, or 30 years) rather than holding the policy until death; It's based on a cost per-thousand; cannot be used on dissimilar policies.
Interest-Adjusted Net Payment Index Method
Will not cover this method
Credit Term Life Insurance
Will pay the remaining balance of a loan if the insured dies before repaying the debt. In essence, it is a decreasing term insurance policy with the creditor named as beneficiary. This product is usually grossly overpriced, the only people who should consider its purpose are those who are uninsurable because of a serious health condition.
Multiple Earnings Approach (more complex) to Estimating Life Insurance Needs
addresses only one factor, that of income replacement; easy but not as accurate as the Needs Approach
Policy Loans
allow the policyholder to borrow from the cash-value built up in the policy; interest must be paid
Guaranteed Insurability
allows you to increase the face amount without a medical exam on specific dates or when the insured marries or has children
Variable Life Insurance
also referred to as "unbundled" life insurance; you can invest in stocks, bonds, mutual funds, zero coupon bonds, money market instruments, etc.; death benefit and cash value portion fluctuate with changes in rates of return on the investment(s); usually a guaranteed minimum death benefit which may increase over the life of the policy, depending on investment performance; funding of the death benefit uses an "assumed interest rate"; cash values are not guaranteed and are usually determined daily; some policies contain provisions calling for the payment of fees and sales charges before there are any policyholder returns (always read the policy); fees and sales charges can be somewhat high, between 1%-1.5%
Vanishing- Premium Life Insurance
another name for Limited-Pay Life Insurance; when premiums stop depends on the success of the investment element; "vanished" premiums are paid out of cash value
Needs Approach to Estimating Life Insurance Needs
considers all of the factors that might potentially affect the level of need. It improves upon the calculations of the multiple-of-earnings approach by including a more accurate assessment of income-replacement needs and incorporates factors that add to and reduce the level of need.
Multiple of Earnings Approach (simple rule of thumb) to Estimating Life Insurance Needs
multiplies one's income by some factor to derive a rough estimate of the level of need.
Convertible Term
offers the policyholder the option of converting a term policy for a permanent policy without evidence of insurability; usually available in the early years; two ways to do this: [fill in once have notes] .
Waiver of Premium
pays the premium if you are totally or permanently disabled and under certain other conditions; can be expensive
Credit Term Life Insurance
pays the remaining balance of a loan if the insured dies; can be very expensive but may be the only insurance available to an individual because of health problems.
Level Premium Term Life Insurance
premium is constant for a fixed time period of 1, 5, 10 or 20 years; the constant premium is an average premium over the fixed time period; assuming that it is renewable, the premium is increased due to the increased age of the insured; can also be convertible to "permanent insurance".
Guaranteed Renewable Term Insurance
premiums go up at each renewal; policy may limit the number of renewals and may specify a maximum age for renewal; does not require a physical for each renewal; premium increases for age only.
Universal Life Insurance
referred to as "unbundled" life insurance; Easier to see the charges for term insurance, company expenses and the interest being paid on the cash accumulation account; Greater flexibility; can change almost anything in policy; Can increase death benefits subject to insurability requirements; Can lower the amount of death benefit amount thus more of the premium goes to cash-value buildup; Premiums may be changed as long as premium is paid to maintain the policy; Two rates of return within Universal Life Insurance: 1.) Current year guaranteed rate and 2.) Contract rate; no guaranteed minimum death benefit like the Variable Life Insurance policy; Includes Option A - level death benefit (face amount of the policy) and Option B , which has an increasing death benefit where the payout at time of death is the death benefit plus the cash accumulation account
Adjustable Life Insurance
sometimes called Premier Whole Life; the basic premise is a money purchase concept; the amount of premiums paid determines the amount of protection and length of protection; llevel premium and level death benefit unless changed as indicated below; you can adjust various facets of the policy over time as the need for protection, length of protection, and the ability to pay premiums changes, but you must formally request this; purpose is to provide flexibility to customers
Whole Life Insurance
sometimes called straight life insurance or ordinary life insurance; can provide lifetime insurance coverage; in this case, fixed premiums are paid for life; pays interest on the cash value portion with a guaranteed minimum interest rate during life of the contract
