Types of Life Insurance Policies

Requirements for agents selling variable life insurance products

- Be registered with FINRA; - Be licensed by the state to sell life insurance; and - Have received a securities license.

Variable Universal Life Features and Characteristics

- Flexible premium that can be increased, decreased, or skipped as long ass there is enough value in the policy to fund the death benefit; - Increasing and decreasing the amount of insurance; and - Cash withdrawals or policy loans. Most of the investment vehicles in variable life policies do not guarantee return. Products are DUALLY REGULATED by the State and Federal Government (by SEC, FINRA, and NASD).

Whole Life Characteristics

- Level premium - Death benefit - Cash value - Living benefits

Interest-Sensitive, Market-Sensitive and Adjustable Life Products

1. Adjustable Life 2. Universal Life

Categories of Life Insurance Policies

1. Temporary Protection (Term Life; Pure Life) 2. Permanent Protection (Whole Life)

Types of Term Life Insurance

3 basic types which are based on how the face amount (death benefit) changes during the policy term: 1. Level, 2. Increasing, and 3. Decreasing. Regardless of the type of term insurance purchased, the premium is level throughout the term of the policy; only the amount of the death may fluctuate, depending on the type of term insurance. Upon selling, renewing, or converting the term policy, the premium is figured at attained age (the insured's age at the time of transaction).

Permanent Life Insurance

A general term used to refer to various forms of whole life insurance policies that remain in effect to age 100 so long as the premium is paid.

Variable Whole Life

A level, fixed premium, investment based product. Policies have fixed premiums and a guaranteed minimum death benefit. Cash value is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer. Policyowner bears the investment risk in variable contracts. ** Since the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be kept in the insurance company's general account-- assets must be held in a separate account, which invests in stocks, bonds, and other securities investments options. Each separate account must maintain assets with a value at least equal to the reserves and other contract liabilities.

Ordinary Whole Life Insurance

A level-premium policy that provides lifetime protection. AKA, ordinary life, continuous premium whole life, or straight whole life. Lowest annual premium.

Cash Value

A policy's savings element or living benefit.

Target Premium

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.

Suitability

A requirement to determine if an insurance product is appropriate for a customer.

Qualified Plan

A retirement plan that meets IRS guidelines for receiving favorable tax treatment.

Variable Universal Life

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.

Variable Life Insurance

Contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance.

Fixed Life Insurance

Contracts that offer guaranteed minimum or fixed benefits.

Liquidation of an Estate

Converting a person's net worth into a cash flow.

Limited-Pay Life

Designed so that the premiums for coverage will be completely paid-up well before age 100. Some of the more common versions of limited-pay life are 20-pay life whereby coverage is completely paid up for in 20 years. Life paid-up at 65 (LP-65)-- coverage is paid up for by the insured's age 65. All other factors equal, this type of policy has a shorter premium-paying period than straight-life, so annual premium will be higher. Cash value builds up faster for the limited-pay policies. Limited-pay policies are well-suited for those insured who do not want to be paying premiums beyond a certain point in time.

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. Policy is completely paid-up after one premium and generates immediate cash.

Adjustable Life

Developed in an effort to provide policyowner with the best of both worlds (term and permanent coverage). Can assume the form of either term insurance or permanent insurance. Insured typically determines how much coverage is needed and the affordable amount of premium. Insurer will determine appropriate type of insurance to meet the insured's needs. As needs change, policyowner can make adjustments in his or her policy. Has following options: - Increase/decrease the premium or premium-paying period, - Increase/decrease face amount, - Change the period of protection; or - Converting from term to whole life or vice-versa. Cash value only develops when the premiums paid are more than the cost of the policy.

Securities

Financial instruments that may trade for value. - Bonds - Stocks - Options

Death Benefit (Whole Life)

Guaranteed and remains level for life.

Policy Maturity

In life policies, the time when the face value is paid out.

Option B

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.

Option A

Level Death Benefit option; the death benefit remains level while the cash value gradually increases.

Traditional Whole Life Products

Provides lifetime protection and includes a savings element (for cash value). Endow at the insured's age 100, which means cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100. Policy premium is calculated assuming that the policyowner will be paying the premium until that age. Premiums for whole life are higher than for term.

Convertible

Provides policyowner the right to convert the policy to a permanent insurance policy without evidence of insurability. Premium will be based on the insured's attained age at the time of conversion.

Term Life Insurance

Temporary protection that lasts only for a specified period of time; "Pure Life" Insurance. Policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection. There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed. Provides "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.

Minimum Premium

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

Face Amount

The amount of benefit stated in the life insurance policy.

Endow

The cash value of a whole life policy has reached the contractual face amount.

Attained Age

The insured's age at the time the policy is issued or renewed.

If an insured skips a premium payment on a universal life policy...

The missing may be deducted from the policy's cash value. The policy will not lapse.

Level Term Insurance

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.

Level Premium

The premium that does not change throughout the life of a policy.

Annually Renewable Term (ART) Insurance

The purest form of term insurance. The death benefit remains level, 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, as the probability of death increases.

Deferred

Withheld or postponed until a specified time or event in the future.

Interest-Sensitive Whole Life

AKA, current assumption life. A whole life policy that provides a guaranteed death benefit to age 100. Insurer sets initial premium based on current assumptions about risk, interest, and expense. If actual values change, the company will lower or raise the premium at designed intervals. Credit cash value with the current interest rate that is usually comparable to money market rates and can be higher than the guaranteed levels. Also provides for a minimum guaranteed rate of interest. Provides same benefits as other traditional whole life policies with the added benefit of current interest rates, which may allow for either greater cash value accumulation of a shorter premium-paying period.

Indexed Life

AKA, equity index whole life. The cash value is dependent upon the performance of the equity index, such as S&P 500 although there is a guaranteed minimum interest rate. Policy's face amount increases annually to keep pace with inflation (as CPI increases) without requiring evidence of insurability. If policyowner assumes risk, policy premiums increase with the increases in the face amount. If insurer assumes risk, premium remains level.

Universal Life Policy (1/2)

AKA, flexible premium adjustable life. Implies policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. Policyowner may even skip paying a premium and the policy will not lapse as long as there is a sufficient cash value at the time to cover the monthly deductions for cost of insurance. If cash value is too small, the policy will expire. Since premium can be adjusted, policyowner may be given a choice to pay either of the two types of premiums: 1. Minimum premium 2. Target premium Two components: 1. Insurance component (always annually renewable term insurance) 2. Cash account

Universal Life Policy (2/2)

Allow the partial withdrawal (partial surrender) of the policy cash value. * There may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made. * Interest earned on withdrawn cash value may be subject to tax. * Partial surrender ≠ Policy loan Offers one of two death benefit options to policyowner: 1. Option A 2. Option B

Renewable

Allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability. Premium will be based on the insured's current age.

Return of Premium (ROP) Insurance

An increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid. The ROP is paid if the death occurs within a specified period of time or if the insured outlives the policy term. Structured to consider the low risk factor of a term policy but at a significant increase in premium cost, sometimes as much as 25% to 50%. When the term is over, the policy expires, and the insured is without coverage. ROP offers the pure protection of a term policy, but if the insured remains healthy and is still alive once term limit expires, the insurance guarantees a ROP. Since amount returned equals the amount paid in, the returned premiums are not taxable.

Nonforfeiture Values

Benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapsed.

Cash Value (Whole Life)

Cash value, created by accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (policy maturity date). Paid out to policyowner (insure and policyowner do not have to be same person). Credited to the policy on a regular basis and have a guaranteed interest rate. AKA, nonforfeiture value.

Special Features

Most term insurance policies are renewable, convertible, or renewable and convertible (R&C).

Decreasing Term Insurance

Policies feature a level premium and a death benefit that decreases each year over the duration of the policy term. Decreasing term is primarily used when the amount of needed protection is time-sensitive or decreases over time. Commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. Amount of coverage thereby decreases as the outstanding loan balance decreases each year. Decreasing term is usually convertible; however, it is usually not renewable since the death benefit is $0.00 at the end of the policy term.

Living Benefits (Whole Life)

Policyowner can borrow against the cash value while the policy is in effect or can receive the cash value when the policy is surrendered. Cash value does not usually accumulate until third policy year and it grows tax deferred.

Level Premium (Whole Life)

Premium for whole life policies is based on the issue age. Remains the same throughout the life of the policy.