Types of Life Policies

Limited Pay

A level annual premium. The policy is designated so premiums for the coverage will be completely paid up before age 100. Some of the more common versions are 20-pay life whereby coverage is completely paid for in 20 years, and life paid-up at 65 whereby coverage is completely paid for by the insured's age 65. Obviously when the premium-paying period is condensed to a shorter duration, a higher annual premium is required.

Insurance Component of a universal life policy

Is always annual renewable term insurance.

Whole Life

Policies are referred to as permanent protection, since as long as the premium is paid, coverage will continue for the life of the insured. The premium is based on the issue age (or the insured's age at the time of the policy issued); therefore, it remains the same throughout the life of the policy. The death benefit is guaranteed and useful for an individual who wishes to lock into a level premium amount that will not increase over his or her lifetime. This is particularly so for an individual using insurance as a tool in estate planning. Build cash value (living benefits), which the policyowner can borrow against, or to which he or she is entitled, in the event the policy is surrendered.

Option A (Level Death Benefit option)

The death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in the later years.

Flexible Premium

The policyowner is allowed to pay more or less than the planned premium.

Annually renewable Term (ART)

The purest form of term insurance. The death benefit remains level (in that sense, its a level insurance), 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. Which provide a level death benefit for a term of one year; however, upon each renewal, the premium increases each year with the age of the insured. The insured does not have to prove insurability, he or she simply has to pay the higher renewal premium.

Fixed Premium

The same amount is paid periodically.

Individual Life Insurance

Written on a single life. The rate and coverage is based upon the underwriting of that individual.

Ordinary Life Insurance

Written on an individual basis; however, it differs from Industrial Life in the following areas: Larger face amounts (at least $1,000); Premiums can be paid annually, semiannually, quarterly or monthly; Premiums are paid by the insured directly to the insurance company; A physical examination may be required to prove the applicant's insurability.

Juvenile Life Insurance

Any life insurance written ion the life of a minor. A common policy is known as the "jumping juvenile" policy because the face amount increases at a predetermined age, often age 21. The face amount jumps, but the premium remains level.

Payor Rider Benefit

Is primarily used with juvenile policies; otherwise, it functions like the Waiver of Premium rider. If the payor (usually a parent or guardian) becomes disables for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21. This rider is also used when the owner and the insured are two different individuals.

Level Premium Term

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

Minimum Premium

The amount needed to keep the policy in force for the current year (only enough to purchase insurance and cover expenses). Will make the policy as an annually renewable term product.

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. In this case, the policyowner may agree to a monthly preauthorized bank draft. The amount of payment is established according to how much the policyowner wants to save each month.

Convertible Term

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

Group Life Insurance

Written as a master policy, issued to the sponsoring organization, covering the lives of more than one individual member of that group. Individuals covered by this insurance do not receive a policy, but receive a certificate of insurance from the master policy. The amount of coverage on the certificate holders must be determined according to nondiscriminatory rules. The rate and coverage are based upon group underwriting with all individuals covered for the same amount and rate. The cost of coverage paid by the employer in excess of $50,000 is taxed to the employee. The group must exist for a reason other than purchasing group insurance; and Individual members covered under the group master policy must have the right to convert their coverage to an individual policy without evidence of insurability should they leave the group.

Equity Indexed Universal Life

A Universal Life policy with an equity index as its investment feature. Has many of the same characteristics as the Variable Universal Life (flexible premiums, an adjustable death benefit, the policyowner decides where the cash value will be invested) with the primary difference being the investment feature. The policy's cash value is dependent upon the performance of the equity index. Cash values and death benefit are not guaranteed. Sale of this product does not require a securities license.

Modified Pay

A lower premium is charged in the first few policy years, usually the fist three to five years, and then a higher level premium is paid for the remainder of the insured's life. These policies were developed to make the purchase of whole life insurance more attractive for individuals who, for ex, are just starting out and have limited financial resources.

Modified Life

A type of whole life policy that charges a lower premium (similar to term rates) in the first few policy years, usually the first three to five years, and then a higher level premium for the remainder of the insured's life. The higher the subsequent premium is typically higher than a straight life premium would be for the same age and amount of coverage. These policies were developed to make the purchase of whole life insurance more attractive for individuals who, for example, are just starting out and have limited financial resources, but will be able to afford higher premiums in the future as their income grows.

Return of Premium Rider

Implemented by using increasing term insurance. When added to a whole life policy, it provides that at death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary. The return of premium rider usually expires at a specified age such as age 60.

Family Term Rider

Incorporates the spouse term rider along with the children's term rider in a single rider. When added to a whole life, policy, the family term rider provides level term life insurance benefits covering the spouse and all of the children in the family.

Non-Participating (stock) Life Insurance Policy

Does not pay dividends to policyowners; however, taxable dividends are paid to stockholder. The safety margin is narrower, because the cost of the insurance to the policyholder cannot be adjusted at a later time. The gross premium charged must reflect, at least for competitive reasons, the actual cost of providing the insurance. Any profit realized in the operation will be used to provide dividends to stockholders as well as surplus funds that may be used as a buffer for future adverse experience.

Nonforfeiture Value/ Cash Value

Does not usually accumulate until the third policy year and it grows tax deferred. The policyowner may also borrow against the cash value of a whole life policy. However, the amount of any outstanding loan and interest will be deducted from the policy face amount upon the insured's death. Additionally, the insurer may defer payment of any loan request for up to 6 months. Created by the accumulation of the premium, is scheduled to equal the face amount of the policy at age 100.

Family Policy (Family Protection)

Combines whole time with term insurance to cover family members in a single policy, providing coverage on every member of a family. The family policy typically provides whole life insurance on the breadwinner of the family and convertible term insurance on the other family members. The spouse has the opportunity to convert his or her term coverage to permanent coverage up until age 65. Children are automatically covered after birth for a specified period of time, usually 30 or 31 days. To continue coverage for the newborn after the initial period, the parents must inform the insurer of the birth within that time period. The children may convert their term coverage to permanent coverage when they turn the age of 21, or the max age for coverage as a dependent that is stated in the policy, without evidence of insurability.

Industrial/ Home Service Insurance

Life insurance written on an individual basis. The following are its distinguishing features: Written in small amounts (usually with a face amount of less than $1,000) Premiums are payable on a weekly or monthly basis; Premiums are collected by a representative of the insurance company at the home of the insured; and Policies are written nonmedically (no medical exam is required; however, medical history information is still collected.)

Variable Universal Life

A combination of universal life and variable life. Like universal life, it provides the policyowner with flexible premiums and an adjustable death benefit. Like variable life, the policyowner rather than the insurer, decided where the net premiums (cash value) will be invested. Also, like variable life, the cash values are not guaranteed, and the death benefit is not fixed. The cash value and/or death benefit may increase or decrease over the life of the policy depending on the investment performance of the underlying sub-account. The death benefit however, generally cannot decrease below the initial face amount of the policy. An individual must also be licensed for both securities and life insurance in order to sell this.

Interest-sensitive Whole Life

Also referred to as Current Assumption Life, is a fixed premium whole life policy that provides a guaranteed death benefit at age 100. This type of policy credits the cash value wit the current (nonguaranteed) interest rate that is usually comparable to money market rates. In addition, the policy also provides for a minimum guaranteed rate of interest. The current interest rate may be tied to bond index rates, Treasury Bill rates or simply declared by the insurer's board of directors. Although the interest-sensitive whole life products typically have fixed premiums, most policies will allow the policyowner to "dump" in additional funds in order to shorten the premium-paying period. The future premium may be offset by excess interest. Interest sensitive whole life provides the 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 or a shorter premium-paying period.

Adjustable Life

Developed in an effort to provide the policyowner with the best of both worlds (term and permanent coverage). An adjustable life policy can assume the form of either term insurance or permanent insurance. the insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insured's needs. As the insured's needs change, the policyowner has the following options: Increase or decrease the premium; Change the premium-paying period; Increase or decrease the face amount of coverage; or Change the period of protection. As a result of this flexibility, the policyowner has the option of converting from term to whole life or vice versa. However, increases in the death benefit or changing to a lower premium type of policy will usually require proof of insurability. In the case of converting from a whole life policy to a term policy, the insurer may adjust the death benefit. The policyowner may also pay additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash value or to shorten the premium paying-period. Common features: Loan provisions, reinstatement, nonforfeiture options, settlement options, etc. The cash value only develops when the premiums paid are more than the cost of the policy. Does not provide as must flexibility for the policyowner.

Family Maintenance Policy

Insurance based on a family income policy which combines whole life with level term insurance to provide a beneficiary with income over a specified period of time if the insured dies during that period of time. If the insured dies within the time period, the insurance is sufficient to pay the monthly income portion of the contract. Also the policy contains permanent life insurance protection to be paid upon the death of the insured. Should the insured survive the specified time period, then the term portion expires without value and the contract is left with only the permanent life protect.

Survivorship Life (second-to-Die or last survivor)

It insures two or more lives for a premium that is based on a joint age. This pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life, which pays upon the first death. This type of policy is often used to offset the liability of the estate tax upon the death of the second spouse.

Variable Life

It is a fixed premium policy with the addition of an underlying investment account. The policyowner may allocate the premium, after certain deductions for expense loads, into a sub-account that is held by the insurance company, call the separate account. The types of sub-accounts that are available include bond accounts, growth stock accounts, money market accounts, real estate accounts, and a balanced fund account. The death benefit and cash value are not guaranteed. The cash value and/or death benefit may increase or decrease over the life of the policy depending on the investment performance of the underlying sub-account. The death benefit, however, generally cannot decrease below the initial face amount of the policy. The premium is fixed and will not change over the life of the policy. Primarily to serve as a hedge against inflation. However, in return for the potential of investment growth, the policyowner assumes the downside risk of unfavorable investment performance of the underlying sub-account, which in turn may result in a death benefit that falls short of the policyowner's needs. An individual must hold a securities license in addition to a life insurance licence in order to sell variable life. In addition, the sale of this must be preceded or accompanied by a prospectus that is filed with the SEC.

Mode

Refers to the frequency the policyowner pays the premium. If the policyowner chooses to pay the premium more frequently than annually, there will be an additional charge (loading) because the company will not have the premium to invest for a full year, and the company will have additional expenses in billing the premium. However, the premium may be paid annually, semi-annually, quarterly, or monthly. Higher Frequency= Higher Premium Monthly> Quarterly> Semi-Annual> Annual

Ordinary (Straight) LIfe

The basic policy that charges a level annual premium for the lifetime of the insured and provides a level, guaranteed death benefit. During the insured's lifetime the policy builds cash value. It is required by law that the policy develops cash value no later than the end of the third policy year. If the insured lives to age 100, the cash value equals the face amount, and the policy endows(matures). The cash value is paid to the insured(usually policyowner) at that time. Of the three common whole life policies, this policy will have the lowest annual premium.

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. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expenses of this option are much greater than those for option A, thereby causing the cash value to be lower in the older years (all else being equal).

Universal Life

Goes by the generic name of flexible premium adjustable life. The death benefit (face amount) can be increased or decreased depending on the insurance needs of the policyowner. The insurer will usually require proof of insurability. The policyowner has the flexibility to increase the amount of premium going into the policy and to later decrease it again. The insurance companies may give the policyowner a choice to pay either the minimum premium or the target premium. Has two components: an insurance component and a cash account. Allow the partial withdrawal (partial surrender) of the policy cash value. However 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. During the withdrawal, the interest earned on the withdrawn cash value may be subject to taxation, depending upon the plan. At the time that an individual applies for the policy, he or she selects the level of premium,l cash value, death benefit and premium-paying period that is desired.

Single Premium Whole Life

Designated to provide a level death benefit to the insured's age 100 for a one-time, lump-sum payment. Endows for the face amount of the policy if the insured lives to age 100. Will generate immediate cash value due to the size of the lump sum payment that is made to the insurance company. Most companies require a minimum premium of $5,000 or more for a single premium policy. The face amount of the policy, as required by the Internal Revenue Code, must be 100% to 250% of the cash value, depending on the age of the insured. The rate of return is usually guaranteed for a period lasting from 1 to 5 years. After that point, the rate is adjusted either at the discretion of the insurer or according to a formula, but it will not fall below a guaranteed minimum stated in the policy. Unlike traditional forms of life insurance, do not have a "front-end" load (deducted form the initial premium). Instead, the policy is subject to a surrender charge that is levied if the policy is surrendered for cash within a specified period of time. The surrender charge is generally in effect for 7 to 10 years on a diminishing basis.

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. Can take the form of what is known as annually renewable term (ART) Has the highest premiums of the three primary types of term insurance sold.

Statutory definition of Life Insurance

Established by the IRS and applies to all life insurance contracts issued after Dec 31, 1984. There must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposed and consequently loses most of the tax advantages that have been associated with life insurance.

Limited-Pay Whole Life

Has the following features: Level annual premium; Level, guaranteed death benefit to the insured's age 100; Endows for the face amount if the insured lives to age 100. Is designated so that 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 for in 20 years and life paid-up at 65 whereby the coverage is completely paid up for by the insured's age 65. All other things being equal, when the premium-paying period is condensed to a shorter duration, a higher annual premium is required. This stands to reason since the premiums for straight life will be spread over the insured's lifetime, thus enabling the insurance company to charge a lower annual premium. A policy that has a shorter premium paying period will accumulate cash value more rapidly compared to a policy with a longer premium-paying period (because of the greater amount of premium paid early). Well suited for those who don't want to be paying premiums beyond a certain point in time.

Family Income Policy

A combination of decreasing term insurance and whole life insurance on the breadwinner of the family. The policy is designed to provide an income period which begins from the effective date of the policy and commonly runs for twenty years, but it is also issued for 1o yrs or even to age 65. This income period is funded with decreasing term insurance. If the insured should die any time during the income period, the perm coverage will provide the surviving family with a monthly income for the remainder of the income period. At the end of the income period, the face amount of the whole life coverage is paid to the beneficiary. If the insured dies after the income period, only the whole life portion will be paid to the beneficiary. This type of policy provides a family with a monthly income upon death of the insured while maintaining permanent coverage until the end of the income payments.

Cash Account

Accumulates on a tax-deferred basis each year and earns either the guaranteed contract rate or the current rate, whichever is higher. When the policyowner pays the premium for a universal life policy, a small part of it is deducted for the premium expense charge, and the balance is allocated into the policy's cash value account. Certain expenses are then deducted from the cash account. These expenses (loads) include mortality costs ( the cost of the insurance or death benefit), sales expenses incurred in marketing and distributing the policy, and expenses involved in issuing the policy.

Endowment

Another type of whole life insurance which have all the same features as a regular whole life policies with a slight variation in the maturity date. They provide a permanent, level death protection if the insured should die prematurely, and they accumulate cash values. Premiums can be paid up until the endowment date, for a limited period of time, or in a lump sum single payment. It matures at an earlier age (before age100). Because the cash value has to build up faster since the funds are intended to be used while the insured is alive, the premium is considerably higher than an ordinary straight life policy. The sooner the policy endows, the higher the premium will be.

Participating (Mutual) Life Insurance Policy

Any policy that distributes its non-taxable annual dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance. A substantial safety margin is built into the premium, sufficient to reflect a willful overcharge, but justified on the assumption that if the extra premium is not needed, it will be returned to the policyholder as a dividend. Permits the insurer to establish a more generous margin in the form of an intentional overcharge, which will be returned to the policyholder if not needed.

Decreasing Term

Policies feature a level premium and a death benefit that decreases each year over the duration of the policy term. Primarily used when the amount of needed protection is time sensitive, or decreases over time. Is commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. The amount of coverage thereby decreases as the outstanding loan balance decreases each year. Is usually convertible; however, it is usually not renewable since the death benefit is at $0 at the end of the policy term. The premium is based on pure protection; therefore, the cost are comparable regardless of the type of coverage purchased.

Mortgage Redemption

Provision insures borrowers for an amount equal to their mortgages. If the borrower/insured dies, the insurer assumes responsibility for paying the outstanding loan balance to the insured's creditor. `

Graded-Premium Whole Life

Similar to modified life in that premiums start out relatively low and then level off at a point in the future. Typically starts with a premium that is approximately 50% or lower than the premium of a straight life policy. The premium then gradually increases each year for the period of usually five or ten years and then remains level thereafter.

Term Insurance

Temporary protection because it only provides coverage for a specific period of time. Also known as pure life insurance. 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. Most generally purchased to provide temporary coverage, a large amount of coverage for a relatively small premium, or both. Has been instrumental in introducing young people to the habit of obtaining life insurance in order to provide various forms of protection, mainly because of its affordability. The premium is often level throughout the term of the policy. Upon selling, renewing, or converting the term policy, the premium is figured at attained age. Only the amount of the death benefit may fluctuate, depending on the type of term insurance.

Single Premium

The policyowner makes one lump-sum payment to the insurance company to create a policy. Will generate immediate cash value due to the size of the lump sum payment that is made to the insurance company. Most companies require a minimum premium of $5,000 or more for a single premium policy.

Level Premium

The premium remains the same throughout the duration of the contract.