Unit 11
Not Guaranteed, Not Taxable
(not like stocks) dividends are a return of a premium, which is why they are not taxed, does not project next year's dividends
Assumed Interest with Dividends
a life insurance company estimates that invested money will earn a given rate over the long run usually around 4% If a company assumes its investments will earn 4% but the invest premiums actually earn 8% the company has earned excess interest
Reduce Premium Dividend Option
a policy owner may apply dividends to reduce future premium payments, in this manner the policyowner will pay the difference between the premium due and the dividend amount.
Accelerated Endowment
a policyowner with an endowment policy will use dividends to accelerate the endowment - dividends may remain as accumulations until they together with the cash value, equal the face amount of the policy at which time the face amount may be paid as an endowment. the dividends may also be used each year to shorten the endowment period, under this option a policy will mature more quickly because its cash value will reach the desired amount of the insurance in a shorter time.
Other Settlement Options
administration of the special arrangement must strictly follow the terms of the contract, insurance companies will handle settlement option elections by individually drafting the agreements
Paid Up Option
allows the policyowner to pay up the policy early Ex. 20pay life policy by using dividends over the life of the policy it is paid in full in 16 yrs
Third-Party & Creditor's Rights
although the life insurance contract is between the policy owner and the insurered, once the insured has died a contractual agreement exists between the insured and the beneficiary. Similarly once the insured dies, the proceeds of a life insurance policy belong to the beneficiary and the insured's creditors have no right to them. The beneficiaries creditors however have a right to the life insurance proceeds
Cash Dividend Option
dividends credited to a policy owner may be paid in cash to that individual and the insurer sends a check to the policy owner. Dividends paid in cash are not considered taxable income because it is a return of unused premium
Paid Up Additions Option
dividends may be used to purchase additional amounts of insurance which added to the face amount of the contract. These are actually single premium purchases of as much life insurance as the amount of the dividend will purchase at the insured's age. The insurance additions will be paid up or paid in full for life and actually increase the insured's death benefit
Nonforfeiture Option not selected
extended term is the used in this case
Reduced Paid Up Insurance Options
insurance company uses the cash value to contract to purchase a single premium insurance contract of the same form as the original policy. The amount of converage will be much less than the original policy but no more premium payments will be required, the policyowner/insured will recieve a policy that is paid in full for life
Non-participating policies
life contracts that do NOT pay dividends
Participating vs Non-participating
life insurance policies are either of theses. At any given age people who buy par policies normally pay premiums that are slightly higher than premiums paid by those who purchase nonpar policies At the end of the year if fewer insured died than estimated a "divisible surplus" results and the company can return part of premiums paid for participating policies, called dividends but not life dividends paid on stocks. Because these dividends are part of the premiums already paid they are generally not taxable income
Dividends
life insurance policies that pay these are known as participating policies they are not guaranteed by the insurere but when paid are based on the difference between the gross premium charged and the actual experience of the insurer
Fixed Period Settlement Option
liquidates the proceeds and the interest and pays them out in seperate installments-the number, frequency, period, etc. of payments can all be determine ahead. the total amount paid out will vary depending on the time length because of the longer the period, the more time interest can accrue
Refund Life Income Options
may take the form of a cash refund annuity or an installment refund annuity
Mortality with Dividends
mortality tables tell us the certain number of insureds in each age group will probably die during the next year. If fewer people die than predicted the life insurance company experiences a mortality savings
Joint and Survivorship, life income option
occurs when if at the death of the first party the scond is alive, installments continue to the later
Life income with period certain
occurs where installments are payable as long as the primary beneficiary lives - if the primary dies the payments will be passed to the secondary
Operating expenses or loading with Dividends
past experience tells a company that it will cost so many dollars per $1000 coverage to keep the company going, such costs as accounting rent, office equipment, and so forth are relatively predictable. Any savings realized will help reduce operating expenses or loading
Withdrawal Provisions
proceeds of a policy are held by the insurere and earn interest - the insured has the right to withdraw the funds lfe on deposit with the insurer at any time, the beneficiary could only withdraw a certain amount each year
Nonforfeiture Options
protect policyowner from losing her entire investment when a life insurance policy is cancelled, or surrendered or when premium payments stop (only available for life policies that accumulate cash value) and there are 3 types - cash surrender value, extended term insurance, reduced paid up insurance
Pure Life Income Option
provides installment payments for as long as the primary beneficiary lives with no return of principal guaranteed
Policy Dividend Sources
source of funds from which life insurance policy dividends are paid is the same three factors used in premium computations which are mortality, interest, expense
Cash Surrender Value
surrender the policy for cash, all types of permanent life insurance contracts may be surrendered to the company for the amount of cash which has accumulated. THe cash surrender value increases each year the policy remains in force. The cash surrender value forms the basis of all other surrender or nonforfeiture values. When exercised the company returns the policy and has 6 mo to pay the cash surrender value, usually it is within 30 days, and once surrendered it cannot be reinstated
Fixed Amount Settlement Option
the amount paid out is more important rather than the time period and payments are made based on the proceed amount per payment
Accumulation at Interest Option
the policyowner may leave the dividends with the insurer to accumulate interest, much the same as a savings account. The interest earned will be at a rate no less than the minimum rate specified in the contract. Dividends left with with an insurer may be withdrawn at any time and if the insured dies the interested and dividends are added to the face amount of the policy.The interested earnings are taxable even though the dividends themselves are not.
Extended Term Option
the policyowner may request that the insurance company use the existing cash value to purchase term insurance equal to the face amount of the original policy with a single net premium, the term insurance will remain in effect for as long a period of time that can be purchased with the cash value available. Extended term in not available for rated policies. This is used as a single premium to purchase the same amount as the coverage but no in a term policy
1 year term dividends option
the policyowner may use dividends to purchase additional 1 year term insurance up to the amount of the cash value of the policy based on the age of the insured and is advantageous to the policyowner whose life insurance needs fluctuate year to year
Interest Only Settlement Options
the proceeds are left with the insurer and teh interest is paid to the beneficiary on an installment basis, this is generall chosen when the insured wants to continue to provide for beneficiaries after the income stops
Advantages of Settlement Options
various options equals freedom from investment concerns. If a beneficiary elects a lump sum settlement of the death benefit, the beneficiary must decide how to use or invest the money, by electing a settlement option other than a lump sum the beneficiary is trusting the expertise and knowledge of the insurance company to administer the proceeds and provide some form of guaranteed income
