Unit 4: Types of Life insurance Policies

Interest-sensitive whole life

(also known as current assumption whole life) is a type of whole life insurance where the cash value can increase beyond the stated guarantee if economic conditions warrant.

Advantages of Whole Life Insurance

- permanent coverage - guaranteed level premiums - lifetime coverages

Disadvantages of Whole Life Insurance

- premium not flexible - higher initial premium

1. The cash value, sometimes referred to as the savings element 2. An insurance protection element that must be paid in addition to the cash value so that the death benefit equals the policy's face amount. (this is known as the net amount of risk to the insurance company, which represent the amount of money the insurer must have on hand to pay the death benefit)

2 components of the death benefit are....

1. 10-pay or 20-pay whole life -> the premiums are payable in 10 or 20 level annual installments 2. life paid-up at age 65 -> premiums are payable in level annual installments from the date of purchase to the year the insured turns 65

2 forms of Limited Payment Whole Life are:

Advantages -> flexible premiums, death benefit options, and cash value Disadvantages -> more complex

Advantages vs. Disadvantages of Adjustable life Insurance policies

Advantages -> potential for high returns, keep pace with inflation, tax advantages Disadvantages -> no guaranteed rate of return, complicated, highly regulated

Advantages vs. Disadvantages of Variable life insurance policies:

Advantages -> premiums are lower (because it only offers death benefit). it is the least expensive form of life insurance Disadvantages -> coverage for a short period of time, term premiums increase as the insured gets older, renewability features expire before teh age of average life expectancy (so, individuals may not be able to obtain or afford coverage at older ages when their risk of dying is greater)

Advantages vs. disadvantage of term life insurance

Death Benefit = cash value + net amount of risk to the insurance company at any given time NOTE: cash values increase each year; the insurance protection element decreases each year

Calculation: Death benefit = ?

- agents selling variable insurance policies must have a valid life insurance license. - to sell investment products, agents must register with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Association (FINRA).

Conditions for selling variable insurance:

limited payment may be a good option even though annual premiums under limited payment policies will be higher than continuous payment policies. Cash value of a limited payment policy accumulates faster than a continuous premium. However, premiums are payable only up to the date the insured turns 65 (meaning they don't have to pay premiums anymore after they turn 65) death benefit does not decrease

Limited payment vs. continuous payment

Level Term Policy

The premium and the amount of coverage are level throughout the term (may be expressed in number of years or a specified age) (death benefit is level, premium is level for the term)

1. death benefit remains level regardless of increases or decreases in the cash value 2. death benefit varies with the fluctuating cash values

Variable universal life policies has 2 death benefit options:

Option A: provides for a level death benefit equal to the policy's face value. As a result of this choice, more of the premium is placed in the cash account, making the cash value rise more quickly. Option B: provides for an increasing death benefit equal to the face value of the policy plus the cash account. (cash value does not increase as quickly because more of the premium is applied to the higher cost of the increasing death benefit over the life of the policy)

What are the 2 death benefit options that a policy-owner can pick under the Universal Life plan.

Convertibility

a feature that allows a policy-owner to convert a term insurance policy to a permanent type of policy without evidence of insurability and without having to submit an application.

Renewability

a feature, with term life insurance, guarantees that the policy will renew (extend) at the end of its term. The insured does not have to re-apply or qualify medically for the coverage. - guarantees the same amount of death benefit, however, the premium for the new renewal period will increase based upon the insured's age at renewal. (insured's attained age)

decreasing term policy

a term insurance policy in which benefit declines over the coverage period until it reaches zero at the end of the term. (death benefit decreases, premium remains level)

Increasing Term Policy

a term insurance policy in which the benefit begins near zero and grows over the term of coverage. (death benefit increases, premium increases)

Original age

age at the time the original term policy was written. A lump sum is required (down payment) that equals what the cash value would have been if a permanent policy was originally purchased instead of the term policy.

Cash Values

are an integral part of whole life insurance policy, and reflect the reserves necessary to assure payment of the guaranteed death benefit.

Variable Policies

are permanent insurance policies designed to provide lifetime coverage for the insured and have cash value and a death benefit. Allow the policy-owner to participate in various types of options while not being taxed on the earnings until the policy is surrendered.

Jumping juvenile policies

death benefit is initially small under juvenile policy. Under this policy, it will automatically increase when the child reaches the age of 18 or 21, with no corresponding increase in premium.

Living Benefits

financial benefits that are available while the insured is still alive

Variable Life Insurance (Variable Whole Life or Fixed-Premium Variable Life)

insurance policy that has a separate account instead of guaranteed cash value.

attained age

insured's age at the time of conversion

1. Fixed, level death benefit 2. Premium schedule fixed in regard to the timing of payments

interest-sensitive whole life policy has...

General Account

is a fund established to hold insurer assets and premiums for their fixed insurance products.

Separate Account

is a fund held by the life insurance company and maintained separately from the insurer's general assets. This account is established to hold premiums used to purchase funds/investments that the company offers

whole life insurance

is a permanent insurance policy which is guaranteed to remain in force for the insured's entire lifetime provided the required premiums are paid, or to the policy maturity date. Premiums will never increase under this policy. (death benefit is fixed and level) (cash values increase each year; the insurance protection element decreases each year)

Equity-indexed universal life

is a permanent life insurance policy that allows policyholders to tie accumulation values to a stock market index such as the Standard and Poor's 500 Index. Gives policyholders the security of fixed universal life insurance with the growth potential of the underlying market index.

Variable Insurance

is an insurance product that contains an investment element. (these policies are regulated because of this)

Juvenile policies

is coverage written on the life of a child or a minor. Are most often permanent life insurance.

Cash Surrender Value

is the sum of money an insurance company pays to a policyholder or an annuity contract owner in the event that the policy-owner quits the insurance contract. (thus giving up the death benefit)

Variable Universal Life

is universal life with a separate account. (Also called Flexible Premium Variable Life)

Term Life Insurance

only offer a death benefit and remain in force for a specified period of time, or term. No death benefit is payable if the insured dies after the term expires

Fixed Schedule

policy owner sets when payments for the level premium need to be made.

Limited-Payment Whole Life Policy

policy that allows for a lifetime of premiums to be paid in a shorter period of time.

Return of Premium Term

term policy that will return all or a part of the premium paid for the policy if the insured is still alive at the end of the term. (premium higher than regular term policy. Premium paid by insured is paid back if insured alive at the end of the term)

Face Amount

the amount of benefit stated in the life insurance policy

Guaranteed (level) rate of interest

the policy cash value increase steadily over the life fo the contract because it is regularly credited with THIS.

Continuous Premium Whole Life (Straight life or Ordinary life)

the premiums for this whole life policy are the same each year for the duration of the contract. if the policy-owner discontinues making premium payments, they will receive the cash value of the policy

Flexible Policies

these policies gives the policy-owner numerous options in terms of premiums, face amounts, and investment objectives

non-participating whole life policy

this policy does not pay dividends to the policy owner, but rather the insurer sets the level premium, death benefits and cash surrender values at the time of purchase. These amounts are fixed at policy issue. Premiums generally start out lower than other whole life insurance types.

Adjustable Life Insurance

this policy gives the policy-owner the options to adjust the face value/death benefit, the premium, and the length of coverage without having to change policies. (offers ability to have term and whole life coverage in one policy. The amount of premium that the policy-owner can afford is used to determine what type of insurance will best meet their needs)

Graded Premium Life Insurance

this policy has an even lower initial premium than modified whole life policies. This policy starts out lower than other type of whole life policies, and increases every year for 5-10 years until leveling off for as long as the policy remains in force.

modified premium whole life policy

this policy has lower premiums during the first 3-5 years. In those early years, this policy will have a lower cost similar to term insurance. However, after the initial period, premiums increase to a certain amount and then are level for the life of the policy (this makes them higher in cost than a continuous premium whole life policy)

Single premium whole life policy

this policy has one payment made at the time of purchase. Creates immediate cash value. The amount of this premium, along with interest earnings, will cover all future costs of maintaining the policy. (pays a fixed interest rate based on the insurance company's investment experience and current economic conditions. Single-premium variable life allows policy owners to select from a menu of professionally managed stock, bond and money market sub-accounts, as well as a fixed account)

survivorship life policy

this policy insures two individuals and will pay the death benefit when the last insured dies. (also known as second-to-die or last-to-die policies)

Indeterminate premium whole life policy

this policy is similar to a nonparticipating whole life policy except that it provides for adjustable premiums. (the company will charge a current premium based on its current estimate of investment earnings, mortality, and expense costs. It these estimates change in later years, the company will adjust the premium but never above the maximum guaranteed premium stated in the policy)

Universal Life (UL)

this policy offers people flexible premiums and flexible coverage over the course of their lifetime.

Joint life policy

this policy usually covers two or more lives with the death benefit being paid when the first insured dies. Once the death benefit is paid out, the policy ends. (also known as first-to-die policies)

Level Premium

this premium makes whole life policies affordable at older ages. this system results in overpaying for the risk of dying in younger years, and underpaying in later years towards the end of life expectancy.