Xcel ch. 4 Types of Insurance Policies

Rob purchased a standard whole life policy with a $500,000 death benefit when he was age 30. His insurance agent told him the policy would be paid up if he reached age 100. The present cash value of the policy equals $250,000. Rob recently died at age 60. The death benefit would be -$250,000 -$750,000 -$375,000 -$500,000

$500,000

Types of Life Insurance Policies

1. industrial Life 2. Group Life 3. Ordinary Life

A modified endowment contract is best described as

A life insurance contract which accumulates cash values higher than the IRS would allow

All of these are valid options for an Adjustable Life Policy EXCEPT The policy's premium can be increased or decreased The policy's death benefit can be increased or decreased A nonforfeiture option can be used to increase the death benefit The policy's protection period can be modified

A nonforfeiture option can be used to increase the death benefit

Single Premium Whole Life

Allows the insured to pay the entire premium in one lump-sum and have coverage for the insured's entire life. • An immediate nonforfeiture value is created • An immediate cash value is created • A large part of the premium is used to set up the policy's reserve

Variable Insurance Products

Because of the transfer of investment risk from the insurer to the policyowner, variable insurance products are considered securities contract as well as insurance contracts. A producer is required to register with the National Association of Securities Dealers to sell variable products

Which of these is NOT subject to income taxation under a Modified Endowment Contract (MEC)? Loan against the cash value Policy withdrawal Policy dividend Death benefit

Death benefit

Which type of life insurance policy pays the face amount at the end of the specified period if the insured is still alive? Adjustable life policy Modified life policy Endowment policy Universal life policy

Endowment policy

Which type of life insurance is normally associated with a Payor Benefit rider? Juvenile insurance Family income insurance Spouse insurance Term rider

Juvenile insurance

Which of these describes the result of a modified endowment contract that failed to meet the seven-pay test?

Pre-Death distribution will become taxable

A single premium cash value policy can be described as

a policy that is paid up after only one payment

Level Term

also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. written to cover a need for a specified period of time at the lowest premium called Level term insurance Always expires at the end of the policy period Provides a fixed, low premium exchange for coverage which lasts a specific period of time

Adjusted life policies

are distinguished by their flexibility that comes from combing term and whole life insurance into a single plan -The policyowner determines how much face amount protection is needed and how much premium the policyowner wants to pay -*Adjustable life insurance allows you to vary your coverage as your needs change without requiring evidence of insurability -No new policy needs to be issued when changes are desired -Adjustable life has all the usual features of level premium cash value life insurance

A Renewable Term Life insurance policy can be renewed at a predetermined date or age, regardless of the insured's health only if the insured provides evidence of insurability anytime at the policyowner's request typically with no change in premium

at a predetermined date or age, regardless of the insured's health

Group Life Insurance

insurance written for members of a group, such as an employer-employee group, association, union or creditor-debtor group. Coverage is provided to the members of the group under one master contract. The group is underwritten as a whole, not on each individual member.

Decreasing term life insurance is often used to provide retirement funds provide coverage for a home mortgage accumulate cash value provide coverage for estate taxes

provide coverage for a home mortgage

Term insurance is appropriate for someone who seeks living benefits for themselves seeks a policy that builds cash value seeks temporary protection and lower premiums seeks permanent protection and higher premiums

seeks temporary protection and lower premiums

Limited Pay Whole Life

whole life insurance where the insured is covered for his entire life, but premiums are paid limited time. As the premium payment shortens, cash values increase faster and the fixed premiums are higher Polices are in effect until the insured's death or they reach the age 100 Ex: under a life paid-up at 65 policy, premiums are only paid until the insured is 65 years old. With 20-ay life policy, the insured only pays 20 years.

What happens to the coverage under a children's term rider when that child reaches a certain specified age? Coverage decreases automatically Coverage increases automatically Coverage remains as long as proof of insurability is provided Coverage is eliminated

Coverage is eliminated

Level premium permanent insurance accumulates a reserve that will eventually equal the face amount of the policy pay a dividend to the policyowner require the policyowner to make periodic withdrawals become larger than the face amount

Equal face amount of the policy

Nontraditional Life Policies

In the 1980s, insurance companies introduced a number of new life products designed to keep up with inflation and are interest-sensitive, most of which are more flexible in design and provisions than their traditional counterparts. The most notable of these are interest-sensitive whole life, adjustable life, universal life, variable life, and variable universal life.

Industrial Life Insurance

Insurance issues very small face amount, such as $1,000 or $2,000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage

More on Term Life

Is often renewable and convertible All TERM insurance has a final TERMination date where you can no longer renew it If the policy is CONVERTIBLE, you can CONVERT it to whole life (think rent to own) at any time. Anytime you renew or convert ANY type of insurance, you do not worry about your health, is your insurability locked in Prices will always go up, because your attained (current) age is used for a new policy Term is typically thought of as "renting" -- you have a roof over your head, but they're going to raise the price until it no longer makes sense for you to keep it or at some point they TERMINATE the contract and kick you out.

Multiple Protection Policies

Pays a benefit of double or triple the face amount if death occurs during a specified period. if death occurs after the period. The period may be for a specified number of years - 10, 15, or 20 years or to a specified age such as 65. These policies are combination of permanent insurance and level term insurance

Variable life insurance and Universal life insurance are very similar. Which of these features are held exclusively by variable universal life insurance? Policyowner may increase or decrease the premium payments Policyowner may increase or decrease the face amount Policyowner can contribute large sums of money Policyowner has the right to select the investment which will provide the greatest return

Policyowner has the right to select the investment which will provide the greatest return

Under a Modified Endowment Contract, what are the likely tax consequences?

Pre-death distribution will become taxable

Annual Renewable Term

Term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability.

Increasing Term

Term life insurance that provides an increasing face amount over time based on specific amounts or a percentage of the original face amount.

Family Plan Policies

These are designed to insure all family members under one policy. Usually the family head is covered by permanent (whole life) insurance and the spouse/children are included on the same policy as level term life riders (family term riders) . The term coverage on the spouse and children are normally convertible to permanent coverage without evidence of insurability.

Graded Whole Life

Under a typical graded premium life insurance policy, the premium increases yearly for a stated number of years, then remains level. Premiums continue to stay level for the remainder of the policy. For example, a policy can start out low in a graded whole life and increase a small amount every year up until the fifth year, then levels off for the remainder of the policy.

Family Income Policies

Whole life and decreasing term insurance (begins date of purchase). Provides monthly income to a beneficiary if death occurs during a specified period after date of purchase. If the insured dies after the specified period, only the face value is paid to the beneficiary since the decreasing term insurance expired. Income this concern usually DECREASES over time because the household shrinks. With decreasing term, the benefit begins to decrease as soon as the policy begins. Whole Life + Decreasing term

Drawbacks of whole life insurance

• Protection is more expensive because of living benefits • Premium paying period may extend beyond the income-earning years

Equity Index Life Insurance

A permanent life insurance policy that allows policyholders to the accumulation values to a stock market index, like the S&P 500. Typically contain a minimum guaranteed fixed interest rate component along with an index account option. Indexed policies give the policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns Potential extra interest based on the investments of the companys general account

Joint Life Policy

A policy that covers two or more people. The age of the insureds are "averaged" and a single premium is charged. It uses permanent insurance (as opposed to term) and pays a death benefit when one of the insureds dies. The survivors then have the option of purchasing an individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies. ONE policy covers two. Think "Joint accounts" with a bank. One account, two people. Note: A variation of the joint and survivor policy, or a "survivorship life policy" (it can also be know a "second to die" policy). This plan also covers two lives, but the benefit is paid upon the death of the last surviving insured. Lower premiums

Example of Credit Policies

If you wanted an insurance policy to protect a $20,000 , 5-year auto loan, you would use a 5 year decreasing life insurance policy with an initial face value of $20,000. You will pay the same level premium every month for the 5-year term of the policy. The face value will start out at $20,000 and change according to a schedule (the decreasing balance of the auto loan). After 5 years, the car will be paid for and the insurance policy will no longer be needed.

A business will typically use which type of life insurance to cover their employees?

Group policy

What kind of life insurance policy covers two or more people with the death benefit payable upon the last person's death? A.) Dual Life insurance B.) Joint Life insurance C.) Last survivor Life Insurance D.) Shared Life Insurance

Last Survivor Life Insurance

whole life insurance

Provides both living and death benefits. Provides permanent life insurance protection for the insured's entire life. It also provides living benefits such as cash value and policy loans.

Renewable Term

Term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having to prove insurability. provides temporary level coverage at the lowest possible cost for a limited period of tie, but then allows policy owners to renew the policy to maintain coverage past the policy termination If customer wanted coverage at the lowest possible cost that was good for a limited period of time, but offered the ability to continue the coverage after expiration, the customer would want this term policy

Reggie purchased a life insurance policy with a face amount of $500,000. After 15 years, the cash value has accumulated to $100,000 and the policy's face amount has become $600,000. Which type of life insurance policy is this? Adjustment Life Credit Life Modified Life Universal Life

Universal Life

Joe has a life insurance policy that has a face amount of $300,000. After a number of years, the policy's cash value accumulates to $50,000 and the face amount becomes $350,000. What kind of policy is this? Increasing Term Life policy Nonparticipating policy Modified Whole Life policy Universal Life policy

Universal Life policy

A Life insurance policy that is subjected to a contract interest rate is refereed to as

Universal life

Variable Universal Life

type of life insurance that builds cash value. It combines all characteristics of a Universal life and variable life. In this the cash value can be invested in a wide variety of separate accounts , similar to mutual funds , and chance of which of the available separate accounts to use is entirely up to the contract owner The variable component in the name refers to the ability to invest in separate accounts whose values vary they vary because they are invested in stock and/or bond markets. The universal component in the name refers to flexibility the owner has in making premium payments . Provides policy owners with flexible premiums, adjustable death benefits, a guaranteed minimum death benefit and gives the insured growth potential for higher returns, but also potential for loss. Insurability can be covered by a variable universal life policy when the death benefit increases

Variable Whole Life Insurance

was created to help offset the effects of inflation on death benefits. It's permanent life insurance with many of the same characteristics of traditional whole life insurance. The main difference is the manner in which the policy's values are invested. With traditional whole life, these values are kept in the insurer's general accounts and invested in conservative investments selected by the insurer to match its contractual guarantees and liabilities. With variable life insurance policies, the policy values are invested in the insurer's separate accounts which house common stock, bond, money market, and other securities investment options. Values held in these separate accounts are invested in riskier, but potentially higher yielding, assets than those held in the general account. The basic characteristics of a variable life policy are: fixed premiums, a guaranteed minimum death benefit which fluctuates over the minimum, and cash values which fluctuate and are not guaranteed.

Convertible Term

A term life policy has a provision that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. Provide Temporary coverage that may be changed to permanent coverage without evidence of Insurability Conversion privilege of group term life policy allows an individual to leave a group term (temporary) plan and convert ones insurance into an individual (permanent) policy without evidence of insurability. always considers the attained (current) age when converting polices Premiums increase due to using your attained age Ex: If you take out a term insurance policy when you're young to take advantage of your good health and the policy lowers premium but want the option to convert the policy to a permanent one for final expense benefits once your finances approve, you would want a convertible plan

Term Life Insurance

Insurance gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period of time because it has a TERMination date. Inexpensive type of insurance , making it an attractive option for large polices. Cheapest type of pure life insurance, due to have a termination date , and not having a cash value , it is ALWAY be cheaper than a whole life policy with the same face value Provides pure death protection since it only pays a death benefit if insured dies during policy term

Decreasing Term

Term life insurance that provides an annually decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. type of life policy which has a death benefit that adjust periodically (according to a schedule) and is written for a specific period of time Written for mortgage or debt that typically decreases over time until it is paid off When someones mortgage balance reduces each year, the face value of the insurance company will adjust accordingly to match. After everything is paid off, the policy expires

Pre-death distributions from a modified endowment contract (MEC) receive different tax treatment than other life insurance policies because

The MEC tends to be an investment vehicle

Which type of life insurance offers flexible premiums, a flexible death benefit, and the choice of how the cash value will be invested? Adjustable life policy Variable universal policy Universal policy Modified whole life policy

Variable universal policy

All of these statements concerning whole life insurance are false EXCEPT Policyowner can take out a policy loan up to the face amount When a whole life policy is surrendered, income taxes may be owed Coverage is normally temporary The death benefit is not affected by outstanding loans

When a whole life policy is surrendered, income taxes may be owed

Index whole life insurance contains a securities component that acts as a(n) hedge against inflation premium stabilizer means to lowering taxes on earnings incentive to purchase more coverage

hedge against inflation

Whole Life

insurance that provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium.

What happens when a term policy is renewed ?

insured does not have to prove insurability . However, the premium price will rise because the insurance company will use the insureds current age to determine new premiums.

A permanent life insurance policy where the policyowner pays premiums for a specified number of years is called a(n) adjustable policy limited pay policy level term policy variable universal policy

limited pay policy

Ordinary Life Insurance

Is made up of several types of individual life insurance, such as temporary (term), permanent (whole)

Juvenile Insurance

Life insurance which is written on the lives of a minor is called juvenile insurance. The adult applicant is usually the premium payor as well, until the child comes of age and is able to take over the payments. A payor provision is typically attached to juvenile policies. It provides that, in the event of death or disability of the adult premium payor, the premiums will be waived until the child reaches a specified age (such as 18, 21, or 25). Payor Provision protects the insured in the event the PAYOR dies or is disabled

Family Maintenance Policy

Whole life and level term (begins date of death). Provides income to a beneficiary for a selected period of time if an insured dies during that period. At the end of the income- paying period, the beneficiary also receives the entire face amount of the policy. If an insured dies after the end of the selected period, the beneficiary receives only the face value of the policy. If an insured die after the end of the selected period, the beneficiary only gets the face value Maintenance "maintains" the family using level term .This means the family will receive a receive a benefit for so many years after the insured's death.

With Universal Life

With universal life: -Changes may be made wit relative ease by the policyowner with these flexible-premium policies -Investment gained toward cash value - unlike whole life (with its fixed premiums, fixed face amounts, and fixed cash value accumulations) universal life allows its policyowners to determine the amount and frequency of premiums payments which will adjust the policy face amount -Basic characteristics of a universal life policy. are flexible premiums, flexible benefits, no minimum death benefit , and cash value withdrawals -Cash value accumulation are subject to minimum interest guarantee -Any surrender charges of universal policy must be disclosed

Types of Whole Life Insurance

1. straight whole life 2. limited pay whole life 3. single-premium whole life 4. modified whole life 5. graded whole life

Modified Endowment Contract (MEC)

A policy that is overfunded, according to IRS tables. Also are policies that dont meet the 7-pay test are considered MEC's and will lose favorable tax treatment. The 7-day pay test is a limitation on the total amount you can pay into your policy in the first seven years of its existence. Test is designed to discourage premiums schedules that would result in paid-up policy before the end of a seven-year period. Ex: if yearly premium is $500, in a seven year period a total amount paid would equal $3,500. If you paid $3,501, it has now exceeded the 7-pay test and is no longer a life insurance contract. It will now be taxed as an investment. -If withdrawn prior to age 59 1/2, there is a 10% penalty -Taxation only occurs when cash is distributed -Funds withdrawn from a MEC are subject to last-in first-out (LIFO) tax treatment, which assumes that the investment or earning portion of contract's values is withdrawn first (making these funds fully taxable as ordinary income). Penalty taxes on premature distributions from a modified endowment contract normally apply to policy loans.

Donald is the primary insured of a life insurance policy and adds a children's term rider. What is the advantage of adding this rider? A. Can be converted to permanent coverage without evidence of insurability B. Coverage can be different for each child C. Premiums on this rider are not required until the limiting age is reached D. Increases the policy's overall cash value

Can be converted to permanent coverage without evidence of insurability

Which of these riders will pay a death benefit if the insured's spouse dies? Guaranteed Insurability rider Family term insurance rider Family whole insurance rider Payor benefit rider

Family term insurance rider

All of these are characteristics of a universal life insurance policy EXCEPT Flexible death benefit All of these are characteristics of a universal life insurance policy EXCEPT Flexible death benefit Fixed surrender value Flexible premiums Builds cash value

Fixed surrender value

Family Plan Policy Example

Husband - Whole life Policy Wife (spouse) - Term Policy - convertible without proof of insurability Children - Term Policies - convertible usually at age 18 or 21 without proof of insurability; premium remains same regardless of the number of children

Interest Sensitive Whole Life

Interest-sensitive life insurance is a type of whole life insurance where the cash value can increase beyond the stated guarantee if economic conditions warrant. This is also called current assumption whole life insurance. It also gives the insured the opportunity to either increase the face amount or use the extra cash value to lower future premiums. Premiums can vary to reflect the insurer's changing assumptions with regard to its death, investment, and expense factors. CAWL (current assumption whole life) policies are almost always a MEC due to accelerated premiums.

Credit Insurance Life

Is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. It is normally issued in an amount not to exceed the outstanding loan balance and is usually paid entirely by the borrower. A decreasing term policy is often used.

Term - Rider

Life insurance product which covers children under their parents policy. Coverage of spouse and children rider is always a level term, and is cheaper than every family member getting their own policy. Allows additional family members to be covered under one policy by attaching everyone to the main policy. Term riders can also allow an applicant to have access coverage by adding an additional term rider for them to a main policy. Policy would be made on Dad, then Mom and the children are riding on (attached to) dad's policy as riders

Modified Whole Life

Low premiums in the early years and jumps to a higher premium in the later years and remains fixed thereafter. Premiums increase just once.

Which of these would be the best example of a limited pay life insurance policy? Whole life policy that pays out its cash value over a 20 year period Whole life policy with premiums paid up after 20 years Term life policy that returns cash value after 20 years Term life policy with premiums paid up after 20 years

Whole life policy with premiums paid up after 20 years

Universal Life

a variation of whole life insurance characterized by considerable flexibility, allows it policyowners to determine the amount and frequency of premium payments and to adjust the policy face amount up or down to reflect changes in needs. Term insurance with an investment fund, buying term and investinf the difference for you. Characterized by consideration and flexibility With universal life: -Changes may be made wit relative ease by the policyowner with these flexible-premium policies -Investment gained toward cash value - unlike whole life (with its fixed premiums, fixed face amounts, and fixed cash value accumulations) universal life allows its policyowners to determine the amount and frequency of premiums payments which will adjust the policy face amount -Basic characteristics of a universal life policy. are flexible premiums, flexible benefits, no minimum death benefit , and cash value withdrawals -Cash value accumulation are subject to minimum interest guarantee -Any surrender charges of universal policy must be disclosed

Straight life

basic whole life insurance with a level face amount and fixed premium payable over the insured's life. Premium payments made until death of insured or age 100 (maturity of policy)

Credit Policies

typically purchased using decreasing term life insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining loan balance. Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of debt or loan is outstanding. Term matched to the length of the loan period nd the decreasing insurance amount matched to the declining loan balance

Advantages of Whole Life Insurance

• Covers the entire life of the insured • Living benefits - cash value and policy loans • Fixed premiums