Chapter 3 - Types of Policies and Riders

Universal Life Insurance (UL)

"Flexible Premium Adjustable Life Insurance. Like ordinary Whole Life, Universal Life Insurance features insurance protection and a savings element that grows on a tax-deferred basis. Unlike whole life insurance, UL is an "unbundled policy." This means the individual elements of the policy and premium - the pure protection element, which includes the mortality risk and policy expenses, and the cash value - are both transparent to the policyowner.

Term Riders

- Additional temporary insurance (level, increasing, or decreasing term) - Mortgage protection (covers increasing debt)

Accelerated Death Benefits

- Allows early payment of a portion of the face amount if insured becomes terminally ill (24 months) - Could include nursing home and dread disease benefits.

Guaranteed Insurability

- Allows the insured to purchase stated amounts of additional insurance every 3 years based on certain ages (specifically 25, 28, 31, 34, 37, and 40), events, or specified dates without evidence of insurability up to a maximum age, usually 40.

Variable Universal Life (VUL)

- Combination of Variable and Universal - Flexible premiums and adjustable death benefits - 2 Death benefit options ( A & B) - Separate accounts show actual investment participation with no guaranteed return. - No guaranteed minimum death benefit. - Owner assumes investment risk (separate account) - All variable products are subject to FINRA regulation. - Prospectus must be provided prior to the sale. - FINRA registration and insurance license required.

Joint Life (First-to-Die)

- Covers 2 or more lives - Death benefit paid upon first death - Premiums based upon joint age - Written on a whole Life Policy

Accidental Death Benefit (Double, Triple Indemnity or Multiple Indemnity)

- Double or tripple the face amount if death was accidental - Based on the face amount of the policy - The benefit is payable only if death occurs before a specific age and within 90 days of the accident.

Note

A UL policy does not enter the grace period until the cash value is $0.

Renewable

A benefit that will renew the contract on the renewal date without evidence of insurability. The policy may be a one (annual), five, ten, or twenty year renewable contract, with premiums increasing at the beginning of each renewal period. The renewal premium is based upon attained age. Renewability is important because the risk is that the insured's health may deteriorate and may be unable to obtain a policy at the same rates or even at all, leaving the insured without coverage. Level term policies may offer the option of being renewal for an additional premium.

Payor Benefit (Waiver of Payors Premium)

A rider that waives the premium payment if the owner dies or becomes disabled and is unable to make the premium payment on behalf of the insured.

Re-Entry Term

An existing term life insurance policy may be exchanged typically one time for a new term life policy on the re-entry date. The new policy's premiums will be based on the insured's attained age, the rates in effect by the insurer at the time of re-entry, and the premium class approved by the company. Once the new policy is issued, the original policy terminates. The reason this option would be considered is if the new policy would offer a lower premium than the original one.

Indeterminate Premium

An indeterminate premium whole life policy is like a non-participating whole life plan of insurance, 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. If these estimates change in later years, the company will adjust the premium accordingly but never above the maximum guaranteed premium stated in the policy.

Question: Which of the following is not a feature of term life insurance? a. Cash value guarantees b.Pure protection c.Level premium d.Temporary coverage

Cash value guarantees

Note 1

Group life is usually written as term and is both renewable and convertible. A term policy that does not contain these two options would cost less than one that does.

Disability Income Benefit

In the event of total disability and after an initial waiting period, premiums are waived and the insured is paid a monthly income, such as $10 per month for each $1,000 of face amount. The monthly disability income benefit is typically limited to a percentage of the death benefit.

Return of Premium

Increasing Term insurance equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount plus an amount equal to the premiums paid.

Return of Cash Value

Increasing Term insurance equal to the cash value. This rider provides the payment of term insurance equal to the cash value amount at time of death.

TEST TIP 1

Payor benefit is commonly used on jumping juvenile policies.

TEST TIP 2

Payor benefit only takes effect if the policyowner dies or becomes disabled before the insured attains the age of 21 or 25.

Question: A "level term" policy means that the _____________ remains the same throughout the lifetime of the policy a. Cash value b.Pure cost of insurance c.Policy proceeds d.Policyowner

Policy proceeds

Modified Whole Life

Premiums for this policy are lower than a typical Whole Life policy in the early years. In the later years, the premiums are slightly higher than a typical Whole Life policy. The purpose of Modified Whole Life is to make the purchase of permanent insurance more attractive for individuals who have limited finances presently, but have the potential for an improved position in the future, such as a new college graduate.

TEST TIP

Single Premium Policies require the LEAST amount of OVERALL premium over the life of the plan.

Family Policy (Family Protection Plan)

The Family Policy provides life insurance in a single contract for all members of the family. A Whole Life policy is written on the head (wage earner) of the family. It may have riders attached (waiver of premium, accidental death, etc.).

Note 3

The greatest advantages of term insurance are the Convertible and Renewable provisions that may be exercised without any proof of insurability.

Effect on the Death Benefit

The insurer must pay the balance of the face amount after the accelerated benefits are paid and any lost interest to the insurance company is deduct.

Endow (Mature)

The maturity date or time at which the policy's cash value equals the face amount and the proceeds are paid to the policyowner.

Accidental Death and Dismemberment

The rider pays 100% of the amount of the rider (principal sum) upon accidental death and it also pays 50% of the rider amount (capital sum) accidental dismemberment losses, such asthe loss of a limb, or eyesight. Double dismemberment benefits are provided at 100% of the rider (2 times the capital sum). - Benefits are only payable if the loss is accidental and occurs within 90 days of the accident.

Convertible

The right to convert the existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract. The premium can be based upon attained age or issue age. The premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond. If the conversion is as of the issue or original age, back premiums plus interest will be required to be paid at the time of conversion.

Separate Account

The separate account is invested in equity securities as offered by the insurance company. The owner may select which separate account they want their premium to be invested in. Cash value in the separate account will fluctuate based on the market conditions and performance of the separate account, which is similar to a mutual fund. The policyowner has an opportunity to achieve higher investment returns. This policy may act as a hedge against inflation. - No guaranteed minimum return on the cash value. - The death benefit is tied to the separate account and also varies along with the performance of the separate account. Death benefits are recalculated annually. While the separate account values may decrease, the policy will never pay less than the guaranteed death benefit in the general account. - Owner assumes investment risk (separate account) - All variable products are subject to FINRA regulation - Prospects must be provided prior to the sale - FINRA registration and license are required

Family Income (Policy or Rider)

This policy is a combination of Whole Life and Decreasing Term insurance. Its purpose is to provide a specified monthly income from the date of the insured's death until a specified future date. The income period begins from the effective date of the policy. If the insured dies within the term period the benefits are paid for the remainder of the term followed by the Whole Life benefits. If the insured lives beyond the income period, only the Whole Life benefits remain to be paid upon death. The Family Income Rider may be added to any permanent policy.

Family Maintenance

This policy is a combination of Whole Life and Level Term insurance. The Family Maintenance insurance policy provides monthly payments for a selected period of years beginning from the date of death of the insured, if death occurs during the stated term. The amount of term insurance is calculated using a multiple thousands in the face amount. $20 monthly income/thousand would be $20 X 100 = $2,000 for a $100,000 policy.

Graded Premium

This policy is similar to Modified Whole Life, except the premium increases each year during the early years of the policy and then remains level. In the later years of the policy, the premium would be greater than a Whole Life policy.

Characteristics of Term:

- Temporary - No cash/loan value - Pure protection - Low initial premium

Juvenile

- Written on the life of a minor. - "Jumping Juvenile" automatically increases in face amount at a specified age (usually 21 or 25) - Protect future insurability

Joint Survivorship Life (Last to Die)

- Written on two lives - Death benefit paid at last insure's death. - Written on a Whole Life Policy - Used to cover estate taxes - Rates lower than 2 policies

Current Assumption or Interest-Sensitive Whole Life

A form of whole life in which the insurance company can change the premiums or interest rate being credited to the account based on current money market rates. Interest rate changes affect the policy premiums. The policy has a guaranteed minimum death benefit, but may increase based on the growth of the cash value. If current rates increase, either the policyowner pays a reduced premium or the cash value will increase at a faster rate. It is possible that the cash value will increase too quickly and could cause the policy to mature prior to age 100. To prevent this from happening, the insurer will add a corridor of insurance protection to keep the policy from endowing. This increase is provided without evidence of insurability.

Question: A Last-to-Die policy would be the most appropriate recommendation for which of the following? a. A husband and wife concerned about paying estate taxes after they have died b. A business owner who wants to make sure his wife has enough money to buy the business from his partner if he should die before his partner does c. A corporation concerned that its CEO might die before the end of his employment contract d. Two business partners who are concerned about the future success of the business and want to provide funds to purchase the business from the decedent's family

A husband and wife concerned about paying estate taxes after they have died

Living Needs Rider

Allows the early payment of a portion of the face amount before death, should the insured become terminally ill, usually less than 2 years to live. Typically it is an amount equal to 50-90% of the policy's face amount. Upon death, the early payment will be deducted from the benefit paid to the beneficiary. The rider is normally provided without a premium charge because it is an advance of the death benefit.

Rider

An added benefit attached to the policy that modifies existing coverage. A rider is usually added at the time of application and typically requires an increase in premium.

Question: A producer is explaining the concept of limited-pay life insurance to her client. Which of these statements is incorrect? a. A policy fully paid up at age 65 will not endow until age 100 b. By paying over a shorter period of time, each of the payments will be higher c.Paying over a longer period of time will make the total payments higher d.By paying over a shorter period of time, each of the payments will be lower

By paying over a shorter period of time, each of the payments will be lower

Question: Which of the following are characteristics of universal life insurance? a. Adjustable death benefit, premiums are fixed for life b. Fixed death benefit for life, premiums may be increased or decreased c. Death benefit options, premiums fixed for life d.Death benefit options, death benefit, and premiums may be changed

Death benefit options, death benefit, and premiums may be changed

Cash Value (Living Benefit)

Money accumulated in a permanent policy which the policyowner may borrow as a policy loan or receive if the policy is surrendered before it matures.

Death Benefit Options

Option A - Pays the face amount of the policy and provides a level death benefit. As the cash value increases, the company's risk decreases. A universal life policy must include an amount at risk. If the cash value approaches the face amount, the death benefit must increase so as to provide for this amount at risk. This minimum separation between the cash value and the death benefit is called the "risk corridor." This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early. Option B - Pays the face amount stated in the contract, which is level term plus any cash values accumulated over the years. This provides for an increasing death benefit. The mortality charge for Option B is greater than Option A.

Limited Payment

Premium payments are for a specified time, such as 20-Pay Life or 30-Pay Life, or to a specified age, like Life Paid up at 65. The face amount, or death benefit, remains level and cash value continues to earn interest and mature at age 100. While the annual premium is higher than Straight Life, it is paid for a shorter period of time and will have a lower total premium outlay.

Note

Premiums are more affordable in the early years.

Question: What does a long-term care rider offer that a Living Needs rider does not? a. Pays a percentage of the death benefit as monthly income for an insured who cannot perform any 1 of the 6 activities of daily living b. Provides up to 100% of the death benefit in a daily or monthly amount for the non-hospital expenses of a chronically ill person who cannot perform any 2 of the 6 activities of daily living c. Establishes a trust fund for the insured's family so that home health care can be paid for with insurance premiums instead of paying the money to the life insurance company d. Provides money equal to a portion of the death benefit to an insured expected to die in the next 2 years

Provides up to 100% of the death benefit in a daily or monthly amount for the non-hospital expenses of a chronically ill person who cannot perform any 2 of the 6 activities of daily living

Note

The Payor Benefit Rider is commonly used on juvenile policies to provide protection in the event the premium payor were to become disabled or die.

Decreasing

The death benefit decreases, but premiums usually remain level for the policy term; often utilized to pay off outstanding mortgage balances. Often such policies are sold as "Mortgage Redemption" or "Credit Life Insurance" with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies the proceeds of the policy can be used to pay off the mortgage. Since the policy owner has control of the policy, it can remain in force for the benefit of his or her survivors after any loan is paid off.

Increasing

The death benefit increases over the life of the policy while the premiums remain level. This type of term is normally written as a rider for the return of premium on a permanent policy over a set number of years.

Level

The death benefit remains level and the premiums remain level during the policy term. Most group life insurance is written with a level term death benefit.

Single Premium

The entire premium is paid in a lump sum at the time of purchase and creates immediate cash value. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. This policy has the lowest total premium outlay for the life of the policy.

Question: The face amount of insurance is also referred to as the: a. The cash value b. The cash surrender value c. The maximum loan value d. The limit of liability

The limit of liability

Note

The only difference in each of these whole life policies is the premium structure

Viator

The owner of a life insurance policy or a certificate holder under a group policy insuring the life of an individual with a catastrophic, life threatening or chronic illness or condition who enters or seeks to enter into a viatical settlement contract.

TEST TIP

Upon death, the death benefit would deduct any benefits advanced out of the death benefit prior to death.

TEST TIP

Utilizes convertible term insurance to help reduce premium cost initially and allow the purchase of permanent insurance later.

Question: A _______________ policy has a death benefit that can increase or decrease over time based on stock market performance, a guaranteed minimum death benefit, a choice of subaccounts in which cash value may be allocated, and a fixed premium. a. Investment Grade Whole Life b. Variable Life c. Equity Indexed Universal Life d. Variable Universal Life

Variable Life

Variable Life

Variable whole life is a whole life policy with certain benefits that will vary based on market conditions. Variable life characteristics include:

Viatical Settlement

an agreement between a third party (specializing in such transactions—viatical settlement provider) and a life insurance policyowner (viator) insuring the life of an individual with a life-threatening or terminal illness, normally with a life expectancy of 2 years or less. The firm purchases the policy at 60 to 80% of the face amount, expecting to profit as the new policyowner at the time of claim. The insured is provided with tax exempt discounted value during the terminal illness, relinquishing all ownership rights to the buyer.

Face Amount

The death benefit amount payable on a life insurance policy. In other words, the amount of coverage the policy provides. This is sometimes referred to as the limit of liability.

Cost of Living (COL)

- Increasing term that increases with the Consumer Price Index (inflation) - Adjustments are made annually with no evidence of insurability.

Characteristics of Whole Life:

- Permanent protection age 100 - Builds cash, loan, non-forfeiture values - Cash value = Face value at maturity - Level premium and face amount

Debts covered in this way include:

- Personal loans - Loans to cover the purchase of appliances, motor vehicles, mobile homes, and farm equipment - Educational loans - Bank credit and revolving check loans - Mortgages loans, etc.

Child Rider

-This type of rider will generally provide level term coverage on the life of all of the insured's children. Such riders are usually offered at one premium rate and may cover newborns after 14 days of life and adopted children who can be added to the coverage without increasing the premium payable. - The children may remain covered up to age 21, with some insurers offering the coverage to the child's 25th birthday. If the primary insured should die while the rider is in force the rider becomes a term policy and will be in force until the maximum age stated in the policy.

Viatical Settlement Purchaser

A person who gives a sum of money as consideration for a life insurance policy or an interest in the death benefits of a life insurance policy or a person who owns, acquires, or is entitled to a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy which has been or will be the subject of a viatical settlement contract for the purpose of deriving an economic benefit.

The features of a UL policy include:

An Adjustable Face Amount - The insured can increase or decrease the face amount. Any increase in the face amount will require evidence of insurability. A Flexible Premium - The premium paid can be increased, decreased or even skipped. As long as there is enough accumulation in the general account to cover the cost of insurance, premiums can vanish. A target premium is established by the insurer, which is the minimum amount that must be deducted to maintain the policy to age 95/100 based on the currently credit interest rates, mortality charges and expense factor. This premium is a benchmark and may or may not be adopted by the policyowner. If the factors change, the amount needed to extend coverage to age 95/100 changes. Because of the flexibility built into the product, the cash value may never equal the death benefit (mature), even if the policy endures to age 95/100. - Target premium based on guaranteed minimum death benefit. - Monthly mortality charges are deducted (annual renewable term) - Expense charges deducted - Cash value earns interest at current rate with a guaranteed minimum (general account) - Owner may borrow against or withdraw from the cash value without terminating contract. - Life only license required

Note 2

Conversion periods vary among insurance companies

Nonfamily Rider

Covers an additional insured with an insurable interest, such as a business partner.

Credit Life Insurance

Credit life insurance is a special form of decreasing term. Unlike the standard decreasing term policy, credit life automatically names the creditor as the beneficiary. There is no option. The policy cannot be written for more than the outstanding debt, since that is the limit of the creditor's insurable interest. Once the loan is paid, the policy ends.

Waiver of Premium

If the insured becomes totally disabled, the company waives premiums for the duration of the disability, therefore the policy remains in force.

Note

If your state has particular Viatical or Life Settlement licensing and solicitation laws, they will be addressed in the state law chapter.

TEST TIP

Know these for the exam: - Must be totally disabled - Has a 3-6 month waiting period - Expires at age 65 - Once the rider expires, the premium is reduced by the cost of the rider - Additional premiums charged for the rider do not increase the cash value of the policy - A change of occupation after policy issue will not affect the Waiver of Premium rider at all

TEST TIP

Know what 2 activities occur to the cash value account every month on a universal life policy: - Current interest is credited to the cash value account -Cost of insurance is charged to the cash value account

Question: Which of these best describes a disability income rider? a. Provides for double the face amount if the insured is disabled and has no income b.Automatically creates an unlimited loan fund in the amount of the death benefit, secured by the cash value, when an insured is totally disabled c.Pays a percentage of the death benefit as monthly income to the insured when totally disabled d. Pays a percentage of the annual premiums as monthly income to the insured if they are totally disabled

Pays a percentage of the death benefit as monthly income to the insured when totally disabled

General Account

The policy provides for both a general account and a separate account. The general account is fixed and guaranteed and provides for a guaranteed minimum death benefit to age 100. Policy loans are available from the general account.

Fixed Premium

The premium is determined by the insurer and remains fixed and level throughout the contract.

Simplified Issue

A life insurance policy that undergoes a simplified underwriting process that does not require a medical exam to issue. Typically they offer face amounts of $250,000 or less in coverage. Term insurance might be used to cover loans, business and personal. The insured may purchase large amounts to cover a specific time, liability or need at the least amount of premium.

Viatical Settlement Representative

A person who is an authorized agent of a duly licensed viatical settlement provider or viatical settlement broker, as applicable, and who acts or assists in any manner in the solicitation of a viatical settlement on behalf of such viatical settlement provider or viatical settlement broker.

Waiver of Cost of Insurance

A rider that waives the deduction of the monthly cost of insurance and expense charges associated with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability. Usually, the disability must occur prior to a stipulated age.

Adjustable Life

Adjustable Life is a level-premium, level-death benefit policy that can assume the form of Term or Whole Life within a single policy while remaining within certain guidelines. All the common features of level premium cash value life insurance are still present. The policyowner may change or make adjustments without adding or exchanging existing policies. The type or amount of coverage and the premium amount may be changed. These policies allows policyowners to manipulate the period of protection (to age 100 or shorter), increase or decrease the face amount with insurability, raise or lower the premium amount, and change the length of the premium payment period. These policies also provide cash value, although reducing the premium could stop the cash value from increasing therefore adjusting the coverage to term insurance. These changes can be exercised annually and are not retroactive. For example, a policyowner is not allowed to decrease the premium starting on a previous date. Adjustable Life is most appropriate for those whose income is expected to fluctuate from year to year or those persons who may have a fluctuation in needs.

Long-Term Care Rider

Provides up to 100% of the policy benefits if the insured qualifies for long-term care benefits as defined in the rider, such as the inability to perform 2 out of 6 activities of daily living. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary. The amount of protection is determined at the time of policy purchase. Long-term care benefits are paid income tax free after the insured meets the qualifying requirements.

Exclusions and Restrictions

The accelerated death benefit shall not contain exclusions or restrictions that are not also exclusions or restrictions in the policy. Typical exclusions apply to suicide, intentional self-inflicted injury, war, or engaging in illegal occupations or activities.

Question: What "jumps" in a jumping juvenile policy? a. The premium jumps five times over the life of the policy, beginning at age 21 or 25 b. The face amount jumps one time, usually to five times the amount of insurance, at age 21 or 25 c. The premium increases by a factor of five on the child's 21st or 25th birthday d.The premium and the face amount jump by a factor of five after the child's 21st or 25th birthday

The face amount jumps one time, usually to five times the amount of insurance, at age 21 or 25

Question: When a whole life policy endows, what happens to the policy's cash value? a. The cash value is deducted from the death benefit and the remainder is paid to the policyowner b. The cash value reverts to the insurance company c. The face amount of the policy is paid to the policyowner d. Cash value is only found in term life policies, not whole life

The face amount of the policy is paid to the policyowner

Straight Life or Continuous Premium

The premium is level and payable to age 100 or the death of the insured, whichever comes first. The face amount remains level throughout the life of the policy. This policy has the highest total premium outlay.

Note

The rider is NOT affected by any change of occupation once issued. Occupation change is a consideration in health and disability insurance, but not life insurance or in the waiver of premium rider.

Annually Renewable Term

The simplest form of term life insurance is for a term of one year. The death benefit remains level and the premiums increase yearly as the policy renews. While it is very inexpensive initially compared to other types of life insurance, over time it can become cost prohibitive. The death benefit is paid by the insurer if the insured dies only while the policy was in force.

Question: A viatical settlement is made between the purchaser of a person's life insurance policy and ____________________. a. The lender who owns the mortgage on the terminally ill insured's home or business property b. The terminally ill insured who must receive at least as much as would be available from the insurance company under any full cash surrender or living needs rider c. The terminally ill insured person's spouse and children who don't want to wait until the insured dies to collect the death benefit d. The agent representing the family of the terminally ill insured

The terminally ill insured who must receive at least as much as would be available from the insurance company under any full cash surrender or living needs rider

Family Rider

This is the combination of writing both the Spouse and Child Rider on one policy. This may be written as a policy or a rider; in the market today, it is normally written in the form of a rider. Usually family riders are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse and $1,000 on each child.

Spouse (Other Insured) Rider

This type of rider will provide level term coverage on the life of the insured's spouse. Such rider will also provide a conversion provision permitting the spouse to convert to permanent coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy.

TEST TIP

Viator - The owner of the life policy who seeks to sell it to the viatical company. Viatical Settlement Purchaser - The company or person that purchases the life policy for the insured. Who pays the premium once the viatical agreement is entered into? Answer: The viatical company.

Life Settlement

the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its death benefit. There is no requirement for the insured to be terminally ill in order for a life settlement to occur. A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy.