Chapter 4 Life Insurance Policies

Variable Universal Life

VUL sometimes referred to flexible premium life insurance and are a combination of universal life and variable life insurance

Accumulation Unit

accounting unit of measurement, which used to calculate the value of a sub account by dividing the net premium by that subaccount's accumulation unit value on the valuation date when the allocation ocurrs

Flexible Death Benefit Protection

allow for an increase or decrease of death benefit after issue. proof of insurability maybe required to increase face amount

Modified Premium Whole Life

allow individuals with limited income to buy permanent life insurance. starting premium called initial premium and the increased premium called the ultimate premium

Pros of variable whole life

allows person to participate in various type of investment options without being taxed on earnings, interest earned on these investments can be applied toward premiums, potentially lowering the amount paid

Endowment or maturity

cannot endow before insured's reaches age 95

Adjustable Life

differentiated by merging term and whole life insurance into one insurance policy. can be adjusted as the policyowner's objectives and financial needs change

Universal life mortality

expenses increases steadily with age

Flexible Death Benefit

face amount is flexible. death benefit can be increased or decreased within certain limits

Universal Life

flexible life policies that allow insured to have "term like" cost of life insurance with remaining premiums invested into the policy's cash value

Modified Endowment Contract (MEC)

if cumulative premium payments exceed certain amounts specified under the IRC policy becomes MEC. If this happens death benefit will still qualify for income tax free treatment but any distributions from policy during the life of policy maybe subject to additional taxes and penalties

Graded Premium Whole Life

increase the amount of the premium. gradually increase over several years

Family Plan Policy

intended to insure husband, wife and all children under one policy with one premium

Temporary Life Insurance

often referred to term life provides protection for temporary period of time (1,5,15, 20 or 30 year terms)

Whole life insurance

pays death benefit whenever insurer dies. death benefit and premiums set at time of policy purchased

7 year pay test (IRC)

policy cannot accumulate cash value too rapidly during first 7 years. if premiums exceed the IRS limits becomes MEC and triggers IRS penalties.

Cash Value

policyowner chooses to have net premiums and cash value invested into separate accounts. normally insurer's proprietary mutual funds or funds offered by other mutual fund companies.. no cash value guarantees

Primary Features of Industrial life insurance

premiums collected weekly, face amount $2,000 or less, family members covered to age 65 or 70, no medical exams needed, 31 day grace period or 28 day for weekly premium policies

Current Assumption Whole Life Insurance

premiums payments are flexible and are linked to current interest rates

General Account

primary bank account contains funds representing all of the insurer's assets and reserves. if general account assets fail to support the required reserve liability, company is considered insolvent and assets are subject to the claims of all creditors and policyholders

Variable whole life

provides permanent insurance protection to the beneficiary upon insured's death. form of whole life insurance and because investment risks it also considered securities contract and regulated under the Federal Securities law and must be sold with prospectus

Single Premium Whole Life

requires payment of a large one time only premium at the beginning of the policy

Second to Die

survivorship life or joint and survivor life. death benefit paid after death second insured

Loans and withdrawal from MEC

taxed as ordinary income also 10% penalty imposed on amount if received by policyowner before age 59 1/2

General vs Separate Accounts

traditional insurance products, whole life, insurers keep all their funds in on general account. variable life insurer has separate account. cannot mix funds from the separate account with those of company's general reserve fund

3 major types of whole life insurance

traditional whole life, universal life and variable universal life

Home Service

usually written for small face amounts $10,000 to $15,000 sold with monthly premium mode by bank draft or direct billing. usually purchased to pay for funeral or burial expenses

Dual Licensing Requirements

variable life policy considered insurance and securities policy in order to well need both insurance license and securities license

Basic Insurance Components

Costs of annual term insurance protection (COI), premiums not used for cost of insurance are invested. Withdrawals made from cash value, insurer's operating expenses are appropriated to each policy sold (policy loading), monthly mortality expenses for insurance protection and the loading expense are deducted from policy's cash value.

Convertible

allows policyowner to change coverage to permanent insurance with no evidence of insurability. insurers require conversion to take place by specific age such as 70

Renewable term life

allows policyowner to renew policy before the expiration date without proving evidence of insurability

Gross premium Factors

amount you must pay each year for insurance coverage. Gross premium = mortality-interest+ expenses

Death Benefit Option2 (Option B)

an increasing death benefit equal to the policy's face amount plus the cash value amount

Premiums

are level and calculated on number years between policy issue date and insured's 100th birthday. Premium is spread equally over premium paying period

Flexible Premiums

as cash values accumulate within the policy there is more flexibility with regard to subsequent premium payments

Pre Need Insurance

burial insurance used pay for insured's funeral at particular funeral home. policy has increasing face amount to fully fund the funeral regardless of the increases in funeral costs.

Juvenile Insurance

children units $1,000 increasing to 5 times face amount when child reaches 21.

Decreasing Term Insurance

decreasing death benefit over the period of the term, premiums remain the same. (example a mortgage)

Individual Credit Line

decreasing term policies on the life of debtors. debtor pays premiums creditor is beneficiary

Credit Life Insurance

designed to cover the life of the debtor, decreasing as the loan balance is reduced by the loan payments

Partial Surrenders

different from variable whole life policies because VUL policies do allow partial surrenders

Death Benefits

face amount of a whole life policy does not change over the lifetime of insured

Increasing Term of Insurance

increasing death benefit increases periodically over term of policy. Some cases death benefit connected to cost of living index (CPI). least common form of term insurance

Flexible premiums

initial premium establishes policy covers the first year expenses such as COI and loading expenses. after 1st year premium is flexible

Cons of variable whole life

insured assumes investment risks,poor fund performance also means that cash and/or death benefit may decline though never below a defined level

Provisions in credit life policies

insured must be given certificate of coverage, required number of insureds must be maintained, debtor's coverage will cease when load is paid off, sold, refinanced or becomes overdue by considerable time period and no conversion privilege

Joint First to Die Policy

insures lives of 2 people. death benefit paid upon death of first insured. Surviving insurer may purchase an individual policy without proof of insurability

Joint Credit line

issued on spouses or business partners, who maybe debtors on the loan as well

Continuous Premium Whole life

level death benefit and level premium payments until insured's death

Limited Pay Whole Life

level premiums that are limited to a certain period (less than 100 years). premiums higher because paid for a shorter period of time

Endowment Contracts

life insurance contract designed to pay lump sum to policyowner after specific term (at maturity)

Maturity or Endowment

mature or endow when insurer reaches age 100 at which the cash value of policy will equal face amount.

Cash Value Guaranteed Interest Rate

minimum interest rate is guaranteed on cash value of policy. if current interest rate exceeds guarantee rate, excess interest will be credited to policy

Policy loans

not required to be paid back but will be deducted from death benefit if outstanding at time of death

Industrial Life Insurance

originally sold to English workers. then sold us to industrial workers small amount $2,000 or less for final expenses (funeral or medical expenses)

Net Premium

paid at start of contract along with compound interest pay the policy benefits when due. Net premium = mortality-interest

Partial Surrenders and/or Policy Loans

partial surrender is usually assessed a small service charge, policy loan usually charged certain amount interest to loan is repaid

Level term insurance

provides level amount of protection for specific number years at a level premium ($200,000 20 year policy)

Death Benefits Option 1 (option A)

provides level of death benefit equal to face amount of the policy. as cash value increases an additional amount of insurance can be added to cash values if necessary

Term Life Insurance

pure life insurance protection only pays benefits upon the death of insured

Unbundled Life Insurance

universal life policy

Separate Accounts

used for variable life polices that are separate from insurer's general account. separate accounts are maintained exclusively for variable policies

Accumulation Unit Value

varies in order to reflect the investment experience of the applicable portfolio

Cash value

whole life insurance guarantees both death benefits and cash value. a living benefit primarily because the insured can access the cash value while they are living