Life Insurance Chapter 2.1

contract interest rate

(usually 3-6%)

IRS

Internal Revenue Service: a U.S. Government agency responsible for collecting of taxes, and enforcement of the Internal Revenue Code

Face amount

The amount of benefit stated in the life insurance policy. Also known as death benefit.

Cash value

a policy's savings element or living benefit

Suitability

a requirement to determine if and insurance product is appropriate for a customer

Qualified plan

a retirement plan that meets IRS guidelines for receiving favorable tax treatment

Viatical Settlements

allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds before their death. Separate contracts; insured sells death benefit to a third party at a deeply discounted rate; New owner continues to pay premiums and receives the original insured's (viator) death benefit upon the viator's death

Renewable provision

allows insured the right to renew term insurance without proof of insurability with premiums based on the insured's current age

minimum payment

amount needed to keep the policy in force for the current year. Makes the policy perform as an annually renewable term product

Option B (Increasing Death Benefit option)

annual increase in cash value so that the de3ath benefit gradually increases each year by the amount that the cash value increases

Nonforfeiture values

benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses

Accumulate

build up

Modified life

charges a lower premium in the first few policy years and then a higher level premium for the remainder of the insured's life. Developed to make the purchase of whole life insurance more attractive for individuals who are just starting out and have limited financial resources, but will be able to afford the higher premiums in the future as income grows.

Variable life insurance products

contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance

Fixed life insurance products

contracts that offer guaranteed minimum or fixed benefits

Liquidation of an estate

converting a person's net worth into cash flow

Option A (Level Death Benefit option)

death benefit remains level while cash value gradually increases, lowering the pure insurance with insurer in the later years

Annually Renewable Term

death benefit remains level, may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually based on the attained age as the probability of death increases

Single Premium

designed to provide a level death benefit to the insured's age 100 for a one-time, lump-sum payment. Completely paid-up after one premium and generates immediate cash

Securities

financial investments for profit and trade (for example, stocks, bonds, options)

corridor

gap maintained between the cash value and the death benefit in a life insurance policy. Percentages vary as to the age of the insured and the amount of coverage. If corridor isn't maintained, loses tax advantages that are associated with life insurance

7-pay test

how much money it takes to pay policy off in 7 years. If what insured is paying is more than that, it becomes a modified endowment contract (MEC)

Policy maturity

in life policies, the time when the face value is paid out

viators

insureds who receive a percentage of the policy's face value from the person who purchases the policy.

Survivorship Life ("second to die" or "last survivor" policy)

insures two or more lives; premium based on joint average of age; pays on the last death. Usually used to offset the liability of estate taxes

group life insurance

issued to a sponsoring organization, such as an employer, covering the lives of more than one individual member of that group. Usually written as annually renewable term insurance. Evidence of insurability is not required; insureds do not own the policy, so they get a certificate of insurance instead of a policy

Decreasing term

level premium, decreasing death benefit over the duration of the policy term. Used when the amount of needed protection is time sensitive, or decreases over time. Commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely.

Increasing term

level premiums, increasing death benefit over the duration of the policy term. Used by insurance companies to fund certain riders that provide a refund of premiums or a gradual increase in total coverage, such as the cost of living or return of premium riders.

Variable life

level, fixed premium, investment-based product. Decreasing term insurance and an investment fund. Cash value fluctuates with the performance of the investments (agent must have both, insurance and securities licenses). Regulated by SEC and FINRA

Level term

most common type of term insurance. Death benefit does not change throughout the life of the policy

current interest rate

not guaranteed in the contract, but may be higher due to current market conditions

Universal Life (flexible premium adjustable life)

policyowner has the flexibility to increase the amount of premium going paid into the policy and to later decrease it again. As long as there is sufficient cash value to cover the monthly deductions for cost of insurance, the insured may skip paying a premium

Straight life (continuous premium)

policyowner pays the premium from the time the policy is issued until the insured's death or age 100 (whichever occurs first. Of the common whole life policies, straight life will have the lowest annual premium

Variable universal life

premium can change depending on how much client wants to invest. Securities version of universal life

Endowment

provide a permanent, level death protection, yet mature much earlier than age 100. Premiums much higher than ordinary straight life policies. Made illegal in 1984 because people were borrowing the cash value right before it matured at age 65 and avoided paying taxes.

Level Premium Term

provides a level premium and a level death benefit throughout the life of the policy

Whole Life Insurance

provides lifetime protection, and includes a savings element (cash value). Endow ant the insured's age 100, which means the cash value created by the accumulation of premiums is scheduled to equal the face amount of the policy at age 100. Premiums are higher for whole life policies than for term

Convertible provision

provides the policyowner with the right to convert the policy to a permanent insurance policy without evidence of insurability with premiums based on the insured's attained age at the time of conversion

target premium

recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime

viatical brokers

represent the insureds

viatical producers

representatives of the providers

Joint Life

single policy designed to insure two or more lives; premium based on joint average of age; death benefit is paid upon the first death only. Costs more than Survivorship Life

Term insurance

temporary protection; only provides coverage for a specific period of time; also known as pure life insurance because it does not gain a cash value. Allows for the greatest amount of coverage for the least amount of cost

Attained age

the insured's age at the time the policy is issued or renewed

Level premium

the premium that does not change throughout the life of a policy

Graded-premium whole life

typically starts with a premium that is approximately 50% or lower than the premium of a straight life policy then gradually increases each year for a period of usually five or ten years and then remains level thereafter

Permanent life insurance policies

various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured as long as the premium is paid.

Limited Payment

whole life policy payment plan in which the policyowner pays a higher premium so that the policy is completely paid up well before age 100.

Re-entry option

with some insurance policies, upon the end of a term policy, the insured may answer medical questions to prove insurability at a discounted premium rate (for example, a person with a standard rating could be re-qualified for a preferred rate if he or she is able to prove qualification)

Deferred

withheld or postponed until a specified time or event in the future