Life Insurance Lesson 3

Family Maintenance Policy

A combination of whole life insurance and level term insurance to provide permanent coverage (lump sum payment to beneficiary when the insured dies) and a monthly family maintenance portion for a set period of time following the insured's death. AKA: Family income policy that combines whole life with level term to provide monthly salary to beneficiary for specified time period (15-20 yrs); only paid if insured dies within period, otherwise expires and only permanent life protection is paid

Mortgage Redemption Insurance

A mortgage redemption policy is similar to credit life insurance in that it is a decreasing term life policy that is designed to pay off a policyowner's mortgage should he or she die while covered under the policy. As with a credit life policy, coverage diminishes accordingly with the amount of mortgage remaining, eventually decreasing to zero.

Interim Term

A type of convertible term policy, referred to as an Interim Insuring Agreement, is commonly provided by insurers to ensure immediate temporary term life protection during the underwriting of a whole life policy. Referred to as 'interim term' coverage, an individual who wishes to purchase a whole life policy in the near future, or who is waiting for his or her whole life policy to be underwritten by the insurer, may be temporarily covered under a term policy which is then automatically converted to a whole life policy within a short period of time. An interim term policy is commonly issued for a period of 1 month up to 11 months, at which time the policy automatically converts to a whole life policy. As a result of this short period of time before conversion, premiums for the whole life policy are based on the age of the policyowner when the interim policy converts to the whole life policy, not the age of the policyowner at the time the interim term began.

Family Income Policy

Combines decreasing term insurance with whole life insurance to provide the insured's family with a monthly income upon the death of the insured, while maintaining permanent coverage until the end of the income payments Ex: Sarah has a policy that will pay her family a monthly income until 2020 if she passes away before that time. Even if she does not pass away before the term ends, she will still be covered with whole life insurance.

Adjustable Life (Flexible Premium)

Consists of both term and permanent insurance - policyowner can from time to time change carious aspects of the policy including increasing/decreasing the face amount, premium, or changing the period of coverage, to continue to be flexible for the policyowner's current needs.

Nonforfeiture Value

Whole life insurance policies also include a 'cash surrender' value (nonforfeiture value) allowing the policyowner to recover part of the premium invested in the policy if he or she stops making premium payments and forfeits ownership of the policy

Indexed Whole Life

- Face amount will move with Consumer Price Index (CPI) - If index increases, policy's face amount and premium increases (up to usually 5% cap) - It is decided at time of policy inception who will absorb the additional amounts in premium costs (insured or insurer) - If CPI decreases, policy face amount and premium do NOT decrease. - evidence of insurability is not required when increases occur (so may be good for someone who has more health problems)

Convertible Term

A term life policy can also be 'convertible,' meaning that a policyowner can convert his or her term policy to a whole life or other cash value policy in the future without being required to provide evidence of insurability. The 'option to convert' is provided to the policyowner who may or may not elect to convert to a long-term policy in the future. When converting to a long-term plan, the policyowner can use either his or her current age, referred to as his or her 'attained age,' or the whole life policy can be written using the original age of the policyowner used at the beginning of the original term policy. If a policyowner's original age is used when converting to a whole life policy, he or she will pay a lower premium based on the younger age in comparison to his or her current age; however, the insurer will require interest to be paid, as well as an additional payment amount equal to the difference in age that the insurer would normally charge for a policy written using the current age of the policyowner. Although both methods of conversion seem to add up to the same amount for the policyowner, instead of incurring a higher premium, the policyowner is actually building up his or her cash value quicker than would occur if he or she paid a higher premium using his or her current age. Essentially, instead of paying a higher premium, the policy's cash value increases quicker as a result of the bulk payment and increased interest.

Limited Payment

Premiums are paid for limited period of time, while guaranteeing coverage for the life of the policyowner. - Premiums are higher since they are fewer - cash values build quicker Limited-payment policies are based on a predetermined number of years such as a 20-payment (20-pay) or 30-payment (30-pay) policy, or are based on age such as a 'Life paid up at age 65′ policy. While life insurance continues on the insured until death (or age 100), the policyowner is limited in payments towards the life policy.

Pure Endowment

This type of endowment does not include a death benefit and only pays out to the insured if he or she survives the endowment period, at which point the endowment has matured and is distributed to the insured

Juvenile Endowment

This type of endowment is used to help fund college expenses and usually mature when a child turns age 18. Again, as a result of the Tax Reform Act of 1984, such policies have lost their popularity due to high premiums and the lack of tax benefits which are associated with life insurance.

Retirement Endowment

This type of endowment matures when the insured turns age 65. If the insured dies before age 65, the endowment's designated beneficiary receives the endowment; if the insured survives to age 65, the endowment matures and is paid out to the insured

Equity Indexed Life

Type of life insurance largely based on rate of return in the financial markets - policyowner can transfer funds from a fixed account to an indexed account. - cash value can only increase if the market is favorable, but cannot decrease when the market declines. - uses an outside index such as the NASDAQ-100 index in the calculation of interest credits.

Modified Premium Whole Life

Usually more affordable than straight whole life policies in the first few years (often around 5 years) then becomes slightly higher than straight whole life for the remainder of its coverage. This type of plan is useful for college students just starting out in the work world, who cannot initially afford whole life insurance.

Juvenile Life Policy

Usually written on children under the age of 15 and vary in type (term, whole life, limited benefit) depending on the family's needs. *Jumping Juvenile* policies 'jump,' or increase four to five times in value once the child turns 21 without increased premium or proof of insurability.

Cash Value

considered a 'living benefit' allowing the policyowner to take out a loan from the life insurer against the policy's accumulated cash value, or use it as collateral on a loan.

Step-Rate Premium

A Premium that increases over the term of the coverage

Survivorship Life Policy (Second-to-Die) (Last Survivor)

Insure two or more lives (for a premium that is based on joint age, pay the death benefit on the last death, and can help offset the liability of the estate tax upon the death of the second spouse)

Wholesale Insurance

Life insurance can be provided for employee groups that are considered too small to legally be considered a group, according to most states' group life insurance regulation. Generally, this type of insurance is marketed to the employees of a small business and provides a uniform policy with similar provisions for each member, but with the ability to customize certain aspects of the policy to meet the needs of each employee.

Term Life Insurance

basic type of life insurance that is lower in cost to a policyowner, is only in force for a specified period of time and does not accumulate cash value, nor does it provide the policyowner with any policy loan value. A term life policy's death benefit is payable only if the insured dies during the specified period of time stated in the policy. - Once the term is up, the coverage is up-- but it can be converted or renewed.

Economatic Policy (Enhanced Ordinary Life) (Extra Ordinary Life)

offered by some mutual companies - allows policyowner to maintain a higher insurance death benefit at a lower premium through the combo of a whole life and term life policy ex: Let's say that a policyowner wants to purchase a $250,000 whole life policy but cannot afford the required premium. He or she could simply purchase a level or decreasing term life policy in addition to a lesser face value whole life policy. Considering that term life insurance is less costly than whole life insurance, the policyowner could purchase a $150,000 whole life policy and also purchase a $100,000 term life policy with a combined death benefit of the desired $250,000. Since $100,000 of the death benefit is under a term life policy, which is cheaper than a $100,000 whole life policy, the overall cost of the combined whole life and term life premiums equate to less than a straight $250,000 whole life policy. As the whole life policy matures, dividends paid to the policyowner from the whole life policy will be used to purchase paid-up additions to the whole life policy, and at the same time, the policyowner will decrease the face amount of the term life policy so that the policyowner never exceeds a combined $250,000 death benefit. Eventually, the term life policy will decrease to zero and the dividends from the whole life policy will allow the policyowner to purchase enough paid-up additional insurance so that the whole life policy equals the desired $250,000

Whole Life Insurance (Ordinary, Permanent, Straight-Life)

provides coverage for an individual's whole life, rather than a specified term (provided he or she continues to make premium payments). Over the life of a whole life policy, both the face amount and premium remain level and the death benefit is guaranteed to the beneficiary. An important feature of whole life insurance that is not associated with term life insurance is that a whole life policy includes an investment component which accumulates 'cash value' and increases over time based on earned interest. With a whole life policy, a portion of the premium pays for the insurance and the rest accumulates tax deferred in a cash value account. The policyowner can borrow against the cash value, and technically is not required to repay the loan; however, any unpaid loans on the policy's cash value equally reduce the death benefit of the policy.

Industrial (Home Service) Life Insurance; Burial Insurance

provides minimal life insurance coverage (usually less than $2,000 and without requiring a medical exam) in the event the insured dies, providing the beneficiary with enough money to cover basic final expenses such as funeral costs Also known as 'home service' life insurance because premium payments are often collected by the agent at the insured's home, usually on a weekly basis. Although this form of life insurance was more common throughout the labor and manufacturing sectors in the past, industrial insurance represents only a small percentage of life insurance sold today.

Family Protection Policy (Family Plan)

this form of whole life insurance provides coverage on each family member with the breadwinner's amount of coverage being four times the spouse's and five times the children's coverage amounts. The children's coverage is usually written as term coverage expiring at age 18 with the ability to convert to long-term coverage without proof of insurability. Ex: Breadwinner: 500,000 coverage Souse: 125,000 coverage Dependent: 100,000 coverage

Facility of Payment Provision

Associated with industrial life and group life insurance - policy provision that permits an insurer to appoint a new beneficiary in an attempt to facilitate the policy's death benefit due to an extenuating circumstance that warrants the need to designate a new beneficiary.(Such circumstances include the inability of a beneficiary to accept benefits because he or she is a minor or if he or she is mentally incapacitated in a hospital, such as in the case of a coma.) In addition, if the beneficiary is deceased or if the whereabouts of the beneficiary cannot be determined within a reasonable amount of time to collect the death benefit, regardless of whether or not insurable interest exists, the insurer can appoint a relative or similar significant individual of the insured, or an entity such as a funeral home that takes on the responsibility of paying the insured's final bills or funeral expenses to help alleviate such obligation.

Decreasing Term

The policy's face amount decreases over time, while premiums remain level. As an example, a decreasing term insurance policy with a face amount of $100,000 and a 10-year term will provide the full $100,000 of coverage if the insured dies within the 1st year, $90,000 of coverage the 2nd year, and so on until the benefit amount reduces to zero at the end of the 10 years. *This type of coverage is purchased to protect against home mortgages, student loan debt or any situation in which the need for insurance is greater at the beginning of the policy, as opposed to the end of the policy.*

Increasing Term

The policy's face amount increases over time, while premiums remain level. Although this type of policy is not often sold as a stand-alone insurance product, it is typically incorporated into a whole life policy as an added rider.

Credit Life Insurance

A credit life policy is designed as a decreasing term life policy and its purpose is to cover the amount of debt owed and diminishes in coverage as the amount of debt decreases, eventually to zero. The policyowner is the creditor and if the debtor dies before the loan is repaid, benefits are paid directly to the creditor to cover the outstanding debt. - Will pay the remaining balance of a loan if the insured dies before repaying the debt. In essence, it is a decreasing term insurance policy with the creditor named as beneficiary. This product is usually grossly overpriced, the only people who should consider its purpose are those who are uninsurable because of a serious health condition.

Joint Life Policy

A policy that covers two or more people under one policy. The premium is based on the average age of both applicants. covers two individuals and is payable upon the first death; the other insured can opt for a single policy without evidence of insurability instead of receiving the policy's death benefit.

Decreasing Term policy

A term insurance policy that maintains a level premium throughout all periods of coverage, but the amount of protection decreases.

Endowment

These policies couple term life insurance with a savings program. As the policyholder, you choose how much you want to save each month and when you want the policy to mature. Based on your monthly contributions, you're guaranteed a certain payout, called an endowment, when the policy matures. You can then use this endowment for your child's college tuition, fees, books, living expenses and other costs. If you should die before the policy matures, your child will receive the payout as your death benefit and will still have the anticipated money for college. **Essentially, an endowment is not worth the cost of its premiums, nor does it receive the tax benefits of a life insurance policy;

Endowment Life Insurance

This type of endowment is a combination of a pure endowment and a term life policy so that the endowment pays out at its maturity, while the term policy pays the beneficiary if the insured dies during the pure endowment period. - pure endowment for insured - plus, term life policy so if insurer dies before the endowments maturity, the beneficiary will still get a death benefit

Variable Life Policies

- Variable life policies are also considered to be 'securities contracts' - to sell variable life insurance policies, one needs both a life insurance license, and also a Financial Industry Regulatory Authority (FINRA) license, such as a series 6. With traditional whole life insurance the insurer guarantees a minimum rate of return to the policyowner due to the fact that the insurer invests conservatively in government securities and investment-grade bonds. With Variable Life Insurance, separate accounts are used to allow a policyowner to deposit money and invest it as he or she prefers. As a result, the policyowner can direct funds towards investments that are considered more aggressive, with the possibility of a greater return. However, this option can leave the policyowner susceptible to financial risk in the event that the investment falls short of what is expected in return for the funds he or she invested.

Variable Universal Life

- combination of universal life and variable life policies, containing a varying degree of death benefits, cash values and premium payments. - policyowner maintains a separate account for his or her investments (since it is variable insurance)

Renewable Term

- insured can renew their term policy without proof of insurability - premium increases according to age at time of renewal

Current Assumption (Interest-Sensitive) Whole Life

- premium payments are flexible and can increase or decrease by the insurer annually based on current interest rate trends that result in higher or lower mortality rates or investment returns to the insurer - when insurer experiences high rates of return, premium rates are reduced - when lower rates of return, premium rates are increased.

Single Premium

-Type of limited payment whole life policy - single lump sum premium payment which is payable at the time the policy is issued - large initial expense, overall it is less expensive than the accumulation of periodic installments over the life of the policy

Level Term

Both premium and death benefit remain constant for the term of the policy. The only aspect that changes, if renewed, is the increase in premium due to the increased age of the policyowner.

Continuous Premium (Straight Life)

Most common type of whole insurance sold - a policyowner streches his or her premium installments over the life of the policy (to age 100 or death, whichever comes first). -Premium levels do not change, they stay continuous

Minimum Deposit Whole Life

This form of whole life insurance is based on an initial premium payment which allows for cash values to immediately build in the account. Subsequent premium payments are then paid by borrowing from the cash value for a portion of, or the entire premium amount instead of contributing additional out-of-pocket premium.

Return of Premium Term Life (ROP)

a more expensive type of term life insurance that provides an 'end benefit' to the policyowner at the expiration of his or her policy's term by returning 100% of the premiums paid into the policy when the insured survives the policy's term. For example, if an insured survives past a 35-year return of premium term life policy and the policyowner does not surrender it beforehand, the policyowner would receive 100% of the premiums paid into the policy upon the insured satisfying the 35-year term. **Although a return of premium provides extra incentive to purchase, deciding to purchase an ROP term life policy should be considered carefully as the extra premium costs involved might be better invested in an interest-bearing retirement account, such as an IRA.

Re-entry Term

A term policy that allows an individual to reapply for, or 'reissue' his or her term life policy every few years (usually 5 years) and receive a premium lower than their guaranteed renewal rate. However, in order to receive this lower rate, evidence of insurability must show that the policyowner is maintaining good health. If not, the policyowner will instead have to pay the guaranteed renewal rate if they want to continue their coverage.

Universal Life

Permanent insurance that offers more flexibility than many other forms - more control over the cost of premiums as well as ability to invest and earn interest on the cash value that the policy builds. - offers flexible premiums and flexible death benefit allowing the holder to shift money between the insurance and savings components of the policy. - allows policyowner to build up savings to protect agiasnt inflation.

Graded Premium Whole Life

Similar to modified whole life with more affordable premiums for the initial years, then gradually increases for the next few years until finally leveling off at a slightly higher rate than standard whole life.