Life Insurance Premiums, Proceeds, and Beneficiaries

Class Designation

A beneficiary designation. Rather than specifying one or more beneficiaries by name, the policy owner designates a class or group of beneficiaries. For example, "my children."

Mortality Factor

A measure of the number of deaths in a given population. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

Lump-Sum Option

A payout arrangement in which the beneficiary receives all benefits in one single payment, minus any outstanding policy loan balances and overdue premiums.

Level Premium

A policy premium that remains the same over the period of time premiums are paid.

Other Premium Factors

Age, Sex, Health, Occupation, Hobbies, and Habits.

Death Benefits

Also known as Policy Proceeds, is simply the money paid to the beneficiary at the time of the insured's death based on settlement options.

Fixed Period Option

An option under which the beneficiary receives a regular income for a specified period of time, such as 10 years, at which time the principal and interest are depleted.

1035 Exchange

If a policy is exchanged for another policy is stipulates that no gain(or loss) will be recognized. Consequently the transaction is not subject to tax.

Types of Beneficiaries

Individuals, businesses, trusts, estates, charities, and minors.

Life Income Option

Installment payments are paid only while the beneficiary is alive and cease on the beneficiary's death, based on life expectancy.

Expense Factor

Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums. The expense factor is also known as the loading charge.

Interest Factor

Insurance companies invest the premiums they receive in an effort to earn interest. This interest is one of the ways an insurance company can lower the premium rates.

Joint and Survivor Option

Life income settlement option which allows two or more individuals to receive income payments for their entire lives.

Estate Conservation

Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell off the assets.

Accelerated Benefit Rider

Life insurance rider which allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness.

Net Payment Cost Index

Method of measuring the cost of an insurance policy to an insured if death occurs at the end of some specified time period. The time value of money is taken into consideration.

Reserves

Money set aside (required by the state's insurance laws) to pay future claims.

Irrevocable Beneficiary

One that cannot be changed without the beneficiary's consent.

Beneficiary

One who receives benefits.

Fixed-Amount Installments Option

Pays a fixed, specified amount of installments until the proceeds are exhausted.

Common Disaster Provision

Sometimes added to a policy and designed to provide an alternative beneficiary in the event that the insured as well as the original beneficiary dies as the result of a common accident.

Spendthrift Clause

State legislation that protects the rights of policyowners and beneficiaries from creditors. Death benefits cannot be attached by creditors of the policyowner.

Primary Beneficiary

The person who is named as first to receive benefits from a policy.

Revocable Beneficiary

The policyholder reserves the right to change the beneficiary designation without the beneficiary's consent.

Single Premium Funding

The policyowner pays a single premium that provides protection for life as a paid-up policy. Normally associated with whole life insurance.

Secondary (Contingent) Beneficiary

The second person to receive benefits from a policy.

Tertiary Beneficiary

The third in line to receive the benefits of a life insurance policy.

Settlement Options

The way the policy is paid off and could be selected at time of policy origination. This can be changed at anytime during the life of the insured. Once selected, the policy cannot be changed by the beneficiary.

Viatical Settlement

An arrangement that allows someone living with a life threatening condition to sell their existing life insurance policy and use the proceeds when and where they are most needed, before death. Premiums are not tax deductible. The death benefit is tax-free if taken as a lump sum to a named beneficiary. Proceeds pass directly to the beneficiary and are no subject to attachment by the insured's creditors. If the death benefit is paid in installments the principal is tax-free but the interest is taxable.

Per Capita (by the head)

Evenly distributes benefits among all named living beneficiaries.

Surrender Cost Index

It measures the cost of an insurance policy by projecting the total amount of cash value in a policy and deducting the total cost of premiums after a certain number of years.

Tax Treatment of Premiums

Premiums paid on individual life insurance policies are generally not deductible. Premiums for life insurance used for business purposes are generally not tax-deductible. Here are the exceptions to these rules: • Premiums used for a charity are tax-deductible. • Life insurance premiums paid by an ex-spouse as court-ordered alimony are tax- deductible. • Employer-paid premiums used to fund group life insurance for the benefit of employees are tax-deductible.

Premium Mode

The frequency with which a policy premium will be paid.

Interest Only Option

The insurance company retains the policy proceeds and pays interest on the proceeds to the recipient at regular intervals.

Facility of Payment Clause

The insurer may pay to a relative or anyone it deems entitled to the benefits in the absence of a designated beneficiary.

Tax Treatment of Cash Values

If cash value is surrendered, the portion that exceeds the premiums paid is taxable. For policies that are not surrendered, the cash value grows tax-free. As long as the cash value stays in the policy taxes will never be imposed on any portion, not even the amount that exceeds the cost basis.

Per Stirpes (by the bloodline)

If the beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary's heirs.

Taxation of Proceeds Paid at Death

Life insurance proceeds paid to a beneficiary are usually tax free if taken as a lump sum. The exception to this rule is the transfer for value rule, which applies when a life insurance policy is sold to another party before the insured's death. Another tax cost typically associated with death is the Federal estate tax (although most relatively simple estates do not require the filing of an estate tax return).

Cash Value

The amount of money a whole life policyholder would receive if the policy were surrendered before death or maturity. These loans, with interest, cannot exceed the guaranteed cash value or the policy is no longer in force. Policy loans are not taxable. Any loans with interest due at the time of death will be deducted from the insured's policy proceeds.

Simultaneous Death Act

When passage of title to property depends on priority of death and there is insufficient evidence that the persons have died otherwise than simultaneously, absent a will provision to the contrary, the property of each passes as though he survived.