Whole Life Insurance
Dividend Options
-Cash -Reduce premium -Accumulate at interest -Paid-up additions (available without evidence of insurability, and is purchased at net rates.) -Purchase one year term
Disadvantages of Whole Life
-Higher annual premium than term up to about age 55 -Surrender charges (loads) apply against CV during first 5-10 years of policy. Loads based on: State premium tax (2%), Acquisition expenses (commissions) Underwriting expenses
What is the total charge (load) for mortality and expenses during the second policy year?
943 (premium) - (current cash value credit) = 2001 - 1058
Why does the total death benefit increase each year?
Dividends
Dividends on Participating Whole Life
Dividends reflect difference between projected and current: -Investment income -Mortality & expense factors Dividends are tax free Check the company's dividend history Check the company's financial rating
Long term needs for death protection -Funeral, probate expenses, estate taxes -Life income for surviving spouse Living values -Loans as emergency source of funds -Retirement income (cash value converted to annuity) -Accelerated death benefit for nursing home and medical expense Level annual premium -Can be paid up within specified period (age 65)
When is Whole Life Best?
whole life insurance premium
level annual premiums -Premiums reflect current mortality, expense and investment income (current assumption premiums)
Sam has a $75,000 whole life policy with an $8,000 cash value. The policy has a minimum guaranteed interest rate on the cash value of 3% and a current rate of 4%. The policy has a loan interest rate of 5%. If Sam borrows $6,000 from the policy on January 1, 2017 what is his net annual interest cost for 2017?
(interest on loan - minimum guaranteed interest rate)*(loan amount) = (.05-.03)(6000) =120
Tax Advantage of all Life Insurance
-Death benefit income tax free -Dividends not taxable
Advantages of Whole Life
-Death benefit will never expire if premium paid -Level premium (paid for life or limited period) -Cash value withdrawal subject to tax on interest element only after withdrawal of premium basis -Cash value in policy not taxed -Cash value not subject to market risk -Loan values are available and not taxable -N.C. State Guarantee Fund provides safety net ($250,000)
Policy Loan
-Policy loan is guaranteed-not subject to credit score -Policy owner pays interest on loan - CV, which secures the loan, continues to earn interest at minimum rate: -Policy owner can repay loan at any time -Loan repayment is optional -Outstanding loan balance plus unpaid interest deducted from death benefit at death -Automatic premium loan prevents lapse (Add to policy as optional feature)
Current Assumption Policies
-Premium and cash value based on current assumptions: Mortality, interests, expenses -insurance company may adjust future premiums and cash values (up or down) in the future if actual mortality, interest, or expenses differ from original assumptions. Adjustments subject to maximum. -Policy net cost = current premium - current CV
Policy Cash Value
-Tax deferred -Not subject to market risk (Current interest paid on current cash value, Minimum interest on guaranteed cash value) -Surrender charges (loads) apply first 5-10 years (Premium tax, acquisition and underwriting expense) -Cash Value Options: Full or partial surrender of policy for cash Conversion of policy to life annuity Policy loan
Alternatives to Whole Life
-Whole Life + Term Rider -Universal life with flexible premium and flexible death benefit -Variable life with choice of investments in separate account, flexible death benefit -Tax free municipal bonds and decreasing term life; however: Bonds are part of probate estate Investment risk with municipal bonds Term life death benefit declines and ultimately expires
Judy has a $50,000 life insurance policy on her life with a cash value of $5,500. Judy borrows $3,000 from the policy at 5% interest and pays $150 in gross interest in 2015. She also receives a dividend of $500 in 2015. What amount of taxable income, if any, must Judy report in 2015 as a result of the life insurance transactions?
0 CV not taxable loan not taxable dividend not taxable
Mark is the beneficiary of a $50,000 policy on the life of his grandfather. The current cash value of the policy is $28,000. If Mark's grandfather dies during the current year, what amount of the death benefit is taxable income?
0 (death benefit not taxable)
Assume Greg is age 45. Policy purchased at age 30. Greg's WL death benefit is $100,000 Greg's current cash value is $35,000 The policy will be paid up at age 65 The level annual premium is $2,000. 1. $100,000 DB, $35,000 CV, 2,000 annual premium. What is the amount of the pure LI protection element at age 45? 2.What death benefit will the beneficiary receive if Greg should die at age 45?
1. 65,000 (100,000 death benefit - 35,000 cash value) 2. 100,000
What is whole life insurance?
Also, referred to as Ordinary Life -Protection for life -Level premium -Level death benefit (Death benefit may increase based on dividends or term rider) -Cash values during insured's lifetime (Partial or full withdrawal of cash value, Loan values for loan against accumulated cash value,Option to convert cash value to life income)
What divides option applies?
Paid up additions
Under this option the insurer applies each dividend payment to buy as much paid-up single premium whole life insurance as the dividend will allow at the insured's attained age.
Paid-up additions
Which dividend option is most favorable to the policy owner?
Paid-up additions
What is the net cost of the policy after 10 years?
premium of 2,001 for ten years 10(2001) - 21526 = -1,516
whole life insurance death benefit
provides death benefit for life
In what year does the annual net policy load equal $0?
year 4 ( premium is less than the increase in cash value)
During what year does that aggregate net cost reach $0?
year 9 (aggregate premiums is equal to current cash value)
