Chapter 11

Life income with period certain (e.g., a specified number of years

), occurs where installments are payable as long as the primary beneficiary lives, but should this beneficiary die before a predetermined number of years, the insurer will continue the installment to a second beneficiary until the end of the certain period.

Life Income Options

*Pure life income *Refund life income *Life income with period *Joint survirorship life

Assumed interest—

A life insurance company estimates that invested money will earn a given rate over the long run, usually around 4%. If a company assumes its investments will earn 4% but the invested premiums actually earn 8%, the company has earned excess interest.

lump sum payment.

A lump-sum settlement is not really considered an option since life insurance contracts automatically provide for a lump-sum settlement in the event of an insured's death.

Reduce Premium Dividend Option

A policyowner may apply dividends to reduce future premium payments. In this manner, the policyowner will pay the difference between the premium due and the dividend amount. Example An insured has a policy with an annual premium of $480. The dividend due for one year is $150. If the insured chose the reduce premium dividend option, the net annual premium due would be $330 ($480 less $150).

3 types of nonforfeiture option

Cash surrender value Extended term insurance Reduced paid-up insurance

Cash Dividend Option

Dividends paid in cash are not considered taxable income because it is a return of unused premium.

Advantages of Settlement Options

If a beneficiary elects a lump-sum settlement of the death benefit, the beneficiary must decide how to use or invest the money. By electing a settlement option other than a lump sum, the beneficiary is trusting the expertise and knowledge of the insurance company to administer the proceeds and provide some form of guaranteed income. Another advantage of settlement options is that any of the options will guarantee a greater return than by simply taking the face amount of the policy. A $100,000 policy will generate a greater death benefit than $100,000 if the proceeds are paid to a beneficiary over time.

Fixed Amount Option

In most cases, this settlement option is more advantageous than the fixed-period option, since it is much more flexible. Insurers allow the insured to specify varying amounts of income at various times. The amount of each installment is the controlling factor under this option as the dollar amount to be paid is established and not the length of time for which installments are to be paid.

Operating expenses or loading—

Past experience tells a company that it will cost so many dollars per $1,000 coverage to keep the company going. Such costs as accounting, rent, office equipment, and so forth are relatively predictable. Any savings realized will help reduce operating expenses or loading.

Accumulation at Interest Option

The interest earned will be at a rate no less than the minimum rate specified in the contract. Dividends left with an insurer may be withdrawn at any time. If the insured dies, the insurer will add the dividends that have accumulated at interest to the face amount of the contract (which is paid to the named beneficiary). The interest earnings on dividends is considered taxable income when paid, even though the dividends themselves are not.

Interest Only

The proceeds are left with the insurer, and the interest is paid to the beneficiary on an installment basis. This type of settlement option is generally selected when the policyowner wants to provide for contingent beneficiaries (such as children) after the death of the primary beneficiary (such as a parent).

One-Year Term Dividend Option

With this option, the policyowner may use dividends to purchase additional one-year term insurance up to the amount of the cash value of the policy. The cost is based on the attained age of the insured. This particular option may be advantageous to a policyowner/insured whose life insurance needs fluctuate from year to year.

Paid-up additions

are actually single premium purchases of as much life insurance as the amount of the dividend will purchase at the insured's attained age.

Cash Surrender Value

cash surrender value increases each year that the policy remains in force. Therefore, the cash surrender value forms the basis of all the other surrender or non forfeiture values. When an insured exercises the cash surrender value option, the policy is returned to the insurer and the company has up to six months to pay the cash surrender value to the insured.

Reduced Paid-Up Insurance Option

he insurance company uses the cash value of the contract to purchase a single premium insurance contract of the same form (e.g., 20-pay life, ordinary life, and modified life) as the original policy. The amount of coverage will be much less than the original policy, but no more premium payments will be required. Thus, the policyowner/insured will receive a policy that is paid in full for life.

Fixed Period Option

involves liquidating the proceeds and interest over a period of years, without reference to a life contingency (paid even if the beneficiary dies). It provides for the payment of policy proceeds in equal installments over a definite period of months or years. The amount of proceeds, the period of time, the guaranteed rate of interest, and the frequency of payments all determine the amount of each installment. The fixed-period option is the best option when the most important consideration is to provide income for a definite period of time.

Refund life income options

may take the form of a cash refund annuity or an installment refund annuity.

joint and survivorship life income option

occurs when, if at the death of the first party the second party is still living, installments are continued during the latter's lifetime.

Third-Party and Creditor's Rights

once the insured dies, the proceeds of a life insurance policy belong to the beneficiary and the insured's creditors have no right to them. The beneficiary's creditors, however, may have a right to the life insurance proceeds.

Nonforfeiture options

protect a policyowner from losing her entire investment when a life insurance policy is cancelled, surrendered, or when premium payments stop.

Extended Term Option

provides extended term insurance in place of the cash value policy. Under this option, the policyowner may request that the insurance company use the existing cash value to purchase term insurance equal to the face amount of the original policy with a single net premium. This term insurance will remain in effect for as long a period of time that can be purchased with the cash value available. Extended term is not available for rated policies. Cash value is used as a single premium to purchase the same amount of coverage as the original policy, but it is now a term policy. "Default Option": If a policyowner fails to select one of the non forfeiture options when premium payments cease, this option generally goes into effect automatically.

pure life income option

provides installment payments for as long as the primary beneficiary lives, with no return (refund) of principal guaranteed.

Withdrawal Provisions

used in connection with settlement options. Under this provision, the proceeds of a policy are held by the insurance company and earn interest. The insured has the right to withdraw the funds left on deposit with the insurer at any time. The beneficiary may withdraw only a limited amount each year.