Chapter 3- Types of Policies and Riders (STUDY)

Spouse (Other Insured) Rider

This type of rider will provide level term coverage on the life of the insured's spouse. Such rider will also provide a conversion provision permitting the spouse to convert to permanent coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy.

Accelerated Death Benefits Riders

provide for an early payment of a portion of the face amount prior to death. This rider provides tax free access to policy benefits based on an insured qualifying as terminally ill (death expected within 12-24 months), or chronically ill such as permanent confinement in a nursing home, long-term care if unable to perform activities of daily living or other acute illness that require long-term care, such as AIDS or the need for an organ transplant. These benefits do not include disability income. Accelerated death benefits do not have to be repaid if the insured's health improves. The accelerated death benefit cannot contain exclusions or restrictions that are not also exclusions or restrictions in the policy. Typical exclusions apply to suicide, intentional self-inflicted injury, war, or engaging in illegal occupations or activities.

Riders Affecting the Death Benefit Amount: Accidental Death and Dismemberment

provides a benefit in addition to the base of the policy. The rider pays 100% of the amount of the rider, known as the principal sum, upon accidental death. If the insured suffers an accidental dismemberment loss, such as loss of a limb or eyesight, the rider pays 50% of the rider amount, known as the capital sum. Double dismemberment benefits (loss of 2 limbs or total eyesight) are provided at 100% of the rider. Benefits of the rider are only payable if the loss is accidental and occurs within 90 days of the accident. This rider typically expires at age 65.

Riders Affecting the Death Benefit Amount: Return of Premium

Increasing Term insurance equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount plus an amount equal to the premiums paid. It adds flexibility when added to a whole life policy. It is also seen with term life insurance policies where for an additional premium the policy will provide for a partial or total refund of all premiums paid depending upon when the policy is cancelled or converted.

Accelerated Death Benefits Rider: Long-Term Care Rider

Provides up to 100% of the policy benefits if the insured qualifies for long-term care benefits as defined in the rider, such as the inability to perform 2 out of 6 activities of daily living. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary. The amount of protection is determined at the time of policy purchase. Long-term care benefits are paid income tax free after the insured meets the qualifying requirements.

Term Riders

Term riders may be attached to virtually any permanent policy, interest sensitive, or term policy to provide an amount of temporary extra insurance protection for a fixed period of time. These riders are useful when an insured needs more insurance or a decreasing amount of coverage for a limited time. Example: mortgage protection.

Universal Life (Flexible Premium Adjustable Life Insurance): Loan

A loan is taken against cash value remaining in the policy. The cash value secures the loan and cannot be used for other purposes, but it remains in the policy. The loan itself neither decreases the total cash value, nor the face amount. The amounts payable would decrease if the loan is not paid back before the insured dies or the policy terminates.

Universal Life (Flexible Premium Adjustable Life Insurance): Partial Withdrawal

A partial withdrawal is a permanent transaction, and cannot be reversed. The funds are paid from the general account. The cash value decreases, and the face amount may be affected as well. Depending on the policy, the withdrawal may also be taxable.

Life Insurance Policy Riders

An amendment or rider modifies conditions of the policy by expanding or decreasing its benefits, or excluding certain conditions from coverage, and are at the option of the insured. Policy riders are available for an additional premium in most cases. Riders are provided for a specified period of time as stated in the policy. It is typical for a rider to end at a specified age (such as the insured's age 65). Once a rider drops from the policy, the additional premium will also drop. Most riders are added at the time of policy issue. Any riders added after the policy has been issued usually require evidence of insurability.

Ordinary Whole Life: Single Premium

The entire premium is paid in a lump sum at the time of purchase and creates immediate cash value. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. This policy has the lowest total premium outlay for the life of the policy.

Variable Life: General Account (guaranteed values)

The general account is fixed and guaranteed and provides for a guaranteed minimum death benefit to age 100. Policy loans are available from the general account.

Family Rider

This is the combination of writing both the Spouse and Child Rider on one policy. This may be written as a policy or a rider; in the market today, it is normally written in the form of a rider. Usually family riders are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse and $1,000 on each child.

Life Settlement

similar to a viatical settlement in that it is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its death benefit. There is no requirement for the insured to be terminally ill in order for a life settlement to occur, whereas, there is with a viatical settlement. A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy.

Accelerated Death Benefits Rider: Living Needs Rider

Allows the early payment of a portion of the face amount before death, should the insured become terminally ill, usually 12-24 months life expectancy. Typically, it is an amount equal to 50 - 90% of the policy's face amount. Upon death, the early payment will be deducted from the benefit paid to the beneficiary. The rider is normally provided without a premium charge because it is an advance of the death benefit.

Nonfamily Rider

Covers an additional insured with an insurable interest, such as a business partner.

Riders Affecting the Death Benefit Amount: Return of Cash Value

Increasing Term insurance equal to the cash value. This rider provides the payment of term insurance equal to the cash value amount at time of death. However, this does not relieve the obligation to pay loans from the claim proceeds at time of death.

Ordinary Whole Life: Limited Payment

Premium payments are for a specified time (20-Pay Life or 30-Pay Life) or to a specified age (Life Paid up at 65). The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. While the annual premium is higher than Straight Life, it is paid for a shorter period of time and will have a lower total premium outlay.

Riders Affecting the Death Benefit Amount: Cost of Living (COL)

The cost of living rider enables the insured to purchase more insurance each year to help offset increasing insurance needs due to inflation. The amount that can be purchased is based on increases in the cost of living index. This additional coverage is usually available at low rates and evidence of insurability need not be provided for such increases.

Ordinary Whole Life: Straight Life or Continuous Premium

The premium is level and payable to age 100 or death of the insured, whichever comes first. The face amount remains level throughout the life of the policy. This policy has the highest total premium outlay.

Variable Life: Separate Account (nonguaranteed values)

The separate account is invested in equity securities as offered by the insurance company. The owner may select which separate account they want their premium to be invested in. Cash value in the separate account will fluctuate based on the market conditions and performance of the separate account, which is similar to a mutual fund. The policyowner has an opportunity to achieve higher investment returns. This policy may act as a hedge against inflation. No guaranteed minimum return on the cash value in the separate account. Owner bears all investment risk.

Sensitive Whole Life Products: Indexed Universal Life (Equity Indexed)

This policy gives policyowners the opportunity to decide the percentage of cash value that is invested in traditional fixed income securities. The remainder of the cash value is invested in an equity index account linked to a stipulated stock index, typically the S & P 500. When there is an increase in the market, a given percentage of the gain is used to determine the interest credited to the policy. When the market declines, the policy is credited with the minimum guaranteed interest rate or zero interest. The policy typically guarantees the principal amount in the indexed account.

Child Rider

This type of rider will generally provide level term coverage on the life of all of the insured's children. Usually offered at one premium rate and may cover newborns after 14 days of life and adopted children without increasing the premium. The children may remain covered up to age 21 or 25, If the primary insured should die, the rider becomes a term policy and will be in force until the maximum age stated in the policy.Upon reaching the maximum age, the rider will also provide a conversion provision, which will permit each child to convert to a permanent plan of coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy.