Chapter 4 Life Insurance Policies

Variable Universal Life

A hybrid or combination of variable life and universal life Universal life features: Premium and death benefit flexibility and premium funding options Variable life features; Cash value investment options A Universal policy with investment options The most flexible of all life policies

Current Assumption Whole Life

A nontraditional whole life policy that provides the potential for lower-cost whole life insurance protection Combines whole life (cash value) and universal life insurance When issued, the death benefit and premiums are fixed for a specified period of time Premiums are the result of mortality costs, expenses, and interest earned The cash value receives an interest rate that varies up or down with market conditions. Premiums are subject to change up or down based on the interest rate received The policyowner does not exercise any control over the changes Higher interest rate = lower premium requirement Lower interest rate = higher premium requirement Premiums (and sometimes the death benefit) are recalkculated based on new current interest rate This is called the "redetermination period' Current interest rate also determines cash value growth Premiums are "indeterminate" or subject to change CAWL is sometimes referred to as interest sensitive whole life insurance Both premium types have the following characteristics: Fixed premium between each "redetermination" period Tax-deferred growth of the accumulation account that consists of premiums, minus expense and mortality charges, plus the current interest rate Fixed death benefit Loan option Early surrender charges which are deducted form the accumulation or cash value account

Equity-Indexed Life Insurance

A product that offers all the benefits and flexibility of UL, while providing upside potential with downside protection Cash values are interest rate driven; determined by changes in the underlying equity index account (most commonly S&P 500 or the minimum guarantee amount) Cash value growth is based on the higher of either: Growth associated with the equity index account or A minimum return of 0 to 2% Growth associated with stock market appreciation has a predetermined cap (e.g., 10-12%) set by insurer; excess growth is retained by insurer. Semi-Endowments: Cash Value = 1/2 death benefit Pure Endowment: No death benefit, just accumulated cash value

Flexible Premium Policies (Non-Traditional)

Adjustable Life Permanent policy with all the characteristics of Whole Life except: Adjustment Provision which allows policyowner to adjust face amount based on changing needs Within limits, the premium or face amount may be adjusted up or down Increasing the death benefit almost always requires underwriting Alterations may also be made to the: Type of coverage (i.e., term or whole life) Premium payment period Premium payment is higher than is needed Protection timeframe

Limited Pay Whole Life

Advantage is it allows the policy owner to cease paying premiums at the conclusion of the limited payment period (at this point the policy is fully "paid-up" for life. Same general characteristics as Straight or Continuous Premium Whole Life Permanent to age 100 Level death benefit Level premium Builds cash value or equity Considered property Difference: Limited payment period; rather than paying to age 100

Indeterminate Whole Life (referred as non-participating policies)

Allows insurers to adjust premiums to reflect any changes in investment income Whole life premium approach whereby an insurer sets a maximum guaranteed premium, but allows policyowner to pay an initial premium that is lower than the maximum guaranteed premium listed in the contract Lower premiums and future premium adjustments will be based on the mortality, investment earnings, and expenses of the company Lower rate guaranteed for a stated number of years The premium is generally adjusted annually A guaranteed maximum premium is also stated Please note that: 1. The insurer can raise premium based on the investment performance of the insurer, but never higher than maximum guaranteed premium 2. Premiums can also be lowered based on the investment performance 3. Benefits provided are the same as any other WL policy 4. Indeterminate term policies are also offered Indeterminate insurance simply allows an insurer the opportunity to offer lower-cost life insurance policies.

Enhanced Ordinary Life

Also known as economic life or extraordinary life, it is a low premium based participating permanent insurance policy. The contract's face amount reduces each year. Any dividends paid are set aside and used to purchase either paid up additions or one year term insurance equal to the reduction of death coverage. This policy provides a guaranteed death benefit in the early years of the policy even if dividends are insufficient to maintain level coverage.

Cash Value

Begins to build after two-to-three years Cash value increases with every premium payment (after third year) Fixed interest rate Available to owner via Loan Option or Cash Value Surrender Not available to beneficiary in addition to death benefit Upon death the beneficiary does not get the cash value they only get the stated death benefit.

Family Maintnance

Combines whole life + level Term Rider $500,000 whole life policy $3,000/month x 20 years Breadwinner dies after six years; 20 years of payment 20 years x 12 months = 240 months

Family policy

Covers entire family under one policy Whole Life-breadwinner Level Term-Spouse and children (50% and 25% of WL Children (natural or adopted) covered after 14 days Children can stay on plan until age 18, 21, or 23 Conversion right available for spouse and children More economical due to more people insured under one contract

Endowments (quicker cash value buildup than other permanent insurance plans except for a single premium life insurance policy.)

Endowments emphasize savings more than a traditional whole life policy. Endowment life insurance contracts pay a death benefit of a named beneficiary upon the death of an insured during a specified "endowment'' period; or it pays a cash value equal to the face amount of the policy at the end of the endowment period if the insured is still living. Remember an endowment pays a death benefit if the insured dies during the endowment or specified period. It does not pay the cash value upon death.

Family Income

Family Income Policy Combines Whole Life + Decreasing Term Rider $500,000 whole life policy $3,000/ month for up to 20 years Plan is less expensive than a family maintenance policy. Breadwinner dies after six years; 14 years of payment 14 years x 12 months= 168 Total benefit $1,004,000 Difference is that this is level term the yearly benefits do not decrease.

Split-Dollar Plan

If Linda and her employer agree on a split-dollar life insurance plan, then the employer will contribute the increase in the policy's cash value each year. is not a type of life insurance policy it is a business arrangement that a firm embarks upon in order to provide life insurance coverage to an employee. This arrangement must be funded with a whole life insurance policy

Industrial Life Insurance

Industrial or home service life insurance was previously sold by debit agents who worked for an insurer and visited policy owners on a weekly or monthly basis to collect premiums. Policies were sold in face amounts of $1,000 or less. They were generally of a whole life type building some equity rather than term insurance.

Joint life and survivorship life

Joint Life (First to Die) Covers two or more people under one contract When first insured dies death benefit is paid to the beneficiary Policy ends upon first death Survivorship Life (Second or Last to Die) Covers two or more people under one contract No benefit payable upon death of first person Death benefit payable after last person dies Offers premiums that are quite low compared with those that would be charged for separate policies; are well situated to meet the need for cash to cover estate taxes; Provides face amounts that usually exceed $1,000,000

Juvenile Life and Credit Insurance

Juvenile Life insurance (e.g., Jumping Juvenile) Policy placed on the life of a child Parent is the owner, child is the insured Jumping juvenile- death benefit increases by five times at age 18 or 21 with No premium increase Credit Life Insurance Protects Bank/lender if the borrower dies Life insurance cannot exceed debt decreasing term only; no cash value Bank is the beneficiary Borrower if is the insured, owner, and premium payer If group contract, bank is owner (insured pays bank, bank pays insurer)

Graded Premium Whole Life

Lower premium in years one through five Increase each year for number of years Premium remains higher for the remainder of policy term Cash Value will equal face amount (DB) at age 100 Premiums level off Policy ends at Age 100

Modified Premium Whole Life

Lower premiums in the first 3-5 years it jumps in year 6 and then stays leveled One-time increase Premium remains higher for the remainder of policy term Cash Value will equal face amount (DB) at age 100 One-time premium increase Policy Ends at Age 100

Minimum Deposit Insurance

Method of financing life insurance which is best suited for individuals who are in higher tax brackets.

Universal Life (Flexible premium adjustable life) interest paid is fixed or guaranteed for the policy year

Non-traditional permanent life insurance policy; also be referred to as "Flexible Premium Adjustable Life" Advantages: Greater premium flexibility; Unbundled or decoupled premiums Ability to increase or decrease the death benefit each year subject to demonstrating insurability. Higher interest rates Unbundled policy provides for the the separation of: Expenses and fees; Death benefit protection; cash value accumulation Considered a permanent form of protection even though it is a combination of annually renewable term insurance coupled with a cash savings fund which is invested in bonds,, mortgages and money market accounts Death benefit (and premium) may be altered up or down depending on changing needs Contract cash value may be over-funded, thereby lowering or eliminating need for future premium by paying premium with cash value. UL offers two death benefit patterns including Option A an dOption B. Under Option A, a levle death benefit is provided. The net amount at risk (NAR) is adjusted after each month. This means that a mortality charge is deducted from the policy's cash savings plan on a monthly basis. Therefore, the cash value and NAR (benefit) together provide a fixed death benefit. Option B provides an increasing death benefit as the cash value increases. Therefore, UL Option B will pay a beneficiary an amount equal to the death benefit and the cash value upon the death of the insured. Corridor- The amount of pure insurance protection above the cash. In order for the contract to qualify as life insurance for tax purposes, there must be "space" between the total death benefit and the cash value of the policy. An automatic increase in the death benefit results when the cash value approaches the initial face amount under Option A Again, if this space is not present, the policy will lose its favorable tax treatment since it would not meet the Internal Revenue Code's definition of life insurance. In addition, for cash value accumulations to receive favorable tax treatment (i.e., tax deferral), a specific percentage of universal life premiums must be used to purchase the death benefit amount.

Policy Loans

Owner's right that may be exercised at any time for any reason Equal to full amount of cash surrender value (90%+/-) Interest charged as stated in policy if fixed, no more than 8% variable rates follow an index If death occurs, any unpaid loan and interest is subtracted from death benefit Interest is due each year on policy, not loan, anniversary

Variable Life

Permanent policy that has many of the characteristics of Ordinary Whole Life, with one distinct difference The cash value is directed into separate accounts or sub-accounts and invested in stocks, bonds, money market accounts, etc. Greater cash value growth potential No guarantee regarding cash value More potential risk owner assumes investment risk, not the insurer Cash value and death benefit change daily based on investment performance of accounts Death benefit increases or decreases in order to maintin the corridor of insurance Annual premiums are fixed Guaranteed minimum death benefit (usually original face amount) Producers need two licences: Life license FINRA series 6 or 7 registration Premium fixed or leveled

Indexed Whole Life

Possess a face amount which increases along with rises in the Consumer Price Index (CPI). Classified according to whether the policy owner or the insurer assumes the inflation risk. Under the type where the policy owner assumes the risk, the death benefit increases each year in accordance with the CPI and the insurer bills the policy owner each year for the new, higher amount of insurance. The insurer agrees not to require the insured to demonstrate insurability for any increase in protection as long as each year's increase in coverage amount is accepted by the policy owner. The type where the insurer assumes the inflation risk is similar to the aforementioned approach, except that the premium charged initially by the insurer is loaded in anticipation of future face amount increases. These increases in face amount do not alter the premium level paid. These policies possess a cap as to the maximum total permitted. Another type of indexed life insurance product that is relatively new is equity indexed life insurance. This type of policy combines most of the features, benefits and security of traditional life insurance with the potential of earned interest based on the upward movement of an equity index. Instead of the including a specific interest rate as in a traditional whole life plan, interest earnings are credited based on increases in the specific equity index (for example, the S & P index) to which the policy is linked. Therefore, credited interest is linked to an index without the downside risk connected with directly investing in the stock market. These policies are characterized by a guaranteed minimum interest rate, tax deferral of interest accumulations, and policy loan access. The equity index returns are designed to keep pace with or beat inflation which protects the policyholder against downside market risk. Equity indexed life insurance contracts combine term life insurance with an investment feature, similar to a universal life plan. Death benefit amounts are based upon the coverage amount selected by the contract owner plus the account value.

Universal Life-Premium Flexibility

Premiums are paid, with mortality costs (term insurance) and administrative costs removed; excess premiums (if any) are then deposited into the cash savings account Premium Payment Options: Target premium: Recommended level annual premium amount that may be sufficient to keep the policy in force throughout its lifetime, based on current assumptions Not guaranteed and owner may need to pay more/less premium in future based on future economic conditions and investment results Minimum premium: required to keep death benefit in force for one more ear with no cash value accumulation Paying only term premium and policy expenses Cost of insurance increases each year Allows owner to maintain a permanent death benefit by only paying a premium equal to the term cost, plus policy fees Owner can maintain a low cost permanent plan and can increase premiums as their financial situation improves Maximum premium: Subject to IRS regulation, it is the largest premium that can be paid without policy losing classificaiton as an insurance policy and becoming an investment Excess premium goes into cash savings account; Cash value receives tax-deferred interest growth; Owner can utilize excess premiums or cash values to pay future premiums; IRS limits maximum contributions allowed; Violation of IRS limits results in loss of many tax advantages In all cases, the cost of insurance goes up annually Future premium payment options continue previous payment option Pay No (or part) of Premiums; allows policy to pay all or part of the term insurance and expenses from cash value if available If cash value is not sufficient, policy will lapse. Cash value grows when premiums are paid and may be used to pay premiums Interest Rate: Guaranteed minimum rate (e.g., 2%); May be higher due to investments in short-term instruments (money market, bonds, mortgages); The higher of the two rates will be credited to the cash value; Higher interest rate affects cash value build-up, but not premium payment or death benefit unless the cash value exceeds the Corridor of insurance

Whole Life Insurance (Also referred to as straight life, continuous premium life, permanent life insurance or ordinary life)

Provides death benefit for the whole of a person's life (until death) or to age 100, whichever occurs first Combination of death benefit protection (term insurance) with cash value Cash value equals face amount (death benefit) at age 100 (CV = FA at age 100 Characteristics: Permanent insurance protection to age 100 or death Level death benefit level premium (higher than term) Builds Cash value or equity Considered property (i.e., policy may be sold or transferred)

Individual Policy With a Family Rider

Rather than offering a family policy that covers the entire family under one contract, an insurer may allow an insured to purchase an individual whole life policy and later add a family rider to it which will cover a spouse, all natural children and any adopted children. This accomplishes the same objective as the family policy since everyone in the family will be covered. However, the scope of coverage is different when comparing both the family policy and the family rider. The family policy covers everyone in the family including the primary insured. The family rider only covers the spouse, natural children and adopted children. The family rider does not cover the primary insured since he or she is covered by the individual policy.

Term life insurance Renewability and Convertibility

Renewability: Ability to renew policy at end of renewal period, without medical exam New renewal term is based on Attained or Actual age Higher premium Subject to maximum age limitations (e.g., age 70) Convertibility: The ability to change existing term policy to permanent policy (whole life or UL), without a medical exam Must maintain identical or lower death benefit amount Two conversion methods when converting from term to whole life: 1. Attained (Actual) Age Simply exchange term policy for a new permanent policy "New" policy premium is based on actual age 2. Original Age (Retroactive) Insurance company will determine what a permanent plan would have cost per year had insured originally purchased permanent insurance Insured would need to make a retroactive lump sum payment to the cash value, in order to "catch up" the cash value as though the permanent plan had been in existence the entire time

Modified and Graded Premium Whole Life

Same characteristics as Straight or Continuous Premium Whole Life Permanent to age 100 Level death benefit Level premium Builds cash value or equity Considered property

Single Pay Whole Life

Same characteristics as Straight or Continuous Premium Whole Life (see above) Limited Payment ---> One Coverage to age 100 Coverage paid for life Most expensive initially, but least expensive over lifetime

Return of Premium Term

Term insurance that allows insured to receive 100% of the premiums paid, if insured lives to end of the policy period. Characteristics: Death benefit if death occurs during term period; 100% of premiums returned if insured is alive at end of policy period-usually 10 to 30 years; If cancelled prior to term end, premiums may also be returned, but on a sliding scaled that builds to 100% Additional Characteristics: Level, but slightly higher premium than ordinary term Premiums still less than WL or UL; added premium invested by insurer for capital growth; Premium returned on a tax-free basis because they are after-tax dollars; there is zero interest earned; Standard riders such as AD&D, Waiver of Premium, and Children's Rider can be added for additional premium; Like any term policy, there is zero cash value

Term Insurance (pure or temporary protection) (provides maximum amount of life insurance at the lowest initial outlay of funds.

The face amount is payable if the insured dies during a specific term, such as five years. Term periods: 1, 5, 10, 15, 20, 30, 40 years or to age 65 Premiums will increase as one gets older. There is no cash value or equity build-up in a term life policy. There are two types of individual term insurance policies: Level Term Insurance - most common form of term life insurance and provides a constant or fixed amount of coverage for as long as the policy remains in force. It is characterized by a level face amount (death benefit) and increasing premiums (higher premium at the end of the renewable period) according to one's age. Level term insurance is renewable up to a specified age (i.e., 70). The fact that level term life insurance is renewable means that at the end of the renewable period, the insured may extend coverage for another renewable period without proving insurability. In other words, the insured is not required to pass a medical exam or demonstrate good health since that requirement was already satisfied before the policy was originally issued. (Even though the premiums increase based on the attained age of the insured, the face amount remains level or constant.) Decreasing Term Insurance- Also referred to as non-level term, the coverage amount of this policy is reduced each year. In other words, the dealt benefit amount of protection decreases annually. The premium, however, remains level or fixed for as long as the policy remains in force. This type of policy is generally used when cash flow is the applicant's primary consideration or to provide funds at death so that survivors are able to pay off a debt obligation. This type of policy enables an insured t leave the house, boat or auto to his survivors free and clear of all debts in case of his premature death. The premium is lower than level term due to the fact that the face amount decreases as the rate per $1,000 of insurance increases. A decreasing term life insurance policy is generally used in connection with a mortgage or other indebtedness and may also be described by insurers as a mortgage protection plan, mortgage redemption plan or non-level term. In addition, decreasing term insurance is the type used for credit life insurance situations that is purchased to cover the amount of a loan or debt (i.e. car loan, boat loan, home equity loan, etc.)

Universal Life-Partial Withdrawals

Universal life allows for partial withdrawals or surrenders from policy cash values Will reduce the death benefit provided; Partial withdrawals or surrenders that: Do not exceed premiums paid are tax-free; Do exceed premiums paid will be taxable as ordinary income in the amount that exceeds premiums paid