Chapter 5 - Life Insurance Policies

variable life insurance

Similar to a traditional, fixed annuity in that retirement payments will be made periodically to the annuitants, usually over the remaining years of their lives. Under the variable annuity, there is no guarantee of the dollar amount of the payments; they fluctuate according to the value of an account invested primarily in common stocks. This insurance policy is also called a securities contract.

Which one of the following has the highest premium: premium & protection to age 100, 20-pay life or single premium whole life insurance?

Single premium whole life insurance

two death benefit options with universal life

1) Option 1 is level. Means the policy death benefit stays level. 2) Option 2 is increasing. It just means the death benefit goes up.

If a policy has the option to renew, you can renew it a:

1) certain number of times or 2) up to a certain age, regardless of his health.

characteristics of universal life

1) flexible premiums 2) adjustable death benefits 3) Two Death Benefit Options - Option 1Level, Option 2 Increasing 3) Attractive Interest Rates on cash values 4) Allows for loans OR withdrawls 5) State Regulated Loans are not taxed as long as the policy is not cashed in. Withdrawls will be taxed to the extent of the gain

The interest-sensitive, which is the third type of policy, gives you two choices. The interest rate affects:

1) premiums or 2) cash value

What determines the increase in the premium payout given a rise in inflation?

1) the Consumer Price Index, or 2) the increase can be specific amounts, or 3) a percentage of the original amount

The amount of a policy's cash value depends upon a variety of factors, including:

1) the face amount of the policy, 2) the duration of premium payments, and 3) how long you have had your policy in force. In other words, it works exactly like a mortgage on a home. If everything else is equal, the longer you have had the mortgage, the more equity you are going to have.

Universal policies are unbundled which means that it unbundules:

1) the insurance (protection) element, 2) the savings (accumulation) element, and 3) the expense (loading) element

multiple protection policy

A combination of term and whole life coverage that pays some multiple of the face amount of the basic whole life portion (such as $10 per month per $1,000) throughout the multiple protection period (such as to age 65). OR f you die with-in a certain time frame it pays double or triple the face amount. It is a whole life policy with a term rider attached. et's say you buy a policy for $100,000. If you die during the first 30 years it pays $200,000. After that, back to the $100,000. The rider can be any length you want.

annually renewable term (ART)

A form of renewable term insurance that provides coverage for one year and allows the policyowner to renew his or her coverage each year, without evidence of insurability. Also called yearly renewable term (YRT).

natural group

A group formed for a reason other than to obtain insurance.

un-natural group

A group that came together for the purpose of buying group insurance.

variable universal life insurance

A life insurance policy combining characteristics of universal and variable life policies. A VUL policy contains unscheduled premium payments and death benefits and a cash value that varies according to the underlying funds whose investment portfolio is managed by the policyowner. OR You combine the universal life, the flexibility of the premium payments, with the choice of choosing investments, and you have what I call "the beast"-variable universal life policy. You have stock-market returns tax-free.

modified endowment contract (MEC)

A life insurance policy under which the amount a policyowner pays in during the first years exceeds the sum of net level premiums that would have been payable to provide paid-up future benefits in seven years. Responsibility of the insurance company to make sure it doesn't become a MEC

characteristics that make family plan policies favorable

Adding a term insurance rider is cheaper than getting another policy. So it's a whole life policy on the main person, let's say $50,000 on the main breadwinner, a $50,000 term rider on the spouse, and a blanket $10,000 of term insurance- just making up numbers, again, they're immaterial, for illustration purposes -- $10,000 rider on all the children. It's blanket coverage. No matter how many children you have in the family, it's $10,000 per child, all for one price, and it's a very low price. Children are not covered until after 14 days of birth. Then they are covered up to 21 years of age, and then they can convert their coverage to whole life or whatever.

family plan policy

All-family plan of protection, usually with permanent insurance on the primary wage earner's life and with spouse and children automatically covered for lesser amounts of protection, usually term, all included for one premium.

re-entry option

An option in a renewable term life policy under which the policyowner is guaranteed, at the end of the term, to be able to renew his or her coverage without evidence of insurability, at a premium rate specified in the policy. A re-entry option says this: If at age 55 or whatever age they give it to you, if you agree to re-enter, you must get another physical examination and if you pass this examination, we will lower your premiums down to, say, $1,000. That way, you'll stay with the company instead of shopping around, and we will retain the good risks to keep off-setting the bad.

What happens to the company risk as the cash value increases?

As my cash value grows, the company's amount at risk goes down.

When does whole life mature?

At age 100

You always convert at what age?

Attained age rates,the age you are now

payor rider

Available under certain juvenile life insurance policies, upon payment of an extra premium. Provides for the waiver of future premiums if the person responsible for paying them dies or is disabled before the policy becomes fully paid or matures as a death claim, or as an endowment, or the child reaches a specific age.

How could I have tapped my money without paying taxes?

By borrowing the money.

What distinguishes whole life from term is..

Cash values

What are some unique features of whole life?

Cash values and a maturity at age 100

endowment

Contract providing for payment of the face amount at the end of a fixed period, at a specified age of the insured, or at the insured's death before the end of the stated period.

convertible term

Contract that may be converted to a permanent form of insurance without medical examination. Convert means change. So what are we converting from? We have a term policy, what are we converting to? Whole life.

joint life policy

Covers two or more lives and provides for the payment of the proceeds at the death of the first among those insured, at which time the policy automatically terminates.

Which one would be more economical?

Decreasing term.

What does determinate mean? How does this apply to policies?

Determinate means "known", nothing changes. Whole life policies are known as determinate types of policies.

With a VUL how do you get that money tax free?

Die or borrow; you don't have to pay it back while you are living

What does endow mean?

Endow means the cash value equals the death benefit

universal life

Flexible premium, two-part contract containing renewable term insurance and a cash value account that generally earns interest at a higher rate than a traditional policy. The interest rate varies. Premiums are deposited in the cash value account after the company deducts its fee and a monthly cost for the term coverage.

Difference between whole life, indeterminate whole life and interest-sensitive whole life:

Guys, the second policy is the same as the first, with one choice, interest rate affected premiums. Third policy is the same as the second, with an additional choice: Interest rate affected premiums or the cash value. How do I remember? What came first in the alphabet-IND or INT? IND. 1) Whole life, no choices. 2) IND, indeterminate, one choice. (premiums) 3) INT, interest-sensitive, two choices. (premiums and cash value)

There are three categories of life insurance, what is the acronym:

H.O.G. = Home Service, Ordinary, Group

optionally renewable contracts

Health insurance policy in which the insurer reserves the right to terminate the coverage at any anniversary or, in some cases, at any premium due date, but does not have the right to terminate coverage between such dates. ALSO, If a policy has option to renew, you can renew this term policy regardless of his health.

jumping juvenile policy

Here's how it works. If you buy a $10,000 policy, at age 21 it jumps by five times. So now it would be worth how much? $50,000. And the premium stays the same.

Which would give us a lower premium?

Higher interest rate. The higher the interest rate, the lower the premium. The lower the interest rate, the higher the premium.

What kind of policies do home service companies sell?

Home service companies sell industrial policies. Some characteristics of industrial are weekly payments and small face amounts. Sometimes this is called "debit insurance" and the premiums are collected weekly at the person's home.

May I, the policyholder, take that money out?

I said with whole life, the premium never goes up and never goes down. Once you start out, it stays the same. Listen to me. I'm 85, they are at risk for how much, $1,000. Do you agree? I have $9,000 in it. If they allowed me to take my money out, their risk would go back up for how much? $10,000, and they would have to charge you for that increase in risk. They don't allow that premium to be changed, they don't allow that money to be taken out.

With a whole life purchased on a year old, what happens if the policy owner dies and can't pay anymore?

If I died when he's 15, the insurance company will start paying the premiums until at the earliest the policy is paid up or 25, whichever occurs first.

how the death benefit is affected by the stocks you purchase

If the investments that you have chosen perform better than that 2-1/2 percent, the death benefit goes up, because the cash value is pushing it up. If it doesn't earn that 2-1/2 percent, then it drops back a little less than what it was at. It can never go below what you initially purchased. So let's say you had a $100,000 policy. Your account has performed well; now you have $110,000. Next year not so well; it's $108,000. But it can't go below that initial hundred thousand.

the rule of constructive receipt

If you have the ability to take your money because it endowed-then we're going to tax you on that money, even if you didn't take it. So you might as well go ahead and take it. The IRS says if you have the ability to take the money because it endowed, then we are going to tax you as if you took it, so you might as well go ahead and take it.

To protect customers the variable products have to be invested where?

In the company's separate account, so that if the account goes belly up, people like Will Rogers are protected.

The minute I took the cash value out, if they allowed me to, what would it do to the company's risk?

Increase it. Therefore, the premium would have to go up.

group insuranc

Insurance that provides coverage for a group of persons, usually employees of a company, under one master contract.

home service insurer

Insurer that offers relatively small policies with premiums payable on a weekly basis, collected by agents at the policyowner's home.

There's two ages that you can concert to, what are they?

Issue age and attained age.

When does whole life endow?

It endows at age 100

What type of group must the group be in order to purchase the group life insurance?

It has to be a natural group, whose purpose was to come together for some purpose other than buying group insurance, like a business or nonprofit or whatever. A husband and wife do not constitute a group.

ordinary insurance

Life insurance of commercial companies not issued on the weekly premium basis; amount of protection usually is $1,000 or more.

Does term have cash values?

No

paid up policy

No further premiums are to be paid and the company is held liable for the benefits provided by the contract.

Do I have to pay the loan I used against whatever was in the CD of the insurance "bucket" back when I'm living?

No, you do not. But what happens if you die without having paid back the loan, Kamikaze? You borrow the thing but you die the next day. They will subtract the loan from the payout plus any interest on the loan that was owed.

Single payment whole life. How about that?

One time.

What kind of policies do ordinary insurance companies sell?

Ordinary is just ordinary. The premiums are paid annually, semi-annually, quarterly, anything else. This is the principal type of life insurance sold.

How can we keep a premium level for a guy my age all the way up to age 100?

Overpayment at the beginning. Whole life. Then later on when the premium should be high, you are underpaying it

endowment period

Period specified in an endowment policy during which, if the insured dies, the beneficiary receives a death benefit. If the insured is still living the end of the endowment period, he or she receives the endowment as a living benefit.

whole life insurance

Permanent level insurance protection for the "whole of life," from policy issue to the death of the insured. Characterized by level premiums, level benefits and cash values.

indeterminate whole life policy

Policy in which the interest rates affect the premiums...interest rates went up, premium went down

Two guarantees with the variable life policy:

Premiums never change, and the death benefit cannot drop below what you initially purchased.

Maturity values

Proceeds payable on an endowment contract at the end of the specified endowment period, or payable on an ordinary life contract at the last age of the mortality table if the insured is still living at that age. Maturity value of a policy is the same as the face amount of the policy and is equal to the reserve value of the contract on this maturity date. Actual amount payable by the company may be increased by dividend additions or accumulated dividend deposits, or decreased by outstanding loans. OR It means the cash value what? Equals the death benefit.

term insurance

Protection during limited number of years; expiring without value if the insured survives the stated period, which may be one or more years, but usually is 5 to 20 years, because such periods generally cover the needs for temporary protection.

adverse selection

Selection "against the company." Tendency of less favorable insurance risks to seek or continue insurance to a greater extent than others. Also, tendency of policyowners to take advantage of favorable options in insurance contracts. To prevent adverse selection, the insurance company must have the good risks to offset the bad risks, and what happened to all the good? They left. To prevent that from happening, insurance companies have what's called a re-entry option, a re-entry option

universal life and premium charge

So my premium amount is going to be affected by how much money I have in my bucket. In other words, if I have $2,000 of my money in the bucket, the next year they are going to sell me $98,000. You understand? If I have $5,000, they are going to charge me for $95,000. Let's say I take money out, I am back to $4,000; they are going to charge me for $96,000.

How can policies be issued and defined?

So policies can be issued, defined in terms of years or defined in terms of age.

modified whole life premiums

So the premium would be less than the whole life but more than the term.

When did they change the endowment policy and how?

So they changed the law in 1988. They said no policy can endow before age 95. If any policy today endows before 95, you are going to be taxed on any gains at ordinary income rates. They did that to keep you from buying these anymore. Why? Because the gains were tax free!

rider

Strictly speaking, a rider adds something to a policy. However, the term is used loosely to refer to any supplemental agreement attached to and made a part of the policy, whether the policy's conditions are expanded and additional coverages added, or a coverage of conditions is waived.

How about limited pay whole life? If I have a 10 pay whole life, how long do you pay on it?

Ten years.

level term insurance

Term coverage on which the face value remains unchanged from the date the policy comes into force to the date the policy expires.

increasing term

Term life insurance in which the death benefit increases periodically over the policy's term. Usually purchased as a cost of living rider to a whole life policy.

decreasing term insuranc

Term life insurance on which the face value slowly decreases in scheduled steps from the date the policy comes into force to the date the policy expires, while the premium remains level. The intervals between decreases are usually monthly or annually.

cash value

The equity amount or "savings" accumulation in a whole life policy. Example: With whole life, we charge him $100 instead of how much? $30.So we take that extra $70 and we put it into a bucket. We call it cash value. And he always pays $100. It never goes up, never goes down. So in the later years, at age 85, when his premiums should be $450, he is paying what? $100. So you overpay it now, and later on when the premiums should be high, you are underpaying it.

the interest rate associated with universal life

The interest rate that universal life policies earn is higher than anything that we've talked about before. It's higher than whole life, indeterminate, or interest-sensitive. Why? Because it's invested in the more aggressive bonds and mortgages than anything we have talked about up to this point. But it's still regulated by the state.

To whom do the cash values belong?

The policy owner.

joint life policy details

They average the ages of the two insureds. So if I was 43 and she was 41, the average age would be 42. Does that make sense? It could be written one of two ways. The first way is whoever dies first, it pays the survivor. So if you die, it pays me, and I go on my merry way, or vice versa. Or it could be written with regard to the second insured to die; it won't pay when the first person dies. It only pays upon the death of the second person. This second way is used to pay estate taxes when the last one dies.

What does the company do with the interest earned?

They pay out the interest. Now, the portion representing principal, the death benefit, is tax-free. The portion representing interest will be taxable.

universal life is annual renewable term insurance

This is a permanent policy, but it consists of my money and their money, which is annual renewable term. Why annual renewable term? Because the amount that they sell me each year is an unknown. We have to wait until that particular year to determine how much they need to sell me. All we've done so far is to show you that there's a bucket, and that bucket needs to have $100,000 in it when I die.

How long do you pay on straight whole life?

To age 100.

So this decreasing term insurance is designed to attach it to a mortgage, why?

To cover a decreasing need.

universal life and adjustable death benefit

Universal life has an adjustable death benefit. You can raise it each year; you can lower it each year. You can do whatever you want to do with it. You can leave it alone.

universal life and flexible premiums

Universal life has flexible premiums. Don't try to understand it yet. Universal life has flexible premiums. You pay whatever you want to pay whenever you want to pay it. You can overpay it, you can underpay it, you can stop paying premium payments.

Out of all these policies we talked about, which one gives you the ability to have a flexible premium?

Universal life.

credit life insurance

Usually written as decreasing term on a relatively small decreasing balance installment loan that may reflect direct borrowing or a balance due for merchandise purchased. If borrower dies, benefits pay balance due. May be individual or group policy.

Now, out of all these, which one gives you the choice of investments?

Variable

graded premium whole life

Variation of a traditional whole life contract providing for lower than normal premium rates during the first few policy years, with premiums increasing gradually each year. After the preliminary period, premiums level off and remain constant.

What kind of policies do group insurance companies sell?

What does Magic Johnson have a lot of? Income. Can he buy insurance? No. Why? Because he has HIV. So you buy insurance with what? Your health. And you keep it in force with premiums. With group insurance, they look at the group as a whole, not the individual members of the group. Does that make sense? How could Magic Johnson get insurance now? With a group. Could they exclude him? No.

What does it mean to say that the policy is unregulated by the state:

Whenever I say that anything is regulated by the state, then the cash values and the interest that it's earned are not invested in the stock market. They're invested into bonds and mortgages.

Single premium whole life insurance

Whole life insurance for which the entire premium is paid in one sum at the beginning of the contract period.

modified whole life

Whole life insurance with premium payable during the first few years, usually five years, only slightly larger than the rate for term insurance. Afterwards, the premium is higher for the remainder of life than the premium for ordinary life at the original age of issue, but lower than the rate at the attained age at the time of charge. What's the purpose of this? It's for people who expect an increase in their salary in a certain amount of time.

Whole life policies...

Whole life policies have cash value and they endow at age 100.

interest-sensitive whole life

Whole life policy whose premiums vary depending upon the insurer's underlying death, investment and expense assumptions. Whole life gives you no changes. The indeterminate whole life policy gives you one change. Interest rate affects what? Premiums.

Attained age

With reference to an insured, the current insurance age. OR The age you are now

juvenile insurance

Written on the lives of children who are within specified age limits and generally under parental control.

Are life insurance benefits tax free?

Yes

Does whole life have cash values?

Yes

Can I borrow out of my policy?

Yes you can borrow against it. How much can I borrow against it? Today I borrow $9,000. Did I borrow my money out of the policy? No. I used the insurance company's money. They use my cash value as collateral. How much is in there tomorrow? $9,000. But how much can I borrow after that? None. Because I already borrowed against it.

Is there a time limit for converting? What is it?

Yes, the time limit for converting and that is usually 10 years or age 55, whichever is later.

If I invest in a mutual fund, am I usually taxed on it?

You are not taxed on these, because the money is inside a life insurance policy.

You need two licenses to sell variable universal life:

You need the state's license and a securities license, federal license (FINRA).

the two death benefit options

You take the cash value plus X equals $100,000, in this case. And X will equal the company's amount at risk. As long as I have sufficient cash value in the policy, I can stop paying the premium payments. Maybe the interest on this $10,000 is sufficient to pay the premiums for the rest of my life. Do y'all understand?

Which would you rather have, a flexible or fixed premium? Which do you want?

You want flexible, because you could make a flexible premium fixed. But you can't make a fixed premium flexible.

A prospectus (info on the insurance plan, risk involved, & separate account) must accompany or precede the sales presentation. So, you need two licenses to sell it:

he state's (which is what you are now learning) and a FINRA (Financial Industry Regulatory Authority license). A Series 6 or Series 7 license. The state and FINRA license. Anything Variable, you need two licenses. When one holds the the securities license they are called a Registered Representative

So under the rule of constructive receipt, it says:

if you can take the money, because it endowed, we're going to tax you as if you took it, so you might as well go ahead and take it.

What are some properties of whole life?

premiums do not go up with whole life, death benefits do not go up with whole life, nothing changes with whole life except the cash value grows

Equity Indexed Universal Life

the cash values are invested in the S & P 500. This does not allow the policy owner to pick and choose the investments but does allow somewhat stock market based returns. If you ever see the word "equity" on the exam, Equity Indexed Annuities or Equity Indexed Universal Life, this means that the cash values are invested into huge mutual funds like the S & P 500 or the Nasdaq-100.

The shorter the payment period...

the quicker the cash value grows, just like a mortgage.

Anything that says "variable" is regulated by

the state and the Securities and Exchange Commission, or the federal government.

Whats the main difference between a variable life policy and a regular whole life policy?

where those cash values are invested. Namely they are invested in mutual funds

So we'd add up all your premiums and subtract your policy's dividends because...

your dividends are return of premium.