Classes of Life Insurance Policies

Group vs. Individual Insurance

The group vs. individual classification defines how life or health insurance coverage is provided. The distinction between a group insurance policy and an individual policy lies in the structure of the contract. More specifically, the key difference lies in the number of people covered under the policy. Group life insurance policies cover many non-related people, while an individual policy covers one person.

Permanent life insurance

As the name implies, permanent life insurance is designed to provide life insurance protection for the insured's entire life. Coverage is provided until the insured dies or reaches age 120, whichever comes first. (Note that policies issued before 2009 may mature when the insured turns 100.) As long as premiums are paid, the insurance stays in force, and (in most cases) is guaranteed to pay the policy face amount. If the insured is still living at age 120, the policy matures, and no more premiums are owed. The insurer pays the face amount to the policyowner. An important feature of permanent life insurance is the level premium. Once the policy is issued, premiums remain level for the full duration of policy coverage. Another distinguishing feature of permanent life insurance is the accumulation element within the policy, known as the cash value. Cash values grow over the life of the policy. In a standard whole life insurance policy, the growth of cash values is designed to equal the policy face amount at the insured's age 120. The policyowner fully owns the cash value and is allowed access to it while the policy is in force, thus providing what is called a "living benefit." However, the cash value is also an essential part of the death benefit. If the policyowner borrows from the cash value while the policy is in force, the death benefit is reduced by the outstanding loan balance (plus accrued interest) at the time of the insured's death. The cash value plays an important role in allowing permanent life to feature a level premium through the insured's entire life. This is more fully explained in a separate lesson

Permanent life insurance can also provide funds, through its cash value, that may be used during the insured's lifetime. What is that feature called? capital accumulation living benefits the money feature permanent values

Living benefits

Individual Insurance

People who buy life insurance for personal protection do so with individual policies. With individual coverage, an insurance policy covers one individual (or, at most two in the case of joint life insurance). It is possible for the owner and the insured to be two different people.

Industrial life insurance

Provided by home service insurance companies (traditionally called debit or industrial insurance companies), industrial life was originally provided as "burial insurance" but today is recognized as an important source of life insurance for consumers with relatively modest (yet equally important) death benefit needs. An industrial insurance policy offers individual coverage in small face amounts, traditionally ranging from $1,000 or $2,500 to $10,000. These policies typically require no medical exam to qualify. Modest premiums are paid frequently—weekly in many cases. In many cases an insurance agent meets personally with the policyowner at home, weekly or monthly, to collect the premium.

Ordinary life insruance

Provided by so-called "ordinary" companies, ordinary life insurance generally includes life insurance issued in face amounts greater than $25,000 (in some cases, $1 million or more). Premiums are payable monthly, quarterly, semiannually, or annually. Ordinary insurance includes virtually every type of life insurance and annuity product covered in this course. Ordinary life insurance is especially popular with consumers today because of its many flexible options

Which one of the following statements about term insurance is correct? It is permanent insurance. Money accumulates in term policies. The policy pays a death benefit only if the insured dies during the term. It is intended to cover the insured to age 120.

The policy pays a death benefit only if the insured dies during the term.

Life insurance is noncancellable

Whether term or permanent, all life insurance policies are noncancellable as long as premiums are paid on time. Insurers cannot cancel any life insurance policy regardless of changes in the insured's risk profile (or for any other reason except nonpayment of premiums).

Fixed life insurance

With a fixed life insurance policy, the insurer guarantees a fixed death benefit and a minimum rate of return (interest crediting) on the policy's cash value. Premiums are invested in the company's general account. By investing conservatively, insurers are able to make the important guarantees that are the foundation of life insurance. The insurer also assumes all risk for making enough profit to cover the policy's promised benefits.

Variable life insurance

With a variable life insurance policy, premiums are invested in investment subaccounts managed by the insurer. The insurer guarantees a minimum death benefit, usually the face amount of the policy at issue. But, the cash values and the death benefit rise and fall based on the subaccount's investment performance. The insurer does not guarantee a rate of return on the cash value invested. Instead, the policyowner assumes all risks for the performance of the policy's investments over time.

Life and health insurance can be classified as participating or non-participating. This classification determines which of the following? whether the policy pays dividends to its owner whether the policy accumulates cash value whether the insurance company contributes premium payments, if needed whether the insurer is a member of the Life Insurance Council of America

whether the policy pays dividends to its owner

Participating vs. Nonparticipating Life Insurance

Life insurance policies can also be classified as participating ("par") or nonparticipating ("nonpar"). With a participating policy, commonly issued by mutual insurance companies, the policyowner is eligible for policy dividends declared by the insurance company. Dividends are paid from the insurer's divisible surplus, which is essentially premiums that exceed all company expenses and liabilities. The dividend can be taken as cash or applied to the premium payment in some form. It can also be left in the policy to accumulate at interest or to purchase additional paid-up life insurance. Or, it may be used to buy one-year term insurance. Policy dividends are covered in a separate lesson. With a nonparticipating policy, issued by stock insurance companies, there are no policy dividends.

Term life insurance

Term life insurance coverage is temporary, applying only for a limited time (or term). The time limit can be as short as one year, as long as 20 years or more, or until the insured reaches a specified age, such as age 65. At the end of that time, the policy expires. The policy pays a death benefit only if the insured dies during the term. No money accumulates in the policy (that is, there is no cash value), so at the end of the term, the insurer owes no payment or refund to the policyowner. The absence of a cash value means that, for any face amount, term life costs less than permanent life insurance at just about any issue age. (Issue age is the insured's age when the policy was issued.) This makes term life especially popular and suitable for relatively temporary financial protection needs (e.g., while raising children). However, lower premiums are a temporary advantage. Term life premiums increase with age, making them difficult to maintain in one's older years. As noted, permanent life premiums remain level for the full duration of policy coverage, up to policy maturity (age 120 for policies issued since 2009).

Group insurance

With group coverage, one master policy covers multiple people—from as few as ten to hundreds or more. The policy is owned by the organization (most commonly an employer) that represents the group and sponsors the coverage. The covered individuals (such as employees or association members) are not policyowners nor are they parties to the contract. Group insurance coverage is evidenced by the individual certificates of coverage each participant receives from the plan sponsor. All other factors being equal, group insurance coverage is generally less expensive per person than is individual coverage. That makes group insurance an attractive way to obtain life insurance. A basic requirement for group insurance qualification is that the group cannot be formed for the express purpose of purchasing group insurance. Fortunately, there are many different types of groups that are qualified to purchase group insurance. Common examples include: employers labor unions trade and professional association groups Regardless of type, each group must conform to the common rules governing group insurance.

Under group insurance coverage, one policy covers a number of people. Who owns these group polices? representatives of the sponsoring companies the insureds the organization that represents the group and which sponsors the coverage the insurance company who issues the policy

the organization that represents the group and which sponsors the coverage

Universal Life Insurance

provides the pure protection of term insurance and the cash-value buildup of whole life insurance, along with face amount variability, rate of cash-value accumulation, premiums, and rate of return