Life and Health Insurance Policies
Universal Death Benefit Options
1. Death benefit = cash values + the remaining pure insurance (decreasing term plus increasing cash values) 2. Death benefit = face amount (pure insurance) plus the cash values (level term plus increasing cash values)
The amount a policy's cash value depends on:
1. Face amount of the policy 2. The duration and amount of the premium payments 3. How long the policy has been in force
Living Benefits
A feature of whole life insurance where a policyowner can borrow loans from their cash value (stored in policy) at reasonable rates of interest. Can access your money (benefits) early in the event of terminal illness -It is not required for the loan to be repaid BUT if a loan is outstanding when the insured dies, the amount of the loan + interest will be subtracted from the death benefit.
Last Survivor Policy (Second to Die Policy/ Survivorship Life Insurance Policy)
A variation of the joint life policy, thus also covers two lives but the benefit is paid upon the death of the last surviving insured. Similar to the joint life policy, the premium for a survivorship life policy is lower than the combined premium for separate life insurance policies on two individuals. Survivorship life insurance policies are useful in estate planning b/c they can provide money to pay taxes on assets.
Maturity at Age 100
Age that life insurance matures at because the insured assumed to be dead by then. Your premium rate for life insurance is based on the fact that you live until 100. If you live past 100 then your cash value=face value (of policy) and you will get a check for that amount.
Option to Renew
Allows the individual to renew the term policy before its expiration date without providing evidence of insurability (good health) -Renewal period will have more expensive premiums than the initial period (reflecting the increased risk) -Most term policies provide several renewal periods until a specified age
Features of whole life
Cash value Maturity at age 100 These two benefits combined produce living benefits for the policyowner
Interest-Sensitive Whole Life
Characterized by changing premiums that reflect the insurer's changing assumptions with regard to its death, investment, and expense factors. If these aspects are more favorable than the company expected ==> lower premiums or more cash value for the policyowner. Vice versa if less favorable (higher premium or choose to reduce face amount)
Industrial Life Insurance
Characterized by comparatively small issue amounts (ex 1,000) with premiums collected on a weekly or monthly basis -Provides insurance coverage to industrial workers or people who are unable to afford insurance for bigger amounts -Quite often marketed and purchased as burial insurance
Modified Endowment Contracts (MEC)
Considered to be a policy that is over-funded. Will be taxed differently if it meets this classification (historically other life insurance has been granted favorable treatment)
Pure Endowment Insurance Concept
Contract that guarantees a specified sum payable only if the insured is living at the end of a stated time period. Nothing is payable in the case prior to death. These two elements (level-term insurance and endowment) together provide the guarantees endowment contracts offer Note: b/c an endowment policy pays a death benefit if the insured dies during a certain period it can be compared to level term insurance
Face Amount Plus Cash Value
Contract that promises to pay, at the insured's death, the face amount of the policy plus a sum equal to the policy's cash value
Joint Life Policies
Covers two or more people. Using some type of permanent insurance (as opposed to term), it pays the death benefit at the first insured's death. The survivors then have the option of purchasing a single individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies. The ages of the insureds are averaged and a single premium is charged for each life
Credit Life Insurance
Credit life is sometimes issued to individuals as single policies but most often is sold to a bank or other lending institution as group insurance that covers all of the institution's borrowers -The cost of group credit life insurance usually is paid entirely by the borrower
Equity Index Whole Life
Equity index whole life insurance is a type of whole life where 80%-90% of the premium is invested in traditional fixed income securities and the remainder of the premium is invested in contracts tied to a stipulated stock index
Types of special use policies that insurers offer in addition to the basic types of life insurance policies
Family plan policies, family income policies, family maintenance policy, joint life policies, joint life and survivor policies, juvenile insurance, credit life insurance
Option to Convert
Gives the insured the right to convert or exchange the term policy for a whole life (permanent) plan without evidence of insurability -This exchange involves the issuance of a whole life policy at a premium rate reflecting the insured's age at either 1. The time of conversion (the attained age method 2. The time when the original term policy was taken out (the original age method) Note: Highly influences cost of insurance -This option generally specifies a time limit to convert, such as 10 years in force or at age 55, whichever is later
Re-entry Term Insurance
Has a low premium for a stated period of time, but is renewable only if the insured passed medical examination at the re-entry date. -If the insured fails the medical exam the premium increases
Ordinary Life Insurance
Individual life insurance that includes many types of temporary and permanent insurance protection plans -Premiums are normally paid monthly, quarterly, semiannually, or annually - "Principal type of life insurance" that includes insurance such as whole, term, universal, and variable life coverage as well as endowment policies
Group Insurance
Is written for employer, employee groups, associations, unions, and creditors to provider coverage for a number of individuals under one contract -Underwriting based on the group not the indivual
3 Basic Forms of Term Life
Level term Decreasing term Increasing term
7-Pay Test
Limitation of the total amount you can pay into your policy in the first 7 years of existence. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a 7 year period. If there is a material change in the contract, the 7 pay test applies again
How does a policy avoid being a Modified Endowment Contract?
Must meet the 7-pay test
Another factor that distinguishes universal life from whole life
Partial withdrawals can be made from the policy's cash value account (without surrendering or taking a loan)
Decreasing Term Insurance
Policies that are characterized by benefit amounts that DECREASE GRADUALLY over the term of protection -Have level premiums Ex. 20 yr 50k decreasing term Pays 50k death benefit at beginning of policy term-------------decreasing-----------> Pays 0 at the end of 20 yrs
Anually Renewable Term (ART)
Provides coverage for one year and allows the policyowner to renew coverage each year, WITHOUT PROOF OF INSURABILITY -This type of policy represents the most basic form of life insurance
Term Life Insurance
Provides low-cost insurance protection for a specified period (term) and pays a benefit only if the insured dies during that period -NO CASH VALUE -Bought $50k 20yr plan Dies before 20yrs ==>gets $50k Dies after 20yrs ==>gets nothing -Term life provides the greatest amount of death benefit per dollar of initial cash outlay
Level Term Insurance
Provides policy with level (same as original) amount of protection over the entire term of the policy -Have level premiums
Two options on a term life policy to extend the coverage period
Renewal Convert
Cash value
Savings element of whole life insurance. This accumulation builds over the policy's life. Whole life insurance plans are credited with a certain guaranteed rate of interest on a regular basis --income taxes may be due when policy is surrendered-- Represents the amount of money a policyowner will receive if policy is surrendered
Graded Premium Whole LIfe
Similar to modified whole life, graded premium policies also redistribute the premiums. Premiums are lower than whole life rates during the preliminary period (first 5-10 years). The premiums will initially increase yearly during the preliminary period then remain level afterwards
Whole life premiums can be paid using these 3 basic forms of whole life plans (there are still many other variations)
Straight Whole Life Limited Pay Whole Life Single-Premium Whole Life
Increasing Term Insurance
Term insurance that provides a death benefit that increases at periodic intervals over the policy's term -Amount of increase in benefit is usually stated as specific amounts or as a percentage of the original amount -Premium increases at gradual rate -Increase may also be tied to a cost of living index (Consumer Price Index) This term policy may be sold as a SEPARATE POLICY but usually purchased as a cost of living RIDER (add on) to a policy
Modified Whole Life
These policies have premiums that are lower than typical whole life premiums during the first few years (usually five) and then higher than typical thereafter Purpose: to make the initial purchase of permanent insurance easier/more attractive
Accidental Death and Dismemberment (AD&D)
This policy can provide financial benefits if an insured is killed, loses a limb, suffers blindness, or gets paralyzed in a covered accident
Because the policyowner assumes the risk, variable insurance products are considered securities and regulated by the Securities and Exchange Commission (SEC). Agents must must also have a Financial Industry Regulatory Authority (FINRA) license to sell.
True
Single-Premium Whole Life
Whole life insurance that has a large one-time only premium payment, which completely pays for the full life of the policy Common Traits: - Policyowner will pay less than if premiums were stretched over several years - An immediate nonforfeiture value is created - An immediate cash value is created - A large part of the premium is used to set up the policy's reserve
3 basic types of coverage for life insurance
ordinary, industrial, group
Whole Life Insurance
(known as permanent insurance) Provides permanent protection for one's entire life from the date of issue to the date of the insured's death. The benefit payable is the face amount of the policy, which remains constant throughout the policy's life. -Premiums are level -Contains cash value
Examples of HISTORICAL favorable tax treatment for life insurance (sellers and consumers of life insurance)
-Cash value accumulations are not taxed to the policyowners as they build inside a policy - Policy withdrawals are not taxed to the policyowner until the amount withdrawn exceeds the total amount the policy owner paid into the contract -Policy loans are not considered distributions and are not taxed to the policyowner unless or until a full policy surrender takes place, and then, only to the extent that the distribution exceeds what was paid to the policy
MEC Tax Treatment (policyowners pay)
-penalty taxes (10%) on premature distributions period prior to age 59.5 from a modified endowment contract normally apply to policy loans -Any gains received from a modified endowment contract is included in the insured's gross income for the year and a 10% tax penalty is assessed on the gain if the insured is under the age of 59.5
Technical and Miscellaneous Revenue Act (TAMRA)
1988 act that revised the tax law definition of a life insurance contract, discouraging the sale and purchase of life insurance for investment purposes or as a TAX SHELTER. Redefine life insurance, creating a new class of insurance called modified endowment contracts
Universal Life Insurance
Characterized by flexible premiums and an adjustable death benefit. Essentially a term policy with cash value. Premium goes to two places: 1. Cost of Insurance (premium required to keep the policy active. Covers policy administration costs, charge for mortality) 2. Savings element (the rest of what you pay goes to an investment account that grows and earns interest). You are able to borrow and withdraw your cash value Allows policyowners to determine the amount and frequency of premium payments and adjust the death benefit up or down
Equity Index Universal Life Insurance
Permanent life insurance that allows policyholders to link accumulation values to an outside equity index (ex. S&P 500) -Usually contains a minimum guaranteed fixed interest rate along with the indexed account option -If the return on the index exceeds the policy's guaranteed rate of return, the cash value with reflect that of the INDEX Has the security of fixed universal life insurance and the growth potential of a variable policy linked to index returns
Adjustable Life
Policy that combines term and permanent insurance into a single plan, with the ability to increase/decrease premium amount and period that it's paid. Can also increase/decrease the face amount and period of protection (increasing the face amount usually requires proof of insurability) This policy is more expensive than most whole life policies since it can easily be converted from whole life to term (and vice versa) and high premium --> low premium contract..etc.
Partial Surrender Provision
Provision that allows an interest-sensitive policyowner to withdraw the policy's cash value interest-free
Family Income Policies
This policy consists of both whole life and decreasing term insurance. This policy will provide monthly income to a beneficiary if death occurs during a specified period beginning after date of purchase. The family income portion of this type of coverage is supplied by a decreasing term policy. Income payments to the bene begin when the insured dies and then continue for period specified in the policy (usually 10,15, or 20yrs from date of policy issue and not from the date of the insured's death). If the insured dies after the specified period, only the face value (whole life) is paid to the bene since the decreasing term insurance expired.
Juvenile Insurance
This policy insures the life of a minor. Application and ownership of the policy rests with the adult (doesn't require minor's consent) until the child comes of age and is able to take over payments. A payor provision is typically attached to juvenile policies. It provides that in the event of death or disability of the adult premium payor, the premiums will be waived until the insured child reaches a specified age (ex. 25) or until the maturity date of the contract, whichever comes first.
Endowments
This policy is characterized by cash value that grow at a rapid pace--high premiums-- so that the policy matures or endows at a specified date (before 100,commonly 65). Provides benefits in one of two ways: 1. As a death benefit if the insured dies with in a SPECIFIED policy period (known as endowment period) 2. As a living benefit, typically at a future time like retirement, to the policyowner if the insured is alive at the end of the endowment period (policy is now fully matured)
Family Plan Policies
This policy is designed to insure all family members under one policy. Coverage is sold in units. For ex., a typical plan could insure the family breadwinner for $20,000. The coverage on the spouse and children is level term insurance in the form of a rider. The spouse's and children's coverage is usually converted without evidence of insurability
Can (and typically do) combine option to renew and convert in the same policy. Ex. 10 yr convertible renewable policy could provide for renewals until age 65 and be convertible any time before age 55
True
Credit life insurance, sold to cover the outstanding balance on a loan, is based on decreasing term insurance.
True
Decreasing term insurance is commonly used to protect an insured's mortgage Mortgage 500k-----400k------200k-----0 Decreasing term coverage 500k-----400k------200k-----0 (Amount of cover reduces roughly in line with the way a repayment mortgage decreases)
True
Like term insurance premiums, the universal life mortality charge steadily increases with age. Even if you pay a level premium, an increasing share of that premium goes to pay the mortality charge as you get older. The policy specifies the percentage of each premium that goes toward the insurance protection and that which is used to build cash value. If the cash value account is not large enough to support the monthly deduction, the policy terminates
True
There are many other forms of whole life insurance, most of which are characterized by some variation in the way the premium is paid
True
Universal life insurance separates the basic components of life insurance: insurance element, savings element, expense element
True
Non-Medical Life Insurance
Typically does not require a medical exam ==> more expensive than medically underwritten policies. Insurer still inquires about the applicant's medical history and lifestyle
Limited Pay Whole Life
Whole life insurance that has level premiums that a limited to specific number of years (ex. 20). The insurance protection lasts until the insured's death, or age 100
Straight Whole LIfe
Whole life insurance that provides permanent level protection with level premiums until insured's death (age 100)
Variable Insurance Products
With this policy premium payments are fixed. Part of the premium is placed in a separate account and invest in a stock, bond, or money market fund. Death benefit is guaranteed but goes UP/DOWN depending on the stock market (investment). -Does not guarantee contract cash values, it is the policyowner who assumes the risk -Policy owners can participate directly in the account's investment performance -High potential for loss or gain but primary purpose of plan , like any life insurance plan, is to provide financial protection in the event of death -Separate accounts (investment) are not insured by the insurer