Life Insurance Ch 8 Policy Options

from Ch 1 Mutual Insurer

an insurance co owned by its policyholders, they do not have stockholders. If mutual insurer is profitable, it pays a dividend to its policyholders. They do not have to pay tax on the dividend bc the IRS views it as a return of unused premium. Since mutual ins co do return surplus monies to policyholders, it is referred to as a participating co issuing participating policies.

from ch 1 Stock Insurers

an ins co in the business to make a profit for its stockholders, the owners of the copr. If corp is profitable, it pays a dividend to the stockholders. Stockholders must pay tax on the dividend received bc the IRS views it as a return on investment.

Dividend

A policy owner's share of divisible surplus (profit after expenses have been met shared equitably by policy owners) paid by a participating policy. sometimes called POLICY DIVIDEND

Dividend surplus

Dividend= extra money resulting from the insurance co savings in mortality, interest earnings and/or reductions in operational expenses which can be divided equitably among the co policyholders / stockholders

Cash Payment

Dividends become payable on contract anniversary dates and are usually sent automatically in the form of a dividend check after company approval.

Paid-Up Additions

Dividends can be used to purchase additional life insurance, of the same kind, but premium rate is based on the age of insured at the time paid-up insurance is purchased.

One year Term

This is done through the issue of a separate rider. policy owner has again chosen to use the dividen as a single premium to increase the death benefit. However, with this option, the increased death benefit is one year term insurance

Reduce Premium

automatically applies your annual dividend toward your annual policy premium. If your dividend is less than your annual premium, you will receive a bill for the difference. If your dividend exceeds your policy's annual premium, the excess dividend can be paid to you in cash, used to purchase paid-up additional insurance, or paid against a policy loan or lien if you have one.

Nonforfeiture Option means

cash values NOT forfeited (u don't just simply lose them, u have options)

PARTICIPATING life insurance Policy

if you own a participating life insurance policy, you are entitled to receive POLICY DIVIDENDS. Not all policies are participating. Of course, it is important to understand, the payment of dividends is not guaranteed; dividends are a reflection of conditions affecting the company and the cost of insurance. - NOT TAXABLE (bc its return of policyholders own money)

I NONPARTICIPATING life insurance Policy

issued by a stock insurer and does NOT pay POLICY DIVIDENDS. Instead these policies may pay STOCK DIVIDENDS to their stockholders -TAXABLE (

Settlement Options (how the policy death benefit will be paid to beneficiary)

- Lump sum cash payment (this option is assumed unless policy owner or beneficiary decides otherwise) - Interest Only (this option provides flexibility bc it allows the beneficiary the right to take all or some of the proceeds at any time or change to another settlement option) - Fixed Time - Fixed Amount - Life Income (amy of pymt is calculated by actuarial dept)

Ch 3 Premium calculation

premium = Mortality Risk + Operating Expenses - Investment Interest

3 Nonforfeiture Options IF policy owner stops paying premiums and fails to select an option, most companies will have an automatic EXTENDED TERM provision

- Cash Surrender (NO COVERAGE- The cash surrender value is the sum of money an insurance company pays to the policyholder or annuity holder in the event his policy is voluntarily terminated before its maturity or the insured event occurs.) -Reduced paid-up insurance (policy owner directed co to use the CV of the lapsed policy as a single net premium to purchase another policy OF THE SAME TYPE, however, any coverage will be MUCH LESS than the original policy, no further premiums are due. There are several reasons to opt for reduced paid up insurance. One of them is financial success. If your investment plans have worked out well, your estate can often provide for your loved ones with little or no need for life insurance. If your policy has accumulated substantial equity, you can convert it to a smaller but still useful amount of fully-paid coverage. You'll never pay another premium, but the policy remains in force to defray funeral expenses or estate taxes. Most will grow slowly over time as cash values once again build up within the policy. -Extended term insurance (policy owner directed co to use the CV of the lapsed policy as a single net premium to purchase THE SAME AMOUNT OF COVERAGE) Whenever an individual could not afford to continue paying their premiums, they would instead be able to get extended term insurance. The insurance company would take the cash balance that is remaining on the policy and then use that amount of money to purchase term insurance. The individual would then be covered by a term life insurance policy that lasted for a specific period of time. The length of the term insurance policy would depend on how big the cash balance was at the time of forfeiture.

Types of Insurance Companies (insurance provided through 2 sources)

-private insurance companies (organized as a stock ins co OR a mutual ins co) - government (federal/state) Social Insurance programs SS, Medicare/Medicaid ** Biggest dif= private insurers strive to make a profit and gov programs are funded by tax payers and serve national and state social purposes

Lump sum cash payment = tax free

Interest paid on any of the installment options = taxable

Accumulate at Interest

policy owner authorizes the co to invest the dividends. The co credits a dividend account w/interest earned at a specific rate. Dividends are NOT taxable, but in this case, the INTEREST EANED WILL BE TAXABLE each year. The dividend acct can be withdrawn by the policy owner at any time or it will be added to the death benefit and payable to the beneficiary

Dividend Options

- Cash Payment - Accumulate at Interest - Reduce Premium - Paid-Up Additions - One year Term

Nonforfeiture Options

A nonforfeiture option is something you can choose instead of simply dropping your insurance policy. These only work if you have a type of whole life policy. If you can't make the premium payments, your insurance will quit covering you. These are two options when you can't make the premiums but still want life insurance coverage: -Reduced paid-up insurance -Extended term insurance NOT this option - Cash Surrender This applies to the CASH VALUE of a permanent life policy. Whether a policy is surrendered or lapsed, the cash value is recovered or used to keep some type of insurance in place. simply put: Non-forfeiture options are ways in which cash values can be paid out to or used in the case the policy is lapsed or surrendered.

Policy Options

Allow policyowner to exercise choice regarding financial decisions about the policy - Dividend Options - Nonforfeiture Options - Settlement Options