Life Insurance - Chapter 2 - Types Of Life Policies

Indexed Life

•Cash value is dependent upon performance of the equity index, such as S&P 500 although there is a guaranteed minimum interest rate. •Policy's face amount increases annually to keep pace with inflation without requiring evidence of insurability.

Variable Universal Life

•Combines many features of the whole life with flexible premium of universal life and the investment component of veritable life, making it securities version of universal life insurance. •Most investment vehicles in variable universal life policies do not guarantee return. •Agents selling variable life insurance products must: -be registered with FINRA -licensed by state to sell life insurance -have received a securities license Features and characteristics: -a flexible premium that can be increased, decreased or skipped as long as there is enough value in policy to fund death benefit. -increasing and decreasing the amount of insurance -cash withdrawals or policy loans

Interest-Sensitive Whole Life

•Current assumption life •Guaranteed death benefit to age 100 •Insurer sets initial premium based on current assumptions about risk, interest, and expense. •If actual values change, the company will lower or raise the premium at designed intervals. •Provides minimum guaranteed rate of accumulation or shorter premium-paying period.

Accumulation Period VS Annuitization Period

Accumulation Period: -Pay in period, owner makes payments (premiums) into an annuity. -This is the time which payments earn interest on tax-deferred basis. Annuitization Period: -liquidation period or pay-out period, time in which the sum that has been accumulated during accumulation period is converted into a stream of income payments to the annuitant. -annuity period may last for the lifetime of annuitant or for specified period, which could be long or short.

The Parties of Annuities

Owner: -The purchaser of the annuity contract, but not necessarily the one who receives the benefits. -The owner of the annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. -Owner of an annuity may be a corporation, trust or other legal entity. Annuitant: -The person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written. -Corporation, trust or other legal entity may own an annuity, but the annuitant must be a natural person. Beneficiary: person Who receives annuity assets, either the amount paid into the annuity or the cash value, which ever is greater. If the annuitant dies during the accumulation period, The balance of the annuity benefits is paid out.

Ordinary/Straight Whole Life

•Basic _________ life policy •Has the lowest annual premium •AKA = continuous premium whole life

Permanent Life Insurance

•Builds cash value and remains in effect for the entire life of the insured (or until age 100) as long as premium is paid. •Most common type is Whole Life.

Adjustable Life

•Can assume form of either term insurance or permanent insurance •Suitable for insureds whose incomes are unpredictable. •Policyowner may adjust: -premium or premium payment period -face amount -coverage period •Cash value of this policy only develops when the premiums paid are more than the cost of the policy.

Limited-Pay Life

•Designed so that the premiums for coverage will be completely paid-up well before age 100. •Some common versions of this are 20-pay life whereby coverage is completely paid for in 20 years, and life paid-up at 65 (LP-65) •This policy has a shorter premium-paying period than straight life insurance, so the annual premium will be higher. •Cash value builds up faster for this policy as well. *Pay a set number of years or to a specified age.

Universal Life

•Flexible premium adjustable life. •Policyowner has flexibility to increase amount of premium paid into the policy and to later decrease it again. •Policyowner may even skip paying a premium as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance. •If cash value is too small, the policy will expire. Minimum premium: -amount needed to keep policy in force for current year. Minimum premium will make policy perform as an annually renewable term product. Target premium: -a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and keep policy in force through its lifetime.

Return of Premium (ROP)

•If insured remains healthy and is still alive once the term limit expires, the insurance company guarantees a return of premium. •Since the amount returned equals the amount paid in, the returned premiums are not taxable. •Low risk factor of a term policy but a significant increase in premium cost, sometimes as much as 25%-50% more.

Pure Death Protection

•Included in Term insurance. •If insured dies during this term, policy pays the death benefit to the beneficiary. •If policy is canceled or expires prior to insured's death, nothing is payable to the end of term. •No cash value or other living benefits.

Joint Life

•Insured 2 or more •Premium based on joint average age of the people •Death benefit upon FIRST death (pays out when first person passed away) •

Survivorship Life

•Insured 2 or more •Premium based on joint average age of the people •Death benefit upon LAST death (pays out when last person passes away) •This policy is often used to offset the liability of the estate tax upon death of the last insured. •AKA = "second to die"

Types of Term Coverage

•Level •Increasing •Decreasing •Premium is level throughout the term of policy, only the amount of death benefit may fluctuate, depending on type of term insurance. •Upon selling, renewing or converting the term policy, premium is figured at attained age.

Decreasing Term

•Level premium and death benefit that decreases each year over the duration of the policy term. •Used primarily for DEBT/Mortgages •To cover a debt while you still owe money to a lender for a loan you haven't paid off yet. D for Debt

Level Term

•Most common type of temporary protection purchased. •Death benefit does NOT change throughout the life of the policy.

Special Features - Renewable&Convertable (R&C)

•Most term policies are renewable and convertible •Renewable: -Right to renew coverage at the expiration date without evidence of insurability. •Convertible: -Right to convert the policy to a permanent insurance policy without evidence of insurability.

Universal Life - Option A&B

•Option A: -Level death benefit option -Cash value gradually increases. •Option B: -Increasing Death Benefit -Annual increase in cash value so that the death benefit gradually increases each year by amount that the cash value increases. -Expenses of this option are much greater than those for option A, causing the cash value to be lower in the older years.

Annuity Basics

•Provides income for a specified period of time or for life •Protects annuitants against outliving their money •Pays until the death of the annuitant (in most cases) -Risk of living too long -Liquidates an estate -Pays an annuity benefit (while living)

Whole Life Insurance

•Provides lifetime protection and includes savings element (or cash value). •Premiums for __________ life are usually higher than for term insurance. Key Characteristics: -Level Premium: Premium is based on issue age, so it remains the same throughout. -Death Benefit: Death benefit is guaranteed and also remains level for life. -Cash Value: Created by accumulation of premium, scheduled to equal the face amount of policy when insured reaches age 100 and is paid out to policyowner -Living Benefits: Policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. Cash value doesn't accumulate until the third policy year and it grows tax deferred.

Annually Renewable Term (ART)

•Purest form of term insurance. •Death benefit remains level, policy may be guaranteed to be renewable each year without proof of insurability, but premium increases annually according to attained age, as probability of death increases. •Aka = Yearly renewable term

Types of Whole Life

•Straight Whole Life •Limited-Pay Whole Life •Single Premium Whole Life

Term Life

•Temporary protection, only provides coverage for specific period of time. •Known as "Pure Life Insurance" •Provides the greatest amount kf coversge for the lowest amount of premium as compared to any other form of protection.

Single Premium

•This policy is completely paid-up after one premium and generates immediate cash. •Level death benefit to the insured's age 100 for a one-time, lump sum payment. *One lump sum (paid up) payment

Premium Payment Options for Annuities

•Two options: -Single Premium - one time lump sum payment -Periodic Payments - premiums are paid in installments over a period of time. -Periodic payments can either be level premium (staying the same throughout) or flexible premium where the amount and frequency of each installment varies.

Variable Whole Life

•level, fixed premium, investment-based product. •These policies have fixed premiums and a guaranteed minimum death benefit. •Cash value of policy is not guaranteed and fluctuates with performance of the portfolio.