Life Insurance Premiums, Proceeds and Beneficiaries

Secondary Beneficiary

Also called the contingent beneficiary or tertiary beneficiary has second claim in the event the primary beneficiary dies before the insured. Contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time of the insured's death.

Revocable Irrevocable

Changing of the beneficiary

Lump-Sum Cash Option Interest Only Option Fixed Period Option Fixed Amount Option Life Income Option

Common Death Settlement Options

1035 Exchange

IAW section 1035 of the Internal Revenue Code certain exchanges of life insurance policies and annuities may occur in a nontaxable exchange. When a cash value life insurance policy is exchanged for another cash value life insurance policy or an annuity for an annuity there will be no income tax on these transactions.

Expense

Insurance companies have operating expenses. These expenses are factored into the premium rates. This is also known as the loading charge.

Calculating Premiums

Once an insurance company determines that an applicant is insurable, they need to establish an appropriate policy premium. The premium will be used to cover the cost and expenses to keep the policy in force

Interest

Since premiums are paid before claims are incurred; insurance companies invest the money in an effort to earn interest. This interest is primary factor in lowering premium rates.

Uniform Simultaneous Death Act Spendthrift Trust Clause

Special Situations

Revocable

The policy owner may change a revocable beneficiary at any time and without the knowledge or consent of the beneficiary.

Irrevocable

The policy owner may not change the beneficiary without written consent of the beneficiary. the policy owner also cannot borrow against the policy's cash value.

Mortality Interest Expense

Three primary factors used in determining premiums

Primary Beneficiary Secondary Beneficiary Per Stirpes Per Capita

Types of Beneficiaries

Fixed Period Option

Under the fixed-period option, also called period certain, proceeds will be paid out in equal installments over a specified period of years.

Uniform Simultaneous Death Act

Under the uniform simultaneous death act, the law will assume that the primary beneficiary died first in a common disaster. this is done to make sure the contingent beneficiary received the death benefit proceeds.

Lump-Sum Cash Option

Upon the death of the insured the policy is designed to pay the proceeds in cash called a lump sum. As a rule this lump sum is not taxable as income.

Interest Only Option

With interest-only option the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient beneficiary at regular intervals. The insurer usually guarantees a certain rate of interest and will often pay interest in excess of the guaranteed rate.

Death Benefit Proceed

also called settlement options, are the methods used to pay the death benefit to a beneficiary upon the insured's death. The policy owner may select a settlement option at the time of the policy application and may also change that option at any time during the life of the insured. Once the policy owner selects the settlement option, the beneficiary can't change it.

Primary Beneficiary

has first claim to the policy proceeds following the death of the insured. Policy owner may name more than on primary beneficiary as well as how the proceeds are to be divided.

Per Stirpes

means by the bloodline, distributes benefits of the beneficiary who died before the insured to the beneficiaries heirs.

Per Capita

means by the head, evenly distributes benefits among the living named beneficiaries.

Mortality

means the rate of death. Mortality tables help insurance companies predict life expectancy and the probability of death for a given group.

Fixed Amount Option

the fixed amount installment option pays a fixed specific amount in installments until the proceeds are exhausted.

Life Income Option

the life income option provides the recipient with an income that he or she cannot outlive. Installment payments are guaranteed for as long as the recipient lives. The amount of each installment is based on the recipient's life expectancy.

Spendthrift trust clause

the spendthrift clause prevents the beneficiaries reckless spending of benefits by requiring that the benefits be paid in fixed installments.

Beneficiaries

there are very few restrictions on who may be named a beneficiary of a life insurance policy. The decision rests solely with the Policy Owner. A beneficiary is the person to which the policy proceeds will be paid upon the death of the insured. Could be individuals, businesses, trusts, estates, or even charities.