types of life insurance policies (and term life ins.)

for test

-term life insurance vs permanent life insurance --TLI= renting a home. --Permanent LI= owning a home

Annually Renewable Term

The oldest form of renewable term insurance is annually renewable term (ART), sometimes called yearly renewable term (YRT). As the name suggests, ART policies provide coverage for one year, at the end of which the policyowner may renew the contract for another year without having to provide evidence of continued insurability. While the face amount remains the same, premiums increase with each renewal. Typically, insurers limit the time frame within which an ART policy may be renewed (e.g., to age 65).

Decreasing Term Insurance

Decreasing term life insurance provides temporary protection for a set period. The main difference between level and decreasing term is the amount of the death benefit payable. The death benefit under a level term policy is set and remains level over the policy's term. By contrast, with decreasing term insurance the death benefit steadily decreases until it eventually reaches zero at the end of the term. If death occurs during the policy's term, the benefit equals the face amount of coverage stated in the contract for that point in the term. Decreasing term premiums remain level for the full coverage term. Some insurers use a premium-paying period that is shorter than the term of coverage. For example, a policyowner might pay premiums for 27 years on a 30-year decreasing term policy. Because coverage decreases over time, decreasing term premiums are less than level term premiums (assuming both policies start with the same face amount). Decreasing term life insurance is most commonly used to cover financial needs that decline over time. Mortgage protection is a good example. With a decreasing term policy that matches the declining mortgage balance, a homeowner is assured that funds will be available to let survivors pay off the mortgage should the homeowner die prematurely. While decreasing term life insurance can generally be converted to a permanent plan for most of the term period, it cannot be renewed.

Convertible Term

The convertibility provision lets policyowners exchange their term coverage for a permanent life insurance policy without having to provide evidence of insurability. The new policy's face amount cannot exceed the term policy's face amount. Typically, the option to convert a term policy to a permanent policy must be exercised no later than a certain date, such as two or three years before the policy expires. --convertibility provision= allows insured to change to a different policy without having to prove insurability. Usually found in term insurance and group insurance.

Re-Entry Option

Some insurers offer a "re-entry" renewal option that lets the owner renew the policy at current rates that are lower than the attained age rates that would be used in a standard renewal. To get the lower re-entry rate, the insured must first prove insurability at the time of renewal or at periodic intervals throughout the policy's term. If the insured is found to have become uninsurable, he or she is permitted to renew at the guaranteed attained age rates used with standard policy renewals -attained age=age that an insured has reached on a given date.

Level Term Insurance

-Provides a Level death benefit. Also charges a level premium set for a period. The most popular form of term life insurance is level term. Level term insurance provides a level death benefit and charges a level premium for the duration of the coverage term. During the term of coverage, neither the death benefit nor the premium change. Whatever the length of the term, at the end of that time, the coverage expires and the protection ends. The term can be for a set period of years (5-year term, 10-year term, 20-year term, etc.). It can also be set for a specified insured age (term-to-55, term-to-65, etc.). For example: A $200,000 level ten-year term policy provides $200,000 of coverage for ten years. The premium for the coverage stays the same for each of the ten years. At the end of the ten-year period, the insurance coverage expires. A $200,000 term-to-65 policy provides $200,000 of coverage until the insured reaches age 65. The premium for the coverage stays the same until the policy ends at the insured's age 65. -Term policies that provide coverage for a few years may be guaranteed level premium term policies in that the insurer guarantees the premium will remain level. Term policies that provide coverage for decades may have a premium that increases periodically according to the insurer's schedule. These are non-guaranteed level premium term policies. The premium for an indeterminate level premium term policy will increase or decrease between the initial premium and a maximum limit set by the insurer.

Key points

-Term life insurance provides temporary protection for a specified, limited time that can be defined in years or by the age of the insured. -Term life is pure insurance, with no cash value (or "savings element") associated with it. -Term life is best used for temporary needs or as a stop-gap measure until the policyowner can afford permanent life insurance. -Level term insurance provides a level death benefit and charges a level premium for the duration of the coverage term. -The convertibility provision lets policyowners exchange their term coverage for a permanent life insurance policy without having to provide evidence of insurability. -Decreasing term life insurance is most commonly used to cover financial needs that decline over time. Mortgage protection is a good example. -Increasing term insurance is most commonly used as a "cost-of-living increase" rider on a permanent life insurance policy.

Attained Age or Original Age Conversion

Converting a term policy to a permanent policy takes place on either an attained age or an original age basis. If a policy is converted under the attained age method, the premiums for the converted policy are based on the insured's age at the time of the conversion. All other factors remaining equal, this means rates will be higher than they were at the original issue age. If the conversion is on the original age (or date) basis, the premiums for the new policy are based on the insured's age when the term policy was originally issued. An advantage of this approach is that premiums would be lower than they would be under the attained age method. However, in exercising this option the policyowner must pay the aggregate premium difference between the term and the permanent insurance from the point of the original policy's issue to the time of the conversion. From that point on, the cost of the permanent insurance remains at the same level, based on the insured's age when the original term policy was issued.

Increasing Term Insurance

Increasing term life insurance is the opposite of decreasing term. With this type of insurance, the death benefit increases over the term to a preset amount or at a preset rate. The premium normally remains level, though at a higher level than either level term or decreasing. Increasing term insurance is most commonly used as a "cost-of-living increase" rider on a permanent life insurance policy. (A rider, which cannot stand on its own, effectively adds a clause or benefit to the base policy.) With an increasing term rider, the policy will pay a death benefit equal to the policy's base amount plus the amount that the increasing term insurance had grown to at the insured's death. Such a rider can usually be added to a base policy at a slightly lower cost than issuing a term policy for this purpose. --rider= attachment to an insurance policy that changes the benefit either by adding new benefits or by excluding certain benefits from coverage.

overview

Life insurance companies offer many types of life insurance policies, each with unique features and provisions that allow it to meet the varying needs of policyowners. The main purpose of all life insurance policies is to pay, upon the insured's death, a sum of money to the policy beneficiaries. When used to meet family insurance needs, the death benefit often replaces the insured's future lost income. The death benefit can also be used to pay the immediate costs incurred when the insured dies. Insureds also have the option of using their life insurance policy to accumulate a sum of money. Some forms of life insurance (specifically permanent policies) create cash values that may grow over the life of the policy, providing what are called "living benefits" because they are accessible while the insured is alive. For example, policyowners can use the cash value for a down-payment on a vacation home, to pay for a child's education, or to meet a financial emergency. Policyowners have other choices as well. For example, they can choose protection-only policies or those that offer a cash value in addition to protection. They can also decide who to insure and how they want to pay their premiums. The lessons in this unit introduce the following types of life insurance policies and describe the purpose and key features of each: -term life insurance -whole life insurance -flexible premium policies -specialized policies -endowment policies -group life

Term Life Insurance

Term life insurance is the most basic form of life insurance. Term life insurance provides temporary protection for a specified, limited time that can be defined in years or by the age of the insured. If the insured dies during the term of coverage, then the policy's death benefit is paid. If the insured is alive at the end of that term, then the coverage ends, and the policy terminates without value. Term life is pure insurance, with no cash value (or "savings element") associated with it. Because the policyowner pays only for the cost of pure protection, term insurance premiums are smaller than premiums for permanent insurance for the same insured at the same issue age. However, the older a term insurance policy insured gets, the higher his or her term insurance premiums become. Because it only offers protection for a limited time, term life is best used for temporary needs or as a stop-gap measure until the policyowner can afford permanent life insurance. While insurers add their own features, term life is available in three basic forms: 1. level term insurance 2. decreasing term insurance 3. increasing term insurance -permanent insurance=lasts for the iinsured's entire lifetime or until age 120. If premiums paid the insurance stays in force and is guaranteed to pay its death benefit.

Renewable Term

Two optional features common to level term insurance contracts are renewability and convertibility. The renewability feature allows the coverage to be renewed for another period or another term without the insured having to provide proof of insurability, meaning that even those who have become uninsurable are guaranteed the right to renew the policy. Known as renewable term life insurance, these policies generally charge slightly higher premiums than nonrenewable term policies to account for the fact that some renewals will involve insureds who have become uninsurable. The premium for the renewal coverage is based on the insured's age at the time of renewal. As a result, the premiums generally increase with each renewal. Most insurers set upper age limits on renewal of their term policies. For instance, most policies cannot be renewed past the age of 65 or 70.Two optional features common to level term insurance contracts are renewability and convertibility. The renewability feature allows the coverage to be renewed for another period or another term without the insured having to provide proof of insurability, meaning that even those who have become uninsurable are guaranteed the right to renew the policy. Known as renewable term life insurance, these policies generally charge slightly higher premiums than nonrenewable term policies to account for the fact that some renewals will involve insureds who have become uninsurable. The premium for the renewal coverage is based on the insured's age at the time of renewal. As a result, the premiums generally increase with each renewal. Most insurers set upper age limits on renewal of their term policies. For instance, most policies cannot be renewed past the age of 65 or 70.

quiz

ina owns a $200,000 five-year renewable term insurance policy and wants to renew the policy at the end of the term. In this case, all the following statements are correct, EXCEPT: The premium for the renewal coverage will be higher than for the initial coverage. The insurer will base the premium for the renewal coverage on Gina's age at the time of renewal. -Gina must prove insurability before the insurer can renew the policy. Gina will be able to renew the policy any time up to age 65 or 70 (as defined in the policy). Most term policies set upper age limits on renewing policies. Thus, if Gina is over age 65 or 70, she will probably not be able to renew the policy. Question 2 Andrea bought a $300,000 term-to-55 policy. Which of the following statements about the policy is NOT correct? The premium for the policy stays the same until the policy ends. The policy gives $300,000 of coverage until Andrea reaches age 55. -The policy will pay the entire death benefit only if Andrea reaches age 55. If Andrea dies before age 55, the policy will pay a $300,000 death benefit. If the insured dies during the term of coverage, then the policy pays the death benefit. Question 3 The convertibility provision of a term life policy lets the owner convert the term coverage into what type of policy? a renewable term policy a convertible term policy *a permanent life insurance policy a paid-up whole life insurance policy The convertibility provision of a term life policy lets the owner convert the term coverage into a permanent life insurance policy without proving insurability. Question 4 What is a term insurance policy in which the protection and premium amounts stay the same during the term period known as? decreasing term increasing term renewable decreasing term -level term Level term insurance offers a level death benefit and premium during a set period. During the term of coverage, neither the death benefit nor the premium changes. How is increasing term life insurance normally sold? as an endorsement as a modified endowment contract *as a rider as a permanent insurance policy Insurers offer increasing term insurance as a "cost of living increase" rider on another policy. Question 2 All the following are common types of term life insurance EXCEPT: *adjustable term insurance annually renewable term increasing term insurance level term insurance While there is a form of permanent life insurance called adjustable life, there is no type of term insurance by this name. Question 3 Which statement about term life insurance is NOT correct? -A small cash value gradually accumulates while the policy is in force. Upon issue, it is generally less expensive than permanent insurance of comparable face amount. It offers protection for a specified, limited period. It pays a benefit only if the insured dies during the specified period. Unlike permanent life insurance, term insurance does not build any cash value. Question 4 To renew a term life insurance policy at a lower rate than the guaranteed rate, what must the insured prove? an insurable interest exists he or she is under age 60 his or her attained age -insurability With renewable term policies, insurers may offer a lower re-entry renewal rate that allows the insured to renew coverage at a lower rate than the guaranteed rate. However, he or she must first prove insurability.