Unit 8: Types of Life Insurance Policies

Disadvantages of Specialized Policies

- Policies set up to meet a specified need may become obsolete if the need changes over time. - Certain policies, if not set up carefully, may incur negative tax consequences.

Economatic

A whole life-type policy with a term rider that uses dividends to purchase additional paid-up insurance.

Juvenile Endowment Policies

Designed to mature at a specific age, such as age 18, to help fund a college education.

Life Insurance Can Be Structured to Provide

- A guaranteed death benefit only, using term insurance - A guaranteed death benefit plus cash accumulation, using some type of permanent insurance - A guaranteed death benefit plus premium flexibility, using universal life - A guaranteed death benefit plus premium and investment flexibility using variable or variable universal live - Liquidity for estates

Disadvantages of Flexible Policies

- Flexible policies that include a securities component may not have guaranteed returns. - Some policyowners need the forced discipline of mandated premium schedule to ensure that they regularly contribute enough to ensure adequate cash value growth.

Disadvantages of Term Insurance

- Overtime, renewable term insurance becomes more and more expensive. - Insured can be left without insurance at a time when protection is needed the most. - Insured can be left without insurance at a time when protection is needed the most. - Pure death protection only. It offers no living benefits such as guaranteed cash values. - It generally is not renewable beyond a certain age, such as age 65 or 70.

Advantages and Uses of Specialized Policies

- Specific combinations of term and permanent insurance can be used to match the need exactly. - The cost of the policy may be lower than ordinary whole life insurance.

Endowment Life Insurance

A combination of a pure endowment plus term insurance for a specified period. The pure endowment provided a living benefit at the end of the endowment period. The term insurance paid a death benefit if the insured died before the end of the endowment period.

Deposit Term Insurance

A level term insurance policy that has a much higher premium for the first year than for subsequent years. The initial premium is significantly higher than the average premium needed to cover the cost of mortality during the term period.

Graded Premium Whole Life Policies

A policy with a gradual increase in premiums compared with a modified life, which has just one increase. With a graded premium whole life policy, the premium increases each year during the early years of the contract (usually 5 years) and remains the same after that time.

Retirement Income

A retirement income policy accumulates a sum of money for retirement while providing a death benefit.

Single Premium Whole Life

A single premium whole life policy is simply a whole life policy with one premium payment. The entire cost of this policy is paid up at the time of purchase. Single premium whole life policies accumulate immediate cash value. Policyowner will pay less for the policy than if the premiums were stretched over several years.

Universal Life Insurance

A universal life policy is similar to whole life policy in the sense that it has the same two components: death protection and cash value. However instead of being fixed and guaranteed amounts, the death protection resembles one-year renewable term insurance and the cash account grows according to current interest rates. - Premium payments are separated and paid toward the insurance protection; the loading cost and remaining balance is used to build the cash value (with interest) - The policyowner may increase or decrease the death benefit during the policy term, subject to any insurability requirements. - Premium amounts may be changed as long as enough premium is paid to maintain the policy. - The interest earned by the cash account will vary, subject to a guaranteed minimum. Universal life contracts are actually subject to two different interest rates - the current annual rate and the contract rate. The current annual rate varies with current market conditions and may change every year. The contract rate is the minimum guaranteed interest rate, and the policy will never pay less than that amount. Many universal life policies will also permit a cash withdrawal, also called a partial surrender, from the cash account.

Adjustable Life Insurance

Adjustable life insurance is a policy that offers the policyowner the option to adjust the policy's face amount, premium, type of protection, and/or length of protection, without having to complete a new application or actually exchange policies. The flexibility of adjustable life is accomplished by allowing conversion from one form of insurance to another, and by making appropriate premium adjustments, if necessary.

Convertible Term Policy

Allows a policyowner to convert or exchange the temporary protection for some form of permanent protection without evidence of insurability. The conversion must be made prior to expiration of the term. Upon conversion, premiums will be based upon attained age.

Endowments

An endowment policy provides for the payment (to the beneficiary) of the face amount upon the death of an insured during a specified period or the payment of the face amount at the end of the specified period if the insured is still alive, whichever comes first. Originally designed to combine life insurance and savings elements. Once the specified period has passed and the insured is living, the face amount would be paid to that insured in a lump sum or in installments.

Guaranteed Cash Value

An insured may CASH IN a policy at any time by surrendering it in exchange for its cash value. An insured may also borrow a portion of the cash value in the form of a POLICY LOAN, but this must be paid back in order to restore policy values. When a policyowner takes a cash value loan, the amount borrowed and any accumulated interest due on the loan become an INDEBTEDNESS against the policy. If the insured dies before the loan has been repaid, it will be subtracted from any death benefit.

Juvenile Life Insurance

Any form of coverage written on the lives of minors. One type of policy is commonly called the JUMPING JUVENILE policy because it automatically increases in face amount at a given age, usually 21, but the premium remains level.

Level Term Policies

Are issued for a fixed face amount, which remains the same during the term of coverage. A level term policy may be issued for an annual period, for a specified number of years, or until a specified age. Premiums may increase annually or be level for the term of coverage.

Index-Linked Policies

As a hedge against high inflationary periods, many companies offer policies with face amounts that increase by the amount of inflation. The policy amounts are generally linked to the Consumer Price Index.

Increasing Term Policies

Begin with little or no insurance protection, and the face amount grows over time.

Multiple Protection Policies

Combinations of whole life and term in which the amount of protection is higher in the early years of the policy and less in the later years.

Family Maintenance Policies

Combines ordinary life insurance and level term insurance. It affords the payment of a monthly income during a stated period of 10, 15, 20 years or to the age 65 as preselected by the insured.

Credit Life Insurance

Designed to insure the lives of debtors for the benefit of a creditor. The insurance premium is being financed along with the item being purchased. Credit life insurance may not be written for an amount greater than the total debt.

Modified Whole Life Policies

Distinguished by premiums that are lower than typical whole life premiums during the first few years and then higher than typical thereafter.

Characteristics of Flexible Policies

Flexible policies off the policyowner the opportunity to change one or more of these components in response to changing needs and circumstances.

Preneed Funeral Insurance

Funeral insurance or preneed burial insurance is a type of life insurance used to pay for an insured's funeral. Funeral insurance pays the face amount upon an insured's death. Really, it is just a contract to provide a preplanned funeral and cemetery services funded by a life insurance contract or annuity.

Whole Life Insurance

Gets its name from the fact that the policy is designed to provide coverage for the whole of life. Also called PERMANENT INSURANCE because the maturity date is beyond the life expectancy of most individuals. When a whole life policy reaches its maturity date, the cash value would equal the face amount.

Reentry Term Policy

Gives the insured the opportunity to provide evidence of insurability at the end of the term and qualify for reduced premium rates.

Renewable Term Policy

Is issued fora specified term and may be renewed at the end of that term without evidence of insurability. It may be limited in the number of renewals or to a specified age beyond which renewals will not be available. The premium will be based on the insured's attained age at the time of renewal.

Decreasing Term Policies

Issued for an initial face amount that declines during the term period and reaches zero at policy expiration.

Retirement Endowment

Issued to mature at age 65 when the insured planned to retire. The face value was payable as a death benefit if the insured died before the maturity date. However, at maturity, the full face amount became payable, usually in the form of monthly installment income.

Joint Life Policies

Most commonly, the policy is issued on two lives with the insured amount payable on the death of the first insured. A variation of the joint is the SURVIVORSHIP LIFE POLICY, which pays the insured amount, not upon death of the first insured to die, but upon the death of the last surviving insured.

Current Assumption Whole Life Policies

Offer Flexible premium payments that are tied into current interest rate fluctuations. During a period of relatively high interest rates, premiums could be reduced. During periods of low interest rates, premiums could be increased within certain limits.

Advantages and Uses of Term Insurance

One of the most common uses for term is to provide a substantial amount of coverage at a minimum cost. It allows a person with limited income to purchase more coverage than might otherwise be affordable.

Face Amount

Or FACE VALUE, of the policy is the amount of money listed on the face page of the policy. This is the amount that will be paid in the event of the insured's death.

Limited-Payment Whole Life

Policies allow the policyowner to pay for the entire policy in a shorter period of time or to a specific age.

Advantages and Uses of Flexible Policies

Premium flexibility allows policyowners to pay what they can, when they can. It also provides the opportunity for policyowners to skip payments when their financial circumstances dictate without losing insurance protection.

Level Premiums

Premiums for permanent insurance policies are designed to remain level during the entire period the policy is in force. In the early years of the contract, the insured actually pays in more premium than is needed to provide the current year's insurance protection, whereas in later years less than is needed is paid in. The company has the opportunity to invest the money at a favorable return.

Pure Endowment

Provided for the payment of the policy's face amount only if the insured lived to the maturity date. If the insured died before the endowment date, all benefits were forfeited.

Family Income Policy

Provides an income to be paid upon the death of the breadwinner. The policy combines decreasing term insurance with a permanent policy. Income payments begin when the insured dies and continue for a period specified from the date of policy issue.

Mortgage Redemption Policy or Rider

Simply a decreasing term insurance. The benefit amount of the term element is intended to be sufficient to pay off the unpaid remainder of the mortgages loan if the insured dies before paying it off.

Minimum Deposit

Technically a method of paying for insurance and not a type of policy. It is a high cash and loan value whole life policy. The cash value of a permanent policy is used to pay the premiums on that policy through the use of policy loans. The first two of these premium payments must be paid by the policyowner and then loans may be used, but only if during the first seven years of the policy at least four of the seven annual premiums are paid from funds other than policy loans.

Level Face Amount

The face amount of the policy is fixed and will not change while the policy remains in effect.

Continuous Premium Whole Life

The most common type of whole life insurance sold. These policies stretch the premium payments over the whole life of the insured. This type of policy is often referred to as straight life insurance.

Variable Universal Life Insurance

The policy has elements of variable life insurance because it is backed by equity investments. The policy has elements of universal life insurance because it allows the policyowner to adjust the amount of the death benefit and/or the premium.

Disadvantages of Whole Life Insurance

The premium-paying period may last longer than the insured's income producing years. It does not provide as much protection per premium dollar as term insurance does.

Advantages and Uses of Whole Life

The principal advantage of whole life is that it is permanent insurance and can be used to satisfy permanent needs such as the cost of death, dying, and final burial expenses. The level premium allows the policyowner to know exactly what the cost of insurance will be and offers a form of forced savings. Whole life builds a living benefit through its guaranteed cash value, which enables the policyowner to use some of this cash for emergencies, as a supplement source of retirement income, and for other living needs.

Variable Life Insurance

These policies have two elements: death protection and a savings/investment element. These policies are not linked to interest rates, but are instead backed by equity investments and securities and are not guaranteed. - They have guaranteed minimum death benefit (actual benefit may be greater and will vary with success of investments) - They have cash values that are not guaranteed (vary with investment success) - These contracts are regulated as securities For fully guaranteed contracts, an insurer maintains a general account, also called a general asset, that consists primarily of safe an conservative investments. The safe investments make it possible for the insurer to guarantee its policies. In contrast, an insurer must establish a separate account, also called a separate asset, for its variable products. In order to sell variable life insurance, an agent must be licensed to sell life insurance and must pass the appropriate securities exam.

Family Protection Policy

This type of policy consists of whole life on the breadwinner and convertible term on the spouse and children. Under a family policy, term insurance coverage is provided without additional premium for children born or adopted after the policy is issued. The term insurance expires on each child as that child reaches a specific age.

Viatical / Life Settlements

Through viatcial settlements, individuals with a terminal illness or severe chronic illness sell their life insurance policies to viatical companies. A life settlement transaction is a transfer of an ownership interest in a life insurance policy to a third party for compensation less than the expected death benefit under the policy or the sale of a life insurance policy for a dollar amount that is less than the policy's face.

Interim Term Policy

When a person wants immediate protection and is thinking of starting a permanent insurance policy in the near future, interim term may be used to cover the period before permanent protection is to begin. The premium for the interim is based on age at application.