Chapter 2 - Types of Life Policies

What happens to the account value if an annuitant dies during the accumulation period of an annuity? Is the account value taxed?

-If an annuitant dies during the accumulation period of an annuity, the account value will be paid to the annuitant's beneficiary or to their estate -Any taxes due will be paid at the estate level

What are the characteristics of the "joint and survivor" settlement option for annuities?

-Income for 2 or more that cannot be outlived -Often used with period certain -When one annuitant dies, the other receives ½ or 2/3 of the original payment amount

What are the characteristics of the "life only" settlement option for annuities?

-Insured cannot outlive income -Any money not paid out are retained by company at insured's death -Pays the highest monthly amount

What is level term insurance?

-Level term insurance is the most common type of temporary protection purchased -The word level refers to the death benefit that does not change throughout the life of the policy

What is the defining characteristic of universal life insurance? What type of insurance is it?

-Offers flexible premiums -Universal life, variable life, and variable/universal life are all interest-sensitive whole life products

What are the characteristics of the "lump-sum" settlement option for annuities?

-Paid at annuitization -All interest accumulated is taxable -Additional 10% penalty imposed prior to annuitant's reaching 59 ½

What are the characteristics of the "annuities certain" settlement option for annuities?

-Payment is guaranteed for a fixed period or until certain fixed amount paid -NO LIFE option

What are the characteristics of the "life with period certain" settlement option for annuities?

-Specific monthly payment for life and a specific period of time -If the annuitant dies before the payment period is up, the payment goes to the beneficiary

What is the difference between survivorship life insurance and joint life insurance? Which premium is lower?

-Survivorship life is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age -The major difference is that survivorship life pays on the last death rather than upon the first death -Survivorship life charges lower premiums

What does the "cash value" characteristic of whole life insurance refer to? What is another name for cash value?

-The cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policy owner -Nonforfeiture value

What is the "convertible" provision of term insurance policies?

-The convertible provision provides the policy owner with the right to convert the term policy to a permanent insurance policy without evidence of insurability -Premium is based on the insured's attained age at the time of conversion

What does the "living benefits" characteristic of whole life insurance refer to?

-The policy owner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered -The cash value does not accumulate until the 3rd policy year and it grows tax deferred

What does the "level premium" characteristic of whole life insurance refer to?

-The premium for whole life policies is based on the issue age -It remains the same throughout the life of the policy

What is annually renewable term insurance?

-The purest form of term insurance -Death benefit remains level -The policy may be guaranteed to be renewable each year without proof of insurability -Premium increases annually according to the attained age, as the probability of death increases

What is the "renewable" provision of term insurance policies?

-The renewable provision allows the policy owner the right to renew the coverage at the expiration date without evidence of insurability -Premium for the new term policy is based on the insured's age at the time of renewal

What are variable products? What benefit do variable life products provide?

-These have no guarantees and are not backed by the state guaranty fund -->Ex: Variable annuity -An agent must be registered with the FINRA to sell a variable product -Variable life products provide a hedge against inflation

What are the characteristics of term life insurance?

-These policies provide the greatest amount of coverage for the lowest premium compared to any other form of protection -There is usually a max age above which coverage will not be offered or at which coverage cannot be renewed

What is limited pay life? What are the two most common forms?

-This is designed so that the premiums for coverage will be completely paid-up well before age 100 1: 20 pay life 2: Life paid-up at 65 (LP-65)

What is the minimum premium?

-This is the amount needed to keep the policy in force for the current year -Paying the minimum premium will make the policy perform as an annually renewable term product

What is a level premium term?

-This provides a level death benefit and a level premium during the policy term -Death benefit is the same thing as face amount

What is the defining characteristic of the cash account component of universal life policies? Is interest earned taxable?

-Universal life policies allow the partial withdrawal (partial surrender) of the policy cash value -Interest earned on the withdrawn cash value may be subject to taxation, depending upon the plan -The death benefit will be reduced by the amount of any partial surrender

What are the six settlement options for annuities?

1: Life Only 2: Refund Life Annuity 3: Life with Period Certain 4: Joint and Survivor 5: Lump-Sum 6: Annuities Certain

What are the two types of premiums associated with universal life insurance?

1: Minimum premium 2: Target premium

What are the two death benefit options offered under universal life policies?

1: Option A - Level Death Benefit Option 2: Option B - Increasing Death Benefit Option

What are the 3 characteristics of a variable annuity?

1: Payment is not guaranteed 2: Premiums are in a separate account 3: Payments are invested in stocks and bonds

What types of people would benefit the most from purchasing an adjustable whole life policy?

Clients with income who fluctuates

What is term life insurance?

Insurance that provides protection for a specified period of time

What is an adjustable life policy?

Life insurance which permits changes in the face amount, premium amount, period of protection, and the duration of the premium payment period

What is the accumulation period for an annuity? What is the annuitization period for an annuity?

-During the accumulation period, money is paid in to the insurer -During the annuitization period, money is paid out to the insured

What is permanent life insurance? What is the most common form?

-A general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (up until age 100) as long as the premium is paid -Whole life insurance

What are the characteristics of the "straight life" form of ordinary whole life insurance?

-AKA ordinary life or continuous premium whole life -Basic whole life policy -Policy owner pays the premium from the time the policy is issued until the insured's death or age 100 (whichever occurs first) -Straight life will have the lowest annual premium of the common whole life policies

What are annuities? How do they relate to life insurance?

-Annuities are the opposite of life insurance -->Life insurance creates an estate -->Annuities systematically liquidate your estate over a period of time -All annuities are for life -An immediate annuity would be funded with a single premium and would begin payments one month later

How does the cash value of an adjustable life policy develop?

-Cash value of an adjustable life policy only develops when the premiums paid are more than the cost of the policy

What are the characteristics of decreasing term insurance? When is it usually used?

-Decreasing term policies feature a level premium and a death benefit that decreases each year -This is usually used when the duration of needed protection is time sensitive, or it decreases over time -Usually convertible, but not renewable

What is insurable interest?

-A financial interest in the life of another person -In life and health insurance, insurable interest must be stated at the time of policy issue

What are the characteristics of the "refund life annuity" settlement option for annuities?

-Guaranteed lifetime income -If the annuitant dies, balance is refunded to beneficiary -Installment option gives beneficiary payments until purchase amount is paid out -Cash refund gives refund of balance of original annuity purchase minus payments made to annuitant

What are the characteristics of variable whole life insurance?

-Variable whole life insurance is a level, fixed premium, investment-based product -These policies have fixed premiums and a guaranteed minimum death benefit -Cash value of the policy is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer -Policy owner bears the investment risk in variable contracts

What is unique about variable whole life products?

-Variable whole life is an insurance and a securities product -Therefore, it is regulated on the state level by the department of insurance and on the federal level by the SEC

What is the increasing death benefit option? What relationship exists between the total death benefit, face amount of the policy, and the current amount of cash value?

-With this option, the death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases -With this option, total death benefit will always be equal to the face amount of the policy plus the current amount of cash value

What are the two components of a fixed annuity?

1: Guaranteed, fixed payment amount 2: Premiums are in the general account

What are the two components of universal life policies?

1: Insurance Component 2: Cash Account

What are the three basic types of term insurance?

1: Level 2: Increasing 3: Decreasing

What are the four characteristics of whole life insurance?

1: Level Premium 2: Death Benefit 3: Cash Value 4: Living Benefits

What does the "death benefit" characteristic of whole life insurance refer to?

The death benefit is guaranteed and also remains level for life

What is the insurance component of universal life policies?

The insurance component of a universal life policy is always annually renewable term insurance

What is the target premium?

This is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime

What is the level death benefit option?

With this option, the death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in later years

What is the return of premium term insurance policy?

With this policy, if the insured does not die during the term, the premium is returned to the insured tax-free