Chapter 8 Life Insurance: Types of Policies

Term Life Characteristics: Pro's and Con's

+'s - substantial amount of coverage at a minimum cost - pure protection then there are no cash values/interest rates - allows a person with limited income to purchase a benefit they might otherwise not be able to afford -'s -renewable term insurance becomes more and more expensive - limited in terms of time/age coverage -no accumulation of cash value - generally not renewable after a certain age

Term Policy Characteristics: Level Term

Issued for a fixed face amount, which remains the same (level) during the term 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 or remain level

Term Policy Characteristics: Decreasing Term

Issued for an initial face amount that declines during the term period and reaches 0 at policy expiration. - Mortgage Insurance - upon death benefit the decreasing term reflects the decreasing mortgage payments

Specialized Forms of Insurance: Survivorship Life

It pays the insured amount not upon the death of the first insured but upon the death of the last surviving insured . Can be sold in terms of term life as well.

Whole Life Insurance

Also called permanent insurance because the maturity date is beyond the life expectancy tables of most individuals. However a whole life policy actually consists of a combination of a savings element and a decreasing amount of net insurance. Cash value will equal the initial face amount upon maturity date. - the premiums have to cover mortality costs, expenses, and the savings account (as cash values increase then the net insurance value decreases) death benefit remains the same but the cash values and net protection change to consistently equal the death benefit

Specialized Forms of Insurance: Juvenile Life Insurance

Any form of coverage written on the lives of a minor. Permanent whole life insurance where the policyowner is the adult or the guardian. Policyowner retains the rights to the policy.

Term Policy Characteristics: Face Amount

The face amount of the policy is the amount of of money listed on the face page of the policy. This is the amount that will be paid for death benefits allotted under the policy.

Types of Whole Life Policies: Continuous Premium Whole Life

The most common type of whole life insurance sold. Policies stretch the premium payments over the whole life of the insured (to age 100). Usually referred to as Straight Life Insurance

Term Life Characteristics: Interim Term

These are sold in the time before the permanent/term life insurance policies begin aka the waiting period from underwriting approval.

Types of Whole Life Policies: Current Assumption

These plans offer flexible premium payments that are tied into current interest rate fluctuations. Insurance company reserves the right to increase and/or decrease the premium within a certain range depending on interest rate fluctuations. High interest rates and premiums could be reduced. Low interest rates then premiums could be increased.

Flexible Policies

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

Types of Flexible Policies: Equity Indexed Life

These policies are attached to the S&P 500. An additional premium must be charged for the increased amount of protection and it may be obtained in one of two ways; 1) increase in premium due to increase in coverage 2) make advance assumptions about rate of inflation

Term Policy Characteristics: Convertible Term

This allows a policy owner to convert the term insurance to a form of permanent/whole life policies W/O evidence of insurability - must be made prior to ending of the term insurance

Specialized Forms of Insurance: Joint Life

This is a policy that is a whole life contract written with two or more persons named as the insured. Most commonly the policy is issued on two lives with the insured amount payable on the death of the first insured.

Types of Whole Life Policies: Limited-Payment Whole Life

Policies allow for the owner to pay for the entire policy in a shorter period of time or to a specified age (20, 30, or paid-up to age 65) premiums are paid early but continue to accumulate cash values until death benefit or maturation date

Whole Life Characteristics: Level Premiums

Premiums are designed to remain level during the entire period of the policy or until maturation date. - on this flat schedule the insured initially pays more in monthly premium at the start because the premium would need to reflect the average pay until 100 years old, and then in later years the insured actually pays less than they should be paying in premium -allows the company to invest the money in the group account

Term Insurance

Term life insurance provides temporary protection for a specified period of time only aka the policy term. Terms can range from 1, 5, 10, 30, or more years. - Term only carries a death benefit on the policy - no cash values on term - pure protection as in only payouts for the intent of the policy (death coverage)

Types of Flexible Policies: Adjustable Life

This is a policy that offers the policyowner the option to adjust the policy's face amount, premium, type of protection, and/or length of coverage without having to complete a new application or exchange policies. - can work on a conversion basis by converting from one form of insurance to another and by making appropriate premium adjustments. - converting from a given amount of term to equal whole life will result in an increase in premium

Specialized Forms of Life Insurance: Endowments

This policy provides for the payment 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

Types of Flexible Policies: Variable Universal Life

Variable because it's backed by equities and investments Acts like Universal because you can adjust the amount of death benefit and the premium You pay premiums which (minus loading costs) are invested into stock portfolios, bond portfolios, and money markets

Term Policy Characteristics: Reentry Term

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

Whole Life Characteristics: Level Face Amount

Death benefit is fixed and remains the same throughout the policy

Credit Life Insurance

Designed to insure the lives of debtors for the benefit of a creditor (who is the policyowner) if the insured dies then the policyowner sets the beneficiary, themselves, to pay off debt. - can be on individual or group basis (usually decreasing term insurance as debtor pays off debts) - debtor pays the total premium which often added to loan installment payments so that in effect the insurance premium is being financed along with the item being purchased - cannot be written in excess of the of the total debt - if coverage is in excess of debt at death then the difference will be paid to estate - no conversion privileges - groups must be maintained at the specific group number

Types of Flexible Policies: Variable Life

Developed in response to limited cash returns from traditional cash value policies. Death protection and a savings element. Backed by equity and on the separate account. Returns are not guaranteed because of stock market returns. - do have a guaranteed minimum death benefit - no guaranteed cash value - regulated as securities - need a separate license from FINRA - cannot guarantee any rates of return on policies or dividends

Types of Flexible Policies: Universal Life

Developed in response to low interest rates earned by traditional whole life cash values. Universal life policies pay higher interest rates during inflation periods. - similar to whole life in sense that it has same components; death protection and cash value -difference is that the death benefit resembles one year term policies and the cash account grows according to current interest rates - premium payments are flexible but you need enough premium to maintain the cash value on the policy There are two death benefit payout options: OPTION A: provides a level death benefit equal to the policy's face amount. As the policy's cash value increases the net death benefit decreases over the contract. There is the corridor level though so then if cash value comes close to superseding the death benefit, the corridor creates the need for a difference and then the death benefit will increase as a result. OPTION B: provides for an increasing death benefit equal to the policy's face amount plus the cash account. Policy is essentially increasing term insurance plus the cash value of a whole life insurance policy.

Industrial Life Insurance

Industrial life policies generally have some of the following traits: - infrequent premium payments - benefits usually less than $2,000 - premiums are collected by the agent at the insured's home/workplace Policy provisions: - 31 day grace period - application is not part of the policy - no medical exams and no cash value accumulation to allow loans - no suicide provisions in policies

Term Policy Characteristics: Renewable Term

Renewable terms stipulates that the policy owner can renew the coverage once the term ends without evidence of insurability - may be limited in number of renewals available and years to which the term is renewable - based on attained age at time of renewal

Types of Whole Life Policies: Single Premium

Simply a policy with one premium payment. This is a lump sum that, with interest rates, will grow and accumulate to cover all future premium payments. Entire cost of the policy is paid up at the time of the purchase. These accumulate cash values immediately. Premiums average out to less premium paid with a lump sum payment.

Viatical/Life Insurance Settlements

Viatical settlements are settlements where individuals with a terminal illness or severe chronic illness sell their life insurance policies to viatical companies. - Viatical company will review the life insurance policy against an individuals expected remaining life Life Settlement: - the policyowner is not necessarily terminally ill in the process. 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 less than the policy's face amount. - there can be benefits to no settlement (accelerated benefits) - tax implications - creditor's rights on a transaction

Term Policy Characteristics: Nonrenewable Term

is issued for a specified amount of time and is nonrenewable - therefore the member would have to apply for a new term policy and would have to provide new proof of insurability

Home Service Life Insurance

Generally modest in size 10,000 to 15,000 in size and generally sold on a monthly debit payment schedule.

Whole Life Characteristics: Nonforfeiture Value

If the policyowner wishes then some or all of the cash value may be withdrawn from the policy and any withdrawal of cash value will reduce both the face value of the policy and the amount of cash available

Whole Life Characteristics: Cash Value

A savings element is built into the policy. This savings is guaranteed to accumulate and earn at a specified interest rate. Usually the policy has little to cash value at the beginning of the coverage. In third year that is generally when the cash values start to accumulate - once the cash value has started then it cannot be forfeited - the insured may CASH IN the policy at any time by surrendering it in exchange for the cash value - a person may take a POLICY LOAN out against the policy's accumulated cash value (loan must be paid back with interest to receive full death benefit) 90% and then 75% of a variable policy - indebtedness - the amount borrowed plus the interest accumulated and if there is a death on the policy then the indebtedness is taken from the policy death benefit

Term Life Characteristics: Increasing Term

Begins with little or no insurance protection and the face amount grows over time - usually attached as a rider on term policies