Classes of life Insurance Policies

Quiz

Question 1 Sylvia's insurer guarantees a fixed death benefit for the policy she owns. Based on this, which one of the following benefits is also most likely guaranteed with this policy? to reinstate Sylvia's policy if it ever lapses to pay premiums for Sylvia in the event of emergencies *a minimum rate of return on the policy's cash value to send an agent to Sylvia's home to collect the premiums Sylvia's policy does guarantee a minimum rate of return on the policy's cash value. Question 2 Which of the following is/are directly involved in the regulation of variable insurance product sales? *Both FINRA and state insurance departments The Securities Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) only state insurance departments only FINRA regulates variable insurance products and sales from an investment perspective while state insurance departments regulate variable products and sales as insurance products. Question 3 When may an insurer cancel either whole life or term life insurance? The insurer may cancel either type of policy without reason at any time. The insurer may cancel either type of policy if the insured exhibits moral turpitude. *The insurer may cancel both types of policies if the policyowner does not pay the premiums. The insurer may not cancel either type of life insurance policy. The insurer may cancel either type of life insurance policy if the policyowner does not pay the premiums. Question 4 Bob's only goal is to provide a death benefit to protect his family in case he dies while his children are young. What type of life insurance is best suited to this need? whole life insurance *term insurance business insurance group insurance Whole life insurance lasts for the insured's entire lifetime or until age 120. Question 1 Permanent life insurance can also provide funds, through its cash value, that may be used during the insured's lifetime. What is that feature called? permanent values *living benefits capital accumulation the money feature Permanent life insurance can provide funds out of its cash value accumulations for use during the insured's lifetime. Thus, this feature is called living benefits. Question 2 Harry and Constance want life insurance to provide death benefits in case either dies, as well as living benefits in the event of financial emergencies. Which of the following would this couple most likely buy? group insurance *whole life insurance business life insurance term insurance Businesses may buy business life insurance to insure the lives of key employees or owners. Individuals, like Harry and Constance, would have no reason to purchase business life insurance unless they were in business together. Question 3 Which one of the following best describes a policy that requires no medical exam to qualify and premiums that are paid to an insurance agent who generally calls on the policyowner at home on a weekly or monthly basis to collect the premium? *industrial insurance term insurance group insurance individual insurance Under a term policy, insurance coverage is temporary, applying to only a limited period of time. The time limit can be as short as 1 year or as long as 20 years (or until the insured reaches a specified age, such as 65). Medical exams may be required, but the premiums are not collected by an agent calling on the insured. Question 4 Which of the following statements about permanent life insurance cash values is NOT correct? The policyowner owns the cash value in the policy and can access it. Cash values grow over the life of the policy, designed to reach the face amount at the insured's age 120. As long as premiums are paid, the insurance stays in force, the cash values grow, and the policy is guaranteed to pay its death benefit. *The beneficiary has full access to the cash value. Only the policyowner owns the cash value in a permanent life policy and can access it. Question 1 In a participating policy, the insurance company pays the policyowner a dividend out of which of the following? *earnings apportioned from company profits earnings available for distribution (the divisible surplus) the company's cash reserves set amounts prescribed in the policy Companies do not pay dividends out of earnings apportioned from company profits. Question 2 All of the following statements about participating policies are correct EXCEPT The owner can leave the dividend in the policy or use it to buy term insurance. *The owner can only take the dividend as cash. The insurance company pays the owner a dividend out of its earnings that are available for distribution (the divisible surplus). The owner can apply the dividend to the premium payment in some form. The owner can take the dividend as cash or apply it to the premium payment in some form. Question 3 Alex owns a "home service" life insurance policy, which means he most likely pays his premiums in which of the following ways? with a single premium payment quarterly by checking account debit. annually by personal check. *weekly or monthly, often personally to the agent who comes to the policy owner's home. Also known as industrial insurance, home service insurance policyowners pay premiums weekly or monthly, either by mail, automatic deduction from a bank account, or in person to the agent. Question 4 All of the following statements about the regulation of the sale of variable products are correct, EXCEPT: *Agents who only sell variable life products and do not sell fixed life products are not required to hold a life insurance license. Agents who sell variable life products are required to comply with all state laws and regulations dealing with the sale of life insurance. Many states also require a state-issued variable life or variable producer's license The sale of variable products is regulated by the Financial Industry Regulatory Authority (FINRA). Selling variable life products also requires a valid life insurance license.

Group vs. Individual Insurance

The group vs. individual classification defines how life or health insurance coverage is provided. The distinction between a group insurance policy and an individual policy lies in the structure of the contract. More specifically, the key difference lies in the number of people covered under the policy. Group life insurance policies cover many non-related people, while an individual policy covers one person. -Group life insurance=life insurance policy that covers multiple non-related people.

Classes of life Insurance Policies

The insurance industry is comprised of a wide range of providers offering an array of unique products. Despite this diversity, life insurance can be classified in ways that help to simplify the differentiation of one type from another. This lesson describes the common ways life insurance is classified.

Life Insurance Is Noncancellable

Whether term or permanent, all life insurance policies are noncancellable as long as premiums are paid on time. Insurers cannot cancel any life insurance policy regardless of changes in the insured's risk profile (or for any other reason except nonpayment of premiums).

Variable Life Insurance

With a variable life insurance policy, premiums are invested in investment subaccounts managed by the insurer. The insurer guarantees a minimum death benefit, usually the face amount of the policy at issue. But, the cash values and the death benefit rise and fall based on the subaccount's investment performance. The insurer does not guarantee a rate of return on the cash value invested. Instead, the policyowner assumes all risks for the performance of the policy's investments over time. Variable Life Insurance= Form of permanent whole life insurance in which premiums are placed in investment sub-accounts that the policy owner owns. Insurer guarantees a minimun death benefit, usually the face amount of the policy at issue. However, the cash values and the death benefit rise and fall on the basis of the sub-account's investment performance.

Regulation of Variable Products

The Securities Exchange Commission (SEC) is responsible for regulating the securities that make up an insurer's separate account. The Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers (NASD), regulates producers who sell variable life products. FINRA also regulates companies that sell investment products, including insurance companies that sell variable contracts

Individual Insurance

People who buy life insurance for personal protection do so with individual policies. With individual coverage, an insurance policy covers one individual (or, at most two in the case of joint life insurance). It is possible for the owner and the insured to be two different people. -Joint Life Insurance= Permanent coverage that insures two persons under one policy. The policy pays the death benefit when the first insured dies.

Producer Qualifications to Sell Variable Contracts

To be properly registered to sell variable insurance contracts, producers must hold either a FINRA Series 6 or Series 7 registration, obtained by passing a FINRA exam. They must also hold a valid life insurance license in the state(s) where they do business. Some states also require a state-issued variable life or variable producer's license. If required in your state, details are provided in the state law units of this course.

for exam know

-fundamental difference in individual insurance and group insurance (through employer or association. number of lives) -difference in term life insurance (pure life insurance only) and Permanent Life insurance ( pure life insurance plus a cash value accumulation element.) -variable life insurance= unlike other two above, baserd on different investment chassis all together. has non guaranteed policy values. before this insurance only had fixed guaranteed values. Dealing with more than one regulatory (body or party) In the unsuracne world you deal with state insurance regulators, your states insurance department. With variable life ins. you deal with your state insurance departments but also at the federal level you deal with FINRA (Financial Industry Regulatory Authority). -- two sets of regulatory rules and gotta understand both.

Permanent vs. Term (Temporary) Insurance

At their most basic level, there are two types of life insurance products: permanent life insurance and term life insurance. Permanent Life Insurance As the name implies, permanent life insurance is designed to provide life insurance protection for the insured's entire life. Coverage is provided until the insured dies or reaches age 120, whichever comes first. (Note that policies issued before 2009 may mature when the insured turns 100.) As long as premiums are paid, the insurance stays in force, and (in most cases) is guaranteed to pay the policy face amount. If the insured is still living at age 120, the policy matures, and no more premiums are owed. The insurer pays the face amount to the policyowner. An important feature of permanent life insurance is the level premium. Once the policy is issued, premiums remain level for the full duration of policy coverage. Another distinguishing feature of permanent life insurance is the accumulation element within the policy, known as the cash value. Cash values grow over the life of the policy. In a standard whole life insurance policy, the growth of cash values is designed to equal the policy face amount at the insured's age 120. The policyowner fully owns the cash value and is allowed access to it while the policy is in force, thus providing what is called a "living benefit." However, the cash value is also an essential part of the death benefit. If the policyowner borrows from the cash value while the policy is in force, the death benefit is reduced by the outstanding loan balance (plus accrued interest) at the time of the insured's death. The cash value plays an important role in allowing permanent life to feature a level premium through the insured's entire life. This is more fully explained in a separate lesson. --level premium= in life insurance policies, insureds pay the same (level) premium over the life of the policy. At any time, the insured never pays more in premium than he or she paid in the early years of the policy, when he or she was young. --Cash Value=is the investment part of a whole life insurance policy. Cash value is the money that builds within the policy over the policy's life. -- Whole life Insurance= Provides permanent insurance coverage for a person's lifetime. Provides guarantees for premiums, cash value, and death benefits. --level premium= Insureds pay the same (level) premium over the life of the policy. At any time, the insured never pays more in premium than he or she paid in the early years of the policy, when he or she was young.

Key Points

-Group life insurance policies cover many non-related people, while an individual policy covers one person. -Group insurance coverage is evidenced by the individual certificates of coverage each participant receives from the plan sponsor. -If the policyowner borrows from the cash value while the policy is in force, the death benefit is reduced by the outstanding loan balance (plus accrued interest) at the time of the insured's death. -Whether term or permanent, all life insurance policies are noncancellable as long as premiums are paid on time. -With their long-term guarantees of cash value growth and a death benefit that will be there when needed, traditional fixed insurance products are supported exclusively by the assets in the insurer's general account. -Variable insurance contracts that are based on separate account investments cannot guarantee future investment performance

Ordinary vs. Industrial (Home Service) Life Insurance

Individual life insurance coverage can be classified as ordinary life insurance or industrial life insurance. Ordinary Life Insurance -Provided by so-called "ordinary" companies, ordinary life insurance generally includes life insurance issued in face amounts greater than $25,000 (in some cases, $1 million or more). Premiums are payable monthly, quarterly, semiannually, or annually. Ordinary insurance includes virtually every type of life insurance and annuity product covered in this course. Ordinary life insurance is especially popular with consumers today because of its many flexible options. Industrial Life Insurance -Provided by home service insurance companies (traditionally called debit or industrial insurance companies), industrial life was originally provided as "burial insurance" but today is recognized as an important source of life insurance for consumers with relatively modest (yet equally important) death benefit needs. An industrial insurance policy offers individual coverage in small face amounts, traditionally ranging from $1,000 or $2,500 to $10,000. These policies typically require no medical exam to qualify. Modest premiums are paid frequently—weekly in many cases. In many cases an insurance agent meets personally with the policyowner at home, weekly or monthly, to collect the premium. --home service insurance= A class of individual life insurance that offers individual coverage in small amounts usually around $1,000 and $2,000. Generally, an insurance agent calls on the policyowner at home on a weekly or monthly basis to collect the premium. Also known as home service insurance. --Industrial Insurance Policy= A class of individual life insurance that offers individual coverage in small amounts usually around $1,000 and $2,000. Generally, an insurance agent calls on the policyowner at home on a weekly or monthly basis to collect the premium. Also known as home service insurance.

Participating vs. Nonparticipating Life Insurance

Life insurance policies can also be classified as participating ("par") or nonparticipating ("nonpar"). With a participating policy, commonly issued by mutual insurance companies, the policyowner is eligible for policy dividends declared by the insurance company. Dividends are paid from the insurer's divisible surplus, which is essentially premiums that exceed all company expenses and liabilities. The dividend can be taken as cash or applied to the premium payment in some form. It can also be left in the policy to accumulate at interest or to purchase additional paid-up life insurance. Or, it may be used to buy one-year term insurance. Policy dividends are covered in a separate lesson. With a nonparticipating policy, issued by stock insurance companies, there are no policy dividends. --Participating Policy= A class of life(or health) insurance policy in which the owner is paid a dividend out of the insurance company's earnings that are available for distributions ( the divisible surplus) --Nonparticipating policy= A class of life (or health) insurance policy in which the owner is not entitled to be paid a dividend. Generally, individual health insurance is non-participating.

Term Life Insurance

Term life insurance coverage is temporary, applying only for a limited time (or term). The time limit can be as short as one year, as long as 20 years or more, or until the insured reaches a specified age, such as age 65. At the end of that time, the policy expires. The policy pays a death benefit only if the insured dies during the term. No money accumulates in the policy (that is, there is no cash value), so at the end of the term, the insurer owes no payment or refund to the policyowner. The absence of a cash value means that, for any face amount, term life costs less than permanent life insurance at just about any issue age. (Issue age is the insured's age when the policy was issued.) This makes term life especially popular and suitable for relatively temporary financial protection needs (e.g., while raising children). However, lower premiums are a temporary advantage. Term life premiums increase with age, making them difficult to maintain in one's older years. As noted, permanent life premiums remain level for the full duration of policy coverage, up to policy maturity (age 120 for policies issued since 2009). --Term Life Insurance= Provides protection for a specified, limited period. The term can be defined in years or by the age of the insured

Fixed Life Insurance

With a fixed life insurance policy, the insurer guarantees a fixed death benefit and a minimum rate of return (interest crediting) on the policy's cash value. Premiums are invested in the company's general account. By investing conservatively, insurers are able to make the important guarantees that are the foundation of life insurance. The insurer also assumes all risk for making enough profit to cover the policy's promised benefits --Fixed life insurance policy=form of permanent life insurance in which the insurer guarantees a fixed death benefit and a minimum rate of return on the policy's cash value. The insurer assumes all the risk for investing premiums received from policyowers through its general accounts and making enough profit to cover the policy's promised benefits.

Fixed vs. Variable Life Insurance

Though it features an array of different offerings, permanent life insurance can be divided into two basic categories based on the product's underlying investment platform: fixed life and variable life.

General Account and Separate Accounts

To back up the many financial guarantees made in their contracts, insurers invest their premiums in conservative investment assets that commonly include U.S .Treasury securities, investment-grade corporate bonds, so-called "blue-chip" stocks, and similarly sound investments. In return for the relatively low returns these conservative investments provide, the insurer has the assurance of investment safety. These assets are managed in the insurer's general account by the company's financial department. With their long-term guarantees of cash value growth and a death benefit that will be there when needed, traditional fixed insurance products are supported exclusively by the assets in the insurer's general account. Assets in a company's general account are unsuitable for the investment objectives of the typical variable insurance contract, which seeks the strongest investment returns possible. With variable contracts, the policyowner designates the investment funds in which premiums will be invested. These investment funds are maintained apart from the insurer's general account in a separate account. Within separate accounts are a variety of sub accounts, each with its own investment objectivity, from which policyowners can choose the ones that best fit their objectives and risk profile. Variable insurance contracts that are based on separate account investments cannot guarantee future investment performance. --General Accounts= Basic account in which an insurance company maintains the funds that support its fixed life insurance and annuity products. The general account's conservative investments allow the insurer to guarantee interest returns on its fixed insurance and annuity products.

Group Insurance

With group coverage, one master policy covers multiple people—from as few as ten to hundreds or more. The policy is owned by the organization (most commonly an employer) that represents the group and sponsors the coverage. The covered individuals (such as employees or association members) are not policyowners nor are they parties to the contract. Group insurance coverage is evidenced by the individual certificates of coverage each participant receives from the plan sponsor. All other factors being equal, group insurance coverage is generally less expensive per person than is individual coverage. That makes group insurance an attractive way to obtain life insurance. A basic requirement for group insurance qualification is that the group cannot be formed for the express purpose of purchasing group insurance. Fortunately, there are many different types of groups that are qualified to purchase group insurance. Common examples include: -employers -labor unions -trade and professional association groups Regardless of type, each group must conform to the common rules governing group insurance. --Group coverage= class of life (or health) insurance policy where one policy covers several people --Master policy= n a group life policy, the master policy indicates the sponsor as policy owner and premium payor. --Association groups=In relation to group life insurance, an association group is compromised of members of associations, such as independent school districts or cities and towns. Members can be insured under an association plan.