Interest-Sensitive Life Products

Minimum Premium

-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*

UL Death Benefit Options

-2 options for the policyowner: 1. *Option A*- the level death benefit 2. *Option B*- increasing death benefit

2 Components of UL Policies

1. an *insurance component: always annually renewable term insurance* 2. a *cash account* -UL policies allow the *partial withdrawal (partial surrender)* of the policy cash value. However, there may be a charge for each withdrawal and there are usually limits as to how much and how ofter a withdrawal may be made. During the withdrawal, the interest earned on the withdrawn cash value may be subject to taxation, depending on the plan

Variable Whole Life

-a level, fixed premium, investment-based product -like traditional insurance forms, these policies have fixed premiums and a guaranteed minimum death benefit -the cash value, however, is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer -the policyowner bears the investment risks in variable contracts -b/c the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be kept in the insurance company's general account. -these assets must be held in a *separate account*, which invests in stocks, bonds, and other securities -any domestic insurer issuing variable contracts must establish one or more separate accounts. -each separate account must maintain assets with a value at least equal to the reserves and other contract liabilities -VL products are *dually regulated* by the State and Federal government -due to the level of investment risk the federal govt. has declared that variable contracts are *securities*, and are thus regulated by the SEC, the Financial Industry Regulatory Authority (FINRA), and/or federal bodies -VL is also regulated by the Insurance Department as an insurance product

Universal Life Insurance

-also know by the generic name of *flexible premium adjustable life* -implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again -the policyowner may even skip paying a premium and the policy will not lapse as long as there is significant cash value at the time to cover the monthly deductions for cost of insurance -Since the premium may be adjusted, the insurance companies may give the policyowner a choice to pay either of the two types of premiums: 1. the *minimum premium* 2. the *target premium*

Variable Universal Life

-A type of insurance that combines many features of the whole life with the flexible premium of universal life, and the investment component of variable life, making it a securities version of UL insurance -Like UL it has the following features and characteristics: 1. a flexible premium that can be increased, decreased, or skipped as long as there is enough value in the policy to fund the death benefit 2. increasing and decreasing the amount of insurance 3. cash withdrawals or policy loans -Unlike UL, most of the investment vehicles in VUL policies do not guarantee return

Target Premium

-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

Interest-Sensitive Whole Life

-also referred to as *current assumption life* -a fixed premium whole life policy that provides a guaranteed death benefit to age 100 -credits the cash value with the *current* (nonguaranteed) interest rate that is usually comparable to money market rates -also provides for a minimum guaranteed rate of interest -current interest rate may be tied to bond index rates, T-Bill rates, or simply declared by the insurer's board of directors -although ISWL products typically have fixed premiums, most policies will allow the policyowner to "dump" in additional funds in order to shorten the premium-paying period. The future premium may be offset by excess interest -ISWL provides the same benefits as other traditional whole life policies with the added benefit of current interest rates, which may allow for either greater cash value accumulation or a shorter premium-paying period

Statutory Definition of Life Insurance

-applies to all contracts issued after December 31, 1984 -there must be a specific "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy -the percentages that apply to the corridor are established in a table published by the IRS and vary as to the age of the insured and the amount of coverage -if corridor is not maintained, the policy is no longer defined as life insurance for tax purposes and consequently loses most of the tax advantages that have been associated with life insurance

Option A: Level Death Benefit

-death benefit remains level while the cash value gradually increases, thereby lowering the *pure insurance* with the insurer in the later years -death benefit increases a certain point in time to stay in compliance with the "statutory definition of life insurance"

Option B: Increasing Death Benefit

-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 -at any point in time the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value -since the pure insurance with the insurer remain level for life, the expenses of this option are much greater than those for Option A, therefore causing the cash value to be lower in the older years (all else equal)