LAH - Chapter 6
death benefit: joint and survivor
benefits will be paid on a life long basis to two or more people this option may include a period certain and the amount payable is based on the ages of the beneficiaries
premiums paid on individual life insurance policies and premiums paid for life insurance used for
business purposes ( the company's benefit) are generally not tax-deductible
Per Stirpes
(meaning by the bloodline) in the event that a beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary's heirs
per capita
(meaning by the head) evenly distributed benefits among all named living beneficiaries
a lower premium does not automatically mean a lower-cost policy, To that extent, cost indexes have been developed to help in the process of measuring an insurance policy's actual cost
1. Surrender cost index 2. net payment cost index 3. the interest adjusted cost method calculates the cost of life insurance, taking into account the time value of money (i.e., the investment return on sums in premium dollars had these sums been invested elsewhere) 4. the traditional net cost method adds a policy's premiums and subtracts dividends, if any, and cash value
other factors that impact the premium amount
1. age 2. sex / gender 3. health 4. occupation 5. hobbies 6. habits 7. benefits, options, and riders 8. premium mode
living benefit options include
1. cash value 2. accelerated benefit 3. viatical settlement 4. life settlement 5. policy dividends
examples of who can be beneficiaries include
1. individuals 2. business 3. trust 4. estates 5 charities 6. minors 7. class (having a group named as the beneficiary instead, such as the children of the insured)
if selected by the policyowner, the settlement option cannot be changed by the beneficiary. Death benefit settlement options include:
1. lump sum 2. interest only 3. fixed period (period certain) 4. fixed amount 5. life income 6. joint and survivor
Primary factors in premium calculation
1. mortality factor 2. interest factor 3. expense factor
by order of succession (death benefit)
1. primary 2. secondary (contingent) 3. tertiary
changing a beneficiary
1. revocable beneficiary 2. irrevocable benficiary
beneficiaries
1. they can be either specific ( a person identified by name and relationship) 2. a class designation ( a group of individuals such as the "children of the insured")
accelerated benefit
Allows someone that a physician certifies as terminally ill to access the death benefit. to be considered terminally ill, a physician must certify that the person has a condition or illness that will result in death in two years
lump sum
Death benefit is paid in a single payment, minus any outstanding policy loans balances and overdue premiums considered the automatic (or "default) options for most life insurance contracts
what is the actual premium paid by the policyowner for life insurance coverage?
Gross Premium. Gross Premium = Net Premium + insurer expenses
interest factor
Insurance companies invest the premiums they receive in an effort to earn interest. the rate of earnings on investments is one of the ways an insurance company can reduce premium rates
Single Premium Funding
The policyowner pays a single premium that provides protection for life as a paid-up policy. this provides for the lowest total premium and fastest build up of cash value ( John, a 30 year old nonsmoker buys a $100,000 whole life policy for one single premium of $70,000. )
An example of Level (fixed) Premium Funding
The shorter the premium-paying period, the higher the periodic premiums BUT, the lower the total premium paid and quicker cash value builds * John can buy that same $100,000 whole life policy for 10 (annual) level premiums of $8,000 each ($80,000 total premiums); or *john can buy that same $100,000 whole life policy for 840 level premiums (monthly for 70 years) for $105 each ($88,200 total)
Graded Premium Funding
a contract characterized, like modified by a lower premium in the early years of the contract. however, premiums increase annually or every year for the initial period it then jumps to an amount higher than what the initial level of premium would have been, and then remains level or constant for the life of the policy (for example, John can buy that same $100,00 whole policy for monthly payments of $20 each year 1, $40 each year 2, $50 each year 3, $75 each year 4 ($2,220 total introductory) and then an additional 792fixed premiums (monthly for 66 years) for $120 each ($95,040 total remainder). ($2,220 introductory + $95,040 for reminder = $97,260 total))
mortality factor
a measure of the number of deaths in a given population
Net Premium
a premium that makes provision for mortality (death benefit) losses only, while being influenced by the interest rate assumed, gender, benefit to be provided and the mortality rate
Policy Dividends
a refund of part if the premiums under a mutual insurer's participating policy
Viatical Settlement
allows someone with a terminal illness to sell their existing life insurance policy to a third party for a percentage of the fdeath benefit the new owner continues to make the premium payments and will eventually collect the netire death benefit the original policyowner is called the Viator and the new third party owner is called the Viatical, or sometimes referred to as the Viatee
facility of payment
allows the insurance company to pay all or part of proceeds to someone not named in the policy that has a valid right this is usually done on behalf of a minor or when the named beneficiary is decreased
flexible premium funding
allows the policyowner to adjust the premiums throughout the life of the contract
minimum deposit financing
allows the policyowner to use policy loans to pay premiums due each year. the policyowner only pays the difference between the premium due and the amount borrowed (plus interest on the policy loan) depending on the type of policy, a policyowner may be able to use the policy's cash value and dividends to pay premium
the cost of life insurance depends largely upon
an individual's specific circumstances and requirement, however, cost estimates are useful so that the consumer has the opportunity to consider every actor when making a buying decision
Modified Premium Funding
characterized by an initial premium that is lower than it should be during an introductory period of time (normally the first three to five years.) After this time, the premium will increase to an amount greater tha what the initial level premium would have been, and then remains level or constant for the life of the policy. *for example, John can buy that same $100,000 whole life policy for 36 initial fixed premiums (monthly for 3 years) for $50 each ($1,800 total introductory) and then an additional 804 fixed premiums (monthly for 67 years) for $110 each ($88,440 total remainder). ($1,800 introductory + $88,440 for reminder = $90,240 total).
premiums on an insurance policy to benefit an ex-spouse as
court ordered alimony are tax deductible
what makes up the insurer's total premium
earned and unearned premiums
primary (death benefit order of succession)
first in line to receive death benefit proceeds
tax implications: cash vale
for policies that are not surrendered, they grow tax free
tax implication: the transfer for value rule applies when a life insurance policy is sold to another party before the insured's death
for this reason, most states require a Viatical Settlement Company or Life Settlement company to inform the client that the proceeds could be taxable in certain situations and recommend they consult a tax advisor
The Economic Benefit Doctrine: Life insurance proceeds paid to a beneficiary as a lump sum are
generally received tax free additionally, proceeds pass directly to the beneficiary and are not subject o attachment by the insured's creditors
how does occupation impact the premium amount
hazardous job increases the risk of loss
the higher the frequency of payments
higher premiums
how does hobbies impact the premium amount
if its risk, this can also increase the risk of loss
simultaneous death
if the insured and the primary beneficiary die at approximately the same time for a common accident with no clear evidence as to who died first, the Uniform Simultaneous Death Act will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries
fixed amount
installment option pays a fixed death benefit in specified installment amounts until the proceeds are exhausted the larger the installments payment the shorter the payout period
expense factor
insurance companies are just like any other business. they have operating expenses which need to be to factored into the premiums
interest only
insurance company holds death benefit for a period of time and pays only the interest earned to beneficiaries a minimum rate of interest is guaranteed and the interest must be paid at least annually
dividends may be used by the policyowner for cash payments, to pay the
insurance premium, to purchase additional paid up whole life insurance, to purchase one year term insurance, or as an investment to accumulate interest while not directly tied to the policy proceeds, dividends are still considered a living benefit
if no one named, or if all beneficiaries die before the insured dies, death benefit will go to
insured's estate
word for the expense factor
loading charge
irrevocable beneficiary
may not be changed without the written consent of the beneficiary they have a vested interest in the policy, therefore the policyowner may not exercise certain right (such as taking out a policy loan) without the consent of the beneficiary
Reserve (premium)
money that together with future premiums, interest, and survivorship benefits will fulfill an insurance company's obligations to pay future claims each state has its own reserve requirements
what is mortality factor based on
on a large risk pool of people and time insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group
example of how hobbies impact the premium amount
only important at time of application. If you tell them you never went sky diving (and that is true) then 5 years later you go sky diving for the first time and die, they will pay
life income
option provide the beneficiary with an income that they cannot outlive
distribution by descent (death benefit)
per stirpes per capita
how does health impact the premium amount
poor health increases probability of death and disability
spendthrift clause
prevent the decease's creditors from obtaining the death benefit and prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installment over a certain period of time
how does premium mode impact the premium amount
refers to the premium payment schedule and permits the policyowner to select the timing of premium payments options include: 1. annual 2. semi-annual 3. quarterly 4. monthly
The Economic Benefit Doctrine
requires that any benefit granted to an individual that has economic or financial value be included as compensation for income tax purposes in the year the benefit is granted individual life insurance generally avoids this doctrine since premature death can cause a substantia risk to a surviving family
secondary - (contingent) (death benefit order of succession)
second in line to receive death benefit proceeds if primary dies first
example of what a doctor will say (accelerated benefit)
since your doctor has certified you are going to stop payin your insurance premiums now since the insurance company also now knowns they are going to have to pay out the benefit soon, they will give YOU some of the proceeds NOW and deduct it from what would go to your beneficiary
premiums on, an insurance policy to benefit a charity are
tax deductible
employer paidd premiums used t fund group insurance for the benefit of employees are
tax deductible for the employer and neither tax deductible not taxable to the employee
tax implication: cash value proceeds from a policy loan do not count as
taxable income, according to the IRS however, if you surrender your policy or if your policy lapses, the IRS is notified of the taxable event and taxes may be required
tax implication: as long as the cash value stays in the policy
taxes will never be imposed on any portion, not even the amount that exceeds the cost basis
The Economic Benefit Doctrine: another tax cost typically associated with death is
the Federal estate tax (although most relatively simple estates do not require the filing of an estate tax return)
earned premiums
the amount a insurer is entitled for coverage provided
cash value
the cash (equity) that accumulates may be borrowed against, used as collateral, utilized as supplemental retirement income, or may be withdrawn for emergencies or other situations where cash is needed
Fixed Period (period certain)
the fixed period option is when the insurer pays proceeds (including interest and principal) in minimum guaranteed dollar payments over a specified number of years
Purpose of premiums
the insurer receives premium from a policyowner in exchange for insurance protection. the premium is part of the policy owner's consideration, or the "binding force" in the contract which cements the agreement between the insurer and policyholder
the more payments (premium) you make
the more it is going to cost you overall
how does benefits, options, and riders impact the premium amount
the number and kinds of benefits provided by a policy affect the premium rate. the greater the benefits, the higher the premium to state it another way, the greater the risk to the company, the higher the premium
how does age impact the premium amount
the older the person, the higher probability of death and disability
living benefit
the option to use some of the future death benefit proceeds before death,
who decides where the death benefit goes to if the insured dies
the policyowner is the uktimate decision maker however, in the underwriting process, the underwriter may consider the issue of insurable interest
Revocable Beneficiary
the policyowner may change the beneficiary at any time without notifying or getting permission from the beneficiary
Level (fixed) Premium Funding
the policyowner pays more in the early years for protection to help cover the cost in later years, which allows the premiums to remain level throughout the life of the policy.
tax implication: if cash value is surrendered
the portion that exceeds the premiums paid is taxable
gross premium
the premium charged by an insurer that is compromised or influenced by all factors of mortality, interest and expenses
unearned premiums
the premium collected form the policyholder for future coverage
The Economic Benefit Doctrine : if death benefits are paid to a beneficiary in installment, as opposed to a lump sum,
the principal is received tax-free and any interest received is taxable
life income installment payment are guaranteed as long as
the recipient lives, the amount of each installment is based on the recipient's life expectancy and the amount of principal
Life Settlement
the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit an insured does not have to have a terminal illness to participate in a life settlement
cost basis
the total of the premiums paid into the policy minus total dividends received in cash or used to offset premiums
tax implication: dividends
they are received tax free however,, if the policyowner chooses to leave the dividends with the insurance company as an investment, any interest which accumulates will be subject ordinary income tax
tertiary (death benefit order of succession)
third in line to receive death benefit proceeds. if no one named, death benefit will go to insured's estate
how does habits impact the premium amount
tobacco use presents a higher risk than non-smokers
tax implication: 1035 Exchange
when an existing life insurance policy is assigned to another insurer for a new contract, the transaction may be treated for tax purposes as a Section 1035 exchange policy exchanges that qualify as a 1035 exchange are not taxable
tax implication: Accelerated Death Benefit
when benefits are paid under a life insurance policy to a terminally ill person, the benefits are received tax free
Death Benefit Settlement Options
while normally selected by the beneficiary, the policyowner may select a settlement option at the time of the application and may change the option at anytime during the life of the insured
common disaster provision
with a common disaster provision, a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefit will paid to the contingent beneficiary
how does sex / gender impact the premium amount
women tend to live longer than men, so their premiums are usually lower
if you could make 1 payments in a lump sum to start and "pay up" the policy
you would save the most amount of money. also, your cash value would begin accumulating right away the higher your premium payments are, the quicker accumulate cash value.