Life Insurance Policies

Face Amount Plus Cash Value

A face amount plus cash value policy is a contract that promises to pay at the insured's death the face

level term insurance

Buy level term for 10 years for 10k. or until 65 for 250k. If the insured lives beyond the 10-year period or past age 65, the policies expire and no benefits are payable.

modified endowment contract(MEC)

Penalty taxes (10%) on premature distributions prior to age 59 ½ from a modified endowment contract(MEC) normally apply to policy loans. • Any gains received from a Modified Endowment Contract (MEC) is included in the insured's gross income for the year and a 10% tax penalty is assessed on the gain if the insured is under the age of 59 ½.

Term Life Insurance

Simplest type of life insurance. Term life provides low-cost insurance protection for a specified period (or term) and pays a benefit only if the insured dies during that period. Term policies do not build cash values. • One advantage of term life insurance is the initial premium is lower than for an equivalent amount of whole life insurance. • Term life provides the greatest amount of death benefit per dollar of initial cash outlay.

Increasing Term Insurance

The amount of increase is usually stated as specific amounts or as a percentage of the original amount. It may also be tied to a cost of living index, such as the Consumer Price Index. Increasing term insurance may be sold as a separate policy, but is usually purchased as a cost of living rider to a policy.

Family Plan Policies

The coverage on the spouse and children is level term insurance in the form of a rider.

Features of Whole life

There are certain features of whole life insurance that distinguish it from term insurance: cash values and maturity atage 100.

A renewable insurance policy?

annually renewable term (ART). This is also called yearly renewableterm, or YRT. Essentially, this type of policy represents the most basic form of life insurance. It provides coverage forone year and allows the policyowner to renew coverage each year, without evidence of insurability.

Indeterminate Premium Policies

current premium at the beginning pf the policy, based on its current estimate of the insurance company earnings, mortality, and expenses. If the estimates change in the future, the company may adjust the premium accordingly, but never above the maximum guaranteed premium written in the policy

Historically, life insurance

granted very favorabletax treatment, as shown in the following: • Cash value accumulations are not taxed to the policyowner as they build inside a policy. • Policy withdrawals are not taxed to the policyowner until the amount withdrawn exceeds the total amountthe policyowner paid into the contract. • Policy loans are not considered distributions and are not taxed to the policyowner unless or until a fullpolicy surrender takes place, and then, only to the extent that the distribution exceeds what was paid into the policy.

what are forms of term life insurance

level term, decreasing term, and increasing term

Straight Whole Life

referred to as Ordinary Whole Life is whole life insurance providing permanent level protection with level premiums from the time thepolicy is issued until the insured's death (or age 100).

Cash Values

whole life insurance combines insurance protection with a savings element. whole life insurance plans are credited with a certain guaranteed rate of interest. This interestis credited to the policy on a regular basis and grows over time. Income taxes may be due when the policy is surrendered. the cash value is often regarded as a savings element because it represents the amount of money the policyowner will receive if the policy is ever surrendered.

Juvenile Insurance

A juvenile life insurance policy is a life insurance policy that insures the life of a minor

Graded Premium Whole Life

Premiums are lower than typical whole life rates during the preliminary period after the policy is issued (usually lasting five to ten years). The premiums will initially increase yearly during the preliminary period then remain level afterwards.

Re-entry Term Insurance

Re-entry term insurance has a low premium for a stated period of time, but is renewable only if the insured passes a medical examination at the re-entry option date. If the insured fails the medical exam, the premium will increase.

Premium Periods

The shorter the premium paying period (and consequently, the higher the premium), the quicker the cash values will grow. This is because agreater percentage of each payment is credited to the policy's cash values. By the same token, the longer thepremium paying period, the slower the cash values grow.

Survivor Income Plans

This is a form of term life insurance where benefits are paid in monthly income amounts to a beneficiary upon the death of the insured rather than as a lump sum. Therefore, the primary benefit provided is survivorship term life insurance. The policyholder may stipulate what survivor benefits will be payable to the beneficiary from the proceeds upon the death of the insured.

Maturity at Age 100

Whole life insurance is designed to mature at age 100. The significance of age 100 is that, as an actuarialassumption, every insured is presumed to be dead by then. No more premiums are owed. The policy is completely paid up.

Interest-Sensitive Whole Life

are more favorable than expected, policyowners will have two options: lower premiums or highercash values. An interest-sensitive life insurance policyowner may be able to withdraw the policy's cash value interest- free. The provision that allows this is called the Partial Surrender provision.

Whole Life Insurance

insurance plan is whole life insurance (also known as permanent insurance). Whole life insurance is called this because it provides permanent protection for one's entire life-from the date of issue to the date of the insured's death. The benefit payable is the face amount of the policy, which remains constant throughout the policy's life. Premiums are set at the time of policy issue, and they too remain level for the policy's life

Features of Term Life

policies are issued for a specified period, defined in terms of years or age. Most contain two options that canextend the coverage period. These are the option to renew and the option to convert the policy.

Option to Renew

A guaranteed renewable policy allows the policyowner to renew the term policy before its expiration date, withouthaving to provide evidence of insurability (that is, without having to prove good health). renewable term policy permits the policyowner to renew the same coverage for another five years at the end of the first five-year term. The premiums for the renewal period will be higher than the initial period, reflecting the insurer's increased risk. Renewal options with most term policies typically provide for several renewal periods or for renewals until a specified age

Universal Life

Universal life insurance is essentially a term policy with cash value, characterized by flexible premiums and an adjustable death benefit. Universal life allows its policyowners todetermine the amount and frequency of premium payments and adjust the death benefit up or down to reflectchanges in needs. Consequently, changes may be made with relative ease by the policyowner and no new policies will need to be issued when changes are desired.

Single-Premium Whole Life

. A single-premium whole life policyinvolves a large one-time only premium payment at the beginning of the policy period. From that point, the coverage is completely paid for the full life of the policy. Here are the common traits of a single premium whole life policy: • An immediate nonforfeiture value is created • An immediate cash value is created • A large part of the premium is used to set up the policy's reserve • The advantage offered by a single premium policy is that the policyowner will pay less for thepolicy than if the premiums were stretched over several years

Modified Endowment Contracts

1988, Congress enacted the Technical and Miscellaneous Revenue Act, commonly referred to as TAMRA. revised the tax law definition of a life insurance contract. It was passed primarily to discourage the sale and purchase of life insurance for investment purposes or as a tax shelter By redefining lifeinsurance, Congress effectively created a new class of insurance, known as modified endowment contracts, orMECs. A modified endowment contract is considered to be a policy that is overfunded, according to IRS tables.

Decreasing Term Insurance

A 20-year $50,000 decreasing term policy, for instance, will pay a death benefit of$50,000 at the beginning of the policy term. That amount gradually declines over the 20-year term and reaches $0 at the end of the term. Credit life insurance, sold to cover the outstanding balance on a loan, is based on decreasing term insurance. • Decreasing term insurance is commonly used to protect an insured's mortgage.

Family Income Policies

A family income policy consists of both whole life and decreasing term insurance. This policy will provide monthly income to a beneficiary if death occurs during a specified period beginning after date of purchase.

Participating vs Nonparticipating

A participating life insurance policy is a policy that has dividend payments from the life insurance company. It is called participating because it is permitted to share or "participate" in the excess earnings of the life insurance company. A nonparticipating policy does not have the right to share in excess earnings, and consequently does not receive dividend payments.

Universal Life Death Benefit Options

Universal life insurance offers two death benefit options. Under Option One (sometimes called Option A), the policyowner may designate aspecified amount of insurance. The death benefit equals the cash values plus the remaining pure insurance(decreasing term plus increasing cash values). This level death benefit is composed of the increasing cash valuesand the remaining pure insurance (decreasing term). the growing cash value-to-total death benefit ratioexceeds a certain percentage fixed by federal law, an additional amount of pure insurance, called the corridoris added to maintain the minimum death benefit requirement. Under Option Two (sometimes called Option B), the death benefit equals the face amount (pure insurance) plus the cash values (level term plus increasing cash values). To comply with the Tax Code's definition of life insurance, the cash values cannot be disproportionately larger than the term insurance portion.

VARIABLE / UNIVERSAL WHOLE LIFE (VUL)

VUL offers the policyowner a combination of investment options with a flexible premium payment / expense deduction method and a guaranteed minimum death benefit. It is the equivalent of a variable whole life policy with a flexible premium payment. It also possesses a guaranteed minimum coverage amount. It may also be referred to as Universal/Variable Whole Life. It is an insurance and investment product with a flexible or variable premium.

Investor-Owned Life Insurance (IOLI

re an investor pays a person to take out a considerable life insurance policy for that person. The investor pays the person's premiums in exchange for the person's life insurance benefits. An IOLI transcation is somewhat similar to a STOLI transaction, the only difference is that an IOLI is always initiated by an investor.

Equity Index Universal Life Insurance

Equity Indexed Life combines most of the features, benefits and security of traditional life insurance with the potential of earned interest based on the upward movement of an equity index 80% to 90% of the premium is invested in traditional fixed income securities and the remainder of the premium is invested in contracts tied to a stipulated stock index. These policies are characterized by a guaranteed minimum interest rate, tax deferral of interest accumulations, and policy loan access. The equity index returns are designed to keep pace with or beat inflation which protects the policyholder against downside market risk. Equity indexed life insurance contracts combine term life insurance with an investment feature, similar to a universal life plan. Death benefit amounts are based upon the coverage amount selected by the contract owner plus the account value.

How does a life insurance policy become an MEC? More importantly, how does a policy avoid being classified as an MEC?

must meet what is known as the 7-pay test. The 7-pay test has nothing to do with the actual number of premium payments. Instead, it is a limitation on the total amount you can pay into your policy in the first seven years of existence. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a seven year period. If there is a material change in the contract, the seven pay test applies again.

Stranger-Owned Life Insurance (STOLI)

s when a person purchases life insurance only to sell to a third-party with no insurable interest, who would therefore be unable to legally purchase the original policy. STOLI is a way to circumvent the insurable interest requirement when purchasing a life insurance policy. To legally purchase life insurance on someone else, the purchaser must have an insurable interest in that person's life. STOLI is prohibited in most states.

Whole Life Premiums

shorter the payment period, the higher the premium this approach allows whole life insurance premiums to remain level rather than increase each year with the insured's age.

Living Benefits

the cash value accumulation build-up in the policy, a policy owner has a ready source of funds that may be borrowed at reasonable rates of interest It is not a requirement of the policy that the loan be repaid if a loan is outstanding at the time the insured dies, the amount of the loan plus any interest due will be subtracted from the death benefit before it is paid

Endowments

• As a death benefit to a beneficiary if the insured dies within the specified policy period (known as theendowment period) • As a living benefit to the policyowner if the insured is alive at the end of the endowment period, at whichtime the policy has fully matured

Family Maintenance Policy

A family maintenance policy consists of both whole life and level term insurance, which provides income for a specific period beginning on the date of death of the insured.

Endowment Premiums

Due to their rapid cash value build-ups to provide early policy maturity, endowment policies have comparativelyhigh premiums. Remember that the shorter the policy term, the higher the premiums. It should be noted that the purchase of endowment policies has been on the decline for several years. This is because they no longer meet the income tax definition of life insurance, and consequently, they no longer qualify for the favorable tax treatment life insurance is given.

cash surrender value

This value is a result of the way premiums are calculated and interest is paid, as well as the policy reserves that build under this system. The amount of a policy's cash value depends on a variety of factors, including: • The face amount of the policy • The duration and amount of the premium payments • How long the policy has been in force The larger the face amount of the policy, the larger the cash values. The shorter the premium-payment period, thequicker the cash values grow

Limited Pay Whole Life

have level premiums that are limited to a specified number of years. -payment life policy is one in which premiums are payable for 20 years from the policy's inception, after which no more premiums are owed. This type of coverage would best suit a prospective insured who desires permanent insurance but does not want to pay premiums indefinitely. Keep in mind that even though the premium payments are limited to a certain period, the insurance protection extends until the insured's death, or to age 100.

Variable Whole Life

, premium payments are fixed. Part of the premium is placed into a separate account, which is invested in a stock, bond, or money market fund. The death benefit is guaranteed, but the cash value of the benefit can vary considerably according to the ups and downs of the stock market. Your death benefit can also increase if the earnings of that separate fund increase. Variable insurance products do not guarantee contract cash values, and it is the policy owner who assumes the investment risk. to either interest rates or minimum cash values. What these products do offer is the potential to realize investment gains that exceed those available with traditional life insurance policies. This is done by allowing policyowners to direct the investment ofthe funds that back their variable contracts through separate account options. By placing their policy values into separate accounts, policy owners can participate directly in the account's investment performance, which will earn a variable (as opposed to a fixed) return. Functioning variable insurance products are considered securities contracts as well as insurance contracts. Therefore, they fall under the regulatory arm of both state offices of insurance regulation and the Securities and Exchange Commission (SEC). To sell variable insurance products, an individual must hold a life insurance license and a Financial Industry Regulatory Authority (FINRA) registered representative's license (FINRA was formerly known as the National Associationof Securities Dealers, or NASD) mind that while these policies involve investment management and offer the potential for investment gains, they are primarily life insurance policies, not investment contracts. The primary purpose of these plans, like any life insurance plan, is to provide financial protection in the event of the insured's death.

Option to Convert

. The option to convert gives the insured the right to convert or exchange the term policy for a whole life (or permanent) plan without evidence of insurability. The cost of insurance is most important when an insured owner is trying to decide whether to convert term insurance at the insured's original age or the insured's attained age.

Universal Life

If the cash value account is not large enough to support the monthly deductions, the policy terminates. specific percentage of all premiums must be used to purchase death benefits or the universal life policy will not receive favorable tax treatment on its cash value. Another factor that distinguishes universal life from whole life is the fact that partial withdrawals can be made from the policy's cash value account. Whole life insurance allows a policy owner to tap cash values only through a policy loan or a complete cash surrender of the policy's cash values, in which case the policy terminates.) , the policy owner may surrender the universal life policy for its entire cash value at any time. However, the company probably will assess a surrender charge unless the policy has been in force for a certain number of years. The company must disclose the policy's surrender charges.

Target premium

is a suggested premium used in Universal Life policies. It does not guarantee there will be adequate funds to maintain the policy to any time, especially to life. It may give an indication of what will be needed (under conservative estimates), to maintain the policy.

Universal life provides this flexibility

by unbundling or separating the basic components of a life insurance policy.These components include: the insurance element, the savings element, and the expense element. As with any otherlife policy, the policyowner pays a premium. Each month, a mortality charge is deducted from the policy's cashvalue accumulation for the cost of the insurance protection. This mortality charge may also include a company expense, or loading charge. A front-end load is assessed a policyholder when the policy is initially issued. A back-end load (i.e., rear-end load) is one assessed when a policy is surrendered. A universal life policy pays a death claim in the amount of the death benefit plus the savings element. The policy specifies the percentage of each premium that goes toward the insurance protection and that which is used to build cash value.As premiums are paid and as cash values accumulate, interest is credited to the policy's cash value. This interestmay be either the current interest rate declared by the company (and dependent on current market conditions)or the guaranteed minimum rate, specified in the contract. As long as the cash value account is sufficient to pay the monthly mortality and expense costs, the policy will continue in force, whether or not the policyowner pays the premium. the cash value account is not large enough to support the monthly deductions, the policy terminates. A specific percentage of all premiums must be used to purchase death benefits or the universal life policy will notreceive favorable tax treatment on its cash value.

Credit Life Insurance

Credit life insurance is a limited benefit policy designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. The beneficiary of such a policy is usually the lender

Adjustable Life

comes from combining term and permanent insurance into a single plan. The policyowner determines how much face amount protection is needed and howmuch premium the policyowner wants to pay. The insurer then selects the appropriate plan to meet those needs. • increasing or decreasing the premium, the premium paying period, or both • increasing or decreasing the face amount, the period of protection, or both (increasing the face amount normally requires providing proof of insurability)

Modified Whole Life

distinguished by premiums that are lower than typical whole life premiums duringthe first few years (usually five) and then higher than typical thereafter

Joint Life and Survivor Policies

A variation of the joint life policy is the last survivor policy, also known as a second to die policy. This plan also covers two lives, but the benefit is paid upon the death of the last surviving insured

Non-Medical Life Insurance

Non-Medical Life Insurance typically does not require a medical exam and tends to be more expensive than medicallyunderwritten policies. The insurer will average out everyone's risk and charge accordingly. Although insurers typically will not require a medical exam, they will still inquire about the applicant's medical history and lifestyle.

Joint Life Policies

joint life policy covers two or more people. Using some type of permanent insurance (as opposed to term), itpays the death benefit at the first insured's death.

Accidental Death and Dismemberment (AD&D)

policy can provide financial benefits if an insured is killed, loses a limb, suffers blindness, or is paralyzed in a covered accident.