Life Insurance Policies

CATEGORIES OF LIFE INSURANCE

(1) ordinary insurance, (2) industrial insurance, and (3) group insurance

Basic Forms of Term Life

(1) level term, (2) decreasing term, (3) increasing term, and (4) annual renewable term

Special Use Policies

A family plan, sold in units, is designed to insure all family members under one inclusive policy. It may be written as a separate contract or as a rider on a basic plan. The format usually provides permanent (whole life) insurance on the policyholder, temporary (term) or whole life on the spouse and decreasing or level term on the children until they reach a specified age. Coverage for children is generally limited to those older than 14 days and younger than 21. All future children born to the primary insured are automatically covered without any additional premium. Children's coverage is typically convertible without evidence of insurability

Loan

A loan against one's own money is a withdrawal with the presumption that it will be repaid (with accrued interest) or the loan and interest amount will reduce that future benefits. Policy loan proceeds are received federal income tax-free unless the policy is a MEC (modified endowment contract)

Jumping Juvenile or Junior Estate Builder

A special form of juvenile insurance is the "jumping juvenile" or "junior estate building policy." This policy is written on children ages one (1) to fifteen (15) in until of $1,000. These units automatically increase to five (5) times the face amount at age 21, hence the term "jumping." A benefit of this form of insurance is that although the face amount jumps' five times, the premium remains the same, and no evidence of insurability is required

Joint and Last Survivor Policy (2nd to Die)

A variation to the joint-life policy is the "last-survivor policy" or second-to-die policy. This policy also covers multiple lives but is designed to pay the death benefit upon the last surviving insured's death

Withdrawl

A withdrawal is similar to a loan, but there is no presumption that the loan will be repaid. The withdrawn amount is treated as a permanent withdrawal, therefore immediately reducing the death benefit and cash value. Only UL and VUL policies permit withdrawals. Withdrawals are tax-free up to the cost basis and are subject to federal income tax

Single-Premium Whole Life (Single Pay Life)

Also, a limited pay policy but instead of a series of payments over a specified period, this premium is paid as a large one-time-only premium payment at the beginning of the policy period. The policy is completely paid-up, and protections remain enforce to age 100

Graded Premium Whole Life

An attractive policy that makes purchasing a whole life policy easier and more affordable to individuals whose current financial resources are limited but demonstrate the ability to have an improved financial position in the future. Like a modified whole life that redistributes the premiums over a specified premium, this policy offers a lower premium in year one. It then increases and levels off after a "preliminary period" at a rate equivalent to a typical straight whole life rate

Deposit Term Insurance

An exception to the level premium approach is deposit term insurance. This type of term policy requires a premium payment in the first year that is much higher than the second and subsequent years' level premiums. At the end of the policy's term, the policyowner receives some of the premium back; the amount returned is typically multiple between the higher first-year premium and the lower second-year premium. Deposit term insurance accounts for a very small percentage of the term insurance sold today

Juvenile Insurance

An insurance policy issued on an individual aged one (1) day to 15 years is classified as juvenile insurance. The insured is the child, and the policyowner is an insurable-interest-bearing-adult, such as a parent or guardian. The premium-payor is typically the adult policyowner, until the insured child reaches a specified age indicated in the contract

Modified Whole Life

As an alternative to traditional whole life insurance where the premium is level for the lifetime, modified whole life insurance provides a smaller initial premium in the beginning years (slightly higher than a term policy). As time progress, the premium rises to a level that would be greater than the typical whole life rate at the age of issue. Overall, the premiums paid are equivalent to the standard whole life policies, but they are modified here. This product is used by individuals who have limited financial resources but have the promise of an improved financial position in the future

Endowment Premiums

As stated previously, endowments are considered the most expensive form of insurance written because of its rapid cash value build-ups (increasing cash value). However, due to changes in the tax code, the popularity of endowments has declined for many years. The most recent Tax Code change specifies that life insurance products cannot endow before age 95; thus, endowments generally do not qualify as life insurance

Payor-Provision

Available under certain juvenile policies, a payor-provision is attached to a juvenile policy. For an additional premium, the policy will waive future premiums of the policy if the person responsible for the payment of the premiums dies or is. Parents must show evidence of insurability to purchase this provision (rider)

Modified Endowment Contracts (MECs)

In 1988, a new class of insurance, known as modified endowment contracts (MECs), was created. These products were a result of a revised tax law definition of "life insurance contracts." When Congress enacted the Technical and Miscellaneous Revenue Act (TAMRA), its purpose was to discourage the sale and purchase of life insurance for investment purposes or as a tax shelter

Maturity at age 100

Permanent insurance is designed to mature at age 100. It is actuarially assumed that every insured is presumed to be dead by that age. At age 100, the cash-value equals the policy's face amount and will be paid to the policyowner (usually the insured) or a beneficiary as a "living benefit" if the beneficiary is still living. At age 100, the policy has completely matured or endowed. No additional premiums are required, and the policy is 'paid-up.

Term Life-Option to Renew

Policies with this option allow a policyowner to renew before the policy termination date without proving evidence of health insurability. Like an ART where premiums increase every year at renewal, policyowners may incur a premium increase based on the policy's renewal provisions. Premium increases at set intervals are known as "step-rate" premiums

Premium Periods

Premium rates for life insurance are based on per $1,000 of insurance. The length of a premium-paying period influences both the premium, and with permanent insurance, the speed in which the accumulation or cash-value grows

Term Life-Re-Entry Option

Some renewable term plans offer an option for re-entry at the end of a policy term. With this option, the policyowner can renew coverage at a guaranteed rate specified in the policy, without evidence of health insurability

Straight Whole Life

is whole life insurance providing permanent level protection with level premiums from the time the policy is issued until the insured's death (or age 100)

Variable Insurance Policies and Securities

The term variable life insurance refers to a form of whole life insurance contracts designed to counteract the effects of inflation on the value (purchasing power) of fixed-face-amount whole life policies. Variable insurance policies are securities and do not guarantee contract cash values. Besides, it is the policyowner who assumes the investment risk

Joint Life (1st to Die)

This contract covers two or more people being insured under one permanent insurance policy. The policy is designed to pay the death benefit when the first of the insureds dies. After this, the surviving insureds have the option of purchasing a single individual policy without providing evidence of insurability

Interest-Sensitive Whole Life / Current Assumption Whole Life

This form of insurance reflects the insurer's changing experience regarding mortality (death), investment, and expense factors. With interest-sensitive products, the cash value levels earned may be greater than the guaranteed levels provided in an indeterminate-premium whole life policy. This may be possible due to more favorable than expected insurer underlying mortality, investment, and expense experiences. On the contrary, if the underlying experience is less favorable than anticipated, the policyowner may choose from paying a higher premium (premium increase) or reduce the policy's face amount and pay the same premiums. Adjustments are normally made annually

Limited Pay Whole Life (i.e., 10 Pay Life, 20 Pay Life, Life Paid Up at age 65)

This variation of whole life is designed to pay premiums over a shorter period (not lifetime) but with protection remaining enforce until the insured's death or age 100

Basic Forms of Whole Life (Method of Payment)

Three (3) notable forms of while life plans are (1) straight whole life, (2) limited pay whole life, and (3) single-premium whole life

Minimum Deposit Whole Life (Financed Insurance)

Unlike other whole life policies where cash value begins building no later than year three, minimum deposit whole life begins earning cash values immediately upon payment of the first payment. The policyowner systematically borrows from the cash value to pay some or all of the premium from that point.

Term Life-Option to Convert

When exercising this option, the insured has the right to exchange or convert the term policy for a permanent (whole life) policy without evidence of health insurability. The new (converted) policy will be issued at a premium rate reflecting the insured's age as stipulated in the policy, attained age method or original age method

Cash Values

Whole life insurance combines insurance protection with a savings or accumulation element commonly referred to as the policy's cash value. This savings element builds over the policy's life and represents the amount of money a policyowner may receive if the policy is ever canceled or surrendered. The policy's cash-value depends on three (3) main factors: (1) the face amount of the policy, (2) the duration and amount of the premium payments, and (3) how long the policy has been in force

Indexed Whole Life

With an indexed whole life policy, the face amount automatically increases as the Consumer Price Index (CPI) increases. Additionally, the premiums for an indexed whole life policy fall under two pricing methods. (1) The policy owner pays an additional premium with each face amount increase, or (2) the insurer assumes the risk. Thus, the policyowner does not pay a higher premium with face amount increases. However, no matter which method is utilized, the policyowner is exempted from furnishing insurability evidence to obtain the face amount increases

Ordinary Insurance

a form of individual insurance, includes many forms of temporary and permanent insurance protection plans written with monthly, quarterly, semi-annually, or annually paid premiums

Endowment Policies

a policy that pays the face amount if death occurs (death benefit) or pays the face amount at the end of the premium-paying period (living benefit). It is the most expensive type of insurance written today. The most common and best use of this policy is for educational purposes

Indexed Universal Life Insurance (IULi)

accounts use an outside index, like the Nasdaq-100 Index or Standard & Poor's 500 Index, when calculating interest credits. The maximum interest crediting rate varies by insurer but typically is limited by a growth cap of 0% to 2%, which varies by insurance company

WHOLE LIFE INSURANCE

also known as straight life, permanent life, and cash-value life insurance, provides permanent protection for the entire "whole" life of an insured (from the date of issue to the date of the insured's death) if premiums are paid

Separate Accounts

are separate from the general accounts. It is maintained for the sole purpose of allowing policyowners to participate directly in the account's investment performance. Separate accounts earn a variable return as compared to the fixed return of general accounts. Separate accounts are not subject to the claims of the insurance company's general credits. Therefore, policyowners cannot lose the physical assists underlying their variable contracts in the event of the company's insolvency

Level Term

both the premiums and death benefit remain level for the term. When the term expires, so does the insurance

Increasing Term

increase the benefit period at periodic intervals. The primary purpose of using an increasing term policy is that of inflation. Increasing term policies are typically tied to a cost of living index, such as the Consumer Price Index (CPI). They can be purchased as a stand-alone insurance policy or a rider to a permanent life insurance policy. As a rider, the policyowner is billed for the additional coverage

Credit Life

is a decreasing term policy designed to cover a debtor's life in the event of their death before paying off a covered loan. The policy's length is matched to the loan's length, and the amount of insurance is matched to declining loan balance. The policy amount shall never exceed the indebtedness of the loan

Adjustable Life

is a flexible form of insurance contract. It is a combination of temporary (term) and permanent (whole life) into one plan. The policyowner determines how much protection is needed and how much premium they are willing to invest, whereas the insurer then selects the appropriate plan to meet those needs

Variable Life Insurance

is a form of permanent life insurance. It mimics many of the same characteristics of traditional whole life insurance. The most significant difference is the way the policy's values are invested. The policy values are invested in the insurer's separate accounts with variable life insurance policies that house common stock, bond, money-market, and other securities investment options. Values held in these separate accounts are invested in riskier but potentially higher-yielding assets than those held in the general account. With variable life insurance, the benefit increase (and decrease) in relation to the policy's values' performance. However, the death benefit will never drop below the fall below the face amount guaranteed at the policy issue

Group Insurance

is a single contract written on multiple people who fall under an employer-employee group, association, creditor, or union

Whole Life Premiums

is designed as if the insured will live to age 100. The full premium-paying period is calculated based on the number of years between the insured's age at the time of issue and age 100, the time of presumed death. This amount, equally spread over the premium-paying period, is known as the "level premium approach

Industrial / Debit / Burial Insurance (sold by "home service" companies)

is sold by "home service" companies typically written on small face amounts, such as $1,000, with premiums collected by debit agents weekly at a policyowner's residence

UL Death Benefit Options

offers two death benefit options; (1) Option One and (2) Option Two. Under Option One, the policyowner may designate a specified amount of insurance. The level death benefit is equal to the cash values plus remaining pure insurance (decreasing term plus increasing cash values). Suppose the growing cash value-total death benefit ratio exceeds a certain percentage fixed by federal law. In that case, an additional amount of pure insurance, called the "corridor" is added to maintain the minimum death benefit requirement. Under Option Two, the death benefit equals the face amount (pure insurance) plus the cash values (level term plus increasing cash values)

Multiple Protection Policies - Whole Life and Level Term

pays a benefit that a factor of the face amount if death occurs during a predetermined specified period. If death occurs after that period has expired, only the face amount is paid

Variable Universal Life (VUL)

product blends features of three types of products: (1) whole life, (2) universal life, and (3) variable life. The most notable features are: (1) premium flexibility, (2) cash value investment control, and (3) death benefit flexibility. Every variable universal life insurance policy is issued with a minimum scheduled premium based on an initial specified death benefit. This initial premium establishes the plan, meets first-year expenses, and provides funding to cover insurance protection costs. Once this initial premium has been paid, policyowners can pay whatever premium amount they wish, with certain limitations. Provided adequate cash value is available to cover periodic charges and the cost of insurance; they can suspend or reduce premium payments. VUL policies generally offer both a level or fixed death benefit and a variable death benefit that fluctuates in response to investments' performance.

Universal Life = UL

s a variation of whole life insurance. However, unlike whole life, with its fixed premiums, face amounts, and cash value accumulations, universal life allows its policyowners to determine the amount and frequency of premium payments along with the ability to adjust the policy face amount up or down to reflect changes in needs. When changes to a policy are made, no new policy needs to be issued, showing the desired changes. Universal life provides this flexibility by "unbundling" or separating the basic components of a life insurance policy, the insurance (protection) element, the savings (accumulation) element, and the expense (loading) element. With each month's premium, a mortality charge is deducted from the policy's cash value account for the cost of the insurance protection. This mortality charge may also include an expense, or loading, charge. As premiums are paid, and as cash values accumulate, interest is credited to the policy's cash value. Interest may be accrued at either the current interest rate or the guaranteed minimum rate. If the cash value account is sufficient to pay the monthly mortality and expense costs, the policy will continue in force, whether the policyowner pays the premium. If the cash value account is not large enough, the policy terminates

Annual Renewable Term (ART) / Yearly Renewable Term (YRT)

the benefit is level, but the premiums increase each year. As time progresses, the policy becomes cost-prohibitive to the policyowner as the annual premium is based on the insured 'attained age.' This form of policy represents the most basic form of life insurance

Decreasing Term

the death benefit decreases over time, but the premium amount remains constant (level). This type of policy is primarily used to cover loan issued by automotive, mortgage, college, or other credit (financial) companies

Indeterminate Premium Whole Life

those in which the premium rate can be adjusted based on the insurance company's anticipated future experience. The maximum premium that the insurer can charge is stated in the contract

General Accounts

which represent the company's general assets, are used to support the contractual obligations of an insurance company's fixed traditional policies. The company is considered insolvent if the general account assets fail to support its reserve liability; thus, the assets become subject to claims of both the company's credits (including policyowners)