LIFE INSURANCE PREMIUMS, PROCEEDS AND BENEFICIARIES

Uses the same formula as the Surrender Cost Index with the exception that it doesn't assume that the policy will be surrendered at the end of the period. The net payment cost index is useful if one's primary concern is the amount of death benefits provided in the policy. It is helpful in comparing future costs, such as in 10 to 20 years, if one will continue to pay premiums and does not take the policy's cash value.

Net payment Cost Index

Insurer pays proceeds (including interest and principal) in minimum guaranteed dollar payments over a specified number of years. Part of the installments paid to a beneficiary consists of interest calculated on the proceeds of the policy. The dollar amount of each installment depends upon the total number of installments

Fixed amount (period certain)

Exceptions for premiums (tax deductible)

* premiums used for charity * life insurance premiums paid by an ex-spouse as court-ordered alimony * employer paid premiums used to fund group life insurance for the benefit of the employee *If cash value is surrendered, the portion that EXCEEDS the premiums paid

Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums. The expense factor is also known as the loading charge. Each insurance policy an insurer issues must carry its proportionate share of the costs for employees' salaries, agents' commissions, utilities, rent or mortgage payments, maintenance costs, supplies, and other administrative expenses.

Expense factor

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 deceased.

Facility of Payment

Living benefit options:

1. Accelerated benefit 2. Viatical Settlement

Types of beneficiaries:

1. Individuals 2. Businesses 3. Trust 4. Estates 5. Charities 6. Minors 7. Class (ex: group of children)

Life insurance premiums are calculated based on the following 3 primary factors:

1. Mortality factor 2. Interest factor 3. Expense factor

Distributuion by descent:

1. Per stirpes (bloodline)- If beneficiary dies before the insured, benefits will be paid to heirs. 2. Per Capita (meaning by the head)- Evenly distributes benefits among all named beneficiaries

Order of Succession:

1. Primary- first to receive benefit 2. Secondary (contingent) 3. Third. If no one named will go to estate.

Exception to tax exemption:

1. Transfer to value- when a life insurance policy is sold to another party before the insured's death. 2. Federal estate tax

Tax treatment of proceeds:

1. premiums - NOT tax deductible 2. Death benefit - tax free if taken as a lump sum to a named beneficiary 3. Death benefit Installments: *Principal is tax-free *Interest is taxable

When an existing life insurance policy is assigned to another insurer for a new contract, the transaction may be treated for tax purposes. NOT taxable

1035 Tax Free Exchange

Allows someone that a physician certifies as terminally ill to access the death benefit. The amount of benefit received will be tax free.

Accelerated benefit

Applies to the savings element of whole life insurance policies that are payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid.

Cash Value

A policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary

Common disaster provision

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. A large portion of every premium received is invested to earn interest. The interest earnings reduce the premium amount that otherwise would be required from policyowners.

Interest factor

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.

Interest only

An irrevocable designation may not be changed without the written consent of the beneficiary. Has a vested interest in the policy, therefore the policyowner may not exercise certain rights (such as taking out a policy loan) without the consent of the beneficiary

Irrevocable Beneficiary

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.

Level Premium funding

Provides beneficiary with an income that they cannot outlive. Are guaranteed for 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 Income

The option to use some of the future death benefit proceeds when they may be most needed, before their death, when the insured has a terminal illness.

Living Benefits

Death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums.

Lump sum

The premium payment schedule and permits the policyowner to select the timing of premium payments.

Mode

A measure of the number of deaths in a given population. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

Mortality factor

Money that together with future premiums, interest, and survivorship benefits will fulfill an insurance company's obligations to pay future claims.

Reserves

The policyowner may change the beneficiary at any time w/o notifying or getting permission from the beneficiary

Revocable Beneficiary

If the insured and primary beneficiary die at same time for a common accident with no clear evidence as to who died first, this act will assume the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiary

Simultaneous Death Act

The policyowner pays a single premium that provides protection for life as a paid-up policy. Normally associated with whole life insurance.

Single Premium funding

Prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time

Spendthrift Clause

Uses a complicated formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per thousand for a policy that is surrendered for its cash value at the end of that period.

Surrender Cost Index

Premiums paid on individual life insurance policies are generally NOT deductible. Premiums for life insurance used for business purposes are generally not tax deductible.

Tax treatment of Premiums

Allows someone with a terminal illness to sell their existing life insurance policy to a third party for a percentage of the death benefit. The new owner continues to make the premium payments and will eventually collect the entire death benefit.

Viatical Settlement