STUDY chapter 5) Options

Dividend Options; -Cash payments -Reduction of premiums -accumulated At Interest -Paid-up Additions -One-Year Term

Nonforfeiture Options; -Reduced Paid-up Insurance -Extended Term -Cash Surrender Value

Reduced Paid-up Insurance

Nonforfeiture option that allows the policyowner to purchase paid-up whole life coverage at a reduced face amount based on the amount of the policy cash value.

Which of the following is a guarantee that is required by law to be a part of life insurance polices that build cash value? Select one: a. Insuring clause b. Settlement option c. Nonforfeiture option d. Dividend option

Nonforfeiture options/values are guarantees that are required by law to be part of life insurance policies that build cash value The correct answer is: Nonforfeiture option

face amount

The amount of coverage under a life insurance policy. Synonymous with face value.

Reinstatement

A required provision in a life insurance policy which permits the policyowner to reinstate a policy that has lapsed, as long as the policyowner can provide proof of insurability, within 3 years.

Accumulation at Interest

Dividend option in which the insurer retains the dividend to be invested.

Extended term

Nonforfeiture option that permits the policyowner to use the policy's cash values to buy paid-up term insurance.

One-year Term Option; *(One-Year Term Option = Fifth Dividend Option)* -The one-year term option or fifth dividend option allows the policyowner to use the dividend as a single premium to purchase one-year term protection. -The amount of the term coverage is based on the insured's attained age, and the face amount can be no more than the amount of the policy's cash value.

-Example: Suppose Tom receives a $200 dividend, and he has $70,000 in cash values. If $125 of the dividend suffices to buy $70,000 worth of one-year term coverage, then Tom can use the remaining $75 of the dividend on other dividend options. -If the insured dies while the one-year term coverage is in effect, the insurer will pay the face amount on both the permanent policy and the one-year term coverage.

One-year Term Option

Dividend option in which the policyowner uses the dividend as a single premium to purchase one-year term protection.

Paid-Up Insurance

Dividend option in which the policyowner uses the dividend to pay up the policy earlier.

Accumulation at Interest

-The accumulation at interest option allows the insurer to retain the dividend to be invested and grow in value. -The dividend earns a rate specified in the policy. -The policyowner can withdraw the dividend at will tax-free, but any interest earned on the dividend is taxable. -Dividends left to accumulate at interest are separate from the policy's cash value.

Dividend Options; *(Policy Dividends = Not Taxable)*

-Policyowners may not use dividends to buy stock in the insurance company. -Dividend options are the choices available to policyowners for settling dividend payment. -There are five dividend options: -Cash Payment -Reduction of Premium Payments -Accumulation at Interest -One-year Term -Option -Paid-up Additions

Which of the following is not a dividend option? Select one: a. Reduction of premium payments b. Paid-up additions c. Reduced paid-up insurance d. Cash payments

Reduced paid-up insurance is a nonforfeiture option. The correct answer is: Reduced paid-up insurance

What nonforfeiture option permits the policyowner to use the cash values to purchase paid-up term life insurance coverage? Select one: a. None b. Cash surrender value c. Extended term d. Reduced paid-up insurance

The extended term option permits the policyowner to use the policy's cash values to buy paid-up term insurance. The correct answer is: Extended term

Cash Surrender Option; *(Cash Value = Year 3)* -Cash surrender option allows the policyowner to receive the policy's cash value. -In most states, policies that build cash value must begin to accrue cash value by the end of the third policy year. -For industrial life policies, cash value must be available after five years. -During the first two policy years, premiums are used to pay acquisition and administrative expenses.

-Once the cash surrender value is exercised: +No death benefit will be paid, +The policy cannot be reinstated, +Any outstanding policy loans plus interest would be deducted from the cash surrender value, and +A surrender fee is charged at the time of cash surrender. -Depending on the state, the insurance company may be permitted to delay payment of cash surrender for up to 6 months from the request. This is called the delayed payment provision and provides insurance companies a buffer if they encounter a financial crisis. *(6 months = How long payment can be delayed.)*

paid-up additions option; *(Insurers automatically use the Paid-up Addition if no dividend option is selected.)* -Example: Tom has $100,000 of whole life insurance. He receives a $500 dividend and decides to use the paid-up additions option to purchase $1,000 of whole life coverage. Tom's whole life policy now has a face amount of $101,000.

-The paid-up additions dividend option is appropriate for policyowners who wish to maximize policy death benefits for the policy beneficiary or who are concerned with long-term benefits. -By purchasing more life insurance, the policyowner who selects the paid-up addition is maximizing the death benefits for the intended beneficiary.

Eddie wants to use a nonforfeiture option. Which of the following may Eddie not use? Select one: a. Cash surrender value b. Accumulation at interest c. Extended term d. None of the above

Accumulation at interest is a dividend option. The correct answer is: Accumulation at interest

Reduction of Premium Payments; -Example: If the next year's annual premium is $1,500 and the dividend received is $300, then the next year's premium would be reduced to $1,200.

Dividend option in which the dividend is used to offset the cost of a future premium payment.

Cash Payment; -With the cash payment option, the policyowner receives a check for the amount of the dividend.

Dividend option in which the policyowner receives a check for the amount of the dividend.

Paid-up Additions

Dividend option in which the policyowner uses the dividend as a single premium to purchase an additional amount of whole life coverage. This dividend option increases the face amount of the policy.

Nonforfeiture Options; -Insurers are required to provide a table of guaranteed nonforfeiture values to policyowners for at least a 20-year period with the policy. -This table is specific to the coverage purchased and shows each of the nonforfeiture options after a certain number of years. -There are three nonforfeiture options: +Cash surrender +Extended term insurance +Reduced paid-up insurance

-Nonforfeiture options/values are guarantees that are required by law to be part of life insurance policies that build cash value. -Insurers are required to make nonforfeiture values available when policyowners discontinue premium payments for any reason.

Dividend Options; *(Policy Dividends = Not Taxable)* -Mutual companies issue participating policies, meaning that policyholders participate in the profits of the insurer through the receipt of dividends. -This is contrary to most stock insurers who issue nonparticipating policies and do not issue dividends to policyholders. -

-Though not guaranteed, participating policies pay dividends to policyowners at the end of each year when the company experiences a surplus. -Dividends become payable at the end of the first or second policy year. -Remember that dividends are a return of overcharged premium, and are not taxable.

Reduced Paid-up Option; -The reduced paid-up insurance option allows the policyowner to purchase paid-up whole life coverage at a reduced face amount based on the amount of the policy cash value. -The cash value acts as a single premium to purchase reduced paid-up insurance. -Any outstanding policy loans plus interest would be deducted from the cash surrender value prior to purchasing reduced paid-up insurance. -In other words, the reduced paid-up nonforfeiture option provides continuing cash value build up, even though the policyholder is no longer contributing any money into the policy.

-With the reduced paid-up insurance option, the policy may be reinstated to the original face amount within the terms of the reinstatement provision. -Key points about the reduced paid-up option: +The policy is paid-up with the cash value used as a single premium to purchase the reduced face amount coverage. +No more premium payments are made. +The insured's attained age is used to determine the amount of reduced paid-up coverage. +Reduced paid-up insurance is the same type of whole life coverage as the original policy, except all policy riders are eliminated.

paid-up additions option; *(Insurers automatically use the Paid-up Addition if no dividend option is selected.)* -The paid-up additions option allows the policyowner to use the dividend as a single premium to purchase an additional amount of whole life coverage. -The amount of coverage that can be purchased is based on the insured's attained age when the paid-up addition is purchased. -A new policy is not issued with paid-up additions. Instead, the paid-up addition coverage is added onto the policy's face amount. -Insurers usually require that the type of coverage purchased with paid-up additions is the same type as the original policy.

-If the policyowner does not select a dividend option, the insurer will automatically use the paid-up additions option. -Unlike the one-year term option, paid-up additions do not expire - they are added onto the policy's face amount. -Unlike the accumulation at interest option, the dividend used to purchase the paid-up additions contributes to the policy's cash value.

Extended Term Option; -The extended term option permits the policyowner to use the policy's cash values to buy paid-up term insurance. -The cash values act as a single premium to purchase the extended term coverage, and the amount of the paid-up coverage is equivalent to the original policy's face value. -The length of the term protection is based on the amount of cash value in the original policy and the insured's age at the time the extended term is purchased. -Any outstanding policy loans plus interest would be deducted from the cash surrender value prior to purchasing extended term coverage.

-The insurer institutes the extended term option by default if the policyowner cannot be reached after the grace period lapses or if the policyowner does not select a nonforfeiture option. -However, if the insured has a rated policy, meaning the insured is a higher risk, the insurer will typically not offer the extended term option because of adverse selection. -With the extended term option, the original policy may be reinstated within the terms of the reinstatement provision.