Types of Life Insurance Policies

Variable life insurance, life universal life itself, has the following features and characteristics:

-A flexible premium that can be increased, decreased or skipped as long as there is enough value in the policy to fund the death benefit; -Increasing and decreasing the amount of insurance; and -Cash withdrawals or policy loans.

Annuities (CONTINUED)

-An annuitant whose life expectancy is longer will have smaller income installments. For example, all other factors being equal, a 65-year old male will have higher annuity income payments than a 45-year old male (because he is younger), or than a 65-year old female (because women statistically have a longer life expectancy). -Annuities are purchased, for the most part, to provide or supplement retirement income. In addition, they are also purchased to fund or to help fund a college education. Actually an annuity can be used for any situation that requires a steady stream of income at some point in the future. Annuities are also used to provide what is known as structured settlements. A structured settlement would take on the form of a court settlement arising from a civil law suit or it may take on the form of the income that is provided to the winner of a state lottery. In addition, many settlement options for a life insurance policy actually involve selecting an annuity payment option. The basic function of an annuity is that of liquidating a principal sum, regardless of how it was accumulated.

Agents selling variable life insurance products must:

-Be registered with FINRA; -Have a securities license; and -Be licensed by the state to sell life insurance

Fixed Annuities

-Guaranteed minimum rate of interest to be credited to the purchase payment(s); -Income (annuity) payments that do not vary from one payment to the next; -The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by annuitant. With fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period. The is called level benefit payment amount. A disadvantage to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation.

Key Characteristics of Whole Life Insurance

-Level premium: The premium foe whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy. -Death benefit: The death benefit is guaranteed and also remains level for life. -Cash value: The cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100(the policy maturity date), and is paid out to the policy owner. (Remember: the insured and the policy owner do not have to be the same person.) Cash values are credited to the policy on a regular basis and have a guaranteed interest rate. -Living benefits: The policy owner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash value, also called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred. The three basic forms of whole life insurance are straight whole life, limited-pay whole life, and single premium whole life; however, other forms and combination plans may also be available.

There are three basic types of term coverage available, based on how the face amount (death benefit) changes during the policy term

-Level, -Increasing, and -Decreasing Regardless of the type of term insurance purchased, the premium is level throughout the term of the policy; only the amount of the death benefit may fluctuate, depending on the type of term insurance. Upon selling, renewing, or converting the term policy, the premium is figured at attained age (the insured's age at the time of transaction)

The annuity income amount is based upon the following:

-The amount of premium paid or cash value accumulated; -The frequency of the payment; -The interest rate; and -The annuitant's age and gender.

Since the premium can be adjusted, the insurance companies may give the policy owner a choice to pay either of the two types of premiums:

-The minimum premium: The amount needed to keep the policy in force for the current year.Paying the minimum premium will make the policy perform as an annually renderable term product. -The target premium: A recommended amount that should be paid on a policy in order to cover the cost of insurance precautions and to keep the policy in force throughout its lifetime.

Annuity

A contract that provides income for a specified period of years, or for life. Annuity protects a person against outliving his or her money. Annuities are not life insurance, but rather a vehicle for the accumulation of money and the liquidation of an estate. Annuities are marketed by life insurance companies. Licensed life insurance agents are authorized to sell some types of annuities Annuities do not pay a face amount upon the death of the annuitant. In fact, they do just the opposite. In most cases, the payments upon the death of the annuitant.

ROP Example

A healthy, 30-year old male pays $380 annually for a $250,000, 30-year term policy. At the end of the 30 years, he has paid a total of $11,400 in premiums which will be returned to him if he is still alive. The insurance company has determined that $250 per year, or $7,500 over 30 years, will cover the actual cost of its protection. The excess funds, which the insurer invests, provide the cash for the returned premiums.

Cash Value

A policy's savings element or living benefit

Suitability

A requirement to determine if an insurance product is appropriate for a customer

Qualified plan

A retirement plan that meets IRS guidelines in receiving favorable tax treatment

Joint Life

A single policy that is designed to insure two or more lives. Joint life policies can be in the form of term insurance or permanent insurance. The premium for joint life would be less than for the same type and amount of coverage on the same individuals. It is more commonly found as joint whole life, which functions similarly to an individual whole life policy with two major exceptions, -The premium is based on a joint average age that is between the ages of the insureds - The death benefit is paid upon the first death only A premium based on joint age is less than the sum of 2 premiums based on individual age, so it is common to find joint life policies issued on husbands and wives. This is particularly so if the need for insurance is such that is does not extend beyond the fist death. Joint life polices are used when there is a need for two or more persons to be protected; however, the need for the insurance is no longer present after the first of the insureds dies. For example, a married couple purchasing a house my use a joint life policy for mortgage protection if both spouses work and earn close to the same amount of income. If one spouse dies, the insurance pays the mortgage for the surviving spouse. Joint life is also used to insure the lives of business partners in the funding of a buy-sell agreement and other business life needs. A buy-sell is a business continuation agreement that determines what will be done with the business in the event that an owner dies or becomes disabled.

Variable Universal Life Insurance

A type of insurance that combines many features of the whole life with the flexible premium of universal life and the investment component of variable life, making it a securities version of the universal life insurance. Unlike universal life, most of the investment vehicles in variable universal life policies do not guarantee return. Variable life insurance products are dually regulated by the State and Federal government. Due to the element of investment risk, the federal government has declared that variable contracts are securities, are are thus regulated by the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA). Variable life insurance is also regulated by the Insurance Department as an insurance product.

Decreasing term

A type of life insurance that features a level premium and a death benefit that decreases each year over the duration of the policy.Decreasing term is primarily used when the amount of needed protection is time sensitive, or decreases over time. Decreasing term coverage is commonly purchased to insure he payment of a mortgage or other debts if the insured dies prematurely. The amount of coverage thereby decreases as the outstanding loan balance decreases each year. A decreasing term policy is usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term.

Adjustable Life Insurance

ADJUSTABLE Life was developed in an effort to provide the policy owner with the best of both worlds (term and permanent coverage). An adjustable life policy can assume the form of either term insurance or permanent insurance. The insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insured's needs. As the insured's needs change, the policy owner can make adjustments to his or her policy. Typically, the policy owner has the followings options: -Increase or decrease the premium or the premium-paying period; -Increase or decrease the face amount; or -Change the period of protection.

The annuity period

Also known as the annuitization period, liquidation period, or pay out period, is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. The annuity period may last for the lifetime of the annuitant or for a specified period, which could be longer or shorter. The annuitization date is the time when the annuity benefit payouts begin (trigger for benefits).

Accumulation period

Also known as the pay-in period, is the period of time over which the owner makes payments (premiums) into an annuity. Furthermore, it is the period of time during which the payments earn interest on a tax-deferred basis.

Survivorship Life

Also referred to as "second-to-die" or "last survivor" policy is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life, which pays upon first death. This type of policy is often used to offset the liability of the estate tax upon the death of the last insured.

Interest- Sensitive Whole Life Insurance

Also referred to as current assumption life, is a whole life policy that provides a guaranteed death benefit to age 100. The insurer sets the initial premium based on current assumptions about risk, interest and expense. If the actual values change, the company will lower or raise the premium at designated intervals. In addition, interest-sensitive whole life policies credit the cash value with the current interest rate that is usually comparable to money market rates, and can be higher than the guaranteed levels. The policy also provides for a minimum guaranteed rate of interest. Interest-sensitive whole life provides the same benefits as other traditional whole life policies with the added benefit of current interest rates, which may allow for either greater cash value accumulation or a shorter premium-paying period.

Deferred Annuity

An annuity in which the income payments begin sometime after one year from the date of purchase. Deferred annuities can be funded with either a single limp sum (Single Premium Deferred Annuities-SPDAs) or through periodic payments (Flexible Premium Deferred Annuities-FPDAs). Periodic payments can vary from year to year. The longer the annuity is deferred, the more flexibility for payment of premium it allows.

Types of Annuities

Annuities can be classified according to how premiums are paid into the annuity, how premiums are invested, and when and how benefits are paid out.

Annuity Investment Options

Annuities may be classifies as fixed or variable based on how the premium payments are invested.

Nonforfeiture Values

Benefits in a life insurance policy that the policy owner cannot lose even if the policy is surrendered or lapses

Variable life insurance

Contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance

Fixed Life Insurance

Contracts that offer guaranteed minimum or fixed benefits

Liquidation if an estate

Converting a person's net worth into a cash flow

Single Premium Whole Life (SPWL)

Designed to provide a level death benefit to the insured's age 100 for a one-time, lump-sum payment. The policy is completely paid-up after one premium and generates immediate cash.

Securities

Financial instruments that may trade for value (for example, stocks, bonds, options)

Indexed (or equity indexed) annuities

Fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Equity indexed annuities are less risky than a variable annuity or mutual fund but are expected to earn a higher interest rate than fixed annuity.

Policy maturity

In life policies, the time when the face value is paid out

Special Features

Most term insurance policies are renewable, convertible, or renewable and convertible (R&C).

Immediate Annuity

One that is purchased with a single lump-sum payment and provides income payments that start within one year from the date of purchase.

Single premium

One time lump -sum payment

Permanent Life Insurance

PERMANENT life insurance refers to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid. The most common type of permanent insurance is whole life.

Periodic payments

Premiums are paid in installments over a period of time. Periodic payment annuities can be either LEVEL PREMIUM, in which the annuitant/owner pau a fixed installment, or FLEXIBLE PREMIUM, in which the amount and frequency of each installment varies

Level premium term

Provides a level death benefit and a level premium during the policy term. For example, a $100,000 10- year level term policy will provide a $100,000 death benefit if the insured dies ant time during the 10-year period. The premium will remain level during the entire 10-year period. If the policy renews at the end of the 10-year period, the premium will be based on the insured's attained age at the time of renewal.

Term Insurance continued

Provides what is known as pure death protection: -If the insured dies during this term, the policy pays the death benefit to the beneficiary; -If the policy is canceled or expires prior to the insured's death, nothing is payable at the end of the term; and -There is no cash value or other living benefits

Return of Premium (ROP)

ROP life insurance is an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid.The return of premium is paid if the death occurs within a specified period of time or if the insured outlives the policy term. ROP policies are structured to consider the low risk factor of a term policy but at a significant increase in premium cost, sometimes as much as 25% to 50% more. Traditional term policies offer a low-cost, simple-death benefit for a specified term but have no investment component or cash value. When the term is over, the policy expires and the insured is without coverage. AN ROP policy offers the pure protection of a term policy, but if the insured remains healthy and is still alive once the term limit expires, the insurance company guarantees a return of premium. However, since the amount returned equals the amount paid in, the returned premiums are not taxable.

Variable Annuity

Serves as a hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity. 3 main characteristics of variable annuities -Underlying Investment: The payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account. The separate account is not part of the insurance company's own investment portfolio, and is not subject to the restrictions that are applicable to the insurer's own general account. -Interest Rate: Issuing insurance company does not guarantee a minimum interest rate. -License Requirements: A variable annuity is considered a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. An agent selling variable annuities must hold a securities license in addition to a life insurance license. Agents or companies that sell variable annuities must also be properly registered with FINRA. Variable premiums purchase accumulation units in the fund, which is similar to buying shares in a mutual fund . Accumulation unites represent ownership interest in the separate account. Upon annuitization, the accumulation units are converted to annuity units. The income is then paid to the annuitant based on the value of the annuity units. The number of annuity units received remains level, but the unit values will fluctuate until actually paid out to the annuitant.

Straight Whole life

Straight life (also referred to as ordinary life or continuous premium whole life) is the basic whole life policy. The policy owner pays he premium from the time the policy is issued until the insured's death or age 100 (whichever occurs first). Of the common whole life policies, straight life will have the lowest annual premium.

Regarding the length of coverage, all life insurance policies fall into 2 categories

Temporary and permanent protection

Term Insurance

Temporary protection because it only provides coverage for a specific period of time. It is also known as our life insurance. Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection.

Convertible

The CONVERTIBLE provision provide the policy owner with the right to convert the policy to a permanent insurance policy without evidence of insurability. The premium will be based on the insured's attained age at the time of conversion.

Renewable

The RENEWABLE provision allows the policy owner the right to renew the coverage at the expiration date without evidence of insurability. The premium for the new term policy will be based on the insured's current age. For example, a 10-year term policy that is renewable can be renewed at the end of the 10-year period for a subsequent 10-year period without evidence of insurability. However, the insured will have to pay the premium that is based on his or her attained age. If an individual purchases a 10-year term policy at age 35, he or she will pay a premium based on the age of 45 upon renewing the policy.

Face amount

The amount of benefit stated in the life insurance policy

Endow

The cash value of a whole life policy has reached the contractual face amount

Attained Age

The insured's age at the time the policy is issued or renewed

Indexed Life

The main feature of indexed whole life (or equity index whole life) insurance is that the cash value is dependent upon the performance of the equity index, such as S&P 500 although there is a guaranteed minimum interest rate. The policy's face amount increases annually to keep pace with inflation (as the Consumer Price Index increases) without requiring evidence of insurability. Indexed whole life policies are classified depending on whether the policy owner or the insurer assumes the inflation risk. If the policy owner assumes the risk, the policy premiums increase with the increases in the face amount. If the insurer assumes the risk, the premiums remains level.

Level Term Insurance

The most common type of temporary protection purchased. The word level refers to the death benefit that does not change throughout the life of the policy.

Beneficiary

The person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out.

Annuitant

The person who receives benefits of payments from the annuity, whose life expectancy is taken in consideration, and for whom the annuity is written. The annuitant and the contract owner do not need to be the same person, but most often are. A corporation, trust or other legal entity may own an annuity, the the annuitant must be a natural person.

Adjustable Life Insurance (CONTINUED)

The policy owner also has the option of converting from term to whole life or vice versa. However, increases in the death benefit or changing to a lower premium type of policy will usually require proof or insurability. In the case of converting from a whole life policy to a term policy, the insurer may adjust the death benefit. The policy owner may also pau additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash clue or to shorten the premium paying-period. Although adjustable life policies contain most of the common features of other whole life policies, the cash value of an adjustable life policy only delouse when the premiums paid are more than the cost of the policy.

Level Premium

The premium that does not change throughout the life of a policy

Owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. The owner of the annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. The owner of an annuity may be a corporation, trust or other legal entity.

Annually Renewable Term (ART)

The purest form of term insurance. The death benefit remains level (in that sense, it's a level term policy), and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as the probability of death increases.

Universal Life Insurance offers one of two death benefit options to the policy owner. Option A is the level death benefit option, and Option B is the increasing death benefit option.

Under Option A (Level death benefit option), the death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in the later years. According to this definition, there must be specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy. The percentages that apply to the corridor are established in a table published by the IRS and vary as to the age of the insured and the amount of coverage. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes and consequently loses most of the tax advantages that have been associated with life insurance. Under Option B (Increasing death benefit option), The death benefit includes the annual increase in cash value that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be qual to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, all expenses of this option are much greater than those for option A, thereby causing the cash value to be lower in the older years (all else being equal).

Universal Life Insurance

Universal life insurance is also known by the generic name of flexible premium adjustable life. That implies that the policy owner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. in face, the policy owner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance. If the cash value is too small, the policy will expire. A universal life policy has two components: an insurance component and a cash account. The insurance component of a universal life policy is always annually renewable term insurance.

Universal Life Insurance (CONTINUED)

Universal life policies allow the partial withdrawal (partial surrender) of the policy cash value. However, there may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made. During the withdrawal, the interest earned on the withdrawn cash value may be subject to taxation, depending upon the plan. The death benefit will be reduced by the amount of any partial surrender. Note, however, that a partial surrender from a universal life policy is not the same as a policy loan

Limited- Pay Whole Life

Unlike straight life, limited-pay whole life is designed so that the premiums for coverage will be completely paid-up well before age 100. Some of the more common versions of limited-pay life are 20-pay life whereby coverage is completely paid for in 20 years, and the life paid-up (LP--65_ whereby the coverage is completely paid up for by the insured's age 65. All other factors being equal, this type of policy has a shorter premium-paying period than straight life insurance, so the annual premium will be higher. Cash value builds up faster for the limited-pay policies. Limited-pay policies are well suited for those insureds who do not want to be paying premiums beyond a certain point in time. For example, an individual may need some protection after retirement, but does not want to be paying premiums at that time. A limited pay (paid-up at 65) policy purchases during the person's working years will accomplish that objective.

Variable Whole Life Insurance

Variable life insurance (variable whole life insurance) is a level, fixed premium, investment-based product. Like traditional forms of life insurance, these policies have fixed premiums and a guaranteed minimum death benefit. The cash value of the policy, however, is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer. The policy owner bears the investment risk in variable contracts. Because the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be kept in the insurance company's general account. These assets must be held in a separate account, which invest in stocks, bonds, and other securities investment options. Any domestic insurer issuing variable contracts must establish one or more separate accounts. Each separate account must maintain assets with a value at least equal to the reserves and other contract liabilities

Whole life insurance

WHOLE life insurance provides lifetime protection, and includes a savings element (or cash value). Whole life policies endow at the insured's age 100, which means the cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100. The policy premium is calculated assuming that the policy owner will be paying the premium until that age. Premiums for whole life policies usually are higher than for term insurance.

Deferred

Withheld or postponed until a specified time or event in the future