ch 4

exchange privilege rider

permits a policy owner to exchange a life insurance policy for another in the future if desired. -allows them to take advantage of policies that may be more sutiable in the future

Cash Surrender Option

policyowners may request an immediate cash payment of their cash values when their policies are surrendered.

basic forms of whole life

straight whole life, limited pay whole life and single-premium whole life

absolute assignemtn

the transfer of the poliyc is complete and irrevocable

assignment provision

transfer of ownership of life insurance policy. the new onwer is known as teh assignee

collateral assignemnt

transfers specific ownership rights to a creditor

one year term dividiend option

use dividends to purchase as much one year term insurance as possible

monthly debit ordinary insurance

a combinatoin of industrial and ordinary insurance

discretionary provision

Gives authority to the insurer when determining the eligibility of an insured for benefits under the policy; designed to protect the insurance company most common exlusions: war, aviation, hazardous occuptions, suicide

reduced premium dividend option

allows a policy ownder to use the dividend to pay all or part of the next premium due on the policy

Nonforfeiture Options

cash value, reduced paid-up insurance, extended term insurance

owner rights provision

defines the person who may name and change beneficiares, select options available under the policy, and receive any financial benefits

right to defer loan

insurer has the right to defer payment up to 6 months in mosts states after the request. protects insurer if multiple ppl want to withdraw

minimun deposit

method of financing life insurance. best suited for individuals in high marginal tax brackets. -allows policyowner to use policy loans to pay premiumds. ex: allowed to borrow cash value and use it to pay premium and hen only has to pay the difference

current assumption whole life (CAWL) / / Interest sensitive whole life insurance

a nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience

waiver of cost of insurance

a rider that covers the cost of the insurance but not the other portion of the premium that pays for the investment component of the whole life policy -whole life policy only

adjustable life

aka bleneded or combination -person insured cannot change -combinging term and permanent insurance into a single plan -policyowner determines face amount needed and permiums they want to pay. the insurer then selects the appropriate plan to meet their needs. -policyowner can increase or decrease premium or premium period, and increase or decrease face amount and period protection ->increasing face amoutn would require proof of insurability -can be converted from term to whole and vise versa. -->lots of flexability, but more expensive than conventional term or whole due to its flexability.

automatic premium loan rider

allows the insurer to pay premiums from the policys cash value if premiums ahve not be paid by the end of the grace payment period

free look provision

allows the policy owner a free look at the policy for a specific number of days

automatic premium loam provision

authorizes the insurere to withdraw from the policys cash value the amount of overdue premium if the premium has not been paid by the end of the grace period.

Reduced Paid-Up Insurance Option

cash value is used as the premium at a lesser face amount than the origional policy. premiums no longer paid out of pocket.

variable /universal whole life (VUL)

combines characteristcs of variable whole and universal life insurance. -offers policyonwer a combo of investment options with flexible premium payment/expense deduction method and guarneteed minimun death benefit

features of whole life

combines pure death protection with cash value -death benefit (face amount) remains constant throughout life. -premiums set at time of poliyc issue and remain fixed. -assumes premiums will be paid till death or age 100 (whatever happens first) -policy designed to "mature" or "endow" at age 100, meaning that the cash value accumlations are equal to the face amount.

Family Maintenance Policy

consists of both whole and level term insurance, providing income for a specific period beginnging on the date of death of insured. -provides income for stated number of years started at date of indered's death -beneficiary will also recieve the entire face amount (whole life) at end of income paying period. -if insured dies after specified period, only whole life is recieved

family plan policies

designed to insure all family memebres under one poliyc.

biggest difference between participating and non participating

dividends -if dividends are left with the insurance agency, the policy may be paid for when the cash value plus accumulated dividiends equal the net single premium

paid up additional options

dividends can also be sued to purchase paid up additions of life insurance

juvenile insurance

insures the life of a minor. -does not require the minors consent. -known as third party ownership -adult is the premium payer until child becomes of age to take voer payment

policy riders

offered added options to policies to meet theri unique needs -must be selected at time the policy is applied for

single -premium whole life insurance

one large premium payment at the beginning of the policy period. then, coverage is completely paid for the full life policy. -immediate cash value is created -a large part of the premium is used to set up the policys reserve -pay less in the long run than if premiums were stretched over several years

payor provision or rider

provides for waiver of premiums if the adult premium-payer should die or become disabled.

main feature distingushing whole life to term life

the cash value and endowment (maturity) -earnes intrest, available for you to withdraw/borrow

misstatement of age or sex provision

the company reserves the right to make an adjustment if the age of the insured is misstated. -adjustments are made in premiums, amount of insurance, or benefits

insuring clause

the companys bsasic promis to pay benefits upon the insured's death.

advantages of term life insurance

-less expensive -if renewable/convertible, protects the insured insurability -may be used in conjunction with debts, mortgages, or as a supplement to whole life insurance -provides greatest amount of protection at the lowest cost

nonparticipating life insurance

A life insurance policy that does not pay dividends to policyowners

disadvantages to term life insurance

-no protection is in effect once the term ends -if renewable / convertible, premium rates rise as the person ages -few death claims are acutally paid under term -possesses no equity (no cash value), so does not mature like a whole life policy does

modified endowment contracts

-premature distribution of a MEC incures a tax penalty of 10% -cumulative premiums exceed federal tax law limits - It must pass the "7-pay test" ->If the total amount a policyowner pays into the contract during its first seven years exceeds the sum of the net level premiums that would have been payable to provide paid-up future benefits. ->by definition, all single premium policies are MECsf

Other Policy Provisions

1. beneficiary designmation- policy owner dectates who receives the benfits 2. settlement options - the ways in which the proceeds can be paid out

amount of a poliycs cash value depends on:

1. the face amount of the policy -the larger the face amount the larger the cash values 2.the duration and amount of the premium payments -the shorter the premium payment period, the quicker the cash value grows, -the higher the premium the quicker the cash value grows 3. how long the policy has been in force -the longer its been in force, teh greater build up in cash values

other insured provision aka dependent riders

ppl that may be added to a primary policy to cover a spouse or other insured

universal life death benefit options

Option A - level death benefit, Option B - increasing death benefit

straight whole life

aka ordinary whole life, providing permanent level protection with level premiums from the time the policy is issued until the insureds death or age 100.

join life and survivor policies

aka second to die policy. -covers two lives, but the benefit is paid upon the dath of teh last surviving insured. -can provide money to pay taxes on assets

guaranteed insurability option rider

allows a policy owner to purchase additoinal life insurance at specified dates w/o providing evidence of insurability

renewable term insurance

allows policyholder to renew the term policy before it expires, without having to provide evidence of insurability. option to renew must be included in policy when purchased. -premiums for renewal period will be higher than initial period. -step up premium due to age and increased risk -allows the insured to continue protection even if they ave become uninsurable due to medical issues. -as premiums increase each renewal, the cost of the policy becomes cost prohibitive. -typically only available to renew until a speicifed age.

equity index universal life insurance

allows policyholders to link accumulation values to an outside equity index.

proof of death

beneficiary must file a claim with insurance company submitting a copy of death certificate

decreasing term insurance

benefit amounts that decrease gradually over the term of protection and have level premiums. 50K life insurance over 20 years decreases to $0 by the 20th year. -commonly used to protect pay off debt in the event of the insured's death ex. mortgage redemption insurance is a decreasing term life plan and is a way to have policyholders a way to have their mortgages pain off in they die beofre its fully paid off. -face value decreases as the balance remaining on the mortgage degreases. -used when the amount of protection needs to decrease over a period of time

endowmnets

cash values that grow at a rapid pace so that the policy matures at a specified date before age 100. -pay a death benefit to a named beneficiary upon the death of an insured during a speicified endowment period. -pays the policyowner a cash value equal to the face amount of the poilcy at the end of the endowment (when the contract endows), if the insured is still living. -does not pay cash value upon death -pays at the earlier of death or at the end of a specifc period (at the end of the endowment period) -whole life policy with accelerated matruity date. ->whole life policy matures at age 100, endowments mature at the end of a specific period, at which the cash value matches face amount. ->shorter endowmnet period means higher premiums -provide a living benefit for a speicific time (college or retirement) -> they only pay if the insurer does not die.

interim ter insurance

convertible term insurace for someone who wants immediate protection but cannot afford permanent protection immediatly. provides interim coverage between now and then eventual conversion to permanet protection. ->typically within the first year. -premium for temp. protection based on the origonal application age -premium for permanenent protection based on the attained age

join life policies

covers two or more people. -using permanent insurance, pays the death benefit at the first insuereds death. -> survivers then have the option of purchasing a single individual policy without evidence of insurabilty. -premium is less than permium for separate policies. premiums paid when first insurer dies

reinstatment provision

in the case of nonpayment of premiums, a policy is restored to its origional status and values brought up to date with the folllowing things required: -back premiums paid -interest on past due premiums paid -outsdanding loans required to be paid -provided insurability -limited time period for this to be possible (usually 3 years)

universal life insurance

insurer pays a monthly fee that splits into two parts 1.covers insurance 2.savigns -meant to be more flexable to policyowner by allowing them to chose how much premium you pay within a certain range -if the cash value account is not large enough to suppor the monthly deductions the policy terminates; -partial withdrawals can be made from the policys cash value account -policy surrender charges must be disclosed

grace period provision

meant to protect the insured. if there is a slight laps in the payment of premiums, prevents insurnace company from forcing provided insurability again. ex. monthly premiums, grace period is no less than thiryt days. -if insured dies during the grace period and the premium has not been paid, the policy beneift is payable, but with premium amount due deducted from benefit

three basic kinds of life insurance coverage

ordinary insurance, industrial insurance, or group insurance

face amount plus cash value

promises to pay the policies face amount plus the policies cash value upon death of insured -not common

consideration clue

the value given in exchange for a contractual promise. states that the policy owners consideration consists of completing the application and paying the initial premium.

policy loan provision

within prescribed limits, policyowners may borrow money from the cash values of their policies. -can be repaid anytime before death, and if not the balance and interest accrued are deducted from the claim.

Jumping Juvenile Life Insurance

Juvenile insurance on which the face amount increases by a multiple, usually five, of the original face amount when the insured reaches 21.

limited pay whole life

have level premiums that are limited to a specified number of years. -ex.20-pay life policy has premiums for the first 20 years, but then no more. -ex.life paid up at 65 policy, pay premiums till age 65 and then no more. ->results in larger premium paymnents, making more cash value add up wuikcer. ->after the premium paying years, cash value continues to grow bc of interest but just not as quickly bc no more premiums are being paid. ->perfect for somoene who wants permanent insurance but not wanting to pay till death

Excess Interest Provision

if a beneficiary decides to leave life insurance proceeds with an insurer following the death of the insured, the insurnace company must pay interest on the proceeds. the interest credited to or paid to the benefirciary is taxable.

accumulation at interest option

leave dividends with the company to accumulate interest, availbel to withdraw anytime

family income policies

consists of both whole life and decreasing term insurance. -provides monthly income to a beneficiary if death occures during a specified period -income is supplied by a decreasing term policy and payments begin when the insured dies and continue through specified period. ex, insured dies 15 years into twonety year policy, 5 years of beneifts. -if insured dies after speicified period, only the face value is paid to the benefiricary since decrease term insurance expired.

convertible term insurance

designed to terminate after a set period of time. may be given the option to convernt to permanent protection (if included in contract when purchased) term -> whole ex. a term policy that provides insurance for 15 years and also has a conversion privilege is called a 15 year convertible term policy. if steve purchased 15 year term life insurance and then 10 yeras in has a heart attack that negatively affects his insurability, he wont be able to get new insurance after the 15 year period possibly. if he purchansed a 15 year CONVERTIBLE term policy he would have the option to extent it to perminent protection the premium rate will reflect the insured age at either the time of the conversion or the time the origonal term policy was taken out the cost of insurance is the most imporant factor to consider when determining whether to convert term insurance at the insured origional age or tehe insured attained age. premiums lower using origoinal age vs attained age. but owner must fund an amount wual to the difference what they would have spent on the policy had they started with tthe whole life. this deposite guarantees lower premiums.

non medical life insurance

does not require medical exam and is more expensive -insurer averages out risk and charges accordingly. -still inquires about medical history and lifestyle

cash values

once premiums have been paid for a certain period of time, a portion of the premium is deposited in to the policy cash value (typically 2/3 years in). accumulated value can builded interest. cash value will equal benefit face amount by age 100. -> if a person purchases insurance today and lives to age 100, they will revieve all their premiums back plus insurance. -> available to the policyowner at any time. owner may cancel insurance and revieve the cash value, or borrow money from it, with an interest charged.

waiver of monthly deductions

pays monthly deductions while youre disabled.

participating life insurance

policy that has dividend payments from the life insurance company.

variable whole life

premium payments are fixed. part placed in to separate account for stocks, bonds, etc. ->cash value varies due to stock market then. -> if earings of this fund increase your death benefit will then also increase. -> dont gaurnetee cash values then, its the insered who takes that investment risk

granted premium whole life

premiums are lower than typical whole life rates during preliminary period (5-10 years),increasing yearly, then staying level after preliminary period.

whole life premiums

premiums for whole life poliyc are caluclated on the baiss of the number of years between the insured age at issued and age 100. the shorter the payment period, the higher the premium.

modified whole life insurance

premiums that are lower than typical whole life premiums during the first few years (usually 5), and then higher afterwards. -first 5 year rate is only slightly higher than term life insurance. ->purpose is to make the initial purchase of whole life insurance easier and more attractive.

suicide provision

protects the inserer against the purchase of a policy in contemplation of suicide. -stipulating a period of time where the death benefit will not be granted if suicide is commited

accelerated benefits provision

provide for the early payment of some portion of the policy's face amount should the insured suffer from a terminal illness or injury.(up to 75%)

increasing term insurance

provides a death benefit that increases at period intervals over the policys term. -typically increase as percentages of the origonal amount or may be tied to a cost of living index (consumer price index)

level term insurance

provides a level amount of protection for a specified period. premiums are fixed for the term of the policy. ex: 100k 10 year level term policy provides stright 100K of coverage for a 10 year period. if the insured dies within 10 years, recieve 100K. if live beyond, get no benefits

long term care rider

provides an acceleration of the death benefit to help pay for costs involved with long ter care

accidental death benefit rider (double indemnity)

provides an additional amount of insurance usually equal to the face amount of the base policy if the cause of death was an accident.

annually renewable term (ART) or yearly renewable term (YRT)

provides coverage for one year and allows the policyowner to renew coverage each year without evidence of insurabiliy. -most basic form of life insurance. -renewal typically automatic, and with an increasing premium .

accidental dath dismemberment (AD&D)

provides financial benefit if an insured is killed, loses a limb, goes blind, or paralized in a covered accident

whole life insurance

provides for the payment of death benefits upon the dath of the insured -provides permanent protection for whole lifetime from date of issue to death --aka ordinary life, permanent, continuous premium life, straight life -fixed death benefit and fixed premium

cost of living rider

provides increases in the amount of insurace protection wihtout requiring the insured to provide evidence of insurability -amount increased is tied to inflation

return of premium rider

provides that in the event of death of the insured within a speified period of time, the policy will pay, in addition to the face amount, an amount equal to the sum of all premiums paid to date.

waiver of premium rider

provides valuable added security for policyowners -available on both permanemtn and term policies -prevents a poliyc from lapsing for nonpayment of premiums while the insured is disabled and unable to work -must be seriously disabled for cetrain length of time and must meet definiitions of "totally disabled "

industrial (home service) life insurance

small issue amounts (1K) with premiums collected on a weekly or monthly basis. often marketed and purchased as burial insurance. aka combination or debit companies.

incontestable clause

specified that afer a certain period of time has elapsed (usually two years from issue date) the insurer no longer has the right to contest the validity of the life insurance policy. -allows the inserer to contest a claim during the contestable period -not valid if claim with content to murder, impersonation, or no insurable interest

modification provision

states that any changes made to the contract must be in writing and endorsed or attached to the poliyc. staes that only an officer of the insurer or authorize home office posses the authrotiy to make any changes or monidfications.

entire contact provision

states that the policy document, the application, and the attached riders constitute the entire contract. nothing can be incorporated by reference -prohibites the insurer from making any changes to the contract policy after the policy has been issued

re-entry term insurance aka revertible term

states that the premium can change at renewal based on insurabiliy. -to maintain lowest premium, the insured may have to prove insurability upon renewal. -if failed physical exam, higher premium rate

step up premium

steady increase in premium

term life insurance

temporary protection. early death protection low cost insurance for a specified, limited, period of time that pays a benefit only if the insured dies during that period. can be defined in terms of years or age (ex 5 yr insurance, or till age 60). only provide coverage for that term. if you dont die, dont get benefits. provides the greatest amount of death benefit per dollar -cheaper than whole life insurance. but do not build cash value

what is considered a collateral on a life insurance policy loan

the policy cash value

maturity at age 100

the policy is designed so at age 100, the cash value of the policy has accumulated to the point that it equals the face amount of the policy. no more premiums are owed, and the insurance company will issue checks for the full falue of the policy.

ordinary life insurance

the principle life insurance purchased in the US and includes both temporary (term) and permanent (whole, universal and variable) life insurance coverage. individually underwritten, meaning each insured must qualify for the insurance. premiums are paid monthly, quarterly, or annually. - cash value accumulations have guaranteed mininum interest rates

extended term option

use the policy's cash value to purchase a term insurance policy in an amount equal to the original policy's face value for as long a period as the cash value will purchase.

Stranger/Investor-Owned Life Insurance (STOLI)/(IOLI)

when a person purchases life insurance only to sell to a third party with no inusrable interest. -prohibited in most states -where an investor pays a person to take out a considerable life insurance policy for that person the investor pays the persons premiums in exchange for the persons life insurance benefits

cash dividend option

when dividends become payable they usually are paid on policy anniverary dates