Chapter 3- Types of Policies and Riders

Endow (Mature)

The maturity date or time at which the policy's cash value equals the face amount and the proceeds are paid to the policyowner.

Riders Affecting the Death Benefit Amount: Accidental Death and Dismemberment

provides a benefit in addition to the base of the policy. The rider pays 100% of the amount of the rider, known as the principal sum, upon accidental death. If the insured suffers an accidental dismemberment loss, such as loss of a limb or eyesight, the rider pays 50% of the rider amount, known as the capital sum. Double dismemberment benefits (loss of 2 limbs or total eyesight) are provided at 100% of the rider. Benefits of the rider are only payable if the loss is accidental and occurs within 90 days of the accident. This rider typically expires at age 65.

Rider Principal Sum

100% of the amount of the rider

Rider Capital Sum

50% of the amount of the rider

Level Term Policy Special Features: Renewable

A benefit that will renew the contract on the renewal date without evidence of insurability. The policy may be a one (annual), five, ten, or twenty year renewable contract, with premiums increasing at the beginning of each renewal period. The renewal premium is based upon attained age. Level term policies may offer the option of being renewable for an additional premium.

Sensitive Whole Life Products: Current Assumption or Interest-Sensitive Whole Life

A form of whole life in which the insurance company can change the premiums or interest rate being credited to the account based on current money market rates. Interest rate changes affect the policy premiums. The policy has a guaranteed minimum death benefit, but may increase based on the growth of the cash value. If current rates increase, either the policyowner pays a reduced premium or the cash value will increase at a faster rate. It is possible that the cash value will increase too quickly and could cause the policy to mature prior to age 100. To prevent this from happening, the insurer will add a corridor of insurance protection to keep the policy from endowing. This increase is provided without evidence of insurability.

Universal Life (Flexible Premium Adjustable Life Insurance): Loan

A loan is taken against cash value remaining in the policy. The cash value secures the loan and cannot be used for other purposes, but it remains in the policy. The loan itself neither decreases the total cash value, nor the face amount. The amounts payable would decrease if the loan is not paid back before the insured dies or the policy terminates.

Universal Life (Flexible Premium Adjustable Life Insurance): Partial Withdrawal

A partial withdrawal is a permanent transaction, and cannot be reversed. The funds are paid from the general account. The cash value decreases, and the face amount may be affected as well. Depending on the policy, the withdrawal may also be taxable.

Disability Riders: Waiver of Cost of Insurance

A rider that waives the deduction of the monthly cost of insurance and expense charges associated with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability. Usually, the disability must occur prior to a stipulated age.

Disability Riders: Payor Benefit (Waiver of Payors Premium)

A rider that waives the premium payment if the owner dies or becomes disabled and is unable to make the premium payment on behalf of the insured. When added to a juvenile policy, the waiver normally cancels at the insureds age 21 to 25 meaning if the payor has not died or become totally disabled. The payor typically must show evidence of insurability before the rider can be added to the policy.

Accelerated Death Benefits Rider: Living Needs Rider

Allows the early payment of a portion of the face amount before death, should the insured become terminally ill, usually 12-24 months life expectancy. Typically, it is an amount equal to 50 - 90% of the policy's face amount. Upon death, the early payment will be deducted from the benefit paid to the beneficiary. The rider is normally provided without a premium charge because it is an advance of the death benefit.

Nonfamily Rider

Covers an additional insured with an insurable interest, such as a business partner.

Types of Term Policies: Credit Life Insurance

Credit life insurance is a special form of decreasing term. Unlike the standard decreasing term policy, credit life automatically names the creditor as the beneficiary. The policy cannot be written for more than the outstanding debt, and once the loan is paid, the policy ends.

Risk Corridor

If the cash value approaches the face amount, the death benefit must increase so as to provide for this amount at risk. This minimum separation between the cash value and the death benefit. This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early.

Disability Riders: Waiver of Premium

If the insured becomes totally disabled, the company waives premiums for the duration of the disability, therefore the policy remains in-force. There is usually a maximum 6-month elimination period before premiums are waived. The Waiver of Premium rider drops at an age stipulated in the contract, such as age 65. So the disability must occur prior to this age in order for premiums to be waived. Once on claim the waiver continues either until the disability ends or the policy ends. Cash value and dividends continue as under normal premium payments.

Riders Affecting the Death Benefit Amount: Accidental Death Benefit (Double or Triple or Multiple Indemnity)

In the event of a claim, the policy normally pays double or triple the face amount if death was a result of an accident. The benefit is payable only if death occurs before a specific age and within 90 days of the accident. It does not add any additional values to the base policy. It may be added to any type of individual life policy. Among other exclusions, death due to sickness is excluded. This rider typically expires at age 65.

Cash Value

Money accumulated in a permanent policy which the policyowner may borrow as a policy loan or receive if the policy is surrendered before it matures.

Universal Life (Flexible Premium Adjustable Life Insurance) Death Benefit Options: Option A

Pays the face amount of the policy and provides a level death benefit. As the cash value increases, the company's risk decreases. A universal life policy must include an amount at risk. If the cash value approaches the face amount, the death benefit must increase so as to provide for this amount at risk. This minimum separation between the cash value and the death benefit is called the "risk corridor." This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early. Individuals purchasing Option A will benefit from larger cash value accumulations

Ordinary Whole Life: Limited Payment

Premium payments are for a specified time (20-Pay Life or 30-Pay Life) or to a specified age (Life Paid up at 65). The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. While the annual premium is higher than Straight Life, it is paid for a shorter period of time and will have a lower total premium outlay.

Accelerated Death Benefits Rider: Long-Term Care Rider

Provides up to 100% of the policy benefits if the insured qualifies for long-term care benefits as defined in the rider, such as the inability to perform 2 out of 6 activities of daily living. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary. The amount of protection is determined at the time of policy purchase. Long-term care benefits are paid income tax free after the insured meets the qualifying requirements.

Types of Term Policies: Re-Entry Term Option

Term policies with this option will allow the insured, upon the end of the original term, to renew based on attained age and may qualify at a discounted rate by proving evidence of insurability. Typically with an annual renewable term policy the term automatically renews as long as the premiums are paid. However, the Re-Entry Term option will allow the insured to renew at a lower rate than renewable term as long as the insured meets the qualifications.

Term Riders

Term riders may be attached to virtually any permanent policy, interest sensitive, or term policy to provide an amount of temporary extra insurance protection for a fixed period of time. These riders are useful when an insured needs more insurance or a decreasing amount of coverage for a limited time. Example: mortgage protection.

Riders Affecting the Death Benefit Amount: Cost of Living (COL)

The cost of living rider enables the insured to purchase more insurance each year to help offset increasing insurance needs due to inflation. The amount that can be purchased is based on increases in the cost of living index. This additional coverage is usually available at low rates and evidence of insurability need not be provided for such increases.

Face Amount

The death benefit amount payable on a life insurance policy. In other words, the amount of coverage the policy provides. This is sometimes referred to as the limit of liability.

Types of Term Policies: Decreasing Policy

The death benefit decreases, but premiums remain level for the policy term; often utilized to pay off outstanding mortgage balances. Often such policies are sold as mortgage protection with the amount of insurance decreasing as the balance of the mortgage decreases. The premiums paid for decreasing term are lower than the premiums payable for level term since the benefit decreases throughout the term of the policy.

Types of Term Policies: Increasing Policy

The death benefit increases over the life of the policy while the premiums remain level. This type of term is normally written as a rider for the return of premium on a permanent policy over a set number of years.

Ordinary Whole Life: Straight Life or Continuous Premium

The premium is level and payable to age 100 or death of the insured, whichever comes first. The face amount remains level throughout the life of the policy. This policy has the highest total premium outlay.

Types of Term Policies: Annually Renewable Term

The simplest form of term life insurance is for a term of one year. The death benefit remains level and the premiums increase yearly as the policy renews. While it is very inexpensive initially compared to other types of life insurance, over time it can become cost prohibitive.

Family Rider

This is the combination of writing both the Spouse and Child Rider on one policy. This may be written as a policy or a rider; in the market today, it is normally written in the form of a rider. Usually family riders are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse and $1,000 on each child.

Specialized Policies: Return of Premium Term

This term policy is written for a specified number of years (20-30 years). If the insured is still living at the end of the term, the policy will provide a refund of all the premiums paid into the policy. Typically these policies have a higher premium than level term insurance.

Spouse (Other Insured) Rider

This type of rider will provide level term coverage on the life of the insured's spouse. Such rider will also provide a conversion provision permitting the spouse to convert to permanent coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy.

Specialized Policies: Joint Life (First to Die)

a whole life policy that is written to cover 2 or more lives. The death benefit is paid upon the first insured to die. Once payment is made, the policy no longer exists. Premiums are based upon a joint issue age; which is obtained by an average of both insureds' ages resulting in a lower premium than two separate policies. This policy provides income protection for spouses when both have earned income.

Viatical Settlement

an agreement between a third party (specializing in such transactions - viatical settlement provider) and a life insurance policyowner (viator) insuring the life of an individual with a life-threatening or terminal illness, normally with a life expectancy of 2 years or less. The firm purchases the policy at 60 to 80% of the face amount, expecting to profit as the new policyowner at the time of claim. The insured is provided with tax exempt discounted value during the terminal illness, relinquishing all ownership rights to the buyer.

Types of Whole Life: Indeterminate Premium

like a non-participating whole life plan of insurance, except that it provides for adjustable premiums. The company will charge a "current" premium based on its current estimate of investment earnings, mortality, and expense costs. If these estimates change in later years, the company will adjust the premium accordingly but never above the maximum guaranteed premium stated in the policy.

Specialized Policies: Joint Survivorship Life (Last to Die)

policy is written to cover 2 or more lives, and the death benefit is not paid until the last insured dies. Premiums are based upon a joint issue age determined from a special table. Couples who plan to defer estate taxes until the second spouse dies purchase this policy and have the policy owned typically by an irrevocable life insurance trust. Rates are lower than 2 separate policies and coverage is in larger amounts.

Types of Whole Life: Modified Premium Whole Life

provides a level death benefit and requires that premiums be paid for the life of the policy (to age 100). The premiums payable however do not remain level. A modified premium policy begins with a premium lower than ordinary whole life for the initial 5 years. After the first 5 years, the premium will increase and remain level throughout the balance of the life of the policy. Because the premiums are lower in the first few years, the cash value will take longer to accumulate. This policy does not offer immediate cash value.

Accelerated Death Benefits Riders

provide for an early payment of a portion of the face amount prior to death. This rider provides tax free access to policy benefits based on an insured qualifying as terminally ill (death expected within 12-24 months), or chronically ill such as permanent confinement in a nursing home, long-term care if unable to perform activities of daily living or other acute illness that require long-term care, such as AIDS or the need for an organ transplant. These benefits do not include disability income. Accelerated death benefits do not have to be repaid if the insured's health improves. The accelerated death benefit cannot contain exclusions or restrictions that are not also exclusions or restrictions in the policy. Typical exclusions apply to suicide, intentional self-inflicted injury, war, or engaging in illegal occupations or activities.

Life Settlement

similar to a viatical settlement in that it is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its death benefit. There is no requirement for the insured to be terminally ill in order for a life settlement to occur, whereas, there is with a viatical settlement. A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy.

Rider

An added benefit attached to the policy that modifies existing coverage. A rider is usually added at the time of application and typically requires an increase in premium.

Disability Riders: Disability Income Benefit

In the event of total disability and after an initial waiting period (such as 6 months), premiums are waived and the insured is paid a monthly income. The monthly disability income benefit is typically limited to a percentage, usually 1% of the face value. The benefit paid from the rider does not reduce the death benefits paid out upon death

Riders Affecting the Death Benefit Amount: Return of Premium

Increasing Term insurance equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount plus an amount equal to the premiums paid. It adds flexibility when added to a whole life policy. It is also seen with term life insurance policies where for an additional premium the policy will provide for a partial or total refund of all premiums paid depending upon when the policy is cancelled or converted.

Riders Affecting the Death Benefit Amount: Return of Cash Value

Increasing Term insurance equal to the cash value. This rider provides the payment of term insurance equal to the cash value amount at time of death. However, this does not relieve the obligation to pay loans from the claim proceeds at time of death.

Universal Life (Flexible Premium Adjustable Life Insurance) Death Benefit Options: Option B

Pays the face amount stated in the contract which is level term, plus any cash values accumulated over the years. This provides for an increasing death benefit. The mortality charge for Option B is greater than Option A. Individuals purchasing Option B will benefit from greater death benefits.

Types of Term Policies: Level Policy

The death benefit remains level and the premiums remain level during the policy term. Most group life insurance is written with a level term death benefit.

Ordinary Whole Life: Single Premium

The entire premium is paid in a lump sum at the time of purchase and creates immediate cash value. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. This policy has the lowest total premium outlay for the life of the policy.

Sensitive Whole Life Products: Indexed Universal Life (Equity Indexed)

This policy gives policyowners the opportunity to decide the percentage of cash value that is invested in traditional fixed income securities. The remainder of the cash value is invested in an equity index account linked to a stipulated stock index, typically the S & P 500. When there is an increase in the market, a given percentage of the gain is used to determine the interest credited to the policy. When the market declines, the policy is credited with the minimum guaranteed interest rate or zero interest. The policy typically guarantees the principal amount in the indexed account.

Specialized Policies: Juvenile

any policy written on the life of a minor. A popular type is commonly called "Jumping Juvenile" because it automatically increases the face amount at a given age (usually age 21 to 25) without evidence of insurability. The premium remains level for the life of the policy, and the usual increase in the face amount is 5 times the issue amount. It protects the insured's future insurability, and a parent is normally the premium payor.

Riders Affecting the Death Benefit Amount: Guaranteed Insurability

Allows the insured to purchase stated amounts of additional insurance every 3 years based on certain ages (specifically 25, 28, 31, 34, 37, and 40), events, or specified dates without evidence of insurability up to a maximum age, usually 40. The premiums are based on attained age. Certain events allow for the insured to obtain additional insurance in between the specified ages such as marriage and the birth or adoption of a child (the need for insurance coverage may increase). It normally limits the insured to acquire additional amounts of the same type of coverage already in-force. The insurer often limits the amount of coverage that may be added. This rider drops at age 40.

Life Insurance Policy Riders

An amendment or rider modifies conditions of the policy by expanding or decreasing its benefits, or excluding certain conditions from coverage, and are at the option of the insured. Policy riders are available for an additional premium in most cases. Riders are provided for a specified period of time as stated in the policy. It is typical for a rider to end at a specified age (such as the insured's age 65). Once a rider drops from the policy, the additional premium will also drop. Most riders are added at the time of policy issue. Any riders added after the policy has been issued usually require evidence of insurability.

Child Rider

This type of rider will generally provide level term coverage on the life of all of the insured's children. Usually offered at one premium rate and may cover newborns after 14 days of life and adopted children without increasing the premium. The children may remain covered up to age 21 or 25, If the primary insured should die, the rider becomes a term policy and will be in force until the maximum age stated in the policy.Upon reaching the maximum age, the rider will also provide a conversion provision, which will permit each child to convert to a permanent plan of coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy.

Variable whole life

a whole life policy with certain benefits that will vary based on market conditions. It has a fix premium that remains level throughout the contract. The policy also provides for both a general account and a separate account. The death benefit is tied to the separate account and also varies along with the performance of the separate account. Death benefits are recalculated annually. While the separate account values may decrease, the policy will never pay less than the guaranteed death benefit in the general account. Policy loans are available from either the general account or the separate account. Typically 75-90% of the cash value can be borrowed. Partial Surrender not allowed. Variable Life is considered a security and can only be sold by producers registered with FINRA

Variable Life: General Account (guaranteed values)

The general account is fixed and guaranteed and provides for a guaranteed minimum death benefit to age 100. Policy loans are available from the general account.

Level Term Policy Special Features: Convertible

The right to convert the existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract. The premium can be based upon attained age or issue age. The premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond. If the conversion is based on the issue or original age, back premiums plus interest will be required to be paid at the time of conversion.

Variable Life: Separate Account (nonguaranteed values)

The separate account is invested in equity securities as offered by the insurance company. The owner may select which separate account they want their premium to be invested in. Cash value in the separate account will fluctuate based on the market conditions and performance of the separate account, which is similar to a mutual fund. The policyowner has an opportunity to achieve higher investment returns. This policy may act as a hedge against inflation. No guaranteed minimum return on the cash value in the separate account. Owner bears all investment risk.