Chapter 4 Special Use Policies

First-To-Die Joint Life Policy; Example: If Jonas, Melvin and Veronica are insured under a $100,000 joint life policy where the policy proceeds are to be split between the survivors and Veronica dies first, then Jonas and Melvin each receive $50,000 and the policy is terminated. If Jonas dies shortly after Veronica, Melvin will not receive any more proceeds.

A first-to-die joint life policy pays the face amount upon the first person's death. After the first person dies, the contract does not provide any further life insurance coverage for the other person. First to die joint life policies are often used for business continuation arrangements.

MEC (Modified Endowment Contract)

A modified endowment contract (MEC) is an over-funded life insurance policy in which proceeds are subject to taxation.

Equity-indexed Life

An Equity-indexed whole life policy is a type contract that is tied to an equity index. Examples of an equity index include the S&P 500 or the Dow Jones Industrial Average. It is similar to an interest sensitive whole life policy.

endowment

An endowment policy is a whole life policy that will pay the face amount under one of two situations: 1.) if the insured is alive at the contract maturity date, or 2.) if the insured dies during the policy period. -The policy cash value must equal the face amount by the end of the policy period.

CPI (Consumer Price Index) = Used to Determine Inflation

CPI (Consumer Price Index) = Used to Determine Inflation

endowment

Cash value in an endowment must accrue very quickly, demanding a higher premium.

Credit Life insurance

Credit life insurance is intended to cover the life of a debtor in the event the debtor dies prior to paying off a debt.The creditor owns the credit life insurance policy and is the beneficiary. The debtor is the insured individual with the debt. Credit life insurance pays the amount of the outstanding debt.

A policy that combines whole life with a term rider, where dividends are earned and used to buy paid-up coverage is: Select one: a. Modified whole life b. Economatic whole life c. Current assumption whole life d. Graded premium whole life

Economatic whole life insurance, also referred to as Enhanced Ordinary Life or Extra Ordinary Life, combines a whole life policy with a term rider in which dividends are earned and used to buy paid-up coverage. The correct answer is: Economatic whole life

endowment

Endowment insurance is similar to level term insurance because it pays a death benefit only if the insured dies during a designated period of time.

Credit life policies usually are issued for a period of 10 years or less. Once the debt is paid off, the debtor's coverage terminates. Credit life policies do not have conversion rights. Credit life policies may be issued individually or through a group policy.

In individual policies, the creditor is the policyowner and beneficiary. In group credit policies, the creditor owns the master policy and certificates are provided to debtors. Insureds under a group policy must receive a certificate of coverage from the creditor indicating their obligations and policy rights. Group credit policies must maintain a minimum number of insureds at all times, which are typically 100 people. New debtors may not be insured if the participation falls below the required minimum.

Joint Life

Joint life insurance policies insure the lives of two or more people. Premiums for joint life policies are less expensive than if each life was insured on a separate policy.

Index-Linked Whole Life

Policy face amount increases with respect to inflation without requiring the insured to undergo a medical exam or provide proof of insurability whenever the face amount increases.

MEC (modified endowment contract = ________________________

Seven-pay Test

MEC (Modified Endowment Contract)

TAMRA restricts the payout on endowment policies issued after January 1, 1985. If a life insurance policy matures prior to the insured reaching age 95, the contract is not treated as life insurance and loses its tax-favored status - the death benefit would be taxable. As a general rule, life insurance death benefits are not taxable, so it is in the policyowner's best interest to avoid these consequences.

TAMRA

Tax Reform Act of 1984. This act restricts the payout of endowment policies.

Charlotte takes out a $14,000 loan. How much credit life insurance can the creditor take out on Charlotte? Select one: a. $767,011 b. $14,000 plus interest c. $7,000 d. $28,000

The amount of credit life insurance can at no time exceed the balance of the debt. The correct answer is: $14,000 plus interest

MEC (Modified Endowment Contract)

The earliest age at which a life insurance policy may endow is age 95. The new 2001 CSO tables increase that age to 120.

endowment

The endowment policy provides a death benefit upon the death of the insured. If the insured is alive at the end of the premium-paying period, then the insurer pays the face amount to the policyowner. Endowment contracts mature on a particular date or when the insured reaches a certain age, such as 20 years from the date of purchase or when the insured reaches the age of 65. For this reason, the cash value in an endowment policy must accrue very quickly, demanding a significantly higher premium.

Economatic whole life insurance, also referred to as Enhanced Ordinary Life or Extra Ordinary Life

combines a whole life policy with a term rider in which dividends are earned and used to buy paid-up coverage.

Interest-sensitive whole life is also known as ________ ________ whole life

current assumption whole life

Index-linked= _________

inflation

The most important points with credit life:

-The creditor can't make money off a credit policy. -The policy can't be for more than the debt. -The policy term can't be longer than the debt. -The creditor can't force the debtor to buy the policy from them.

In an Equity-indexed whole life policy, the cash valued is guaranteed. However, if the stock or equity index the contract is linked to does better than the guaranteed amount, the policy grows at the index's rate. So they have a guaranteed floor, but they don't have a ceiling on growth.

-They have: Fixed premiums, Guaranteed death benefits. - Equity Indexes = S&P 500, DJIA

Credit life insurance is usually issued as decreasing term life. As the debt is paid off, the face amount decreases to match the amount of the debt. At any time, the face amount of the policy cannot be greater than the amount of the debt. The debtor usually pays all premiums.

Creditors often require that debtors have life insurance. This is where credit life insurance comes into play. However, creditors cannot stipulate which insurer debtors use to purchase coverage. Other forms of life insurance, aside from credit life, may be used to cover a debt.

endowment

The policy cash value must equal the face amount by the end of the policy period. Premiums for endowment policies tend to be higher to build cash value more quickly for an earlier policy maturation date.

MEC (Modified Endowment Contract)

To determine whether a life insurance policy is a MEC, the IRS developed the seven-pay test under the Technical and Miscellaneous Revenues Act (TAMRA).

second-to-die, or survivorship life policy

With a second-to-die, or survivorship life policy, two lives are insured on one policy, and the policy pays out only upon the death of the second insured. Survivorship life policies are frequently used for estate planning. The policy proceeds are used to pay estate taxes.

Judy wants to purchase whole life insurance, but cannot afford straight life insurance premiums. Her agent recommends she purchase economatic whole life. If Judy wants $500,000 of whole life coverage, which of the following is a possible arrangement? Select one: a. $500,000 term; $0 whole b. $350,000 term c. $400,000 whole; $100,000 term d. $500,000 whole; $0 term

With an economatic whole life policy, the policyowner purchases a mix of whole and term, permitting less expensive premiums. Dividends are used to purchase paid-up permanent coverage, which converts the term rider to permanent coverage. Therefore, a portion of whole life coverage is purchased with a decreasing term rider. The best choice is an economatic policy comprised of $400,000 whole life, with a $100,000 decreasing term rider. The correct answer is: $400,000 whole; $100,000 term

Special Use Policies

Following are a variety of special use whole life policies. Each policy is catered to fit specific needs, but most combine some aspects of whole and term insurance.

Endowment

However, with a pure endowment contract the policy only pays a stated amount if the insured is alive at the end of the designated period of time. In this case, a death benefit is not paid. Therefore, an endowment policy combines level term insurance with pure endowment.

Decreasing Term

Insurance that provides a face amount that decreases to zero over the policy period. Example: mortgage reduction insurance.

Seven-pay Test

Premiums paid cannot cause a policy to be paid-up after seven years.

-Interest-sensitive whole life (also known as Current assumption whole life) provides flexible (varying) premiums based on a changing current interest rate. -The insurer may raise or lower the premium within a specified range stated in the policy. -Funds are placed in the insurers general account.

-Higher interest rates allow the insurer to reduce the premium, and lower interest rates require the insurer to raise the premium. -The policy has a guaranteed minimum death benefit and a guaranteed minimum rate of return. -Premium changes usually occur annually.

Index-linked whole life

-The Consumer Price Index (CPI) is used to determine the inflationary effect on policies. --------Insurers provide index-linked policies with annually increasing premiums or offer a premium that is level, but higher, to estimate and account for expected index changes.

MEC (Modified Endowment Contract)

-To pass the test, the premiums paid during the first seven years of the policy may not exceed the total amount of level annual premiums that would pay-up the policy in seven years. -If the policy fails the seven-pay test, it is considered a modified endowment contract. -If the policy death benefits are increased, the policy undergoes an additional seven-pay test.