exam fx

4. Juvenile Policies

1) Jumping Juvenile 2) Payor Rider

2. Family Protection, Family Policy, Family Rider

A family protection or family policy combines whole life with term insurance to cover family members in a single policy, providing coverage on every member of a family. The family policy typically provides whole life insurance on the breadwinner of the family and convertible term insurance on the other family members. The spouse has the opportunity to convert his or her term coverage to permanent coverage up until age 65. Children are automatically covered after birth for a specified period of time, usually 30 or 31 days. To continue coverage for the newborn after the initial period, the parents must inform the insurer of the birth within that time period. The children may convert their term coverage to permanent coverage when they turn the age of 21, or the maximum age for coverage as a dependent that is stated in the policy, without evidence of insurability.

1. Mortgage Redemption

A mortgage redemption provision insures borrowers for an amount equal to their mortgages. If the borrower/insured dies, the insurer assumes responsibility for paying the outstanding loan balance to the insured's creditor.

Adjustable life

Adjustable life was developed in an effort to provide the policyowner 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 policyowner can make adjustments in his or her policy. Typically, the policyowner has the following options:

If an insured skips a premium payment on a universal life policy,

If an insured skips a premium payment on a universal life policy, the missing premium may be deducted from the policy's cash value. The policy will NOT lapse.

Joint life = survivorship life =

Joint life = first to die; survivorship life = second to die (last survivor).

Jumping Juvenile

Juvenile life insurance is, as the name implies, any life insurance written on the life of a minor. A common juvenile policy is known as the "jumping juvenile" policy because the face amount increases at a predetermined age, often age 21. The face amount jumps, but the premium remains level.

Modified and Graded Premium Whole Life

Modified life is a type of whole life policy that charges a lower premium (similar to term rates) in the first few policy years, usually the first 3 to 5 years, and then a higher level premium for the remainder of the insured's life. The higher subsequent premium is typically higher than a straight life premium would be for the same age and amount of coverage. These policies were developed to make the purchase of whole life insurance more attractive for individuals who, for example, are just starting out and have limited financial resources, but will be able to afford the higher premiums in the future as their income grows.

Single premium whole life (SPWL)

Single premium whole life (SPWL) is 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.

Straight life (also referred to as ordinary life or continuous premium whole life)

Straight life (also referred to as ordinary life or continuous premium whole life) is the basic whole life policy The policyowner pays the 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.

The convertible provision

The convertible provision provides the policyowner 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.

6. Policies Linked to Indexes

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 policyowner or the insurer assumes the inflation risk. If the policyowner assumes the risk, the policy premiums increase with the increases in the face amount. If the insurer assumes the risk, the premium remains level.

Death Benefit Options

Universal life offers one of two death benefit options to the policyowner. Option A is the level death benefit option, and Option B is the increasing death benefit option.

Whole life insurance provides

Whole life insurance provides lifetime (permanent) protection and accumulates cash value.

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 policyowner will be paying the premium until that age. Premiums for whole life policies usually are higher than for term insurance.

Cash value

a policy's savings element or living benefit

Nonforfeiture values

benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses

Accumulate

build up

Variable life insurance products

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

Securities

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

Level premium

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

Policy maturity

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

Annually renewable term (ART)

is 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.

Limited Payment

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 life paid-up at 65 (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.

Lapse

policy termination due to nonpayment of premium

all life insurance policies fall into 2 categories:

temporary and permanent protection.

Face amount

the amount of benefit stated in the life insurance policy

Attained age

the insured's age at the time the policy is renewed or replaced

Endow

to have the cash value of a whole life policy reach the contractual face amount

Deferred

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

The three basic forms of whole life insurance are

1) straight whole life, 2) limited-pay whole life and 3) single premium whole life; however, other forms and combination plans may also be available.

Level Premium Term

Level premium term, provides a level death benefit and a level premium during the policy term.

Level term insurance

Level term insurance is 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. level term insurance refers to the death benefit, which does NOT change.

Flexible Premium Policies

Flexible premium policies allow the policyowner to pay more or less than the planned premium.

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.

Fixed life insurance products

contracts that offer guaranteed minimum or fixed benefits

key characteristics of whole life insurance.

1) Level premium — the premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy. 2) Death benefit — the death benefit is guaranteed and also remains level for life. 3) 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 policyowner. (Remember: the insured and the policyowner 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. 4) Living benefits — the policyowner 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.

Indeterminate Level Premium

An indeterminate premium term policy contains a provision that provides a current premium scale (nonguaranteed) and a maximum premium scale (guaranteed), beyond which premiums cannot be raised.

Decreasing term

Decreasing term policies feature a level premium and a death benefit that decreases each year over the duration of the policy term. 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 the 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.

Graded-premium whole life

Graded-premium whole life is somewhat similar to modified life in that premiums start out relatively low and then level off at a point in the future. A graded premium whole life policy typically starts with a premium that is approximately 50% or lower than the premium of a straight life policy. The premium then gradually increases each year for a period of usually 5 or 10 years, and then remains level thereafter. Modified Life and Graded-Premium Life policies are useful as a compromise between straight life and convertible term insurance since the premium is less than straight life in the early years, but some cash value is being accumulated. The actual premiums paid over the life of the contract for a modified or graded premium policy are actually the same as paying for a straight life policy to age 100.

Increasing Term

Increasing term features level premiums and a death benefit that increases each year over the duration of the policy term. The amount of the increase in the death benefit is usually expressed as a specific amount or a percentage of the original amount. Increasing term is often used by insurance companies to fund certain riders that provide a refund of premiums or a gradual increase in total coverage, such as the cost of living or return of premium riders. This type of policy would be ideal to handle inflation and the increasing cost of living. It is also often added to another policy as a rider, such as with return of premium policies.

Indeterminate premium whole life policies

Indeterminate premium whole life policies have the premium rate that may vary from year to year. These policies specify two premium rates: a guaranteed level premium stated in the contract (maximum premium), and a nonguaranteed lower premium rate that the policyowner actually pays for a set period of time. After the initial period (usually 2-3 years), the insurer establishes a new rate which could be raised, kept the same or lowered, based on the company's expected mortality, expense and investments. The premium, however, can never be higher than the guaranteed maximum.

Indexed universal life

Indexed universal life is a universal life policy with an equity index as its investment feature. It has many of the same characteristics as the variable universal life (flexible premiums, an adjustable death benefit, the policyowner decides where the cash value will be invested) with the primary difference being the investment feature. Under a variable universal life policy, the policy's cash value is dependent upon the performance of one or more investment funds. Under the equity index universal policy, the policy's cash value is dependent upon the performance of the equity index. Cash values and death benefit are not guaranteed. Sale of the equity indexed universal life product does not require a securities license (whereas the sale of variable universal life does require a securities and life license).

Interest-sensitive whole life, also referred to as current assumption

Interest-sensitive whole life, 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.

3. Joint Life and Survivorship Life

Joint life is 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; andThe death benefit is paid upon the first death only.

Permanent life insurance

Permanent life insurance is a general term used to refer 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.

Premium rates on a joint life policy are

Premium rates on a joint life policy are determined by averaging the ages of both insureds.

Return of premium (ROP)

Return of premium (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.

Survivorship life (also referred to as "second-to-die" or "last survivor" policy)

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 the first death. This type of policy is often used to offset the liability of the estate tax upon the death of the last insured.

Term insurance

Term insurance is temporary protection because it only provides coverage for a specific period of time. * It is also known as pure life insurance. * Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection. * There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed. Term insurance 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.

The payor benefit rider

The payor benefit rider is primarily used with juvenile policies (any life insurance written on the life of a minor); otherwise, it functions like the waiver of premium rider. If the payor (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21. This rider is also used when the owner and the insured are two different individuals.

The renewable provision

The renewable provision allows the policyowner 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.

5. Return of Premium

The return of premium rider is implemented by using increasing term insurance. When added to a whole life policy, it provides that at death prior to a given age, not only is the original face amount payable, but an amount equalto all premiums previously paid is also payable to the beneficiary. The return of premium rider usually expires at a specified age such as age 60.

Under Option A

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. Notice that the pure insurance is actually decreasing as time passes, lowering the expenses, and allowing for greater cash value in the older years. The reason that the illustration shows an increase in the death benefit at a later point in time is so that the policy will comply with the "statutory definition of life insurance" that was established by the IRS and applies to all life insurance contracts issued after December 31, 1984. According to this definition, there must be a 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.

2. Universal Life

Universal life insurance is also known by the generic name of flexible premium adjustable life. That implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policyowner 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. Since the premium can be adjusted, the insurance companies may give the policyowner a choice to pay either of the two types of premiums: The minimum premium is 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 renewable term product.The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.

Guaranteed Universal Life

Unlike universal life insurance, which accumulates interest dependent on market indexes, guaranteed universal life insurance eliminates the reliance on market risk, and provides more affordable coverage. This policy does not accumulate cash value, which allows for lower monthly premiums as compared to universal life insurance. Because there is no cash value component, the death benefit remains level throughout the life of the policy. The policy has a no-lapse guarantee, which means that as long as the policyowner pays the premium, the coverage will remain in force.