KY Life Insurance

Hazard

anything that increases the chance of loss

Policy Provisions: Policy Assignment

assigns ownership collateral assignment - collateral for a loan partial assignment - part of the proceeds assigned conditional assignment - assignee to receive only under certain conditions

Term Policies: Renewable Term

the insured can obtain another term policy like the one had, without further proof of insurability - even if health condition developed during the term; based on attained age

Tax Advantages of Life Insurance

1. The earnings on the cash value accumulate tax free unless and until withdrawn 2. With certain exceptions, the proceeds paid at the insured's death *installments would be taxable on interest only

Policy Provisions: Incontestable Clause

2 years in KY - states that after the policy (term and permanent) has been in force a certain length of time, the company can no longer contest it, or void it, except for non-payment of premiums

Permanent Policies: Indexed whole life

has a death benefit that increases with inflation - tied to CPI

Riders: Exchange Privilege Rider

i.e. - Insurance on the company's CEO no matter who it is - allows cash value to grow

Policy Provisions: Privilege of Change Clause

i.e. - may allow change from term to whole describes exact conditions under which the company will allow the policy owner to change coverage - and to which types of protection adverse selection could occur with whole to term in the event the insured discovers an illness and uses cash value

Term Policies: Decreasing Term

i.e. credit life policy

Policy Provisions: Per Capita Designation

if one of the named bene's is already dead when the policy matures, the remaining bene(s) divide their share, in addition to receiving their own

Annuity Settlement Options: Joint Life Annuities

if one of the two annuitants dies, the other does not continue to receive payments

Permanent Policies: Graded Premium Whole Life

low initial premium that increases each year for first 5-7 years - several different increases in premium

Permanent Policies: Modified Whole Life

low initial premium that increases to a higher level premium - one jump in premium

Obligations at death

medical and funeral expenses, plus debts or current bills, taxes

Business Insurance: Entity Purchase Plan

the business entity, usually a partnership or corporation, buy the insurance on the life of each principal. Policy will provide the cash the business entity needs to purchase the deceased principal's interest in the business

Peril

the cause of loss

Living Benefits of Life Insurance

loan values, retirement income, cash withdrawals, dividends

Premiums: Modified Premium Plan

graded - stair steps, premium increase every year to a certain point one big increase in premium

Needs Approach

(most popular approach to determining life ins need) includes spousal support, death taxes, education, burial

Dividends: Dividend Options

1. Cash Dividend Option - check issued 2. Accumulation at Interest Option - let dividends accumulate at interest with the company. they will be invested and add interest earnings 3. Paid-Up Additions Option - use dividends to buy additional life insurance protection - based on attained age

Elements of a legal contract

1. Competent Parties 2. Legal Purpose 3. Offer & Acceptance 4. Consideration

Three Income Periods: Needs Approach

1. Family Dependency Period - kids at home (greatest need) 2. Pre-retirement Period - kids move out, before SS begins 3. Retirement period - SS/Pension begins

Dividends: Sources

1. Mortality 2. Assumed interest 3. Operating expenses, or loading

Policy Provisions: Grace Period

30 days

Premiums: Gross Premium

= Net premium + loading (expense)

Premiums: Net Premium

= cost of ins - interest earnings

Human Life Value

=salary x #years to retirement

Annuity Settlement Options: Life Annuity - No Refund

A life annuity, or straight life, provides for a periodic income to be paid to the annuitant for as long as he lives.

Term Policies: Convertible Term

Allows conversion to permanent insurance regardless of insurability. Rate based on attained age, some may give option on age at policy purchased By converting the convertible term policy at the insured's original age rather than the attained age, the insured will obtain two advantages: the premium will be lower, cash values will be higher

Riders: Accelerated Benefits Rider

Allows policy owners who are terminally ill, or who require long-term care or permanent confinement to a nursing home, to collect all or part of their death benefit while they are still alive. Two years or less is considered terminally ill, or need help with at least 2 ADL's

Annuity Premium Amounts: Single Premium

An annuity purchased by a single lump sum payment

Business Insurance: Executive Bonus Plan

An employer-paid-for plan that provides permanent life insurance for selected employees. Nonqualified plan because it does not have to be offered to all employees. -benefits will be taxed -treated unfavorably by the IRS -premiums are not deductible

Methods of Risk Management

Avoid the risk Reduce/control the risk Retain the risk Transfer the risk

Policy Provisions: Irrevocable Bene

Can't be changed without consent of bene

Family Plans

Combination of policies, or family plans, customarily provide coverage on the principal breadwinner equal to four times the spouse's and five times the children's coverage amounts.

Riders: Disability of Income Rider

Company guarantees the insured policy owner a regular monthly income for as long as she remains totally and permanently disabled. Based on the face amount of the policy and will generally pay certain amount per $1,000 in coverage

Policy Provisions: Reinstatement Clause

Conditions: 1. Policy owner must pay all back premiums due plus interest on the amount 2. must show proof of insurability 3. less than three years must have elapsed

Important Contractual Concepts: Executory Contract

Contract that is not completed immediately; some future act remains to be done to consummate the contract

Tax-Sheltered Annuities

Contributions are tax free, income to bene is fully taxable as income. To encourage public school systems and tax-exempt charitable, educational, and religious organizations to set aside funds for their employees' retirement , TSA plans may be set up and the contributions excluded from current taxable income of the employers.

Permanent Policies: Variable Universal Life

Flexible premium payments and variable death benefits

Permanent Policies: Universal Life

Flexible premium payments, adjustable death benefit that accumulates cash values

Permanent Policies: Variable Life

Death benefit can vary - up or down, but there is a guaranteed minimum death benefit No guaranteed minimum cash value *money can be lost with this policy, must be securities licensed to sell (NASD)

Deferred Annuity Death Benefits

Death benefits of a deferred annuity are considered to be the amount returned when the annuitant dies before receiving any payments under the annuity. Generally will get back a portion of what you've paid in - benefits only for the living only

Capital Conservation and Capital Liquidation

Determines how benefits are paid Conservation - interest only payments; two advantages : it generates income indefinitely, it creates a legacy Liquidation - smaller fund needed, invades principal

Important Contractual Concepts: Parol Evidence Rule

Everything agreed upon must in the written agreement, including oral agreements

Nonforfeiture and Settlement Options: Extended Term Option

Face amount stays the same, but the term will be different - term depends on the net cash value that is applied as a net single premium at the insured's attained age

Annuity Premium Amounts: Premium Determination

Five factors to determine annuity premiums: 1. Annuitant's age 2. Annuitant's sex 3. Assumed interest rate 4. Income amount and payment guarantee 5. Loading for company expense

Annuity Period: Fixed Payout

Fixed dollar amount payout that remains the same for the rest of the contract

Industrial Life Insurance

For persons of limited means. Usually for burial expenses. Three characteristics: 1. the face amount of the policy is usually $1,000 or less 2. The premium is small and collected monthly or even weekly 3. The premium is collected by the agent, often in person from the policyowner

Riders: Payor Rider

If the person who is paying the premiums - in most cases the parent - should die or become disabled before the child has reached a specified age, the company will waive all further premiums until the child reaches that age

Deferred Annuity

Income payments to begin at some point in the future, i.e. retirement

Settlement Options: Fixed-Amount Option

Length of the benefit period is uncertain - specific benefit chosen, but interest earned on balance can't be known

Mortality

Life insurance

Permanent Policies: Joint Life Policies

Lower premium than 2 individual policies - generally first-to-die Will pay the face amount upon the first death among the persons covered by the policy or upon the last death among the persons covered.

Permanent Policies: Modified Endowment Contracts

MEC - any policy funded more rapidly than 7-pay life any money taken from these policies is subject to unfavorable tax rules

Riders: Term Rider

May be used when additional life insurance is needed for a certain period, such as when children are growing up. Requires the term rider to be attached to a permanent policy and that the permanent policy must have a premium paying period at least equal to or greater than the term rider used in combination with it.

Jumping Juvenile

Normally purchased by a parent for a child. At the time the child turns 21, the face amount automatically jumps by an amount usually five times greater than the original face amount with no increase in premium and no evidence of insurability required. The insured takes over the premiums at age 21 at a cost much less than if the policy were purchased at the current age of 21.

Permanent Policies: Combination or Blended Products

Offers lower premium than a comparable all-permanent policy, good alternative when permanent protection is desired but may not be able to afford the higher premiums -Uses dividends to buy more permanent coverage. The addition of permanent coverage replaces the term coverage. -cash value will build slower -Lower premium, same death benefit

Riders: Waiver of Premium Rider

Often expires at age 60 Exempts a disabled policy owner from payment of premiums during the term of disability while keeping the policy in force Disability must be permanent and total for the waiver provision to apply. Typically a 90-day waiting period

Permanent Policies: Universal Life, death benefit

Option A: provides level death benefit Option B: provides an increasing death benefit *either is non-taxable to beneficiary

Permanent Policies: Single Premium Whole Life (SPWL)

Pay policy premium all at one time. Advantage: Will pay less in one lump sum than the cumulation of premiums over many years. Disadvantage: If you die too soon, you will have paid too much - death benefit the same These policies are considered modified endowment contracts

Permanent Policies: Adjustable Life

Policy may be adjusted by the policy owner, within certain limits. 1. Face amount (usually with evidence of insurability) 2. Amount, frequency, or both of premium payments 3. Period of insurance protection

Permanent Policies: Limited-Pay Life

Policy own pays for a specified number of years. Advantages: 1. Builds cash value faster (pay in more over shorter period of time) 2. Won't have to pay entire life Disadvantage: 1. If you die early, then you end up paying in more than you would have with a term policy

Permanent Policies: Whole Life

Policy owner pays premiums for his/her whole life

Entire Contract

Policy, application plus oral agreements

Important Contractual Concepts: Estoppel

Precendence set by actions; must continue that practice

Annuity Premium Amounts: Level Premium

Premiums are paid in periodic installments over the years before the date on which the annuity income begins.

Policy Provisions: Beneficiary Designations

Primary, contingent and tertiary

Policy Provisions: Minors as Bene's

Proceeds to minors may be held by the insurance company, paying interest on them until the bene reaches legal age - or the company may insist that a trustee or guardian be appointed for the minor (someone who is legally entitled to receive and manage the policy proceeds)

Purposes of Annuities

Protects us in the event we live too long, live longer than our resources allow. Pays income until you die

Family Plans: Family Income Policy

Provides an income to be paid on the death of the family breadwinner. The payout period, which is determined when the policy is purchased, is schedule to last until the family's income needs diminish. Sold for periods of 5, 10, 15 or 20 years. Benefits begin at effective date of policy.

Family Plans: Family Maintenance Policy

Provides for income for stated number of years from the date of death of the insured, provided the insured dies before a predetermined time. Benefit begins at death

Two-Tiered Annuities

Provides options for lump sum or periodic payments. Has different values available for distribution at maturity, depending on whether the value is taken in a lump sum before annuitization or left with the issuer for periodic payments.

Riders: Return of Premium Rider

Provides, that in the event of the death of the insured within a specified period , the policy will pay an amount equal to the sum of all premiums paid up to that point in addition to the face amount of the policy.

Immediate Annuity

Receive now - large lump sum premium, after waiting one payout interval

Annuity Settlement Options: Life Annuity Certain

Receive payments for a minimum number of years. Income installments must be paid at least for the number of years guaranteed in the contract. If annuitant dies before term period certain, the bene receives the payments

Annuity Settlement Options: Refund Life Annuity

Refund annuity guarantees that an amount at least equal to the purchase price of the contract will be paid.

Variable Annuities

Regulated at the federal level. Characterized by a variable rate of growth and a variable benefit payable to the annuitant

Permanent Policies: Joint Life Policy with Survivorship

Second-to-die insurance, covers two lives and guarantees payment only when the second insured dies. Useful in estate planning since certain assets may have been tax sheltered after the death of the first.

Life Insurance

Spreading among many persons the financial loss resulting from an individual's death so that the cost for each individual is small

Annuity Settlement Options: Temporary Annuity Certain

Starts and stops at specific dates. Company guarantees that payments will be made for a specified number of years, often 10, 15 or 20 years. Because this income is guaranteed, if the annuitant dies before receiving payments for the specified number of years, the annuitant's beneficiary receives the payments for the remaining number of years.

Permanent Policies: Endowment Policies

Tax Reform Act of 1994, any policy issued after 1/1/85 that endows before 95 will not be considered life insurance - in the end the cash value with accumulate and the death benefit will be taxed

Annuity Premium Amounts: Flexible Premium

The annuity benefit is unknown until the last premium payment is made. Purchaser has the option to vary each premium payment as long as it falls between a minimum and maximum amount.

Policy Provisions: Applicant Control or Ownership Clause

The applicant maintains control of the policy until the insured minor is of legal age

Premiums: Reserves

The company is required to keep enough money available to pay the death claims it's likely to receive. legal reserve - the amount required to pay future claims, on the basis of the mortality table and a maximum assumed interest rate prescribed by the state laws or the insurance commissioner

Variable Annuities: Annuity Unit

The company pays them to the annuitant

Annuities: Nonforfeiture Provisions

The contract holder may have several options, or the rights to the cash value accumulation up to the point the premium stopped. 1. Paid Up Contract - benefit payments are reduced 2. Lump Sum - Can just take cash out

Viatical Settlements

The insured, or victor, sells her life insurance policy to a vatical settlement provider for a reduced percentage of the policy's face value. After the exchange, the vatical settlement provider becomes the owner of the policy and the bene. While the victor lives, the provider must continue to pay premiums to keep the policy in force. When the insured dies, the vatical settlement provider receives the entire death benefit.

Law of Large Numbers

The larger the number of people and deaths recorded, the more reliably one can predict how many will dies at a specific age in the entire population of insured of that age. If the records are kept for many millions of people of all ages over a long period of time, the predictability becomes very reliable.

Market-Value Adjusted Annuities

The market value adjustment feature applies only if the contract is surrendered before the contract period expires. The interest rate is fixed if held to maturity. Early withdrawal will cause market value adjustment.

Annuity Period: Variable Payout

The payout can change, selecting the investment experience of the principal.

Variable Annuities: Accumulation Units

The policyowner buys them from the company

Annuity Settlement Options: Joint Life and Survivorship

There are more than one (usually two) annuitants, and both receive payments until of the dies. The second annuitant then receives continuing payments under the annuity contract.

Annuities: Annuity Period

They pay you indefinitely until death

Policy Provisions: Policy Exclusions

War or Military Service Aviation Hazardous Occupation or Hobby

Nonforfeiture and Settlement Options: Lapsed and Reinstated Policies

When a policy owner wants to reinstate a policy: 1. the policy owner must usually apply to do so; usually within three years 2. the policy owner will have to pay back premiums plus interest 3. if the company requires it, the insured will have to prove insurability.

Riders: Guaranteed Insurability Rider

Will guarantee that the insured can purchase more permanent insurance at specified ages, without proof of insurability

Policy Provisions: Common Disaster Provision

Writes into a policy that the primary bene must outlive the insured a specific length of time in cases of simultaneous (or nearly simultaneous) death, or the proceeds are paid to the contingent bene (usually 10-30 days).

Original Age

age at the time the original policy was purchased lower premium but you have to pay add'l sum, but builds cash value faster

Business Insurance: Section 303 Redemption

allows a corporation to redeem (or purchase) enough of its stock from the owner's estate to pay death taxes, funeral costs, and admin expenses

Term Policies: Level Term

benefit stays the same

Term Policies: Increasing Term

benefits increase as chance of death increases

Riders: Cost of Living Rider

benefits increase with CPI

Policy Provisions: Revocable Bene

can be changed

Group Insurance: Conversion Privilege

characteristics of conversion from group to permanent life insurance: 1. no proof of insurability is required 2. conversion must be to a whole life policy 3. conversion must be applied for within one month of termination 4. premiums for the new policy will be based on the insured's attained age

Policy Provisions: Misstatement of Age Clause

company can adjust premiums on account of misstatement - in the event of death, the company will pay death benefit based on what the premiums paid would have purchased

Policy Loans: Deferring Loans

company may delay policy loans for six months from the date of application for the loan. An automatic premium loan provision requires the company to automatically loan the policy owner any premium that becomes past due

Policy Provisions: Insuring Clause

contains the basic promise of the life insurance company to pay a specified sum of money, in a lump sum or an equivalent income stream, to the bene upon the death of the insured.

Term Policies

covers short term needs at a low cost

Dividends: One-Year Term Dividend Option

dividend money is used to buy term coverage of one year's duration, based on attained age of the insured, with the amount usually limited to the current cash value of the policy

Riders: Accidental Death Rider

double indemnity if death occurs on account of an accident

Policy Provisions: Ten-Day Free Look

examination period required, commonly 10 days, beginning the day the policy owner receives the policy. Full refund of all premiums paid if the policy owner decides to return it during the 10-day examination period.

Business Insurance: Section 457 Deferred Compensation Plans

for state, local gov'ts, non-profits

Policy Provisions: Uniform Simultaneous Death Act

if the primary bene and the insured die in the same accident and there's no proof that the bene actually outlived the insured, the proceeds are paid as if the primary bene dies first. This means the proceeds of the policy are paid to any named contingent bene(s), or into the estate of the insured if contingent bene(s) are not named

Business Insurance: Deferred Compensation

incentive plan that allows an employer to provide certain employees, including stockholder-employees, with compensation at some predetermined future date, usually at retirement - used to defer taxes

Settlement Options: Interest Option

insurance company keeps the proceeds and invests them for the bene - paying the interest earned as income to the bene

Important Contractual Concepts: Contracts of Adhesion

one sided contract -- no negotiating

Policy Provisions: Automatic Premium Loan Provision

only for permanent policies when included, allows the company to use, automatically, whatever portion of the cash value is needed to pay premiums as they fall due. Keeps the policy in force when it would otherwise lapse as a result of non-payment of premiums

Nonforfeiture and Settlement Options: Cash Surrender Value Option

policy owner entitled to the full amount of the cash value, with this exception: if the policy owner has borrowed money on a policy loan, the amount yet to be repaid plus interest will be deducted from the csv

Policy Provisions: Suicide Clause

policy voided if suicide occurs within 2 years of issuance

Attained Age

present age

Business Insurance: Split-Dollar Insurance

purpose is to allow valued employee who needs additional insurance protection to buy it at less cost than individually purchased insurance. Basic plan insures the life of the employee and splits the premium payments between the employee and the employer. When death occurs, the employer receives that part of the death benefit equal to the cash value portion of the policy or the amount of premiums paid, whichever is greater. The employee's been receives the balance.

Methods of Estate Building

savings account/plan, investments, life insurance

Policy Provisions: Consideration Clause

second most important provision, deals largely with the consideration paid by the policy owner for life insurance protection--the premium

Policy Provisions: Execution Clause

states the insurance contract is executed when both parties (the company and the policy owner) have met conditions of the contract.

Nonforfeiture and Settlement Options: Reduced Paid-Up Insurance Option

the policy owner essentially uses the cash value of a present policy to purchase a single premium insurance policy, at attained age rates, for a reduced face amount

Business Insurance: Cross-Purchase Plan

the principals in the business, the partners or stockholders, each buy insurance on each other to provide the cash each will need to purchase a share of the deceased'd interest in the business

Policy Provisions: Per Stirpes Designation

the proceeds belonging to the deceased brother would not go to the other bene's - proceeds pass to deceased heirs

Settlement Options: Fixed-Period Option

the size of the benefit payment is uncertain because the amount of interest earned can't be known bene receives a regular income, comprising both interest and principal, for a specified period - until principal decreases to zero

Settlement Options: Advantages

three advantages: 1. the insurer invests the money, thus relieving the bene from the care of managing and investing the funds 2. the money is safe with the insurance company 3. interest earnings on the retained proceeds are guaranteed

Policy Provisions: Spendthrift Clause

to protect the bene's from their own extravagant spending - protection from creditors, always paid other than lump sum, may not encumber proceeds

Important Contractual Concepts: Aleatory

unequal contract -- one person/party will receive more than another

Dividends: Reduce Premium Dividend Option

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

Settlement Options: Life Income Option

would likely result in the lowest monthly payment of the settlement options provides for payment of installments for the entire lifetime of the payee

Annuities: Accumulation Period

you pay