Life Insurance Policies
Single Premium
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.
Regulation of Variable Products (SEC, FINRA and New York)
Variable life insurance products are dually regulated by the State and Federal Government. Due to the element of investment risk, the federal government has declared that variable contracts are securities, and are thus regulated by the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers (NASD). Variable life insurance is also regulated by the Insurance Department as an insurance product. Agents selling variable life insurance products must: Be registered with FINRA; Have a securities license; and Be licensed by the state to sell life insurance. The Superintendent has the sole authority to regulate the issuance and sale of variable contracts and to issue related rules and regulations.
Special Features: Renewable and Convertible
Most term insurance policies are renewable, convertible, or renewable and convertible (R&C). 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. 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.
Group Underwriting Requirements
Group life insurance is underwritten on a group basis as opposed to an individual basis. Each participant completes a short application that clearly identifies the insured and the insured's beneficiary. Generally, if the group is large enough, there are no medical questions since the plan will be issued based upon the nature of the group and the group's past claims experience.
Survivorship Life (Second-to-die)
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.
Universal Life 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.
Universal Life Option B
Under Option B (Increasing Death Benefit option), the death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expenses of this option are much greater than those for Option A, thereby causing the cash value to be lower in the older years (all else being equal).
Annually Renewable Term
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.
Credit Life Insurance
Credit insurance is a special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor. Credit life is usually written as decreasing term insurance, and it may be written as an individual policy or as a group plan. When written as a group policy, the creditor is the owner of the master policy, and each debtor receives a certificate of insurance. The creditor is the owner and the beneficiary of the policy although the premiums are generally paid by the borrower (or the debtor). Credit life insurance cannot pay out more than the balance of the debt, so that there is no financial incentive for the death of the insured. The creditors may require the debtor to have life insurance; they cannot, however, require that the debtor buys insurance from a specific insurer.
Limited Payment
Unlike straight life, 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. For example, an individual may need some protection after retirement, but does not want to be paying premiums at that time. A limited-pay (paid-up at 65) policy purchased during the person's working years will accomplish that objective.
Conversion to Individual Policy
Another characteristic of group insurance is the conversion privilege. If an employee terminates membership in the insured group, the employee has the right to convert to an individual policy without proving insurability at a standard rate, based on the individual's attained age. The group life policy can convert to any form of insurance issued by the insurer (usually whole life), except for term insurance. The face amount or death benefit will be equal to the group term face amount but the premium will be higher. The employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time, the employee is still covered under the original group policy. Other rules that apply to conversion involve the death or disability of the insured, and termination of the master policy. If the insured dies during the conversion period, a death benefit equal to the maximum amount of individual insurance which would have been issued must be paid by the group policy, whether or not the application for an individual policy was completed. If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual permanent insurance of the same coverage.
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. As well as being a flexible premium policy, universal life is also an interest-sensitive policy. Although the insurer guarantees a contract interest rate (usually 3 to 6%), there is also potential for the policyowner to get a current interest rate, which is not guaranteed in the contract but may be higher because of current market conditions. A universal life policy has two components: an insurance component and a cash account. The insurance component of a universal life policy is always annually renewable term insurance.