Part 3: Life Insurance Policies
Since the premium can be adjusted in UNIVERSAL LIFE INSURANCE, the insurance companies may give the policy owner a choice to pay either of the two types of premiums:
1. Minimum Premium 2. Target Premium
What are the Key Features of ADJUSTABLE LIFE?
Can be Term or Whole Life and convert from one to the other
What is the premium of VARIABLE LIFE?
Fixed - if Whole Life Flexible - if Universal Life
Can CREDIT LIFE INSURANCE pay out more than the balance of the debt?
No, the 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.
What is the Cash Value of VARIABLE LIFE?
Not guaranteed; Separate Account
Fill in the Blank: Term insurance provides what is known as
PURE DEATH PROTECTION
What is the key feature of VARIABLE LIFE?
Permanent Insurance
What is a unique aspect of group underwriting?
The cost of the coverage is based on the average age of the group and the ratio of men to women. In addition, in order to reduce adverse selection, the insurer will require a minimum number of participants in the group, depending on whether the employer or employees pay the premium.
LP 65 - Life Paid Up at 65
The coverage is completely paid up for by the insured's age 65.
Define Term Life Insurance
This is a temporary protection because it only provides coverage for a specific period of time. It is also known as pure life insurance.
Define LEVEL TERM INSURANCE
This 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.
What is the cash value of UNIVERSAL LIFE?
Guaranteed at a minimum level; General Account
Define 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.
True or False In the case of converting from a whole life policy to a term policy with ADJUSTABLE LIFE the insurer may adjust the death benefit.
True
List 3 Specialized Policies
1. Joint Life also known as First-to-Die 2. Survivorship Life also known as Second-to-Die 3. Juvenile Life
Universal life offers one of two death benefit options to the policy owner. Name the 2 options:
1. The level death benefit option 2. The increasing death benefit option
The following individuals are permitted to enter into group life contracts:
1. Those related by marriage, blood or adoption 2. Those that have a common interest through ownership of a business enterprise, which they actively manage 3. Those that otherwise have an insurable interest in each other's lives. Note: This does not validate any illegal practices.
Define FINANCIAL STRENGTH OF THE GROUP
Because group insurance is costly to administer, the underwriter should consider whether or not the group has the financial resources to pay the policy premiums, and whether or not it will be able to renew the coverage.
What are some other rules that apply to conversion in Group Life Policies?
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.
In Credit Life Insurance who is the owner and the beneficiary of the policy?
The creditor is the owner and beneficiary of the policy although the premiums are generally paid by the borrower - or the debtor.
Explain ANNUALLY RENEWABLE TERM - ART
This is the purest form of term insurance. The death benefit remains level in the 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.
True or False With term life insurance there is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed.
True
Describe the Premium of ADJUSTABLE LIFE
Can be increased or decreased by policyowner
What is the face amount of VARIABLE LIFE?
Can increase or decrease to a stated minimum
Discuss 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.
Expound upon the idea of GROUP LIFE INSURANCE
In contrast to individual life insurance, which is written on a single life, and in which the rate and coverage is based upon the underwriting of that individual.
Define PURPOSE OF THE GROUP
The group must be created for a purpose other than to obtain group insurance.
Who determines how much coverage is needed in ADJUSTABLE LIFE?
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.
What is JOINT LIFE also used to insure?
The lives of business partners in the funding of a buy-sell agreement and other business life needs. A buy-sell is a business continuation agreement that determines what will be done with the business in the event that an owner dies or becomes disabled.
What other option is available to the policy owner with ADJUSTABLE LIFE insurance?
The policy owner has the option of converting from term to whole life or vice versa. However, increases in the death benefit or changing to a lower premium type of policy will usually require proof of insurability.
True or False If any individual insured is not given notice of the right to an individual policy within 15 days, the insured will be granted an additional period within which to exercise that right. This new period will expire within 15 days of the notice, but under no circumstances will extend more than 60 days beyond the policy's next expiration date.
True
Define LIVING BENEFITS
The policy owner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered.
How does group underwriting differ from that of individual insurance, based upon the group characteristics and makeup?
Some characteristics of concern to a group underwrited include the following: 1. Purpose of the Group 2. Size of the Group 3. Turnover of the Group 4. Financial Strength of The Group
Define DEATH BENEFIT
The death benefit is guaranteed and also remains level for life.
What is the most common type of permanent insurance?
The most common type of permanent insurance is whole life.
Who is GROUP INSURANCE issued to?
The sponsoring organization and covers the lives of more than one individual member of that group. Group insurance is usually written for employees-employer groups, but other types of groups are also eligible for coverage. It is usually written as annually renewable term insurance.
VARIABLE UNIVERSAL LIFE INSURANCE, like universal life itself, has the following features and characteristics:
1. A flexible premium that can be increased, decreased or skipped as long as there is enough value in the policy to fund the death benefit 2. Increasing and decreasing the amount of insurance 3. Cash withdrawals or policy loans
Agents selling variable life insurance products must:
1. Be registered 2. Have a securities license; 3. Be licensed by the state to sell life insurance
How does ADJUSTABLE LIFE insurance work?
As the insured's needs change, the policy owner can make adjustments in his or her policy.
Note: Increasing Term Insurance will not be covered further in this course material.
Because it is not required on the state exam outline.
Define WHOLE LIFE INSURANCE
This 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 policy owner will be paying the premium until that age. Premiums for whole life policies usually are higher than for term insurance.
What are the key characteristics of whole life insurance?
1. Level Premium 2. Death Benefit 3. Cash Value 4. Living Benefits
Explain the INTEREST-SENSITIVE portion of the Flexible Premium Policy of Universal Life Insurance
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 policy owner to get a current interest rate, which is not guaranteed in the contract but may be higher because of current market conditions.
Explain the SEPARATE ACCOUNT as it pertains to variable life insurance.
Because the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be kept in the insurance company's general account. These assets must be held in a separate account, which invests in stocks, bonds, and other securities investment options. Any domestic insurer issuing variable contracts must establish one or more separate accounts. Each separate account must maintain assets with a value at least equal to the reserves and other contract liabilities.
Expound upon INDIVIDUAL CERTIFICATES in group policies
In group life policies, the insurer must issue to the policyholder individual certificates to be delivered to each insured person. The certificates must describe the insurance protection to which each insured is entitled, to whom the insurance benefits are payable, and the various rights and conditions.
What are the qualifications of producers for the sale of variable products?
Any person who is selling variable contracts in this state must be licensed as a life insurance producer and file evidence of a license as a registered representative or principal with the Financial Industry Regulatory Authority (FINRA). Agents who sell variable contracts may also be required to be registered with the Securities Division of the Arizona Corporation Commission.
What is the cash value of ADJUSTABLE LIFE?
Fixed rate of return; General account
Define SINGLE PREMIUM whole life insurance
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.
Describe 20-pay life - one of the common limited pay whole life insurance options
20-pay life whereby coverage is completely paid in 20 years
Define CREDIT LIFE INSURANCE
Credit Life 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.
Under INCREASING DEATH BENEFIT OPTION the death benefit includes the following:
1. Annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. 2. 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. 3. 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.
Note: The 3 basic forms of whole life insurance are as follows:
1. Straight whole life with continuous premium 2. Limited-pay whole life 3. Single Premium Whole Life
Variable life insurance policies delivered in this state must comply with the following requirements:
1. The insurer bears mortality and expense risks 2. For scheduled premium policies, the insurer provides a minimum death benefit in an amount that equals or exceeds the initial face amount of the policy as long as the insured pays the premiums 3. The policy must reflect the investment experience of one or more separate accounts that are established and maintained by the insurer 4. Each variable life insurance policy must be credited with the full amount of the net investment return that is applied to the benefit base. 5. At least once a year, the insurer must determine any changes in the variable death benefits of each variable life insurance policy 6. At least once a month, the insurer must determine the cash value of each variable life insurance policy.
Explain JOINT LIFE
This is a single policy that is designed to insure two or more lives. It's 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. 1. The premium is based on a joint average age that is between the ages of the insureds. 2. The death benefit is paid upon the first death only.
Describe the Premium of Universal Life
Flexible because it can be a Minimum Premium or Target Premium
True or False The policy owner may also pay additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash value or to shorten the premium paying-period.
True
True or False An insurer must file variable life insurance policies, and their riders, endorsements, applications and other related documents, with the Director.
True And the director must approve each policy before it can be delivered or issued for delivery
List characteristics of PURE DEATH PROTECTION
1. If the insured dies during this term, the policy pays the death benefit to the beneficiary 2. If the policy is canceled or expires prior to the insured's death, nothing is payable at the end of the term; and 3. There is no cash value or other living benefits
In Universal Life Insurance, can the premiums be skipped?
The policy owner of Universal Life Insurance 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.
Explain DECREASING TERM policies
These 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.
The one similarity between ADJUSTABLE LIFE, UNIVERSAL LIFE, AND VARIABLE LIFE is what?
They all can borrow cash value.
Explain the RE-ENTRY OPTION
Some policies contain a re-entry option where the insured, upon the end of a term policy with guaranteed renewable option, may qualify for a discounted premium rate with proof of insurability.
Explain 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 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 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.
What are LIMITED-PAY POLICIES well-suited for?
They are suited for those insured 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-life-paid-up a 65 policy purchased during the person's working years will accomplish that objective.
What is this an example of? A married couple purchasing a house may use a policy for mortgage protection if both spouses work and earn close to the same amount of income. If one spouse dies, the insurance pays the mortgage for the surviving spouse.
This is an example of JOINT LIFE
True or False Regardless of the type of term insurance purchased, the premium is level throughout the term of the policy; only the amount of the death benefit may fluctuate, depending on the type of term insurance.
True
True or False Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection.
True
Explain FLEXIBLE PREMIUM POLICIES
There are several other types of whole life policies. While they all have the same key characteristics, they may also offer unique features based on how the policy owner pays the premium or how the premium is invested.
A UNIVERSAL LIFE POLICY has 2 components:
1. An insurance component 2. A cash account
What are the 3 basic types of term coverage available, based on how the face amount of the death benefit changes during the policy term:
1. Level 2. Increasing 3. Decreasing
Any person who is qualified to sell variable contracts must immediately report to the Director any of the following:
1. The suspension or revocation of the insurance producer's license in any other US State or Territory. 2. Any disciplinary sanction by any national securities exchange, national securities association or federal, state or territorial agency that has jurisdiction over securities or variable contracts; and 3. Judgments or injunctions against the insurance producer for conduct involving fraud, deceit or misrepresentation or a violation of any insurance or securities law.
Define LEVEL PREMIUM TERM
As the name implies, provides a level death benefit and a level premium during the policy term. For example, a $100,000 10-year level term policy will provide a $100,000 death benefit if the insured dies any time during the 10-year period. The premium will remain level during the entire 10-year period. If the policy renews at the end of the 10-year period, the premium will be based on the insured's attained age at the time of renewal.
Explain the CERTIFICATE OF INSURANCE and MASTER POLICY/CONTRACT concerning Group Insurance
Each insured participant under the group plan is issued a certificate of insurance evidencing that they have coverage. The actual policy, or master policy/contract is issued to the sponsor of the group, which is often an employer. The group sponsor is the policyholder and is the one that exercises control over the policy.
Describe LIMITED PAY whole life insurance
Limited-pay whole life is designed so that the premiums for coverage will be completely paid up well before age 100. 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 polices.
What is the face amount of both the Adjustable Life Insurance and Universal Life Insurance?
Flexible: set by policyowner with proof of insurability
Define TURNOVER OF THE GROUP
From the underwriting perspective, a group should have a steady turnover: younger, lower-risk employees enter the group, and older, higher-risk employees leave.
Define MINIMUM PREMIUM as it relates to Universal Life insurance premiums
The MINIMUM PREMIUM is the amount needed to keep the policy in force for the current year. Paying the minimum premium is the amount needed to keep the policy performing as an annually renewable term product.
Define 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, which is called the policy maturity date, and is paid out to the policy owner.
True or False Unlike Universal Life, most of the investment vehicles in Variable Universal Life policies do no guarantee return.
True
True or False Upon selling, renewing, or converting the term policy, the premium is figured at attained age or in other words, the insured's age at the time of the transaction.
True
Explain a "corridor gap" as it pertains to the Level Death Benefit Option
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 the tax advantages that have been associated with life insurance.
How does the CASH VALUE work with ADJUSTABLE LIFE?
Although adjustable life policies contain most of the common features of other whole life policies, the cash value of an adjustable life policy only develops when the premiums paid are more than the cost of the policy.
List the the Variable Products of Whole Life Insurance
1. Variable Universal Life 2. Regulations of Variable Products 3. Qualifications of Producers for the Sale of Variable Products
Is a DECREASING TERM POLICY convertible and renewable?
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.
What is "Variable Life" Insurance? or "Variable Whole Life" Insurance?
It is a level, fixed premium, investment-based product. Like traditional forms of life insurance, these policies have fixed premiums and a guaranteed minimum death benefit. The cash value of the policy however is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer. The policy owner bears the investment risk in variable contracts.
Describe JUVENILE LIFE INSURANCE
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, the premium remains level.
Another FLEXIBLE PREMIUM POLICY is INDEXED WHOLE LIFE. What are its features?
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.
True or False A premium based on joint age is less than the sum of 2 premiums based on individual age, so it is common to find joint life policies issued on husbands and wives. This is particularly so if the need for insurance is such that it does not extend beyond the first death.
True
Explain the Regulation of Variable Products - SEC, FINRA, and NASD
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.
Discuss the TYPES OF PLAN SPONSORS
Group life insurance plans may be sponsored by employers, debtor groups, labor unions, credit unions, associations, and other organizations formed for a reason other than purchasing insurance. Insurance companies may establish a required minimum number of persons to be insured under a group plan.
Explain LEVEL DEATH BENEFIT OPTION
1. The death benefit remains level while the cash value gradually increases - lowering the pure insurance with the insurer in the later years. 2. Pure insurance is actually decreasing as time passes which lowers expenses and allows for greater cash value in the older years.
True or False Joint life policies are used when there is a need for two or more persons to be protected; however, the need for the insurance is no longer present after the first of the insureds dies.
True
Unless the Director provides written approval, insurers cannot employ any person in connection with the handling of separate account assets who, within the last 10 years have done the following:
1. Was convicted of a felony or a misdemeanor offense involving embezzlement, fraudulent conversion or misappropriation of funds 2. Was found guilty of violating any law involving any fraud or misrepresentation
What is PERMANENT LIFE INSURANCE?
It 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.
Describe the characteristics of STRAIGHT LIFE, also known as ORDINARY LIFE and CONTINUOUS PREMIUM WHOLE LIFE
Straight 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.
Define UNIVERSAL LIFE insurance FLEXIBLE PREMIUM POLICY
Universal life is also known by the generic name FLEXIBLE PREMIUM ADJUSTABLE LIFE. That implies that the policy owner has flexibility to increase the amount of premium paid into the policy and to later decrease it again.
Define VARIABLE UNIVERSAL LIFE insurance
Variable Universal Life Insurance is a type of insurance that combines many features of the whole life with the flexible premium of universal life and the investment component of variable life, making it a securities version of the universal life insurance.
Two features that distinguish group insurance from individual insurance are:
1. Evidence of insurability is usually not required unless an applicant is enrolling for coverage outside the normal enrollment period 2. Participants -insureds- under the plan do not receive a policy because they do not own or control the policy.
What are the key features of UNIVERSAL LIFE?
Permanent insurance with renewable Term protection component
Define TARGET PREMIUM as it relates to Universal Life Insurance premiums
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.
True or False The insurance component of a universal life policy is always annually renewable term insurance.
True
True or False The insured and the policy owner do not have to be the same person.
True
Typically, the policy owner of ADJUSTABLE LIFE has the following options:
1. Increase or decrease the premium or the premium paying period. 2. Increase or decrease the face amount; or 3. Change the period of protection
When are DECREASING TERM POLICIES purchased?
It 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.
What is the reason that the illustration of this option A shows an increase in the death benefit at a later point in time?
It is so that the policy will comply with the "statutory definition of life insurance" that was established by the IRS and applies to life insurance contracts issued after December 31st, 1984.
True or False A domestic insurer cannot change the investment policy of a separate account without first filing the change with the Director. That change will become effective 60 days after it was filed.
True
When does the cash value or living benefits accumulate?
The cash value, also called non forfeiture value, does not usually accumulate until the third policy year and it grows tax deferred.
Define SIZE OF THE GROUP
The larger the number of people in the group, the more acurate the projections of future loss experience will be. This is based on the Law of Large Numbers of similar risks.
How are indexed whole life policies classified?
They 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.
Define ADJUSTABLE LIFE insurance FLEXIBLE PREMIUM POLICY
This insurance was developed in an effort to provide the policy owner 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.
