XCEL Ch.4 Type of Insurance Policies
Adjustable Life Policies
are distinguished by their flexibility that comes from combining term and whole life insurance into a single plan The policyowner determines how much face amount protection is needed and how much premium the policyowner wants to pay. Adjustable life insurance allows you to vary your coverage as your needs change without requiring evidence of insurability. Consequently, no new policy needs to be issued when changes are desired. Adjustable life has all the usual features of level premium cash value life insurance
Credit Policies
are typically purchased using a decreasing term insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining loan balance. Since Credit Life insurance is designed to cover the lie of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding. For example, if you wanted an insurance policy to protect a $20,000, 5-year auto loan, you would use a 5 year decreasing term life insurance policy with an initial face value of $20,000. You will pay the same level premium every month for the 5 year term of the policy. The face value will start out at $20,000 and change according to a schedule (the decreasing balance of the auto loan). After 5 years, the car will be paid for the insurance policy will no longer be needed
Types of Whole Life Insurance
1. Straight Whole Life 2. Limited Pay Whole Life 3. Single-Premium Whole Life 4. Modified Whole Life 5. Graded Whole Life
Modified Whole Life
low premiums in the early years and jumps to a higher premium in the later years and remains fixed thereafter. Premium increase just once
Advantages of Whole Life
1. Covers the entire life of the insured 2. Living benefits- cash value and policy loans 3. Fixed premiums
3 types of Life Insurance policies
1. Industrial 2. Group Life 3. Ordinary Life
Family Plan Policy Example
Husband- Whole Life policy Wife (spouse)- Term Policy - convertible without proof of insurability Children - Term policies - convertible usually at age 18 or 21 without proof of insurability; premium remains same regardless of the number of children
Ordinary Life
Is made up of several types of individual life insurance, such as temporary (term), and permanent (whole)
Whole Life Insurance
Provides both living and death benefits. Provides permanent life insurance protection for the insured's entire life. It also provides living benefits such as cash value and policy loans
Family Income Policies
Whole life and decreasing term insurance (begins date of purchase). Provides monthly income to a beneficiary if death occurs during a specified period after date of purchase. If the insured dies after the specified period, only the face value is paid to the beneficiary since the decreasing term insurance expired. Income this concern typically DECREASES over time because the household shrinks. They use decreasing term instead of level. With decreasing term, the benefit begins to decrease as soon as the policy begins
Equity Index Universal Life
a permanent life insurance policy that allows policyholders to tie accumulation values to a stock market index, like the S&P 500. Indexed universal life insurance policies typically contain a minimum guaranteed fixed interest rate component along with the indexed account option. Indexed policies give policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns. Potential extra interest based on the investments of the company's general account
Convertible Term
a term life policy has a provision that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. Convertible Term provides temporary coverage that may be changed to permanent coverage without evidence of insurability. For example, if you take out a term insurance policy when you are young to take advantage of your good health and the policy's lower premium, but want the option covert the policy to a permanent one for final expense benefits once your finances improve, you would want a convertible term life policy
Annual Renewable Term
term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability
Increasing Term
term life insurance that provides an increasing face amount over time based on specific amounts or a percentage of the original face amount.
Drawback of WholeLife
1. Protection is more expensive because of living benefits 2. Premium paying period may extend beyond the income-earning years
Term-Rider
A term rider is a type of life insurance product which covers children under their parent's policy. Family Plan Policies usually cover the family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is always level term. This is cheaper than every family member getting their own policy. For example, the main policy may be on Dad, then mom and the children are riding on (attached to) dad's policy as term rider. Term riders allow for additional family members to be covered under one policy by attaching everyone to a main policy. Term riders can also allow an applicant to have excess coverage by adding an additional term rider for them to the main policy.
Interest-Sensitive Whole Life
Interest-sensitive life insurance is a type of whole life insurance where the cash value can increase beyond the stated guarantee if economic conditions warrant. This is also called Current Assumption Whole Life insurance (CAWL). It also gives the insured the opportunity to either increase the face amount or use the extra cash value to lower future premiums. Premiums can vary to reflect the insurer's changing assumptions with regard to its death, investment, and expense factors. CAWL policies are almost always a MEC due to accelerated premiums
Renewable Term
Term Insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having to prove insurability. Renewable Term provides temporary level coverage at the lowest possible cost for a limited period of time, but then allows the policyowner to renew the policy to maintain coverage past the policy's termination. When a term policy is renewed, the insured does not have to prove insurability. However, the premium price will rise because the insurance company will use the insureds current or attained age to determine the new premiums. If a customer wanted coverage at the lowest possible cost that was for a limited period of time but offered the ability to continue the coverage after the expiration, the customer would want a renewable term policy.
Decreasing Term
Term life insurance that provides an annully decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. A decreasing term policy is a type of life policy which has a death benefit that adjusts periodically (according to a schedule) and is written for a specific period of time. Decreasing term policies are usually written for a mortgage or other debt that typically decreases over time until it is paid off. For example, a 15-year decreasing term policy could protect a 15 year mortgage. As the mortgage balance reduces each year, the face value of the insurance policy will adjust accordingly to match. After a mortgage is paid off, the insurance policy will expire
Joint Life Policy
a policy that covers two or more people. The age of the insureds are "averaged" and a single premium is charged. It uses permanent insurance (as opposed to term) and pays a death benefit when one of the insureds dies. The survivors then have the option of purchasing an individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies. ONE policy covers TWO. Think "joint accounts" with a bank, One account two people NOTE: a variation of the joint lie policy is the joint and survivor policy, or a "survivorship life policy" (it can also be known as a "second to die" policy). This plan also covers two lives, but the benefit is paid upon the death of the last surviving insured
Modified Endowment Contract (MEC)
a policy that is overfunded, according to IRS tables, is classified as a Modified Endowment Contract. Policies that do not meet the 7-pay test are considered MEC's and will lose favorable tax treatment. The 7-pay test is a limitation on the total amount you can pay into your policy in the first seven years of its existence. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a 7-year period. For Example, if year premium is $500, in a 7-year period a total amount paid would equal $3,500. If you paid $3,501, it has not exceeded the 7-pay test and is no longer a life insurance contract. It will now be taxed as an investment * If withdrawn prior to age 59 ½, there is a 10% penalty * taxation only occurs when cash is distributed * funds withdrawn from a MEC are subject to last-in first-out (LIFO) tax treatment, which assumes that the investment or earnings portion of the contract's values is withdrawn first (making these funds fully taxable as ordinary income) * Penalty taxes on premature distributions from a modified endowment contract normally apply to policy loans
Single Premium Whole Life
allows the insured to pay the entire premium in one lump-sum and have coverage for the insured's entire life. · An immediate nonforfeiture value is created · An immediate cash value is created · A large part of the premium is used to set up the policy's reserve
Level Term
also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. Life insurance written to cover a need for a specified period of time at the lowest premium is called level term insurance. Term insurance always expires at the end of the policy period. For example, if D needs life insurance that provides coverage for the remainder of her working years and wants to pay as little as possible, D would need level term. Level term provides a fixed, low premium in exchange for coverage which lasts a specified time period.
Term Life
insurance gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period of time because it has a TERMination date. Term insurance is an inexpensive type of insurance, making it an attractive option for large policies. Term life is the CHEAPEST type of pure life insurance, and due to having a termination date and not having any cash value, it will ALWAYS be cheaper than a whole life policy with the same face value. It provides a pure death protection since it only pays a death benefit if the insured dies during the policy term.
Industrial Life
insurance issues very small face amounts, such as $1000 or $2,000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage
Whole Life
insurance that provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium .
Variable Universal Life (VUL)
is a type of life insurance that builds cash value. It combines all the characteristics of a universal life and variable life. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'Variable' component in the name refers to the ability to invest in separate accounts whose values vary-they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. This provides the policyowner with: · flexible premiums · adjustable death benefits · a guaranteed minimum death benefit · gives the insured growth potential for higher returns, but also potential for loss evidence of insurability can be required for an individual covered by a variable universal life policy when the death benefit is increased
Universal Life
is a variation of whole life insurance, characterized by considerable flexibility. · Changes may be made with relative ease by the policyowner with these flexible premium policies · Investment gains go towards cash value · Unlike whole life (with its fixed premiums, fixed face amounts, and fixed cash value accumulations) universal life allows its policyowners to determine the amount and frequency of premium payments which will adjust the policy face amount. · Cash value accumulations are subject to a minimum interest guarantee · Any surrender charges of a universal policy must be disclosed
Credit Life Insurance
is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. it is normally issued in an amount not to exceed the outstanding loan balance and is usually paid entirely by the borrower a decreasing term policy is most often used
Group Life Insurance
is insurance written for members of a group, such as a place of employment, association, or a union. Coverage is provided to the members of that group under one master contract. The group is underwritten as a whole, not on each individual member. One of the benefits of group life coverage is usually there is no evidence of insurability required
Juvenile Life
life insurance which is written on the lives of a minor is called juvenile insurance the adult applicant is usually the premium payor as well, until the child comes of age and is able to take over the payments. a payor provision is typically attached to juvenile policies. it provides that, in the event of death or disability of the adult premium payor, the premiums will be waived until the child reaches a specified age (such as 18, 21, or 25). payor provisions protects the insured in the event the PAYOR dies or is disabled
Multiple Protection Policies
pay a benefit of double or triple the face amount if death occurs during a specified period. If death occurs after the period has expired, only the policy face amount is paid. The period may be for a specified number of years - 10, 15, or 20 years or to a specified age such as 65. These policies are combinations of permanent insurance and level term insurance
Family Plan Policies
these are designed to insure all family members under one policy. Usually the family head is covered by permanent (whole life) insurance and the spouse/children are included on the same policy as level term life riders (family term riders). The term coverage on the spouse and children are normally convertible to permanent coverage without evidence of insurability. If "attached" to someone else's policy. Think side car on motorcycle. RIDERS must RIDE on something
Straight Life
this is basic whole life insurance with a level face amount and fixed premium payable over the insured's entire life. Premium payments made until death of insured or age 100 (maturity of policy).
Limited Pay Life
this is whole life insurance where the insured is covered for his entire life, but premiums are paid for a limited time. As the premium payment period shortens, cash values increase faster and the fixed premiums are higher. For example, under a life paid-up at 65 policy, premiums are only paid until the insured is 65 years old. With a 20-pay life policy, the insured only pays for 20 years. These policies are in effect until the insured's death or they reach age 100
Graded Whole Life
under a typical graded premium life insurance policy, the premium increases yearly for a stated number of years, then remains level. Premiums continue to stay level for the remainder of the policy. For example, a policy can start out low in a graded whole life and increase a small amount every year up until the fifth year, then levels off for the remainder of the policy.
Variable Whole Life Insurance
was created to help offset the effects of inflation on death benefits. Its permanent life insurance with many of the same characteristics of traditional whole life insurance. The MAIN DIFFERENCE is the manner in which the policy's values are invested: · With Traditional whole life, these values are kept in the insurer's general accounts and invested in conservative investments selected by the insurer to match its contractual guarantees and liabilities · With Variable life insurance policies, the policy values are invested in the insurer's separate accounts which house common stock, bond, money market, and other securities investment options Values held in these separate accounts are invested in riskier, but potentially higher yielding, assets than those held in the general account. The basic characteristics of a variable life policy are: · Fixed premiums · A guaranteed minimum death benefit which fluctuates over the minimum · Cash values which fluctuate and are not guaranteed
Family Maintenance Policy
whole life and level term (begins date of death). Provides income to a beneficiary for a selected period of time if an insured die during that period. At the end of the income- paying period, the beneficiary also receives entire face amount of the policy. If an insured die after the end of the selected period, the beneficiary receives only the face value of the policy. Maintenance "maintains" the family using level terms. This means the family will receive a benefit for so many years after the insured's death
