Chapter Four

Types of Life Insurance

Term Life Insurnace

covers the risk of death for a limited period

Permanent (Whole) Life insurance

uses the same concept of an average premium, but the time period covered is a person’s entire lifespan, right up to the point where the risk of death is statistically 100%

Decreasing Term Life

have benefit amounts that decrease gradually over the term of protection and level premiums - typically used to pay off debt that the insured has

Credit Life Insurance

a limited benefit (term) policy 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 - beneficiary is typically the lender - most often sold to a bank or other lending institution as group insurance that covers all of the institution’s borrowers - typically paid entirely by the borrower

Increasing Term Life Insurance (Incremental Term Life Insurance)

term life insurance that provides a death benefit that increases at periodic intervals over the policy’s term - The increase is typically stated as a specific amount or as a percentage of the original amount -

Level Term Life

most common type of term life insurance - provides a constant or fixed amount of coverage for as long as the policy remains in force

Renewable Term Life Insurance

Level term policies that include an option to renew them when they are set to expire. They have what is called a “step-up” premium because each time the policy is set to renew, the premium will increased to make up for the increased risk of the insured becoming another year older. The option to renew is often combined with an option to convert the policy to a permanent policy. One thing to note is that when the insured chooses to renew or convert the policy, they can do so even if they are in bad health and wouldn’t be insurable under a new policy. These policies eventually become prohibitive because they become too expensive to keep.

Annual Renewable Term Life Insurance (ART/YRT)

most basic form of term life insurance. policy period lasts for one year, and then the premium increases at each renewal. Insured does not have to prove insurability at each renewal.

Re-Entry Term Life Insurance

these policies allow for the policy to be renewed, but the insured has the option to either forego proving insurability and pay a higher premium, or they can have a health exam and potentially pay the lowest premium.

Interim Term Life Insurance

a form of convertible term insurance designed for individuals seeking immediate coverage but unable to afford permanent insurance right away

Bundled Premiums

whole life insurance premiums - mean the insurer is not required to explain to the policy owner how the premium paid is ultimately distributed (i.e., for death protection, commissions, and other expenses)

Straight-Whole Life

the most basic form of whole life insurance; also known as ordinary whole life. Level premiums and level death benefit. Cash value grows. Matures at age 100.

Limited Pay Whole Life Insurance

also known as 10-pay-life, 20-pay-life, 30-pay-life, or paid-up-at-65, the premium for these policies is paid for a limited time, and then they are considered to be paid in full to age 100. The premium is a lot higher on these policies since you are condensing the time in which premiums are paid to 10, 20, or 30 years instead of to age 100. Policy still matures at age 100, but cash value builds more rapidly during “premium paying years” than the “non-premium paying years.” Still reaches face value at 100. Best for someone that wants a whole life policy, but doesn’t want to pay premiums indefinitely.

Single-Premium Whole Life Insurance

the most extreme form of a limited-payment policy - fully paid up after one or two payments - immediate cash value is created - part of premium is used to setup policy’s reserve - over time, owner will pay less for policy than if premiums were paid annually - defined as a modified endowment contract by the IRS - death benefit is tax free, but any loan distributions are taxed.

Modified Whole Life Insurance

characterized by an initial premium that is lower than that of straight whole life insurance for an introductory period. The policy owner will pay a lower, flat initial premium for the first few years, compared to the straight life premium. After this time, the premium will increase to an amount higher than what the initial straight whole life premium would have been then remains level -

Graded Premium Whole Life

characterized by a lower premium at first, premiums increase annually or every year during the initial period. Once the premium increases to its final level, exceeding the whole life premium, it remains fixed for the remainder of life

Enhanced Whole Life Insurance (Economatic/Extraordinary)

a low–premium, participating, permanent life insurance policy. The contract’s face amount is reduced each year. Any dividends paid are set aside and used to purchase either paid-up additions or one-year term insurance, which is equal to the reduction of death coverage. This policy provides a guaranteed death benefit in the early years of the policy, even if dividends are insufficient to maintain level coverage

Indeterminate Premium Whole Life Insurance

 a type of whole life policy that offers a low initial premium for a specified period. After that period, the insurer may then increase premiums. The characteristics and benefits of this policy are similar to those of other contracts - allows the premium to change due to changes in the insurer's investment income. Therefore, future premium adjustments are based on the insurer’s investment performance, mortality experience, and expenses - premiums may rise and fall, but they will never exceed the guaranteed maximum.

Current Assumption Whole Life (CAWL)/Interest-Sensitive/Excess Interest

characterized by premiums that vary to reflect the insurer’s changing assumptions concerning its death, investment, and expense factors - cash values may be higher than the guaranteed levels - policies are either high-premium or low-premium - both types include: The use of an accumulation account, which is made up of the premium, less expense and mortality charges, and credited with interest based on current rates

• Minimum guaranteed cash value and rate of return

• Maximum annual premium

• Use of a surrender charge, fixed at issue, which is deducted from the accumulation account to derive the policy’s surrender value, and

• Use of a fixed death benefit and maximum premium level at the time of issue

Low-Premium: low premium type includes an indeterminate premium that’s initially low. It also contains a redetermination provision that allows the insurance company to refigure the premium after a specified period

High-Premium: high-premium type, the initial premium is relatively high. It includes an optional pay-up provision that allows the policy owner to cease paying premiums once the policy’s values are sufficient to pay up the contract

Equity-Indexed Whole Life Insurance (Indexed)

offers the security of traditional life insurance while allowing interest earnings tied to an equity index (S&P 500), without direct stock market risks. The policy guarantees a minimum interest rate, defers taxes on interest, and provides access to policy loans. Designed to outpace inflation, these policies blend term life insurance with investment features, akin to universal life plans, with death benefits based on chosen coverage and account value

Non-Traditional Life Insurance Products

Universal Life Insurance, Variable Life Insurance, Indexed Universal Life Insurance, Variable Universal Life Insurance, Current Assumption Whole Life (CAWL), Yearly Renewable Term (YRT), and Annually Renewable Term (ART). Developed primarily in the 1970s and beyond, these plans are characterized by adjustable or variable death benefits and premiums, allowing for more personalized coverage and financial planning.

Adjustable Life Insurance

provides an adjustable death benefit and cash value, while also possessing all of the features of traditional whole life policies. Its distinguishing characteristic is a provision referred to as the adjustment provision. The advantage of this policy is that it permits the policy owner to make prospective adjustments (i.e., in the future) to the policy’s coverage amount. The policy premium is fixed for the policy year

Universal Life Insurance (Flexible Premium Adjustable Life)

it allows contract owners to change the coverage amount at their discretion. This type of policy may be characterized as interest-sensitive as it utilizes changing interest rates (or rate of return) to determine cash values. These changing interest rates are not used to determine death benefits or future premiums.

Universal life premiums pay for pure protection (i.e., YRT term insurance), plus a portion is deposited into the Accumulation Account. The cash value may also be referred to as: (1) a cash value fund, (2) a cash savings plan, (3) policy equity, or (4) a savings feature.

The policyowner may pay any amount of premium they wish each year or no premium at all if there is sufficient money in the accumulation account.

When considering this type of policy, a person must remember:

• The death benefit may not be guaranteed if not appropriately managed

• A minimum interest rate is guaranteed, which never changes

• The interest rate may be higher depending on the company’s performance (current rate), and rates may be adjusted quarterly

• At times, the amount of coverage provided for the year will depend on the cash value available

They have unbundled premiums - contract owners may make partial withdrawals of cash value instead of having to take loans - two death benefit choices > Option A (One) says that a level death benefit is provided by calculating the NAR (net amount at risk) each month and deducting a mortality charge from the cash value each month which means the cash value and NAR (benefit) together provide a fixed death benefit > Option B (Two) says there is an increasing death benefit as the cash value increases so the death benefit equals the face amount plus the cash value at the time of death.

Corridor

In Universal Life, the amount of pure insurance protection above the cash value - for tax reasons, an automatic increase to the death benefit happens when the cash value reaches a certain percentage of the death benefit

Waiver of Monthly Deduction Rider (Waiver of the Cost of Insurance) [Universal Life Only]

this (rider) waives premiums when the policyowner is permanently disabled; however, it does not waive the total premium. This rider waives only the cost of the pure protection (mortality, interest, and expenses), not the portion allocated to the cash value.

No Lapse Guarantee Rider [Universal Life Only]

this (rider) prevents a lapse by imposing a premium payment schedule that requires minimum premiums to be paid on a regular basis - guarantees that the policy will not terminate before a determined date if specified amounts of premium are paid, and any policy loan plus accrued loan interest does not exceed the cash surrender value