Life Insurance Review

Term Insurance: Pure or Temporary

DB only: No cash Value: Face amount payable only if death occcurs in term, Max amount of life insurance for lowest initial outlay

Advantages of term

Less expensive, ensures insurability, offset debt or mortgages

Disadvantages of Term

Coverage is not Permanent , Premiums increase, No cash value

Credit/Decreasing Term Insurance

Protects bank/lender if borrower dies

• Cannot exceed debt

• No cash value

• Bank= beneficiary

• borrower is insured, owner and premium payer

• Group contract: bank is owner(insured pays bank)

Renewability term

Renew at end of period, without medical exam:

• New renewal is based on attained or actual age

• Higher prem each renewal

• maximum age limitations

Convertibility term

• change term to permanent (WL or UL w/o showing insurability)

• Must maintain identical or lower death benefit amount

1st conversion age : Attained Age

• exchange term for permanent

• policy premium based on actual age

2nd : Original age

• What permanent plan would have cost per year if purchased at original age

• Insured makes lumpsum payment to cash value in order to “Catch Up” the cash value as though the permanent plan had been in existence the entire time

Whole Life Insurance

• Also reffered to Straight Life , Continous Premium Whole Life, Pre determined life.

• Cash Value will equal face amount at age 100

• Cash value: builds after 2-3 yrs, increase with every premium payment after 3rd year

• Fixed interest rate

• Owner has loan option or cash value surrender

• Not avalible to beneficiary

• Single Pay: one payment, Most expensive , but least expensive lifetime

Adjustable Life Insurance

• permanent policy with all characteristics of Whole Life except:

  1) Policy owners to adjust face amount based on changing needs

  2) Within Limits, the premium or face amount may be adjusted up or down

  3) Increasing death benefit almost always requires proof of insurability

Can also alter

• type of coverage- term or whole life

• Flexible premium payment periods

• Premium payment: higher than needed

• Protection time frame

Universal Life insurance

Flexibility: Flexible Premium adjustable Life

• Combination of Annually renewable term(ART) and a cash value fund

• Death benefit can be altered up and down depending on changing needs

• Over-Fund contact, therby lowering or eliminating need for premium

• target premiums : amount needed to keep contract in force

• partial CV withdraws are allowed

Universal Life Insurance Continued( Transparent- Unbundled Premium

Owner recieves annual statement indicating breakdown of

• Premiums

• Death benefit

• Mortality charges

• Expenses

• Cash value

Interest rate

• Guranteed minimum rate

• May be higher due to short term investments (Money Market)

• Higher Rate effects cash build up, Not premium or death benefit

UL 1st death benefit option A

Level Death benefit

UL 2nd Death benefit Option B

Level death benefit plus cash value

• Death benefit is not guaranteed in a UL contract due to the ability of owner to alter payment

Joint Life

First to die:

• Covers two or more people under one contract

• When first insured spouse dies, death benefit is paid to the beneficiary (policy ends on first death

Survivorship Life(second or last to die)

• Covers two or more people under one contract

• No benefit payable with the death of first

• Death benefit payable after second person dies

• Offers Premiums that are low compared to those that would be charged for seperate policies

• Well situated to meet the need for cash to cover estate taxes

• Face amounts that exceed $1,000,000

Juvenille Life Insurance

• Paid on the Life of the child

• The parent is the owner , child is the insured

• Jumping Juvinille: DB increases by 5x at ages 18-21, No premiums increase

Variable Life Insurance

Variable whole life has all the same characteristics of ordinary whole life with one distinct difference.

• The difference is that the cash value is directed into” separate or subaccounts”

• The cash value is invested in stocks, bonds, or other investment vehicles

The “ separate account “ is regulated as a mutual fund by the exchange commission according to Investment Company act of 1940

greater cash value growth potential

• No guarantee regarding cash value

• greater potential risk- Cash value and death benefit change daily based on investment performance

Annual premiums are fixed(Variable Whole Life)

Guaranteed minimum death benefit

Consideration clause (exchange of values)

Application information and premium in exchange for insurers promise to pay

Payment of premium

OWNERS RIGHT = Owners promise to pay

Insuring clause: Insurance companys = Promise to pay

• Appears on first or face page and provides a summary of contract

• outline and scope of coverage

• Insuring agreement

• Provides death benefit , mode of premium , beneficiaries and exclusions

Incontestable Clause

• Insurer may challenge material misrepresentation on an application, only during the first two years

• “rescindd “ policy and return premium

• Protects insurer

Entire Contract

Policy owner is entitled to the policy, application and any riders, waivers or endorsements which constitutes entire contract

• Mandatory provision

• Photocopy of original application

• Protects policy owner /consimer

Free Look Provision

• Upon delivery it allows the policy owner the right to return the policy after reviewing it for any reason within a specific time frame

• 10 days minimum after delivery (receipt) of policy

• “right to examine”

• 30 day free look for senior policies

Conversation option

• policyowner can convert from one policy to another

• Term to term = no insurability required

• Term to whole life= no insurability required

Reinstatement Provision

Applies to lapsed policies

• Within 3 to 7 years

• Proof of insurability and back premiums plus interest required

• After 45 days coverage is automatic

• Does not apply to surrender policy

Automatic Premium Loan

Insurer can borrow from the cash value to pay unpaid premium after grace period expires

• Must be selected at time of application

• Must have available cash value

• to prevent unintentional lapse of policy

• Creates loan against policy

Premium Mode

• Annual, semiannual, quarterly

• Annual is the least expensive

• Monthly is more expensive, more convenient

• Allow insurer to charge service fee

Assignment

• Transfer of policy owners’ rights to another party

  • Absolute assignment = Transfer of all rights to another party

  • The child attains policy from parents at the age of majority

• Collateral/temporary= TRansfer of some but not all rights to another party

• Whole life cash value to secure loan via the bank

Common Disaster

When insured and primary doe and it can not be determined whom actually died first , assumed that primary had died first

• Death benefit is therefore payed to contingent

Spendthrift Provision

Protects beneficiary from creditors

• creditors cannot attach lien against death benefits left with insurer

• Lump sum benefits are not protected

Policy Loans - Owners right to borrow via loan from cash value

• = to full amount of cash surrender

• Not available within first two to three years

• Fixed interest rate, not to exceed 8%

• Loan does not create taxable event

• If death occurs with outstanding loan, loan amount and loan interest is subtracted from death benefit

• Interest due each year on policy anniversary date

Dividend Options (there are 6 options)

1) Cash is tax free

2) reduce future premium

• apply against future premium

3) Accumulate an Interest

• Dividends placed in separate accounts

• Insurer pays interest(taxable) and the dividend is tax free

• Upon death, payable in addition to death benefit

4) Paid Up Permanent Additions

• Buy small, additional Paid WL policies

• Small amount of additional paid-up protection added on anniversary date

• Increases Overall Death benefit

  5) Paid-up option

  • pay up policy earlier than expected

  • 6) One year term

    • Use dividends to purchase additional term insurance

    • Term death benefit paid in addition to WL death benefit

    • Term expires after one year

Five Death Benefit Settlement Options for beneficiaries

1) Lump Sum:

• Income tax free

2) Fixed Period:

• Fixed number of payments over certain time frame

• 20 years of monthly income

• Main concern is having income for definite period

3) Fixed Amount:

• Specific dollar amount for indefinite period

• $2,500 per month until exhausted

• Primary Concern is monthly income / Dollar amount

• More flexible than fixed period since amount can be altered

4) Interest Only

• Proceeds are left with the insurer, only the interest is paid to the beneficiary

• Beneficiary can withdraw at anytime

• beneficiary receives a guaranteed interest rate

• Bene is protected against claims of creditors

• INTEREST IS ALWAYS TAXABLE

5) Life income- Single premium immediate annuity

• Income for the entire life

• Several payout options to choose

• Joint and Survivor income option

Accidental Death Rider

• Provides additonal Db is accidental

• multiple indemnity: 2x or 3x

• Death must occur 90 days after accident

• Death benefit is known as the Principal sum

• Capital sum is accidental not dead but injured like arm gone

• Cheap

Guranteed Insurability

• additional amounts of life insurance at future dates, no physical exam needed or proof insurability

• Future dates are anniversary policy dates

• certain age

• Additional Insurance based on attained or actual age

Cost of Living Adjustment Rider

• Automatic increase in DB based on consumer price index

Return of Premium Rider

• INC term rider added to term or permanent policy, Inc DB in proportion to premiums paid

Return of Cash Value

• Inc term rider is added to WL , inc death benefit equal to cash value accumulation increase each year

Insurance Contract Features: Viatical

Free from federal income tax if terminally ill

Viator= policyowner who considers Viatication Transaction

Viatical Settlement Broker = Negotiates between two parties, No more than 2% of the amount paid to viator as compensation

Viatical Settlement provider= Company that purchases Life insurance from a policy owner

• The VSP purchases policy from Viator and becomes the new owner

• Names itself as beneficiary

• Responsible for premium payment

Previous owner receives lump sum buyout, 50 to 90%

The previous owner usually has terminal/chronic illness

T/F Crapo is used to remember Policy loan rights

False

T/F The Db must be paid to a family member

False

T/F The insurer may not always pay death benefit n

True

A policyholder can sell it back to insurance company

False

Business Use of Life Insurance (Business Continuation- Buy-Sell agreement)

• For partners death

• Makes money available to purchase interests of deceased partners beneficiaries

• Pre arranged purchase price

Entity Plan:

• Agreement between corporate owners , # of owners is the amount of policies needed

Cross Purchase Plan:

• Agreement between partners only

• Number of partners - 1 times Number of partners = # of policies

Group Insurance Concepts

• Group as a whole is evaluated

• No individual underwriting

• Good risks out weigh bad risks = Adverse selection

• Impairments are covered

• Enrollment periods

Conversion option:

• within 31 days without proof of insurability

• DB are provided within 31 day period

• Term to whole life = attained age

• No medical exam or health questions

Annuities

• Contract providing Income for a fixed period or lifetime

• Systematic Liquidation of an estate or pool of money(Opposite of Life Insurance)

• Products sold by Life Insurance companies

• Protection against outliving ones income

Fixed Annuity

• predetermined monthly income for life

• general Asset account

• Interest rate guaranteed

• Limits Policyowner risks

• INSURER ASSUMES RISK

Variable Annuity

• Monthly benefit varies based on performance

• separate account of stocks and bonds

• Higher potential return no guarantee

• Policyowner assumes the risk

• Requires FINRA Series 6 or 7

Annuities and how premium is paid

• Lumpsum: or single sum, fully funded with one payment

• Periodic: Level premium or flexible premium

When benefits begin for annuities

• Immediate Annuity: 1st payment begins within 30 days of first deposit, only funded by lump sum

• Deferred Annuity: Defer payment to later date

Staright Life or Pure Life Annuity

• Income for life with no refund to survivor

• No survivorship- Greatest risk is to annuitants beneficiary

• Largest Monthly Income

• greatest overall potential benefit

Life with period certain Annuity

• Income for Life, with survivor benefit if annuitant dies before end of term or designated period

Unit Refund Life Annuity

• Annuitant receives an amount at least equal to his original investment at death and any remaining amount is paid to beneficiary

Equity Indexed Annuity

Allows for stock market appreciation with downside protection

Guarantee of principal, safety

Fixed annuity: Guaranteed minimum rate received regardless of index performance

Indexing Investment method

• Linked to Equity Index

Participation Rate

• Percentage of the index “gain” that is kept by the contract holder with the remainder kept by an insurer

Tax Treatments of Life Products(Dividends)

• Considered an return of an overpaid premium and are not taxable

• Interest is taxable

Tax Treatments for Life products (Loan Interest)

• Interest is not deductible

• Not a taxable event

Tax Treatments for Life products( Settlement options other than Lump Sum)

• When death benefits are left with an insurer, Interest is paid on proceeds

• Interest is taxable

Life Insurance is considered a personal expense

• Premiums are not deductible

• Death benefit is received income tax free

Cash Value (Whole Life Policy)

• Grows tax deferred

• Upon Surrender, not taxable unless the cash value exceeds the premiums paid (cost basis) then, only the excess is taxable

• Cost basis consist of premiums paid for the base policy only and not premiums paid for riders

Modified Endowment Contract

• Premiums Paid are not in proportion to death benefit provided

• MEC is IRS classification of an insurance contract

• Seven pay test: If premiums paid during first seven years exceed the net level premium that should have been paid, it is an MEC

• Disadvantages: Any distributions (withdrawals, dividends and loans) become taxable

• Withdrawls:

  • Taxed on Last in /First Out basis

Advantages: Death benefit remains income tax free and cash value growth is tax differed until withdrawn

Taxation of Group Life Insurance

• Employer-paid premiums are deductible to the employer as a business expense

• DB is tax-Free

• The cost of $50,000 group life is tax exempt to employee

• The cost of coverage for death benefits exceeds $50,000 will be taxed as ordinary income to the employee

1035 Exchange

• IRS allows a tax free exchange of an insurance product for another of like kind

• Eligible exchanges:

  • Life insurance policy for another one, endowment or annuity

  • Endowment policy for another endowment or annuity

  • Annuity contract for another annuity

  • Annuity cant be exchanged for life insurance policy

Employer sponsored Plans

1) Employee retirement security act

• Prevent misuse and mismanagement of pension plan funds

• Rules for private sector defined death benefit and contribution plans

• Determines Qualified status

  • Employer and employee contributions are tax deductible

  • Earnings are typically tax deferred

2) Plans cannot be discriminatory and must be offered to all employees who

• are age 21 or older

• Have at least one year of full-time service(1,000 hours)

3) An approved vesting schedule must be followed:

• Specifies the percentage of the employer contributions to which the employee is entitled when withdrawing from the plan

• Employees are 100% vested in their own contributions

Employer sponsored plans Distributions

• benefits taxable upon withdrawal

• Plus 10% penalty on withdraws prior to 59 ½

• Death or disability

• Qualified financial hardship

• 1st time Primary home purchase

• Plan Loan

• 20% withholding

Simplified Employee Pension Plans SEP IRA

• Employer sponsored IRAS

• Small Employers and their employees

• Contributions are deductible to employer

Maximum Contribution limits:

• 25% of adjusted gross self employed income(tops out at maximum dollar amount)

Keogh Plans or HR -10

• Self employed and employees

• Contributions are deductible to employer

Traditional IRA

Available to all individuals who have earned income

• Funed by cash

• Possible tax deduction, tax deffered

• Age 50 plus catch up additional $1000

• Fully or partially taxed

• Required minimum distribution at age 72

Social Security Qualifications

Fully insured

• Maximum benefits

• 40 quarters(10 years of contributions)

Currently Insured

• Six quarters during the past 13 quarters which result in loss

Primary Insurance amount

• Full retirement benefit after full retiremrnt age

• AVG indexed monthly earnings

• Determines what was contributed vs income payment

Parties of the contract

Two party: Owner is insured and owns policy , pays the premium

Third Party Contract: the owner is not insured

• An example would be Rick buys a policy on his son
  

• Rick is the policy owner

• Son is insured

Reinsurance

• Insurance purchased by insurance companies, transfer of risk

• Spreads out risk, thereby avoiding huge losses

• Industry stability

Two types of reinsurance

1) Faculative: Case by case basis

2) Automatic: Automatic acceptanc of portion of risk

Actual or expressed

• Powers an agent has that are defined in agent contract

Implied

Uusal and customary business practices that may not specifica;;y be listed in contract

Apparent

Authority the public see the agent having

Special Features of contract

• Aleatory: Unequal: may or may not provide more in benefits than [remiums paid

• Adhesion: Take it or leave it

• Unilateral (one sided): only one party needs to act

Concealment

Failure to voluntarly disclose materials facts relevant to under writting process

The application

• Primary tool used to gather info

Section 1: Gneral info about applicangt

Section 2: Detailed health info

Agent report: section used by agents to list general observations

Home office Underwriting

• Application, agents report and personal interviews

• Attending Physician Statement, medical and physical exams paid for by insurer

• Consumer reports

• Medical Information Bureau': Attempt to eliminate the high risk revealing pre-existing conditions

  • Medical information from previous applications

  • Shared among member insurance companies

  • Health history, driving record and abnormal pap studies

Credit Review: Fair Credit Reporting Act of 1970

• Consumers’ rights ,l if denied, the consumer has the right to

  • Be provided with a source of information

  • Challenge info is the report

  • Be issued the policy if the error is found

Factors that influence how much premiums will be for individual policy

Age, Gender, Occupation, Height and wright, Fmily health history, Personal Health history, Personal Habits, Hobbies and Salary’s, Travel and hospitilizations

Three important factors when determining LIFE INSURANCE PREMIUMS

1) Mortality Charge: Which is the probability of death

2) Interest: INvestment return

3) Expenses: Loading includes

• Producers commisions

• Company Profits

• Admin costs

Contract Delivery

• Producer Responsibilities

  • Person Insured

  • Coverage amount

  • effective date

  • Policy provisions

  • beneficiaries

  • Premium and Premium mode

  • ownership rights

  • Exclusions and riders

    10 day free look period

  • for seniors it is 30

Insurability Type Conditional Receipt

• Coverage is effective on date both premium and application is given to the agent and application is provided to agent

General Insurance Law

1) Commisioner/ Superintendent of insurance powers and duties

2) Insurance definitions: (domestic, foreign, alien, mutual, stock, fraternal, certificate of authority

3) Licensing Requirements for producers

4) Continuing education requirements

5) Appointments and record maintenance

6) Suspension of licenses

7) Marketing practices

• Rebating: Giving money to policyholders to incentivize a sale

• Misrepresentations: Insurer makes untrue statement

• Twisting: Inducing the policy owner to drop an existing policy and get a new one

• defamation: Ruining a person’s good name

• Coercion: Forces person to get insurance

• Unfair discrimination: When similar risks are treated differently

• Fraud: Knowingly lies

• Commingling: Mixing of funds belonging to one party with funds belonging to another

• False advertising

• Unfair claim practice

8) Change of name and address(30 days)

9) Reporting of actions