4. Life & Health: Types of Life Insurance Policies

What does face amount mean?

The amount of the death benefit payable when the insured dies.

Face amount = it’s usually found on the 1st (face) page of the policy, also called faced value

What are living benefits?

Financial benefits that are available while the insured is still alive.

What is term life insurance?

• policies that only offer a death benefit

• duration is only during a specific period of time (term)

What is level term policy?

A type of term life insurance where both the death benefit and the premium stay the same (level) throughout the entire term.

•  Term length is stated in years (e.g., 10, 20, or 30 years) or to a specific age (e.g., Term to Age 65, Term to Age 70).

What is a decreasing term policy?

The death benefit goes down every year until $0, premium stays the same.

— good coverage for financial obligations that decrease over time, such as a mortgage or bank loan.

What is a increasing term policy?

The death benefit starts at zero or low, and increases over the term of the policy, the premium also increases.

— good for financial obligations that increase over time, such as keeping up with inflation or cost of living.

What is a return of premium term policy?

Return all or part of the premium paid if the insured is still alive at the end of the term.

• premium higher than a regular term policy

• 100% return = higher premium

• 50% return = lower premium

What is renewability?

With term life insurance, it guarantees the policy will renew (extend) at the end of the term.

• no need to reapply or qualify medically

• renewal period is the same term as the original

• guarantees the same amount of death benefit, but the premium will increase based on age = insured “attained age”

• higher premium at each renewal = step-rate premium

• renewable term policies expire at the age specified in the policy

What does “attained “age” mean?

The insured’s age at the time of renewal w/ a renewable term policy.

What is an A.R.T. (Annual Renewal Term) contract?

1-year term that renews annually with increasing (step-rate) premiums each year.

What is convertibility?

A feature that allows a policyowner to convert a term life insurance policy into a permanent life insurance policy w/ out a medical exam or new application.

— “No evidence of insurability” (medical exam) is the biggest advantage

What are the advantages of term insurance?

• lower premiums

• least expensive form of life insurance

What are the disadvantages of term insurance?

• coverage only during the term of the policy

• premiums increase as insured ages

• renewability feature expires before the average lifetime age f expectancy

What is Whole Life Insurance?

Permanent insurance policy to remain in force for the whole life of the insured + premiums never increase.

What are the 8 characteristics of Whole Life Insurance?

• level premium

• fixed premium schedule

• fixed, level death benefit

• cash value

• guaranteed interest crediting

• Policy surrender

• policy loans

• death benefit components: cash value (savings element) & insurance protection element

What is level premium?

The premium amount never increases from the original amount.

The purpose is to make whole life policies affordable at older ages. Overpay at younger ages and underpay in later years.

What is fixed premium schedule?

The policyowner selects the level premium on a fixed schedule, like monthly. If not paid, the policy will go out of force, or “lapse”.

What is fixed, level death benefit?

The death benefit is fixed and level. The face amount always remains the same.

What is cash value?

The reserves necessary to assure payment of the guaranteed death benefit.

What is guaranteed interest crediting?

The cash value increases steadily over the life of the contract b/c it is regularly credited with a guaranteed (level) rate of interest.

What is policy surrender?

The policyholder’s right to quit the contract and cash in the reserve fund value of the policy, giving up the death benefit.

What are policy loans?

Allows the policyholder to borrow up to the cash value, with interest paid on the amount, keeping the policy and death benefit in force.

What are the 2 components of the death benefit?

• Cash value

• Insurance protection - insurance company must pay to have the amount of money on hand to pay the death benefit, the “net amount of risk”

—cash value increases every year, insurance protection decreases

What is endows or endowment?

When the whole life policy matures, usually age 100 or 120. If the insured is still living at endowment, the cash value/face amount is paid, and the policyowner pays income tax on any capital gain.

What are the 7 types of Whole Life Policies?

• continuous premium whole life

• limited-payment whole life

• single premium whole life

• modified premium whole life

• graded premium life insurance

• indeterminate premium

• interest-sensitive or current assumption whole life

What is continuous premium whole life?

Also known as straight life or ordinary life.

The premiums are the same each year for the duration of the policy. If the policyholder doesn’t make premium payments, they will receive the cash value.

What is limited-payment whole life?

Policies allow for a lifetime of premiums to be paid in a shorter, “limited” period.

Common forms:

• 10-pay/20-pay = premiums paid in 10 or 20 level annual installments.

• life paid-up at age 65 = premiums paid in level annual installments to age 65.

— annual premiums higher and the cash value accumulates faster

What is single premium whole life?

One time payment at time of purchase. Covers all future costs of maintaining the policy with immediate cash value.

What is modified premium whole life?

Lower premiums the first 3 - 5 years, similar to term life. After initial period, premiums increase to a certain amount and then level for the rest of the policy.

What is graded premium whole life insurance?

The policy has an even lower initial premium than modified whole life. Premiums lower and increase every 5 - 10 years until leveling off.

What is indeterminate premium?

A whole life policy similar to a nonparticipating whole life policy except it can have adjustable premiums. The company charges a premium based on its current estimate of investment earnings, mortality, and expense costs. If estimates change later, the company adjusts the premium, never over the maximum guaranteed premium stated in the policy.

What is interest-sensitive or current assumption whole life?

The policy has a current interest rate & a guaranteed interest rate.

The cash value can increase beyond the stated guarantee if economic conditions warrant.

Features:

• fixed, level death benefit

• fixed premium schedule

— the insurer will make investments w/ a percentage of each premium payment. Excess or current interest from the investments may be credited to the cash value rise. Interest rate not fixed and fluctuates on current economic conditions.

What is straight life or ordinary life also called?

Continuous Premium Whole Life

What are advantages and disadvantages of whole life insurance?

— Advantages:

• permanent coverage

• lifetime coverage

• guaranteed level premiums

— Disadvantages:

• premium not flexible

• higher initial premium

What are flexible policies?

Gives the policyowner numerous options for premiums, face amounts, and investment objectives in response to changing needs and circumstances.

What are the 3 types of flexible policies?

• adjustable life insurance

• universal life

• equity-indexed universal life insurance

What is adjustable life insurance?

• options to adjust the death benefit, premium, and length of coverage w/ out having to change policies.

• have term and whole life in one policy, depending on affordability of the premium.

— large death benefit and low premium acts like a term policy = all premium to death benefit and no cash value.

OR

— low death benefit @ same premium, the cash value would increase and act like a whole life policy.

What is Universal Life?

For people who want flexible premiums and coverage over the course of their lifetime.

— premiums accumulate interest in the policy’s cash value

— monthly interest credited to the cash value is either the guaranteed rate or current rate, whichever is higher

— every month a term cost of insurance and administrative fee are taken from the cash value by the insurer. The policy stays in force as long as there is cash value to cover monthly expenses.

Can the policyholder increase or decrease the death benefit with Universal Life?

Yes, subject to any insurability requirements.

What are the 2 death benefit options for Universal Life?

1. Level death benefit = to the face value. More of the premium is placed in the cash account.

2. Increasing death benefit = to the face value + the cash account. More of the premium is applied to the higher cost of the increasing death benefit.

— withdrawals & loans can be made against the cash value; they can also surrender or “cash in” the contract for its current cash value.

Do both Whole Life and Universal Life allow loans from the cash value?

Yes, but only Universal Life allows withdrawals (partial surrender) from the cash value.

— a withdrawal is federal income tax-free up to the premiums paid, taxed thereafter as income.

— withdrawals do not require repayment, but reduces cash value and death benefit.

What is Equity-Indexed Universal Life Insurance?

A permanent policy that allows policyholders to tie accumulation values to a stock market index. Typically has a minimum guaranteed interest rate component along with the indexed account option.

— fixed universal life insurance w/ growth potential of the market index.

What are advantages and disadvantages of flexible policies?

— Advantages:

• flexible premiums, death benefit options, and cash value

— Disadvantages:

• more complex

Which flexible policy allows you to skip a premium as long as there is enough cash value to cover the monthly expenses?

Universal Life

What are variable policies?

Permanent insurance policies that provide lifetime coverage + have cash value and a death benefit.

What is a separate account?

A fund held by the life insurance company and maintained separately from the insurer’s general assets.

— account holds variable annuity & variable life insurance premiums to purchase funds/investments the company offers.

Is there a guaranteed rate of return or risk of loss in the separate account investment option?

They usually include a mixture of stocks, bonds, mutual funds, money markets, or commodities and do not guarantee investment returns. However, it can provide higher returns than traditional policies.

What are the agent requirements for variable insurance?

Because the product contains an investment element, the agent must have a valid life insurance license and register with the SEC (Securities and Exchange Commission) and the FINRA (Financial Industry Regulatory Association). Highly regulated.

What are the 2 types of variable policies?

• Variable Life Insurance

• Variable Universal Life

What is variable life insurance?

Whole life with a separate account, separate account instead of guaranteed cash value. Also called Variable Whole Life or Fixed-premium Variable Life.

What are the 2 death benefit options for variable life insurance?

Option 1: death benefit is level regardless of increase or decrease of cash value.

Option 2: death benefit varies w/ fluctuating cash values.

— death benefit increases w/ positive investment results, but never decreases below the face value if negative. Face value = guaranteed minimum death benefit

What is Variable Universal Life?

Universal Life with a separate account. Can lapse if the cash value doesn’t cover monthly premiums, so NO guaranteed minimum death benefit.

What are the 3 specialized policies?

• joint life

• survivorship

• juvenile

What is a joint life policy?

Covers 2 or more lives, death benefit paid when the 1st one dies. Also called first-to-die policies.

What is a survivorship policy?

Insured 2 people, death benefit paid when the last insured dies. Also called second-to-die or last-to-die policies. Can provide money to pay estate settlement costs and related expenses upon the death of a 2nd spouse.

What is a juvenile policy?

Coverage on the life of a child or minor, mostly permanent life insurance. Death benefit, and locking in the low premium for the child’s entire life.

What is a jumping juvenile policy?

Policy automatically increases at age 18 or 21 with no increase in premium.