Policy Loans and Options

Policy Loans

Financial tool of life insurance policies in which it can offer quick cash. Usually available when the policy has been active for 3 years and can borrow up to the available cash value or a % of it.

Rate Provisions

The allowable interest on a life insurance loan. Up to a max of 8% if a fixed rate, & if variable it is based on Moody’s corporate bond yield

Automatic Premium Loans (APL)

Has to be elected by the policyowner. Allows the insurer to automatically borrow against the life insurance cash value if the owner misses a premium. Keeps it from lapsing after a grace period

Partial Withdrawals

Only available in Universal Products. Insured takes out money from their life insurance that directly reduces the cash value of it. Cannot take out more than the cost basis/premiums put in.

Tax-free

Premiums are paid with post-tax dollars and are thus ____

Taxable

Earnings have yet to be taxed when pulled out of a policy and are thus _____

Surrenders

Taking out the full Cash value before the policy would have otherwise ended normally. Cancels the entirety of the policy.

Surrender Charge

Fee that the insurance company may levy on the policyowner if they cancel the life insurance policy early

Cash Surrender Value

The entitled amount a policyowner is able to get after they surrender a policy; it’s the total cash value less any surrender charges the insurer recuperated

Surrender Charge Schedule

Displays the charge of surrendering in the form of a % or amount for each year the policy is active. Generally the surrender fee decreases over time, eventually going to zero after a certain amount of years

Settlement Options

Policyowner chooses a way in which to receive the death benefit. Unless none was chosen, then it goes to the beneficiaries to decide

Lump Sum

Default way to receive a life insurance settlement. One full payments given tax free

Installment Options

Choosing to receive the death benefit another way than lump sum, that is subject to earn interest that is taxable

Principal

Original death benefit that is not taxable

Interest

Earned on the principal that is held in an account and becomes taxable as income

Interest Only Option

A type of settlement option in which the Insurer holds the death benefit to accrue interest. Principal remains intact, but the interest gained on the account gets paid out.

Capital Conservation

Another way to say Interest Only Settlement Option

Fixed Amount Option

A type of Settlement Option in which a fixed dollar amount is paid out until all is exhausted. Any interest earned actually extends the length of time payments will be made for.

Fixed Period

A type of Settlement Option. Pays out the death benefit, which can be variable each time depending on the interest, for a specified timeframe. Often like 10 or 20 years. Can extend to the beneficiary if the timeframe is not completed while the Insured was alive

Life Income

A type of Settlement Option. Uses the death benefit to buy an Annuity for a beneficiary. Payments made to beneficiaries depend on their age

Straight Life

A type of Life Income Option. An Annuitant receives payments for the entirety of their own life and that’s it. Pays the most.

Life with Refund

A type of Life Income Option. Annuitant receives funds for their life or until it is equal to the death benefit originally put into the Annuity. If there is any outstanding balance, the remainder goes to the beneficiary of the Annuitant.

Life with Period Certain

A type of Life Income Option. Guarantees payments to an Annuitant (or beneficiary if the Annuitant dies prematurely) for a specified timeframe.

Joint Life Income

A type of Life Income Option. Guarantees annuity payments to 2 annuitants; however, when one of them dies the annuity terminates.

Joint and Survivor Income

A type of Life Income Option. Guarantees lifetime income of two annuitants, even after one of them dies, the other still gets payments.

Joint and Full Survivor

A version of joint and survivor income option in which the surviving annuitant continues to receive 100% of their original payments after the first one dies

Joint and 2/3 Survivor

A version of joint and survivor income option in which the surviving annuitant continues to receive 2/3 of their original payments after the first one dies

Joint and ½ Survivor

A version of joint and survivor income option in which the surviving annuitant continues to receive 1/2 of their original payments after the first one dies

Nonforfeiture Options

If someone has life insurance and the policy builds a cash value and the policy is either allowed to let lapse or cancelled this allows the cash value to be put to use after the policy ends

Cash Surrender

Type of Nonforfeiture Option in which the Insured cancels the policy they have a receive the current cash surrender value

Reduced Paid Up

Type of Nonforfeiture Option in which the insured buys a smaller benefit fully paid up whole life policy with the remaining cash value from their cancelled policy

Extended Term

Type of Nonforfeiture Option in which the insured buys a single premium term policy with the same death benefit they had with their cancelled policy.

Dividends

Only avilable on particpating policies for insureds with a mutual insurer. Only paid when declared and are not guaranteed. Considered a return of premium and thus are not taxable (unless it exceeds the amount of premiums paid)

Cash Payment

A type of Dividend Option. Insured elects this option and receives a check in the mail if a dividend is declared around the time of their policy anniversary

Reduction in Premium

A type of Dividend Option. Insured elects this option and has the Insurer automatically apply the declared dividend amount to the insured’s next premium payment to lower the cost

Accumulate at Interest

A type of Dividend Option. Insured elects this option and lets the dividends sit in the insurer’s internal account to accumulate interest. The insurer discloses the interest rate and how it will be compounded over time

Paid-Up Additions

A type of Dividend Option. Buys really small single premium whole life policies with dividends paid to an Insured. These policies have their own separate death benefit, cash value, and possibility of more dividends

Paid Up Option

A type of Dividend Option that uses the dividends to enable the Insured to pay more on future premium payments. in the long run, this shortens the overall premium paying period allowing the policy to get paid in full earlier than originally planned

1 Year Term Option

A type of Dividend Option that buys a single premium 1 year term policy. Amount of extra coverage for that year depends on the dividend amount received and the insured’s age