FIN 4320: Chapter 11 - Life Insurance Types

Types of Life Insurance

The Stumbaugh School of Risk Management & Insurance, FIN 4320 Risk Management & Insurance, Chapter 11, covers various types of life insurance policies.

Other Types of Life Insurance

Beyond standard policies, several specialized types of life insurance exist, including:

  • Modified Life
  • Preferred Risks
  • Joint Life
  • Second-to-Die Life
  • Group Life

Modified Life

  • Description: This is a Whole Life policy characterized by lower premiums during the initial 3−53-5 years of the policy term.
  • Attraction: It is particularly appealing to younger individuals who desire a whole life policy but are early in their careers and have lower current incomes. This structure makes whole life coverage more accessible early on.

Preferred Risks

  • Eligibility: Individuals classified as "preferred risks" are those in better health, which qualifies them for better, lower insurance rates.
  • Underwriting Process: These policies are carefully underwritten, meaning applicants undergo a thorough assessment of their health and lifestyle to determine their risk profile.
  • Minimum Face Amount: Policies for preferred risks may often come with a substantial minimum face amount, such as 250,000250,000 or 500,000500,000. This indicates that it's often for higher coverage needs.

Joint Life (First-to-Die)

  • Mechanism: This type of policy covers multiple insured individuals. The death benefit is paid out when the first insured person dies.
  • Benefit Distribution: Upon the death of the first insured, the remaining survivors (beneficiaries) split the death benefit.
  • Premium Cessation: Premiums for the policy stop once the first insured dies.
  • Examples of Use: Commonly used by spouses (husband-wife) or business partners, where a financial payout is needed upon the death of the first individual to provide for the survivor or maintain business continuity.

Second-to-Die (Survivorship Life)

  • Mechanism: This policy also covers multiple insured individuals, but the death benefit is only paid out when the last insured person dies.
  • Beneficiary Receipt: Beneficiaries receive the death benefit after the death of the second (or last) insured individual.
  • Premium Cessation: Premiums for this policy stop when the second insured person dies.
  • Cost Advantage: Premiums for a second-to-die policy are typically lower compared to purchasing two individual life insurance policies for each person. This is because the payout is deferred.
  • Use in Estate Planning: It is frequently utilized in estate planning.
    • Estate Tax Note: When the first spouse dies and leaves their estate to the surviving spouse, there are generally no estate taxes incurred at that time, thanks to the unlimited marital deduction. A second-to-die policy ensures liquidity for estate taxes that may be due upon the death of the surviving spouse.

Group Life

  • Benefit Provision: Provides life insurance benefits to members of a specific group.
  • Employment Benefit: Most commonly offered as an employment benefit by employers to their employees.
  • Cost Structure: Typically features a low-cost structure and is often offered on a Yearly Renewable Term (YRT) basis.
  • Basic Amount of Insurance: The amount of coverage provided to an individual is usually determined by one of the following methods:
    • Based on their earnings.
    • Based on their position within the organization.
    • A flat, uniform amount for all group members.
    • Often, the basic amount is set as 11 times an individual's salary, up to a specified limit.