2.2.5 Life Insurance Flashcards
What is life insurance?
Contract between an insurance company and an individual that is designed to provide financial compensation to the named beneficiaries in the event of the insured’s death.
Four types of life insurance…
Term Insurance
Whole Life Insurance
Universal Life Insurance
Variable Life Insurance
Term insurance.
Describe coverage.
Cash value?
Protection for a specified period (“term”)
Least expensive form.
Benefit is paid out only if insured dies during the term of coverage.
Does not accumulate cash.
Uses of term insurance?
Provide substantial amount of coverage at a minimum cost.
Lower premiums allow for more protection.
Whole life insurance.
Describe coverage.
Permanent; provides protection for the whole life.
Benefit payable is the face amount of the policy (constant).
Policy set at start of policy issue; remains constant as well.
Describe the cash value of whole life insurance.
Cash held in the insurer’s general account.
Whole life insurance combines a death benefit with an accumulation, or a savings element.
Insurer invests in conservative investments and guarantees the policy’s cash value.
Uses of whole life?
Level premium (investor knows exactly the cost)
Forced savings (via cash value)
Three ways to surrender the policy…
- Surrender policy for its cash value
- Take reduced paid-up policy where the death benefit is decreased and future premiums are no longer required, or
- Take extended term insurance (ill face amount if death occurs within specified period)
Universal life.
Characteristics.
Premium payments are separated.
Policy owner may increase or decrease the death benefit.
Premium amount may be changed (so long as enough is paid to maintain policy)
Interest earned by the cash account will vary, subject to a guaranteed benefit.
Universal life.
Interest rates.
Current annual rate:
Varies with current market conditions, and may change every year.
Contract rate:
Minimum guaranteed interest rate. Policy will never pay less than that.
Universal life.
Advantages & disadvantages.
Advantages include…
Permanent insurance the can build cash values
Typically guarantees a minimum interest rate
Flexibility to adjust death benefit and premiums
Ability to “overfund” the policy
Provides for cash value loans
Disadvantages include…
Poor investment results could lead to higher premiums (if the same face amount of coverage was desired)
Variable life insurance.
How does it differ from whole life insurance?
Premiums are invested not in the insurance company’s general account, whose investments are determined by the insurance company, but in a separate account, in whose investments the insured has some choice - common stock, bonds, money market instruments, and so on.
Requires both insurance and securities licenses to sell.
Variable life insurance.
Cash value?
Fluctuates with the performance of the separate account and is not guaranteed.
Compare and contrast.
Scheduled-premium VLI contract
vs.
Flexible premium VLI contract
Scheduled-premium VLI contract
- Minimum guaranteed benefit
- Net premiums invested in a separate account the policy owner selects.
Flexible premium VLI contract
- No guaranteed benefit
- Premiums invested only in a separate account, and there is only a variable death benefit.
Whole life.
Premium?
Death benefit?
Accounts?
Cash value guarantee?
- Scheduled premiums
- Fixed death benefit
- Premiums to general account
- Guaranteed cash value
