2.9 - Classes of Life Insurance Policies Flashcards
Classes of Life Insurance Policies
A. Group
B. Individual
Group - (Classes of Life Insurance Policies)
An insurance plan normally owned by an employer, creditor, or association, under which coverage is provided for the employees, debtors, or members. Group insurance generally provides protection for an employee’s named beneficiary, typically their spouse if married. The coverage may be changed only in the Master policy.
The coverage is normally written on a renewable term basis providing no cash value or living benefits as found in individual cash value policies. The amount of coverage can be limited to a fixed dollar amount such as $50,000 or a multiple of earnings, (for example, 2 times annual salary). Some group plans allow for the purchase of additional coverage, which may be partially or fully underwritten. Upon retirement, group coverage can be converted to an individual permanent life insurance plan without having to prove insurability.
Individual - (Classes of Life Insurance Policies)
The greatest difference between group and individual life insurance is the full latitude of ownership. Unlike group policies, individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve an estate or provide a living benefit for the terminally ill. Unlike group insurance, which can end upon separation of service or the employer choosing to discontinue the plan, individually owned policies leave the decision of keeping the policy to the policyowner.
Ordinary Life Insurance - (Classes of Life Insurance Policies)
Any type of life insurance that is not group, industrial, or government insurance. A large number of people are insured with an ordinary life policy making this the largest portion of the life insurance in force today.
Industrial (Home Service) - (Classes of Life Insurance Policies)
Synonymous with debit life insurance, it makes up only about .03% of the life insurance today. These small policies, normally $250 to $1,000, were originally sold to pay funeral expenses.
Permanent - (Classes of Life Insurance Policies)
A life insurance policy that remains in force to age 100 or beyond. The premium is always higher than that on a term policy at issuance, when the amount of coverage and underwriting factors are equal. This policy provides for living benefits for the policyowner or insured by way of its cash values. It also has many options available to the policyowner, as will be described later in the text.
Term - (Classes of Life Insurance Policies)
Has the lowest initial premium outlay and designed for someone with a large insurance need, but with limited cash flow. This coverage is often referred to as temporary, as it is usually written to cover a short time period. This policy does not build cash values and the benefit will either remain level, increase, or decrease depending on the type of policy. It is typically used to cover mortgages, short term obligations, or for younger couples with one or more children.
Participating - (Classes of Life Insurance Policies)
A class of policy marketed by a mutually-owned company. The word participating means a dividend may be paid to the policyowner when they are declared by the board of directors. The company is not required to issue only participating policies, but only participating policies will be eligible for dividends. Participating policy dividends are treated as a refund of premium for tax purposes initially. However, once all premiums have been recovered, any further dividends are taxable.
Nonparticipating - (Classes of Life Insurance Policies)
A policy marketed by a stock insurer. A stock insurer is a company under the control of the stockholders who would receive a share of any profits in the form of a corporate dividend, as opposed to a policy dividend. Stock dividends are treated as ordinary income for tax purposes. A policyholder does not have to be a stockholder.
Fixed - (Classes of Life Insurance Policies)
The policy has a fixed amount of coverage, benefits, and premium. Without riders, future inflationary trends will cause the purchasing power of the policy’s benefits to be reduced.
Flexible - (Classes of Life Insurance Policies)
Universal and Variable Universal Life policies have given the policyowner more flexibility in terms of premiums, investment objectives, and other policy benefits. These policies assist the insured during inflationary periods with the changing needs of the policyowner and insured.
Variable - (Classes of Life Insurance Policies)
A policy introduced in the 1970s that uses separate account(s) for the cash value accumulation. The separate accounts are similar in nature to mutual funds, and a securities license and life license are required to sell this policy. The policyowner takes on the investment risk of the policy. The policy’s overall death benefit can increase, along with the cash values, with positive investment performance coming from the separate accounts selected; however, there is no guarantee of return and down markets can cause significant loss of policy value.
