3.2 - Types of Policies Flashcards
Level
The death benefit and the premiums remain level during the policy term. Most group life insurance is written with a level term death benefit.
The death benefit is also known as the policy proceeds or face amount.
Decreasing
The death benefit decreases, but premiums remain level for the policy term; often utilized to pay off outstanding mortgage balances. Often such policies are sold as mortgage protection, with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies the proceeds of the policy can be used to pay off the mortgage. The premiums paid for decreasing term are lower than the premiums payable for level term since the benefit decreases throughout the term of the policy.
Credit Life Insurance
Credit life insurance is a special form of decreasing term. Unlike the standard decreasing term policy, credit life automatically names the creditor as the beneficiary. There is no option. The policy cannot be written for more than the outstanding debt, since that is the limit of the creditor’s insurable interest. Once the loan is paid, the policy ends.
Although credit life insurance, which is term, can be obtained as an individual, it is usually sold on a group basis to a creditor, such as a bank, finance company, or a company selling high priced items on the installment plan. The policy generally pays the outstanding balance of the debt at the time of the borrower’s death, subject to policy maximums. Debts covered in this way include:
- Personal loans
- Loans to cover the purchase of appliances, motor vehicles, mobile homes, and farm equipment
- Educational loans
- Bank credit and revolving check loans
- Mortgages loans. etc.
Increasing
The death benefit increases over the life of the policy while the premiums remain level. This type of term is normally written as a rider to provide cost of living or return of premium benefits.
Annually Renewable Term
The simplest form of term life insurance is for a term of one year. The death benefit remains level and the premiums increase yearly as the policy renews. While it is very inexpensive initially compared to other types of life insurance, over time it can become cost prohibitive. The death benefit is paid by the insurer if the insured dies only while the policy was in force.
Re-Entry Term Option
Term policies with this option will allow the insured, upon the end of the original term, to renew based on attained age and may qualify at a discounted rate by proving evidence of insurability. Typically, with an annual renewable term policy, the term automatically renews as long as the premiums are paid. However, the Re-Entry Term option will allow the insured to renew at a lower rate than renewable term, as long as the insured meets the qualifications of insurability.
Special Features
These special features are typically available only on level term insurance policies, and an additional premium may be charged. A renewable and convertible term policy will cost more than a level term policy.
- Renewable
- Convertible
Renewable (Special Features)
A benefit that will renew the contract on the renewal date without evidence of insurability. The policy may be a one (annual), five, ten, or twenty year renewable contract, with premiums increasing at the beginning of each renewal period. The renewal premium is based upon attained age. Renewability is important because the risk is that the insured’s health may deteriorate and the insured may be unable to obtain a policy at the same rates, or even at all, leaving the insured without coverage. Level term policies may offer the option of being renewable for an additional premium
Convertible (Special Features)
The right to convert the existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract. The premium can be based upon attained age or issue age. The premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond. If the conversion is based on the issue or original age, back premiums plus interest will be required to be paid at the time of conversion.
