3.3 - Permanent Insurance - Traditional Whole Life Flashcards
Characteristics of permanent (whole) life
Provides coverage for an entire lifetime. The permanent protection matures (endows) at the insured’s age 100 (or to age 121 if the policy is based on the 2001 Mortality Table), when the face amount equals the cash value. If the insured is still living at age 100, the insurer will pay the face amount to the owner.
The net amount at risk is the face value minus the cash value. As the cash value increases over time, the net amount at risk decreases. This does not affect the face amount of the policy. Since the cash value equals the face amount at maturity, it stands to reason that as the cash value grows, the amount of risk to the insurance company decreases.
These policies have a level premium and level face amount. To keep the premium rate level, the premium at the younger ages exceeds the actual cost of protection. This extra premium builds a reserve, known as the cash value, which helps pay for the policy in later years, as the cost of protection rises above the premium. The cash value provides an accumulation element in the policy. Traditional policies earn a specified guaranteed rate of return. Once the cash value has accumulated for a certain number of years, typically 3 years, the owner can borrow against the policy.
Whole life policies stretch the cost of insurance over a longer period of time in order to level out the otherwise increasing cost of insurance.
Unlike term insurance, a whole life policy cannot be convertible or renewable.
Ordinary Whole Life
Ordinary whole life insurance provides insurance protection to age 100, cash value accumulation to age 100, and fixed-level premium payments. The premium payments may be structured as follows:
A. Straight Life or Continuous Premium
B. Limited Payment
C. Single Premium
Straight Life or Continuous Premium - (Ordinary Whole Life)
The premium is level and payable to age 100 or the death of the insured, whichever comes first. The face amount remains level throughout the life of the policy. This policy has the highest total premium outlay (the amount of money spent on something).
Limited Payment - (Ordinary Whole Life)
Premium payments are for a specified time, such as 20-Pay Life or 30-Pay Life, or to a specified age, like Life Paid up at 65. The face amount, or death benefit, remains level and cash value continues to earn interest and mature at age 100. While the annual premium is higher than Straight Life, it is paid for a shorter period of time and will have a lower total premium outlay.
Single Premium - (Ordinary Whole Life)
The entire premium is paid in a lump sum at the time of purchase and creates immediate cash value. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. This policy has the lowest total premium outlay for the life of the policy.
Premium outlay
The amount of premium assumed to be paid by the policy owner or other premium payer out-of-pocket.
Indeterminate Premium
Provides for adjustable premiums. The company will charge a “current” premium based on its current estimate of investment earnings, mortality, and expense costs. If these estimates change in later years, the company will adjust the premium accordingly, but never above the maximum guaranteed premium stated in the policy.
Modified Premium Whole Life
- Premiums payable do not remain level.
- Begins with a premium lower than ordinary whole life for the initial 5 years
- After the first 5 years, the premium will increase and remain level throughout the balance of the life of the policy
- Designed for individuals who cannot afford the premiums of ordinary whole life in the earlier years
Provides a level death benefit and requires that premiums be paid for the life of the policy, to age 100. The premiums payable however do not remain level. A modified premium policy begins with a premium lower than ordinary whole life for the initial 5 years. After the first 5 years, the premium will increase and remain level throughout the balance of the life of the policy. This type of policy was designed for individuals who cannot afford the premiums of ordinary whole life in the earlier years. Because the premiums are lower in the first few years, the cash value will take longer to accumulate. This policy does not offer immediate cash value.
Adjustable Life
Combines features of term and whole life coverage, giving policyowners the option to change the characteristics of their policies as their needs change over time. Adjustable life is most appropriate for those whose income is expected to fluctuate from year to year, or those persons who may have a change in needs. All the common features of level premium cash value life insurance are still present.
These policies allows policyowners to manipulate the period of protection (to age 100 or shorter), increase (with evidence of insurability) or decrease the face amount with insurability, raise or lower the premium amount, and change the length of the premium payment period. These policies also provide cash value, although reducing the premium could stop the cash value from increasing, therefore adjusting the coverage to term insurance.
These changes can be exercised annually and are not retroactive. For example, a policyowner is not allowed to decrease the premium starting on a previous date. Changes can only be made on a policy anniversary date as approved by the insurer.
