3.4 - Nontraditional Whole Life (Interest/Market – Sensitive) Flashcards
Current Assumption or Interest-Sensitive Whole Life
The insurance company can change the premiums or interest rate being credited to the account based on the current money market rates. Interest rate changes affect the policy premiums. The policy has a guaranteed minimum death benefit, but it may increase based on the growth of the cash value. If current rates increase, either the policyowner pays a reduced premium or the cash value will increase at a faster rate. If cash values increase too quickly, this could cause the policy to mature prior to age 100. To prevent this from happening, the insurer will add a corridor of insurance protection to keep the policy from endowing. This increase is provided without evidence of insurability.
In other words:
- The insurance company can change the premiums or interest rate being credited to the account based on the current money market rates
- Premiums may fluctuate due to current interest rates
- Provides guaranteed death benefit
- Cash value growth may fluctuate due to current interest rates
Indexed Universal Life (Equity Indexed)
Indexed universal life insurance is a type of permanent life insurance, which means it has a cash value component in addition to a death benefit. The money in your cash value account can earn interest based on a stock market index chosen by your insurer, such as the S&P 500 or the Nasdaq Composite
This policy gives policyowners the opportunity to decide the percentage of cash value that is invested in traditional fixed income securities. The remainder of the cash value is invested in an equity index account linked to a stipulated stock index. When the market declines, the policy is credited with the minimum guaranteed interest rate or zero interest. The policy typically guarantees the principal amount in the indexed account.
Universal Life (Flexible Premium Adjustable Life Insurance)
Features insurance protection and a savings element, the cash value, that grows on a tax-deferred basis. UL is an “unbundled policy.” This means the individual elements of the policy and premium— which includes the mortality risk, policy expenses, and the cash value—are credited to the account separately, after the premium is paid. Universal life has built-in guarantees regarding the cost of insurance (mortality risk) and the interest rates applied to cash values.
The level of flexibility and the features of a UL policy include:
- Adjustable Face Amount: The insured can increase or decrease the face amount of the policy. Any increase in the face amount will require evidence of insurability.
Mortality charges are deducted monthly from the policy’s cash value. The mortality charge is the cost of pure insurance, and although it is deducted monthly, it is determined annually based on the mortality risk of each age group. The increases in the cost of the mortality charge is limited to a policy maximum. The insurance protection is considered annual renewable term.
Expense charges used to cover administrative costs are also deducted monthly from the cash value. This includes the insurance company’s cost of maintaining the policy and can be impacted by the overall increasing administrative costs associated with a plan. Like mortality charges, there is a maximum charge established within the plan.
Interest is credited to the cash value on a monthly basis at the current interest rate, but will never be less than the guaranteed minimum rate established at the time the policy was issued.
The level of flexibility and the features of a UL policy include:
- Flexible Premium: A target premium is established by the insurer, which is the minimum amount that must be deducted from the cash value to maintain the policy to age 100, based on current interest rates, mortality, and expense charges. Because mortality and expense charges are deducted from the cash value monthly, the policyowner has more flexibility with universal life premium payments. The premiums can be increased, decreased, or even skipped at the policyowner’s discretion, as long as there is sufficient cash value to cover these deductions. The flexible premium feature also allows the policyowner to increase premiums during working years to accumulate enough cash value to make future premium payments in later years when the policyowner is not working. This is known as a vanishing premium. If the cash value becomes insufficient to pay the monthly deductions, however, the owner will be required to start paying premiums to prevent the policy from lapsing.
General Account - (Universal Life)
A portion of the premium is invested by the insurance company and held in their general account. The current return on the investments is credited to the UL policy.
A guaranteed minimum interest rate applied to the policy (usually around 3%-4%) means that, no matter how the investments perform, the insurance company guarantees a certain minimum return on the cash value. If the insurance company does well with its investments, the current interest rate will be credited to the cash value, causing the cash value to grow at a faster rate. This policy has a general account, so the producer needs only a life insurance license to sell it. Premiums and interest are credited into the general cash value account.
Expenses, loans or withdrawals, and mortality charges (cost of insurance) are deducted from the cash value account.
Loans and Partial Withdrawals - (Universal Life)
UL policy gives the policyowner the option to take a policy loan, and also to take a partial withdrawal from the cash value, without terminating the contract.
A loan is taken against the cash value remaining in the policy. The cash value secures the loan and cannot be used for other purposes, but it remains in the policy. The loan itself neither decreases the total cash value, nor the face amount. The amounts payable would decrease if the loan is not paid back before the insured dies or the policy terminates.
A partial withdrawal is a permanent transaction, and cannot be reversed. The funds are paid from the general account. The cash value decreases, and the face amount may be affected as well. Depending on the policy, the withdrawal may also be taxable.
Universal Life (aka Flexible Premium Adjustable Life Insurance)
A more flexible version of whole life insurance
A. Adjustable Face Amount: with insurability. The insured can increase or decrease the face amount. Any increase in the face amount will require evidence of insurability.
B. Flexible Premiums: by policyowner - The premium can be increased, decreased, or even skipped. As long as there is enough accumulation in the general account to cover the cost of insurance premiums can vanish.
C. Target Premium: based on guaranteed minimum death benefit. The minimum amount that can be deducted to maintain the policy to age 100.
D. Mortality Charges: deducted monthly (annual renewable term)
E. Expense Charges: Deducted
Universal Life
Interest and Premiums are put into the Cash Value Account (General Account) while Expenses, Loans and Withdrawals, and Mortality Charges are taken out of the Cash Value (General Account).
Death Benefit Options - (Universal Life)
Universal Life allows you to choose from two death benefit options, Option A or Option B.
Option A – Pays the face amount of the policy and provides a level death benefit. As the cash value increases, the company’s risk decreases. A universal life policy must include an amount at risk. If the cash value approaches the face amount, the death benefit must increase so as to provide for this amount at risk. This minimum separation between the cash value and the death benefit is called the “risk corridor.” This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early.
Option B – Pays the face amount stated in the contract, which is level term plus any cash values accumulated over the years. This provides for an increasing death benefit. The mortality charge for Option B is greater than Option A.
Individuals purchasing Option A will benefit from larger cash value accumulations while individuals purchasing Option B will benefit from greater death benefits.
Characteristics of Universal Life
Death benefit options, death benefit, and premiums may be changed
Death benefits options are a key characteristic of all forms of universal life insurance. All UL policies permit the policyowner to make changes in both the amount and timing of premium payments, including making no payments at all, and the death benefit may be increased or decreased in accordance with the terms and provisions of the policy.
Variable Life
Variable whole life is a whole life policy with certain benefits that will vary based on market conditions.
It has a death benefit that can increase or decrease over time based on stock market performance, a guaranteed minimum death benefit, a choice of subaccounts in which cash value may be allocated, and a fixed premium.
Only Variable Life, also known as Variable Whole Life, has all of these characteristics. Variable Universal Life does not adjust the death benefit in relation to stock market performance. Equity Indexed Universal Life does not permit allocation of cash value in stock-based funds. There is no such thing as Investment Grade Whole Life.
Variable life characteristics include:
A. A Fixed Premium
B. Accounts
C. General Account (Guaranteed Values)
D. Separate Account (Nonguaranteed Values)
A Fixed Premium - (Variable Life)
The premium is determined by the insurer and remains fixed and level throughout the contract.
Accounts - (Variable Life)
The policy provides for both a general account and a separate account.
