Annuities and Life Policies Flashcards
Joint Life Insurance
Covers two or more insureds and pays benefit to the others on the policy after the first one dies (often called First to Die insurance)
Survivorship Life Insurance
Pays benefit to survivors of two or more people on the policy when everyone is dead. For example, policy may cover two parents and benefit is paid to child when they both die. This helps pay for estate taxes which are avoided when the first parents dies. (Often called last to die)
Adjustable Life Insurance
Can be changed based on changing life circumstances. . Death benefit can be changes, premiums can be changed, and policy can be converted from whole life to term life and back to whole again.
Two death benefit options under Universal Life
Option 1 or A: Death benefit stays level over time. Option 2 or B: Death benefit increases as cash value increases.
Annuitization Disbursement Options
- Life Annuity - annuities paid until death (income you can never outlive). Also called straight life or pure life.
- Life Income with Period Certain Annuity - annuities paid until death or certain period of time; whichever is greater
- Temporary Life Annuity - annuities paid until death or certain period of time; which is less.
Options for Whole Life Insurance Premiums
- Limited Pay: requires premium payments for a limited period. They can be considered MECs if premiums are paid for less than 7 years.
- Single Premium: Only one single premium - create high cash value quickly. (Used for immediate annuities?). Loans are not tax free due to single premium whole life insurance being an MEC (modified endowment contract).
- Current Assumption: premiums are fixed and then re-calculated on pre-determined anniversary dates. Death benefit may also change.
Graded Premium/Step Rate Whole Life Policy
Premium gradually increases usually for the first five years of the policy (graded period) and then levels off. Does not use term insurance coverage at all.
Surrender Charges
Charges levied against an insured when withdrawing money from a deferred annuity since they want that money to invest. Also called a back end load charge.
Fixed Annuities
Annuities that pay a guaranteed rate payment for a fixed period of time. They earn a fixed interest rate (minimum rate guarantee) and the interest rate can never fall below. There is little investment risk.
Market Value Adjusted Annuities
Surrender value of a policy changes based on the investments of the insurer. They will look at the interest gained from the client’s money. If they are making more money than they are paying the client, the surrender value decreases and the client must pay a penalty because they are giving up a profitable investment. If they are paying less than what the money is earning, it will pay the client a bonus for surrendering on their bad investment.
Types of Term LI Policies
Level Term: face value of the policy stays constant throughout the entire term
Decreasing Term: face amount of policy decreases over the policy term (goes to 0). This is used to coincide with loans that are taken out to be paid over time (ex. mortgage). As time goes on, less money is needed to pay off the mortgage so that face value of the policy decreases.
Increasing Term: face amount of policy increases over term of policy
Variable Universal Life
Policy that combined universal and variable life insurance. Includes minimum premium amount and subaccount investing from variable life. Once sufficient cash value has built up, you can skip premium payments like in universal life, and additional premium payments can be put in to further build cash value. Guaranteed minimum death benefit.
Conversion Policy Rules
Attained age- based on current age at the time of conversion
Original age - based on age when policy began
When converting, face value of the converted individual can be $10,000 or whatever it was on the group policy ; whichever is less.
Insureds have 31 days to convert a policy from group to individual. If member dies during the grace period, the face value will be paid to a beneficiary minus one premium payment.
Individual plan will be issued based on the current rate for other applicants of the same age.
Cash Refund Life Annuity
Annuity where upon death of annuitant, the beneficiary will receive a refund equal to the difference between the total principal contributed to the SPIA and how much has already been paid out in a cash lump sum amount. Guarantees that payments will be made even if the annuitant dies soon after starting payments. There is also no interest added to income payments. Ex. if annuitant paid in premium $100,000 and annuitized $40K by the time he died, the balance of $60,000 would be paid to beneficiaries in lump sum or installments.
Joint and Survivor Life Annuities
Payments are made to multiple individuals. Annuities will continue to the survivor after the first member dies. Payments are made at a certain level while both annuitants are alive, and then when one person dies, the payments continue to the second person at a percentage. Insurer will continue to make payments until the other person dies.
