Ch. 4 - Life Insurance Polivies- Policies, Provisions, and Riders

Question 1

Industrial life insurance

Answer 1

Issues very small face amounts, such as $1000 or $2000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage.

Question 2

Ordinary Life Insurance

Answer 2

Is life insurance of commercial companies not issued on the weekly premium basis. It is made up of several types of individual life insurance, such as temporary (term), permanent (whole).

Question 3

Group Life Insurance

Answer 3

Is insurance written for members of a group, such as a place of employment, association, or union. Coverage is provided to the members of that group under one master contract. The group is under written as a whole, not on each individual member. One of the benefits of group life coverage is usually there is no evidence of insurability required.

Question 4

Term Life Insurance

Answer 4

Gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period of time because it has a TERMination date. Term insurance is an inexpensive type of insurance, making it an attractive option for large policies. Term life is the CHEAPEST type of pure life insurance, and due to having a termination date and not having any cash value, it will ALWAYS be cheaper than a whole life policy with the same face value. It provides a pure death protection since it only pays the death benefit if the insured dies during the policy term.

Question 5

• Level term

Answer 5

It’s also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. Life insurance written to cover a need for a specified period of time at the lowest premium is called level term insurance. Term insurance always expires at the end of the policy period. For example, if D needs life insurance that provides coverage for the remainder of her working years and wants to pay as little as possible, D would need level term. Level term provides a fixed, low premium and exchange for coverage which lasts a specified time period.

Question 6

• Decreasing term

Answer 6

Is term life insurance that provides an annually decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. A decreasing term policy is a type of life policy which has a death benefit that adjusts periodically according to schedule and is written for a specific period of time. Decreasing term policies are usually written for a mortgage or other debt that typically decreases overtime until it is paid off. For example, a 15 year decreasing term policy would protect a 15 year mortgage. As the mortgage balance reduces each year, the face value of the insurance policy will adjust accordingly to match. After the mortgage is paid off, the insurance policy will expire.

Question 7

• Credit policies

Answer 7

Are typically purchased using a decreasing term life insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining loan balance. Since credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding. For example if you wanted an insurance policy to protect a $20,000, five-year auto loan, you would use a five-year decreasing term life insurance policy with an initial face value of $20,000. You will pay the same level premium every month for the five-year term of the policy. The face value will start out at $20,000 and change according to a schedule (the decreasing balance of the auto loan). After five years, the car will be paid for and the insurance policy it will no longer be needed.

Question 8

• Increasing term

Answer 8

Is term life insurance that provides an increasing face amount overtime based on specific amounts or a percentage of the original face amount.

Question 9

• Convertible term

Answer 9

A provision that allows policy owners to convert their term insurance into permanent policies without showing proof of insurability. Convertible Term provides temporary coverage that may be changed to permanent coverage without evidence of insurability. For example, if you take out a term insurance policy when you are young to take advantage of your good health and the policies lower premium, but want the option to convert the policy to a permanent one for final expense benefits once you’re finances improved, you would want a convertible term life policy. The conversion privilege of a group term life policy allows an individual to leave the group term (temporary) and convert his or her insurance to an individual (permanent) policy without providing evidence of insurability. The most important factor to consider when determining whether to convert term insurance at the insured’s attained age or the insured’s original age is the premium cost. The number one factor which impacts life insurance premium cost is the insured’s current or attained age. For example, a $25,000 policy on a healthy 7 year old boy will cost substantially less than a $25,000 policy on a 57-year-old man. Whether converting an individual or group term insurance policy, although your insurability is guaranteed, your age is typically reevaluated to your current (attained) age, not left at the age you were when you applied for the original term policy. Convertible term would allow you to take your temporary coverage and change it to permanent coverage without evidence of insurability or good health, but your premiums will increase due to using your attained age.

Question 10

• Renewable term

Answer 10

Is the term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy. Without having to prove insurability. For example, if you have a 10 year renewable and convertible term; after after the 10 years are up, the policy terminates or you can renew it. If you renew it the premium price will go up, and you will have the policy for another 10 years. This cycle continues until you are too old to renew or it’s too expensive. ALL TERM insurance has a final termination date when you can no longer renew it.

Question 11

• Annual renewable term

Answer 11

Is term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable and leave without proof of insurability.

Question 12

• A term rider

Answer 12

is a type of life insurance product which covers children under their parents policy. Family plan policies usually cover the family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is always level term. This is cheaper than every family member getting their own policy. For example, the main policy may be on dad, then mom and the children are riding on attached to dad‘s policy as term riders. Term riders allow for additional family members to be covered under one policy by attaching everyone to a main policy. Term riders can also allow an applicant to have excess coverage by adding an additional term rider for them to the main policy.

Question 13

Whole life insurance

Answer 13

Provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium. All whole life has the same type of benefits. The only difference in “types” of whole life is how the policy is paid. Some will be paid straight until death or at age 100, some will be paid for after a few years or by a specific age, some may give you a little discount in the early years to help you get started, etc. All whole life insurance last until death or age 100, but has a fixed premium, and level benefit with cash value accumulation, regardless of how it is paid. Whole life is often compared to BUYING; like BUYING a house.

Question 14

* With Whole Life - Limited Pay

Answer 14

The coverage remains on a limited pay life policy until age 100 or death, which ever happens first. Even though the premium payments are limited to a certain period, the insurance protection extends until the insured‘s death, or to age 100. For example, if you were to purchase a 20 day policy, premiums would need to be paid for 20 consecutive years. After that, you would not be required to make any additional premium payments, and your coverage would be guaranteed until death or age 100. A 40 year old applicant who would like to retire at age 70 and wants a policy with level premiums, permanent protection, and premiums paid up at retirement would also choose a paid up at age 70 limited pay policy. A limited pay life insurance policy covers an insured’s whole life with level premiums paid over a limited time.

Question 15

Whole Life - Modified

Answer 15

Is a policy where the premium stays fixed for the first 5 years. And then increases in year 6 and stays level for the remainder of the policy. Modified whole life has all the same features of any other whole life except the insurance company cuts you a break on premium for the first few years. For example, Kay wants to buy life insurance because she knows it is a cheaper when she is young. However, she is a college student and cannot afford the large premium associated with her life. The insurance company may offer her a modified whole life to lock in her age and provide her all of the benefits of whole life, but give her a discount on premium while she’s in college. After the first five years of policy, she will be out of school and able to afford the normal premium cost. Modified whole life describes a whole life policy with a premium that increases once after the first few years and then remains level for the remainder of the policy.

Question 16

Whole Life - Modified Endowment Contract (MEC)

Answer 16

Is best described as a policy that exceeds the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract. And MEC does not meet the seven pay test and is considered over funded, cording to the IRS. For that reason, the policy will lose favorable tax treatment. The test is designed to discourage premium schedules that would result in paid up policy before the end of a seven year. For example if your annual premium for a policy was $1000 and you paid $20,000 in the first five years, you will have failed the seven pay test by exceeding $7000 (7 years times one year of premium). Said differently, you have exceeded the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract.

Question 17

Joint Life Policy

Answer 17

Covers the lives of two individuals and saves on premium cost by averaging the ages of the two insureds.
Joint life policy pay the face amount after the first person covered on the policy dies. This is similar to a joint checking account. Policy is shared between two people, and when one person dies, the other receives the entire account. If B & M were insured under a joint life policy and B were to die, M would receive the entire benefit and would also no longer be insured. A policy that promises to pay the face amount on the death of the first of 2 lives covered by the policy is called a joint life policy.

Question 18

A joint survivor or last survivor life policy

Answer 18

Covers the lives of two individuals and saves on premium costs by averaging the ages of the two insured‘s. Joint life survivor or last survivor policies only pay the death benefit upon the death of the last insured person. For example, say B and M purchase a joint life survivor policy. If B were to die first and then M died 10 years later, no benefits would be paid out from the policy until M died. A joint life and survivor policy covers two lives but only pays benefits after the death of the last insured.

Question 19

A family maintenance policy

Answer 19

Pays a monthly income from the date of death of the insured to the end of the pre-selected. Period the payment of the face amount of the policy is payable at the end of such preselected. Period SP is looking to purchase a life insurance policy that will pay a stated monthly income to his beneficiaries for 20 years after he dies and a lump sum of $20,000 at the end of that 20 year period, he should purchase a family maintenance policy. Family maintenance policies provide an income for a specific. Starting at the death of the insured.

Question 20

A family income policy

Answer 20

Pay’s and income beginning at the insurance death and continues for a period specified from the date of policy use. For example, G purchased a family income policy at age 40, with a 20 year rider.. If Gj were to die at age 50, G’s family would receive an income for 10 years.

Question 21

An adjustable life policy

Answer 21

Owner is usually looking for a policy offering flexible premiums. As financial needs and objectives change, the policy owner can make adjustments to the premium and/or face amount of an adjustable life insurance policy. Adjustable life policies are able to provide these features by combining whole life and term life into a single plan. If a policy owner was looking for a policy in which they could control the amount and frequency of payments with a death benefit that can be adjusted as their life needs to change, they would want an adjustable life policy. There typically are no dividends involved with adjustable life policies. Increasing the face amount may require a policy owner to provide proof of insurability. Usually a customer with an adjustable life policy has a special need for flexible premiums.

Question 22

Universal life insurance policy

Answer 22

Incorporates flexible premiums and an adjustable death benefit. The investment gains from a universal life policy usually go toward the cash value. The policy owner can use the cash value to manipulate the flexible aspects of a universal life insurance policy. A customer who wants a policy that gives them the most options and at the most control would be looking for a universal life policy. Universal policies use gains to fund the cash value and give the policy owner options for flexible premiums and adjustable death benefits.

Question 23

With Variable Universal Whole Life

VUL

Answer 23

The policy owner controls the investment of cash values and selects the timing and amount of premium payments. Variable universal life policies give a policy owner the best of both variable life and universal life. If a policy owner was looking for a policy that allowed them to control how much and when premium was due, what investment accounts were used for funding, and where the returns from those investment accounts went, they would be looking for a variable universal life policy. Policy owner can control the timing and amount of premium payments as well as the investment of cash values with a variable universal life policy.

Question 24

Equity indexed universal life insurance

Answer 24

Combines most of the features, benefits and security of traditional life insurance with the potential of earned interest based on the upward movement of an equity index. Unlike, a traditional whole life plan, this plan allows policyholders to link accumulation values to an outside equity index like S&P 500 .80% to 90% of the premium is invested in traditional fixed income securities and the remainder of the premium is invested in contracts tied to a stipulated stock index

Question 25

Cash value

Answer 25

Equity amount or “savings” accumulation in a whole life policy.

Question 26

The Endowment Policy

Answer 26

Is a contract providing for payment of the face amount at the end of a fixed period, at a specified age of the insured, or at the insured’s death before the end of the stated period.

Question 27

Face amount + cash value policy

Answer 27

Is a contract that promises to pay at the insured’s death the face amount of the policy plus a son equal to the policy’s cash value.

Question 28

Juvenile Insurance

Answer 28

Is written on the lives of children who are within specified age limits and generally under parental control.

Question 29

Non-Medical Life Insurance

Answer 29

Typically does not require a medical exam and tends to be more expensive than medically underwritten policies. The insurer will average out everyone’s risk and change accordingly. Although insurers typically will not require a medical exam, they will still inquire about the applicant’s medical history and lifestyle.

Question 30

Target premium

Answer 30

Is a suggested premium used in universal life policies. It does not guarantee there will be adequate funds to maintain the policy to any time, especially to life. It may give an indication of what will be needed (under conservative estimates), to maintain the policy.