Chapter 14 - Policy Decisions Flashcards
Options that Insurers can add to policies
Dividends: only mutual insurance companies pays dividends. It’s for an overcharge of premiums. Term insurance doesn’t pay dividends. Dividends are not taxed, as its refund for overcharged premium. You have choose how dividends are received…
-Additional Paid Up - the policy owner uses the dividend to purchase a miniature paid up Whole Life Policy. It will purchase as much as the premium allows. It’s free of sales commissions and admin expenses. Typically chosen for the policy owner if they don’t specify what to do with the dividend.
-One Year Term Insurance - fund a small term policy.
-Accumulate at Interest - the company holds the dividends in a savings account which earns interest at a rate the company chooses. You can withdraw the funds at any time.
-Cash - cashed out each year.
-Reduce Premium - used to buy down next years premium.
-Paid up Life - used to reduce the length of time the owner has to pay on a whole life policy.
Cash Value Options
you can borrow against the cash, use the living in benefit or surrender the policy which leads to Nonforfeiture options…
-Extended Term Insurance: default option chosen. Extends the coverage with the same face value as long as the cash lasts.
-Reduced Paid-Up Insurance - uses the cash to purchase a reduced paid up policy.
-Cash - take the money and run. Their 3 year right to reinstate privilege is gone and the policy is canceled.
Settlement Options
Cash - beneficiary receives a lump sum. Automatic default option. Tax free.
Fixed Amount Installments - pays each month at a specified amount until the proceeds and interest are exhausted. Only the interest is subject to income tax.
Fixed period installments - same as fixed amount but over a specified number of years. Shorter fixed period = larger payment, vice versa. Interest is taxed.
Interest - the insurance company invests the policy proceeds and earns interest. The policy owner can state when the beneficiary draws from this account, could be interest only at stated periods. Could be a monthly limit or at a certain age. Only the interest is taxed.
Annuity - used to fund an annuity
