Chapter 2-Term Life Ins Flashcards
Term life insurance
Contract specifying that insurance company will pay death benefit if life insured dies within term
no term insurance issued past 65/70 yrs old
Policy holder
Purchased the insurance + makes all decisions
- also referred to as “the insured”
Life insured
Person on whose life the insurance is on
- also called annuitant
Single life policy
- Only 1 person insured
- death benefit only paid if THAT person dies
Joint 1st to die
Single amount of coverage for 2 or more lives.
- death benefit paid when 1st person dies , only 1 death benefit
- when 2 or more ppl share same debt obligation
- often used to fund buy/sell agreements
- terminates after 1st person dies
Joint last to die
- single coverage on 2 or more lives
- death benefit paid after last person dies
- good when risk doesn’t arise till death of last person (I.e tax liability, etc)
- on death- deemed disposed of capital property @FMV unless property goes to spouse.
Death benefit
Amount insurance company pays if life insured dies during term
Level term
Death benefit = face amount
- good when insurance needs NOT expected to change
Decreasing term
Death benefit decreases over term, premiums stay the same
- less than level term
- good when risk decreases over time (I.e mortgage)
Increasing term
Death benefit increases over term
- premiums also increase
- increase in death benefit usually applied at predetermined times (I.e every year ) –or fixed %– or ties to inflation
- increases are restricted w/ cap or # of increases)
- used when risk expected to increase over time
Premium
Amount policyholder pays for insurance
- premiums typically level over term
- premium tax 2-4%
How premiums Set
Term insurance is pure insurance - value relates to death benefit.
- premiums a combo of mortality costs + expenses
Mortality costs :
Approximates insurance company cost of paying death benefit
=Face amt X insured prob. Of death in year.
Expenses
Cost of selling policy,
underwriting,
investigating claims ,
paying death benefits
Renewable term insurance
Guaranteed right to renew policy at end for another term without proof of insurance
- limited to specific age
Non renewable term insurance
Expires at end of term, have to apply for new insurance , have to prove insurability
Renewal provisions: Renewable with guaranteed rates
New premiums reflect age of life insured at renewal
Renewal provision:
Re-entry term with adjustable rates
Subject to different renewal rate schedules
- guaranteed renewal rate
- lower rate adj. for good health
- initial premiums lower
Convertible term insurance
option to convert term policy to permanent insurance
- no proof of insurability
- more expensive
- new policy is extension of old one- NOT reset
Incontestability limitation
Insurance company has 2 years after issuing policy to void policy if ERROR in material fact
Suicide exclusion clause
Insurance company won’t pay death benefit if life insured commits suicide working 2 years of contract issued
Attained age
Age on which life insurance premiums based.
- premiums after conversion can be:
~attained age conversion
~ original age conversion - have to pay insurance lump sum to catch up
Advantages of term insurance
- Lower initial cost
- premiums guaranteed
- renewable/ convertible provisions extended
- can be customized
Disadvantages of term insurance :
- premiums/ coverage not guaranteed after term
- premium increase with age
- not available past certain age
- worthless after term
