Chapter 2: Types of Life Policies Flashcards
Term insurance
Temporary protection over a specific period of time (no cash value)
Provides the greatest amount of coverage for the lowest premium.
Face amount
Death benefit
3 Types of Term Insurance
- Level
- Increasing
- Decreasing
Level Term Insurance
Death benefit or face amount doesn’t change throughout life of policy
Annually Renewable Term (ART)
Death benefit remains level but premium increases annually according to attained age as probability of death increases; policy may be renewable each year w/o proof of insurability
Decreasing term policies
Level premium and death benefit that decreases each year over the duration of the policy term; usually convertible but not renewable
Increasing term policies
Level premiums and a death benefit that increases each year over the duration of the policy term
Return of premium policies
Increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid
Renewable
Allows the policy honor the right to renew the coverage at the expiration date without evidence of insurability
Convertible
Provides the policy owner with the right to convert the policy to a permanent insurance policy without evidence of insurability
Permanent life insurance
Life insurance policies that build cash value and remain in effect for the entire life of the insured or until age 100 as long as the premium is paid
What is the most common type of permanent insurance?
Whole life
Nonforfeiture value
(AKA cash value) Benefits in a life insurance policy that the policy owner cannot lose even if the policy is surrendered or lapses
Usually does not accumulate until the third policy year and grows tax deferred
Characteristics of whole life insurance:
What remains the same throughout the life of the policy in whole life insurance?
The premium and the death benefit
How is cash value created in whole life insurance?
It is the accumulation of premium; It is scheduled to equal the face amount of the policy when the insured reaches age 100
Ordinary whole life
(AKA Ordinary life and Continuous premium whole life) This whole life policy will have the lowest annual premium.
Limited-Pay life
What are two of the more common versions of limited pay life?
The premiums will be completely paid up well before aged 100; Cash value builds up faster for these policies
20-Pay life & Life Paid-Up at 65 (LP-65)
Single Premium Whole life (SPWL)
The policy is completely paid up after one premium payment and it generates immediate cash; Provides level death benefit to the insurers age 100
Adjustable life
The policy owner gets the best of both worlds (term and permanent); cash value only develops when policyowner pays more than the premium amount
What options does the policy owner have under adjustable life?
- Increase or decrease the premium
- Increase or decrease the premium paying period
- Increase or decrease the face amount
- Change the period of protection
Universal life (AKA Flexible premium adjustable life or interest sensitive life)
The policyowner has the flexibility to increase the amount of premium paid and to later decrease it again
What is the insurance component of a universal life policy?
Annually renewable term insurance
Death Benefit options for Universal Life
Level Death Benefit
Increasing Death Benefit
What is the difference between whole life and universal life in terms of interest rates?
Whole life interest is a fixed interest; universal life has interest that is analyzed and could be changed every year
Variable whole life insurance
fixed premiums and guaranteed minimum death benefit but cash value is not guaranteed; policyowner bears the investment risk
What are the requirements for an agent to sell variable life insurance?
- Be registered with FINRA (Financial Industry Regulatory Authority)
- Be licensed by the state to sell life insurance
- Have received a securities license (series 6 and 63)
Variable life insurance
Uses separate accounts
