Chapter 3- Whole Life + T100 Flashcards
Concept of Permanent Insurance
- Coverage over entire life of insured
- extended protection for risks that don’t expire
Permanent Insurance
- Premiums stay level
- early year premiums higher
- excess amt builds up reserve, funds higher cost of insurance later
Types of permanent Insurance (3 W.T.U)
- Whole life
- Term-100 (T-100)
- Universal Life
Whole life insurance
- Coverage for entire life
- premiums stay the same
- Cash Surrender Value (CSV)
term-100
- Coverage for entire life–> Matures at 100 years old (no more premiums , no CSV)
- Savings from excess premiums
Universal Life
Coverage for entire life
- savings b/c of excess premiums
- savings ->tax Sheltered if part of Death benefit
- Savings ->tax deferred if withdraw before death
- flexibile
Overview of whole life ins
- Guarantees premiums, DB, CSV
- Doesn’t expire, No renewal
- cannot be cancelled
- early year premiums in excess= Policy reserve
- Policy reserve reinvested to grow, later on offsets when premiums not enough
How premiums are set
Premiums based on assumptions on:
- Mortality Costs
- Expenses
- Investment returns
Periodic premiums calculated using modal factor
Mortality Costs
- approximates insurance companies cost of paying death benefit
formula: face amount X life insured probability of death in year
Expenses that premiums cover (4- s.u.i.p)
- Cost to sell policy
- Underwriting
- Investigating claims
- Paying death benefit
Whole life Premium options (3 O.S.LP)
- Ongoing premiums
- Single Premiums
- Limited payment
Ongoing Premiums
- Traditional form
- Fixed premium for entire contract
Single Premium
- Single lump sum premium, lasts entire lifetime
- referred to as “paid up”
Limited Payment
-Premiums payable for specific period of time or to specific age
Death benefit options (2)
- Guaranteed whole life
2. Adjustable whole life
Guaranteed whole life death benefit option
- Death benefit + premiums guaranteed not to change
- Insurance company takes all the risk
Adjustable whole life (Death benefit option)
- Death benefit and premiums guaranteed for certain time, then compared to actual projections AND adjusted periodically to reflect actual experience
- policy holder bears risk
Non participating policy
- excess revenue keeps policy reserve at required levels
- If excess revenue not req for policy reserve–> ins co keeps as profit
Participating policies
- excess revenue keeps policy reserve at required levels
- may distribute some/all as policy dividend to participating policy holders
Dividend payment options (participating) C.P.A.P.T
-Cash
-Premium reduction
-Accumulation
-Paid up additions
Term Insurance
Impact of Death benefit nad cash values (??)
Cash dividend payment option
-Ins co pays dividends by chq or direct deposit
Premium reductions
Insurance co applies policy dividend to reduce premiums
if policy dividend more then premium- excess paid out or allocated
Accumulation
Ins co. deposits dividend in seperate accumulation account, invested for growth
Paid up additions
Annual policy dividend used as single premium to buy MORE whole life insurance
- same base as initial policy
- has own death benefits csv
Term Insurance
Single premium used to buy 1 yr term insurance
-evidence of insurability not req
Impact on death benefits and cash values
Participating policy dividend may affect DB and CSV:
- PUA may increase CSV and Death benefit
- Accumulation may increase death benefit
- Term insurance may temporarily increase death benefit (for the term)
Non Forfeiture benefits
- cash surrender value (CSV)
- Automatic premium loans (APL)
- Reduced paid up insurance
- Extended Term insurance
Cash surrender values
- if polidy holder cancels policy, means they surrendered
- CSV: amount insurnace co. pays to policy holder if surrender contract (may be taxable)
Cash surrender values :Surrender charges
-surrender charges against the policy cash value to deter ppl from surrendering before recoup expenses
Cash surrender values: Policy loans
- Can get policy loan from insurance company up to 90% of CSV
- Csv and death benefit reduced by outstanding loans and interest
Automatic premium loan (APL)
- If policy holder misses a pmt, ins co makes loan against CSV for the amt
- used until total policy loans + interest = 90% of CSV) then policy is canceled, rest of CSV goes to policy holder
Reduced paid up insurance
- allows policy holder to stop paying premiums and still keep SOME life insurance
- amount depends on amount of CSV and attained age
- no evidence on insurability req
Extended term insurance
???
Limited payment whole life insurance
provides coverage for life but premoium only required for certain period of time
- premiums higher
benefits: add later
