chapter 5 summary Flashcards
life insurance
involves the transfer of the risk of premature death from one party to another party. contracts create an immediate estate and there are no standard life insurance policies.
term life
provides pure or temporary protection and is the simplist form of life insurance coverage.
provides max amount of life insurance for lowest initial premium, has temporary or limited protection, has no cash value or equity.
level term life insurance
provides a level amount of protection for a specified period, after which the policy expires.
increasing term life insurance
provides a death benefit that increases at periodic intervals over the policy’s term.
decreasing term life insurance
provides a death benefit amount that decreases gradually over the term of protection.
mortgage redemtion insurance
a type of decreasing term life insurance policy.
credit life insurance
term policy designated to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is paid. the max benefit for a credit life insurance policy is the value of the loan.
option to convert
gives insured the ability to convert or exchange the term policy for a whole life policy without evidence of insurability.
interim term life insurance
a type of convertible term insurance that’s written on a person who wants protection immediately, but not able to afford permanent at that time. the premium for the term protection is based on the original application age. the premium for permanent protection is based on the age when permanent protection begins.
option to renew
allows policyowners to renew the term before expiration date without being required to provide evidence of insurability.
step up premium
a steady increase in premium
annually renewable term (ART) or yearly renewable term (YRT)
provides coverage for one year and allows policy owner to renew coverage each year, without evidence of insurability.
advantages of term life
less expensive than permanent
may protect the insured’s insurability if the policy is renewable and or convertible
may be used in conjunction with debt, mortgage, or supplement to whole life
provides most substantial amount of protection for lowest cost
disadvantages of term life
protection terminates when the policy terminates.
if term is renewable or convertible, premium rates rise as the insured ages, which often leads to policy cancellation prior to the policy terminating.
due to temporary nature, few death claims are actually paid under term life policies.
don’t contain any cash savings or equity.
whole life insurance
provides for the payment of a death benefit or face amount coverage upon death of the insured, regardless when the death occured.
form of permanent insurance. level, fixed, or predetermined death benefit/premium.
shorter the payment period, higher the premium.
tax-deffered cash value
designated to reach the face amount (mature) at age 100
premiums are payable as long as the insured is alive.
most basic types of whole life
ordinary, straight life, continuous premium life
single premium whole life
the most expensive whole life policy initially. an immediate cash value is created, a large part of the premium is used to set up the policy’s reserve.
the advantage is that the policy owner will pay less for the policy than if the premiums were stretched over several years.
modified whole life
type of WL policy characterized by an initial premium that is lower than straight WL insurance for an introductory period. after that, premiums jump to a rate higher than a straight life policy would have cost if it were taken out originally.
graded premium WL plan
a contract that’s characterized, like modified life, by a lower premium than straight WL in the early years of the contract. however, premiums increase annually or every year for the initial period. thereafter, it jumps to an amount that’s higher than the whole life premium and remains fixed for life.
enhanced whole life
reffered to as economatic life or extraordinary lie, is a low premium based participating permanent insurance policy.
indexed whole life
offers a face amount (death benefit) that increases in line with rises in the consumer price index (CPI) without requiring evidence of insurability.
equity indexed whole life
includes contracts where the policyholder can share in a percentage of the growth of an indexed investment. minimum interest and death benefit are guaranteed. These products are not considered securities.
adjustable whole life (non traditional)
also reffered to as blended or combination policies, are distinguished by their flexibility from combining term and permanent insurance into a single plan.
premium may change
looks to future
adjustable death benefit based on changing needs
Universal life (non traditional)
essentially a term policy with cash value, flexible premiums, and an adjustable death benefit.
tax deffered cash value has a gauruntee
considered permanent insurance. coverage remians in place for the life of the insured as long as the cost of insurance can be paid by th cash value or increasing premium payments.
may surrender the universal life for its entire cash value at any time
target premium is a suggested premium that’s used in universal life policies
offers 2 death benefit options:
1) death benefit equals cash values plus remaining pure insurance (decreasing term plus increasing cash values)
2) death benefit equals face amount (pure insurance) plus the cash values (level term plus increasing cash values)
equity index universal life
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.
securities and exchange commission (SEC) regulated life insurance policies
Variable life and universal variable whole life (or variable universal life)
variable life
guaranteed minimum death benefit
death benefit and cash value will vary based on investment performence
tax-deffered cash value is deposited in a seperate account and then invested in securities
permanent insurance in which owner has control over investments
fixed premium
universal variable whole life
hybril of universal life and variable whole life
flexible premiums and death benefit with control over investments
combines an investment feature and a flexible premium
special use policies
family plan policy, family maintenance policy, joint life policy, survivor policy, juvenile policy, endowment policy, modified endowment contract, industrial life insurance, monthly debit ordinary life insurance
family plan policy
designated to insure all family members under one policy
family maintenance policy
consists of whole and term life and level term insurance, which provides income for a specific period beginning on the date of death of the insured.
joint life policy
covers 2+ people and pays a benefit upon the first death of a covered person
last to die (survivor) policy
covers 2+ people and pays a benefit upon the death of the last person covered.
juvenile policy
any type of ordinary life insurance policy that insures the life of a minor.
endowment policy
characterized by cash values that grow at a rapid pace so that the policy matures or endows at a specified date
higher premiums than WL
quickest cash value build up
pays if the insured dies or if the insured survives the endowment period
modified endowment contract
considered to be a policy that’s overfunded. MEC’s dont technically meet the IRS definiyion of a life insurance policy. “Failed the 7-pay test” premiums paid in the first 7 years exceed the total amount of premiums required for the same insurane policy to be paid up in 7 years.
industrial life insurance
characterized by comparatively small issue amounts, such as $1,000, with premiums collected on a weekly or monthly basis
monthly debit ordinary life
a combination of insdustrial life and ordinary life.
face amount plus cash value
a contract that promises to pay the policy’s face amount plus the policy’s cash value upon death of the insured.
stranger-owned life insurance (STOLI)
when a person buys life insurance only to sell to a third party with no insurable interest, who would be unable to legally purchase the original policy.
non-medical life insurance
typically doesn’t require a medical exam and tends to be more expensive than medically underwritten policies.
participating life insurance
a policy that has dividend payment from the life insurance company
non participating life insurance
does not have the right to share in excess earnings and consequently doesn’t recieve dividend payments
summary term
Death benefit: level or decreasing
Cash Value: none
Premium: level increases at each renewal, decreasing is fixed.
Policy Loans: NO
Partial withdrawals of cash value: NO
surrender charges: NO
summary whole life
Death benefit: fixed, level, or predetermined
Cash Value: predetermined, tax-deferred and guaranteed
Premium: level for the period selected
Policy Loans: yes
Partial withdrawals of cash value: no, to recieve cash it must be borrowed
surrender charges: no
summary single premium whole life
Death benefit: fixed, level, and predetermined
Cash Value: predetermined, tax-deferred, and guaranteed
Premium: lump-sum premium paid at issue
Policy Loans: yes
Partial withdrawals of cash value: generally no
surrender charges: yes
summary interest sensitive/current assumption whole life
Death benefit: fixed or level
Cash Value: scheduled and guaranteed plus accumulation fund from excess interest
Premium: may vary based on experience
Policy Loans: yes
Partial withdrawals of cash value: yes
surrender charges: yes
summary adjustable life
Death benefit: level but changable by request
Cash Value: predetermined and tax-deferred but new shcedule needed after each negotiated policy change
Premium: level, but the level may change when policy change is requested
Policy Loans: yes if theres cash value
Partial withdrawals of cash value: no, to recieve cash ut must be borrowed
surrender charges: no
summary universal life
Death benefit: flexible. orignal DB cannot be guarunteed if the owner is not funding the plan with premiums. a flex premium insurance plan.
Cash Value: guaranteed minimum interest rate which will vary each year based on the money market index.
Premium: flexible premium. required first year target and then the owner may pay flexible premiums each year or nothing at all
Policy Loans: yes. loans affect interest rate.
Partial withdrawals of cash value: yes
surrender charges: yes
