Flexible Permanent Flashcards
Flexible Permanent Life Insurance vs. Traditional Whole Life
List 2 more flexible options these policies allow.
- flexibility in when and how much premium they pay
- allows insured to change the entire nature of the policy’s cash value and death benefit.
Adjustable Life Insurance allows the insured to change what 3 aspects of the policy?
The first of the new generation of flexible permanent life products was the adjustable life insurance policy.
Adjustable life gives the policyowner freedom to
- change the premiums,
- change the face amount, and even
- change the type of insurance (from term life to ordinary whole life to limited-pay whole life).
For example, if a policyowner increases the death benefit but does not increase the premium, the cash value growth slows or stops. This impact on the cash value can reduce the term of the coverage from the insured’s whole life to only five years or so—effectively converting it into a term life policy.
An increase in the premium will result in the death benefit increasing.
The main advantage of adjustable life insurance is its flexibility. Insurance needs change over time, and adjustable life lets the policyowner change the policy to best suit those changing needs.
With Universal Life Insurance (UL) you can make changes to both the _______________ and the _________________.
Not long after adjustable life was introduced, the insurance industry introduced a product featuring even greater flexibility: universal life insurance (UL).
FLEXIBLE PREMIUM PAYMENTS
- increase premiums
- reduce premiums
- pay no premiums
CHANGE DEATH BENEFITS UP OR DOWN
- increase the death benefit (subject to evidence of insurability)
- decrease it
- and choose to change the premium, or not
Unbundled Policy Components
What gives a UL the flexibility it enjoys?
What 3 components are unbundled?
In a universal life insurance policy, the three components that are central to the policy’s premium—
- mortality,
- interest, and
- expenses
They are treated as separate policy elements and are unbundled. Unbundling these 3 elements is the key to the flexibility enjoyed by UL.
- Premiums are credited to the policy’s cash value.
- Cash values are credited with a rate of interest.
- Insurer deducts an amount to cover the mortality and operational expenses
As long as the policy’s cash value is enough to cover the monthly deductions, the UL policy remains in force. However, if premiums are reduced or terminated, the cash value will become depleted and the policy will lapse.
Minimum Interest Guarantee means what 2 things?
- Universal life insurance policies guarantee that the monthly interest credited will not be less than a guaranteed minimum (typically 3 or 4 percent) is stated in the policy contract
- But could and usually is higher than the guaranteed minimum, if market conditions warrant.
What are UL Mortality Charges and how do they change over time?
The monthly mortality charge deducted from a UL policy’s cash value reflects the cost of insurance for that point in the insured’s life.
Consequently, over time, the mortality cost increases, which reflects the insured’s increasing age.
Premium Flexibility
What is the maximum premium and how does it connect to the IRS?
What does the low-end premium represent?
Premium flexibility is one of the main features of universal life insurance.
Insurers list three different premium levels—a low-end, high-end, and “just right” amount.
The maximum premium, also called the guideline premium, is the highest amount that can be paid for that level of death benefit and still permit the policy to meet the guideline premium test.
The guideline premium test is one of the tests a policy must meet to qualify as life insurance and thus receive the favorable tax status of life insurance.
The test is applied to determine whether the policy has been “overfunded” or exceeds the IRS corridor requirement.
The Corridor Requirement is used by Congress to prevent what?
In 1984, Congress all life insurance contracts to maintain a minimum level of pure insurance protection (net amount at risk) to be considered life insurance.
A contract that fails this requirement loses the favorable income tax treatment enjoyed by life insurance.
Congress wanted to prevent life insurance policies from being used mainly for tax-advantaged investment purposes.
What is a UL Death Benefits called?
What are the 2 standard death benefits in UL?
While the death benefit in most life insurance policies is referred to as the policy’s face amount, with UL it is called the specified amount.
- Face amount implies a benefit amount that is contractually guaranteed.
- With its flexible policy terms, the UL contract cannot guarantee a face amount.
Universal life policies typically offer two standard death benefit options:
- Option 1 (or Option A): level death benefit
- Option 2 (or Option B): increasing death benefit
Policyowners switch death benefit options with few if any restrictions.
Death Benefit Option 1: Level Death Benefit
Like the death benefit of a traditional whole life policy UL1 generally remains level, and the policy’s cash value is paid as a part of the policy’s specified amount.
Death Benefit Option 2: Increasing Death Benefit
As the cash value increases, the death benefit increases by the same amount. If the cash value decreases, the death benefit decreases by the same amount.
The death benefit never decreases to less than the specified amount stated in the policy.
Because the net amount at risk (i.e., the pure insurance protection) remains level, the cost of insurance deductions under are normally higher.
In what 2 ways can one access cash values in traditional whole life?
How can they access Cash Values in UL?
Traditional whole life policies provide access to cash values through only two means:
- policy loans
- a full surrender of a contract, in which all accumulated values are paid out to the owner and the policy terminates
However, a UL policy offers a third option:
- partial withdrawals (also called partial surrenders) from the policy’s cash value.
A withdrawal reduces the UL policy’s cash value as well as the current death benefit by the withdrawn amount.
- Under death benefit Option 1, the withdrawal may reduce the death benefit to an amount less than it was at policy issue.
- Under death benefit Option 2, the withdrawal reduces the current death benefit, but the specified amount (that is, the amount of the death benefit at policy issue) will never be less than it was at policy issue.
UL Surrender Charges
What are the two ways policies are charged fees?
UL policies impose a surrender charge if they are surrendered within a specified period of time after issue to cover all the early expenses involved.
Insurers may assess either a front-end load or a surrender charge for purposes of recouping acquisition costs.
- Front-end loads directly reduce the amount that is added to the cash value and are less appealing to consumers than
- Back-end loaded policies charge surrender charges at the time of withdrawal of cash value from the policy - this is preferred and is another reason UL policies are preferred.
Identify 3 key features of Indexed Life Insurance?
Indexed life insurance is a fairly recent product innovation.
- It is a form of permanent insurance in which the interest credited to the contract’s cash value is tied to an equity index (S&P 500) instead of a rate declared by the insurer.
- The advantage of an indexed policy to consumers is the potential for higher rates of return than those associated with traditional policy interest-crediting.
- To offset the risks in the stock market, most insurers offer a guaranteed minimum interest rate.
List 3 features of Variable Universal Life
A popular product today is variable universal life insurance (VUL), which combines features of variable life and universal life.
Like variable life,
- VUL policies invest their premiums in separate (nonguaranteed) investment accounts.
- VUL is considered both a life insurance and securities product. To sell VUL policies, a producer must hold both a state life insurance license and a FINRA securities registration.
- VUL policies feature premium flexibility.
