Individual Life Insurance Flashcards
Personal Needs
Primary income earner
- final expenses
- survivors income
- education needs
- mortgage debt
- outstanding debt
- special wishes
Non-Working Spouse
- child care
- care of parents
- mortgage debt
- special desires (adjustment fund)
Death of both spouses
- estate tax
- effective transfer to heirs
- family goals
- special desires (adjustment fund)
Determining need
Needs Analysis- determine need and subtract resources to cover
Human life value- determine need (don’t subtract anything) PV of income lost (uses a discount rate)
Term Life Insurance
Short Term need
Low Cost
No Cash Value
Limited need for protection and $$ are limited
*more important to have sufficient coverage than a cash value
Annual Renewable Term (ART)
Yearly Renewable Term (YRT)
1 yr only
renewable
increase premium with renewal
no evidence of insurability
Disadvantage: increasing premium can become substantial
Level Term
Level Premium is guaranteed for some period of time
longer the guarantee the higher the premium
Disadvantage: At end of term premium can escaleate
Decreasing Term
Level Premium
Death Benefit Decreases
Long Term Mortgages
First to Die
Written on lives of 2 or more people
Payable on death of first person
Use: mortgage protection, buy sell arrangements, debt protection
Re-Entry Provision
can re-qualify at a new level premium
simplified underwriting
Low rate
If person does not qualify can still keep policy at a much higher rate
Term insurance Provisions
Renewability- guarantees the right to renew for a limited number of years
Most have age limit to combat adverse selection
Conversion Provision (Convertability)- exchange term for permanent within a specific time frame w/o evidence of insurability
Whole Life Insrance
Protection for entire life
Have a savings or investment component
Cash value may be used for loan or received if policy surrendered
Advantages: tax deferred growth on cash value
permanent protection / savings component
level premium
Disadvantages: Expensive
No flexibility on payment
Slow growth
Straight Whole Life
Ordinary Life Premiums paid until death or 100 Cash value = face value at 100 Level Death Benefit Level Premium
Limited Pay Whole Life
Best for a long life expectancy Only Pay Premiums to a certain age Example 20 year pay life or paid up 85 Higher level premiums Level Death Benefit
Universal Life Insurance
Adjustable: Premiums, face value and cash value
Cash value investment not controlled by insured.
Can use cash value to pay policy premiums
- if premiums pd and cash value are not sufficient to keep policy in force, additional premiums must be paid. (additional expense from co expenses and mortality costs)
Withdrawals and Loans UL
Can make Partial Withdrawals without debt
Lower interest rate on loans from cash value
Death Benefit Alternatives
UL A - Death Benefit Constant
Cash Value Increases (like whole life)
Cash value exceeds benchmark -death benefit
will increase (1984 tax act)
UL-B - As cash value increases - death benefit increases proportionally (add cash value)
*unless Q says B assume it is A
Variable Universal Life
Classified as a security (state and SEC, Series 6)
Insured directed Investment options
No min guaranteed rate of return or interest
Cash value is invested in a separate account
VUL Separate Account
Flexible Premiums
Can pay higher premium up front (avoid MEC)
cash value not part of insureds general account
General account is legal reserve - liability account of the insurance carrier. Is typically frozen if carrier is insolvent. (whole and universal)
Separate account is not frozen.
This does not guarantee against lost…just insolvency
Endowments
Designed to pay a lump sum at maturity or death
Typically 20-30 yr maturities or at certain age
Since 1984 tax act most don’t qualify as insurance
Typically wrong answer!
Second to Die
Designed to pay estate tax at death of second spouse
Premium lower than 2 separate policies
Can be any kind of Life ins (WL, term, UL, VUL)
Automatic Premium Loan - WL
If premium not paid during grace period (usually 31 days)
APL selected- co makes loan against cash value to pay
Incontestable Clause
All
Insurer will not contest the policy after it has been in force for a specific period of time. (typically 2 years)
- exceptions
-no insurable interest at inception
-intent to murder
-healthier person impersonated applicant
Reinstatement Clause
owner can reacquire lapsed policy under certain circumstances
proof of insurability
payment in arrears plus interest
Misstatement of age
policy adjusted to that which the premiums paid would cover at correct age
Suicide Clause
In first 2 years - insurer only liable for return of premium
Riders - Waiver of Premium
WL - all premiums waived if insured becomes totally and permanently disabled..cash value still credited
UL and VUL
a. co just waives charges of mortality and admin fees does not include waiver for increment to companies cash value(insured still pays this)
cash value grows only by interest paid to cash value act
b. full premium waived
premium added to cash value M&E deducted from cash value
Riders - Guaranteed purchase option
can purchase additional insurance at 3 yr intervals up purchase optionto a certain age regardless of insurability
Riders - Accidental Death
Doubles the standard death benefit if dies accidently
Dividend Options
- Cash - pd to policy owner
- Reduction of Premium - subtracted from premium due
- Accumulated with Interest -remains in interest bearing act with insurance co. INTEREST IS TAXABLE. Added to death proceeds or cash value if surrendered. Div not taxable
- Purchase Paid up Additions - purchase more whole life ins. Adds to face and cash value *cash value growth of dividends is taxable
- One year Term Insurance -1 yr term equal to policy’s base cash value (5th dividend option)
Non-forfeiture Options (Whole Life)
- Cash Option- take cash surrender value at any time (-indebtedness, plus accumulated dividends) 6mo delay can apply ( if co is in financial difficulty is prevents mass cash outs
- Reduced Amount Paid up Insurance - Face amount of Policy is reduced. DB - Amount of cash paid up whole life value would purchase as a single premium
- Paid up Term (Extended term) - continued for as long as cash value will permit. Level amount of insurance for a fixed period. Insured outlives term, policy is terminated. (Uses a higher mortality table because ins co at more risk)
Settlement Options
Surrender or Payment on Death
- Cash Option - lump sum
- Interest Option - proceeds retained temporarily by insurer. Interest ONLY is paid. (popular while bene is trying to decide what to do)
- Fixed period - proceeds and interest paid for specific time.
- Fixed amount - proceeds paid as a fixed amount for as long as proceeds plus interest last. (spendthrift option)
- Life Income Option (4) - single life, Jt and survivor, period certain, refund)
NAIC
NAIC- voluntary. No legal power. Through state commissioners exchange information and ideas and coordinate regulatory activities.
- Oversees State Accreditation Program
- Promotes law and regulation uniformity
- Transmits information to regulators
- Protects interest of policy holders/ preserves state regulations
12 ratios to keep tabs on insurance co
4 of 12 off then on NAIC watch list
NAIC life insurance illustrations- model regulation-
Primary source of financial information. Preliminary and final copies should be given to the client.
Non-variable only -
1. certified annually by illustration actuary
2.copies of illustration must be sent to insurer with application
3.must be signed by applicant and agent
4.at the time of sale must be given annual report
5.can’t be represented as anything other than life insurance
6.can’t use vanish or vanishing premiums
Life Insurance Illustrations Must Include:
Life Insurance Policy Model Law - defines and limits how co may illustrate policy values.
Must be labeled life Insurance Illustration Must include: 1.Name of Insurer 2.Name of producer 3.Name age and sex of proposed insured 4.Underwriting and rating classification 5 Initial Death Benefit
Accelerated Benefit Rider
Pays a portion of the death benefit early if insured is terminally ill (2yrs or less). (excluded from income)
Chronically ill there is an exclusion$330/day. LTC needs only. (unable to perform 2 ADL’s, requires supervision due to cognitive impairment.)
Viatical Payments
Selling of terminally ill persons life ins to company specializing in such transactions. (24 mo)
Life Settlements*
Not Terminally or Chronically Ill
Usually over 65
- Tax free return premium basis = (Premiums-cost of insurance)
- Ordinary income = basis - total cash value
- LTCG cash value (or federal income tax basis)- net settlement proceeds
See page 6-20 Danko
