Kaplan - Unit 4 Flashcards
Types of Life Insurance Policies
Face Amount
The amount of the death benefit because it’s usually found on the the first page of the policy.
Living Benefits
Financial benefits that are available while the insured is still alive.
Level Term Policy
Equals the face amount throughout the term of coverage. Premium also remains level. Term of coverage may be expressed in reference to a number of years or a specified age.
Decreasing Term Policy
Benefit declines over the coverage period until it reaches zero at the end of the term. Appropriate for financial obligations that decrease steadily over time like mortgages, loans, etc.
Increasing Term Policy
Benefits begin near zero and grow over the term of coverage. Appropriate to cover financial obligations that increase steadily. Also helps keep benefits current with inflation and rising cost of living expenses.
Term Insurance Differences
LEVEL TERM
- Death benefit is level
- Premium is level for the term
DECREASING TERM
- Death benefit decreases
- Premium remains level
INCREASING TERM
- Death benefit increases
- Premium increases
Return of Premium Term
Premium is higher than regular term policy. The premium paid by insured is paid back if insured is alive at the end of the term.
Renewability
Guarantees that the policy will renew (extend) at the end of its term. Insured does not have to re-apply or qualify medically for the coverage.
The premium for the new renewal period will increase based upon the insured’s age at renewals; the insured’s attained age. This is called a step-rate premium. The term policy expires at an age specified in the policy (65 or 70)
Convertibility
Allows a policyowner to convert a term insurance to a permanent type of policy without evidence of insurability and without an application.
The premium for the policy is based on one of two options:
Attained age: Insured’s age at time of conversion
Original age: Age at the time the original term policy was written. A down payment is required equal to the amount of what the originally purchase would have been.
Term Life Insurance
- Renewable
+ No new application required
+ New premium based upon attained age - Convertible
+ Can be changed to permanent insurance
+ No new application required - LOW initial cost
- Coverage for a short period of time
Whole Life Insurance
A permanent insurance policy, guaranteed to remain in for for entire lifetime, as long as premiums are paid or the policy maturity date. Premiums will never increase.
Level Premium
Results in overpaying for the risk of dying at younger ages, and underpaying in later ages. The mode of payment is on a fixed schedule.
Fixed, Level Death Benefit
Like the premium, the death benefit of a whole life policy is fixed and level and the face amount will remain the same.
Cash Values
An integral part of a whole life policy, and reflect the reserves necessary to assure payment of the guaranteed death benefit.
Guaranteed Interest Crediting
The policy cash value increases over the life of the contract due to a guaranteed (level) rate of interest as stated in the policy illustration.
Policy Surrender
The right to quit a contract early for a claim of a share of the reserved fund attributable to the policy. This waives the death benefits.
Policy Loans
Loan provisions that allow the policyholder to borrow up to the cash value of the policy. Interest must be paid, and if the insured dies, the amount borrowed plus any interest charges are deducted from the death benefit.
Death Benefit Components
- The cash value (or the savings element), and
- An insurance protection element that must be paid in addition to the cash value so that the benefit equals the face amount.
This is known as the net amount of risk to the insurance company; the amount of money the insurer must have on hand to pay the benefit.
Traditional Whole Life
- Fixed premium
- Fixed & level death benefit
- Cash value
+ Guaranteed interest
+ May be surrendered
+ May be borrowed
+ Endows at age 100 - Death benefit
+ Amount at risk to the company
+ Plus cash values
Continuous Premium Whole Life
Same each year for the duration of the contract, also referred to as straight life or ordinary life. If premium payments are discontinued, insured receives the cash value.
Limited-Payment Whole Life
Allows for a lifetime of premiums to be paid in a shorter period of time.
- 10-pay or 20-pay whole life; premiums are payable in 10 or 20 level annual installments, and
- life paid-up at age 65; premiums are payable in level annual installments from the date of purchase to the year the insured turns 65.
Single Premium Whole Life
One payment made at the time of purchase. This, along with interest earnings, will cover all costs of maintaining the policy. They create immediate cash value.
Modified Premium Whole Life
Lower premiums during the first 3-5 years, similar to term insurance. However, after that, the premiums increase and are then level for the rest of the policy, making them higher in cost than a continuous premium whole life policy.
Graded Premium Life Insurance
Starts out lower than other types of whole life policies and increases every year for five to ten years until leveling off for a as long as the policy remains in force.
Indeterminate Premium
Similar to a nonparticipating whole life policy except that it provides adjustable premiums. Premiums are based on current estimate of investment earnings, mortality, and expense costs. These will be adjusted in later years but never above the maximum guaranteed premium stated in the policy.
Interest-Sensitive or Current Assumption Whole Life
Type of whole life insurance where the cash value can increase beyond the stated guarantee if the economic conditions warrant. It has:
- a fixed, level death benefit, and
- a premium schedule fixed in regard to the timing of payments.
Investments are made with a percentage of each premium payment. Cash value can increase but the policyowner will be protected from a drop in value below a stated minimum.
Types of Whole Life Policies
- Continuous premium
- Limited payment
- Single premium
+ Immediate cash values - Modified premium
+ Lower premium first 3 - 5 years
+ Premium jumps once then levels off - Graded premium
+ Lowest initial premium of all whole life policies
+ Premium increases for a 5 - 10 years then levels off - Indeterminate premium
+ Premiums adjusted by the company
+ Has a guaranteed maximum premium - Interest sensitive
+ Has a current interest rate
+ Guaranteed interest rate
Whole Life Insurance
- Advantages
+ Permanent Coverage
+ Guaranteed Level Premiums
+ Lifetime coverages - Disadvantages
+ premium not flexible
+ Higher initial premium
Adjustable Life Insurance
Gives the policyowner the options to adjust the face value/death benefit, the premium, and the length of coverage without having to change policies. Also offers the ability to have term and whole life coverage in one policy. The premium the insured can afford is used to determine what type of insurance will best meet their needs.
Universal Life (UL)
UL premiums are flexible, not fixed. Premiums accumulate as interest in the policy’s cash value. The monthly interest is either the guaranteed or current rate, whichever is higher. Fees are taken from the cash value by the insurer.
Universal Life options
Insured may increase or decrease the death benefit. In addition they have the flexibility to choose one of two death benefit options:
Option 1: Level death benefit equal to the policy’s face value. As a result, more of the premium is placed in the cash account, making the value rise more quickly.
Option 2: Increasing Death Benefit equal to the face value plus the cash account. Cash value does not increase as quickly because more of the premium is applied to the higher cost of the increasing death benefit.
UL allows for withdrawals (partial surrender) from the cash value. It is federal income tax-free up to the premiums paid. After that it is taxed as ordinary income.
Equity-Indexed Universal Life Insurance
Permanent life insurance policy that allows insured to tie accumulation values to a stock market index such as the S&P 500 Index. Contains a guaranteed interest rate component along with indexed account option.
Flexible Policies
Adjustable life
- Policyowner
- Adjusts the death benefit
- Adjusts the premium
Universal life
- Flexible premium
- Cash account
+Cost of insurance withdrawn monthly
+ Fees withdrawn monthly
+ Current or guaranteed interest
- Option A - level death benefit (insurance amount only)
- Option B - increasing death benefit (insurance amount plus cash account)
Equity-indexed universal life
- Current interest on cash account
+ Up or down based upon a stock market index
+ Account still guaranteed by the company
Flexible Premium Policies
Advantages
- Flexible premiums, death benefit options, and cash value
Disadvantages
- More complex
Separate Account
A fund held by the insurance company and maintained separately form the insurer’s general assets to hold variable annuity and variable premiums used to purchase investments the company offers.
Distinct from the general account established to hold insurer assets and premiums for their fixed insurance products.
Variable Insurance: Agent Registration
- Agents selling variable policies must have a valid life insurance license.
- Agents must register with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Association (FINRA).
Variable Life Insurance
Has a separate account instead of guaranteed cash value. Also called variable whole life or fixed-premium variable life. Like UL policies, variable UL policies have two death benefit options.
Option 1: Death benefit remains level regardless of increases or decreases in the cash value.
Option 2: Death benefit varies with the fluctuating cash values.
Death benefit cannot decrease below the original face amount, the guaranteed minimum death benefit.
Variable Universal Life
UL with a separate account and also called a flexible premium variable life. It’s a permanent life insurance since the death benefit will be paid if the insured dies as long as there is sufficient cash value in the policy. A VUL policy can lapse which means it does not have a guaranteed minimum death benefit.
VUL offers 2 options: Option 1 remains level and option 2 death benefits will fluctuate with cash value.
Variable Policies
- Life insurance plus investments
- Must have life insurance license & securities license
- Investments are in the separate account (securities)
+ Owner can lose money
-Types
+ Variable life
= Death benefit can increase
= Has guaranteed death benefit
+ Variable Universal Life (VUL)
= No guaranteed death benefit
Variable Policies Differences
Advantages
- Potential for high returns
- Keep pace with inflation
- Tax advantages
Disadvantages
- No guaranteed rate of return
- Complicated
- Highly regulated
Joint Life Policy
Covers two or more lives with the death benefit being paid when the first insured dies. Also called the first-to-die policies. Costs less than the cost of 2 individual policies. May be right for married or retired couples.
Survivorship Life Policy
Insures 2 individuals and will pay when the last insured dies. Also called the second-to-die or last-to-die policies. Costs less than the cost of 2 individual polies. Can provide money to pay estate settlement costs.
Juvenile Policies
Coverage written on the life of a child or a minor and are most often permanent life insurance. Besides death benefit, it also locks in the low premium for the child’s entire life and guarantees life insurance in case their health changes.
Jumping Juvenile Policies
When the death benefit of a juvenile policy seems too small when the child is grown up, the face amount of some policies will increase when the child turns 18 or 21 with no corresponding increase in premium.
