Lesson 3 - Life Ins. Flashcards
Reasons for Life Insurance
- Income replacement
- Final Expenses
- Estate Preservation
Parties to Life Ins. Contract
The insured - whose life is covered by the life insurance policy.
The owner - purchased and can sell a policy as well as who typically pays the premiums.
The beneficiary - entitled to receive the death benefit.
(One person can be all three with bene being their estate)
(When they are 3 diff. people = Goodman Triangle or Unholy Trinisty = tax issue)
Life Ins. Underwriting
- Underwriters may work with customers to explain steps that the customers can take to become insured.
- insurers attempt to select applications from those who have a level of expected losses that is similar to the level of expected losses of their current customers.
- underwriting typically begins with an insurance agent
- underwriting involves both the selection and pricing of applicants.
Calculating Life Ins. Needs: Human Life Value Approach
Annual earnings - expenses/taxes would have been incurred
- Calc # yrs would have worked (WLE)
- Calc future value of lost earnings w/ expected earnings growth rate
- Calc present value fam share of earnings at inflation rate to get HLV
Calculating Life Ins. Needs: Needs Approach
estimates the surviving family’s cash needs at and after the death of the insured
-income replacement needs
Calculating Life Ins. Needs: Capitalized Earnings Approach
modification of the human life value approach
Modifications:
- No need to find WLE
- Returns on the life insurance are presumed to be at the long-term riskless rate
Types of Life Ins.
- Term
- Permanent (whole and universal)
Types of TERM life Ins. : Annual Renewable Term
Annual Renewable Term:
- can purchase in sub. years w/out evidence of insurability…but premiums increase
- ^ many comp. limit renewal period without insurability
- DB is fixed
- no CV
Types of TERM life Ins. : Level Term
- premiums level for period
- no CV
- DB is fixed
- Larger premiums in earlier years than ART…less in later yrs
Types of TERM life Ins. : Decreasing Term
- premiums level throughout policy
- no CV
- DB decreases over time (need for life ins. generally decreases over time)
ex. Mortgage insurance is decreasing term
Term Life Provisions
- renewable - most without insurability
- convertible - most can be converted to whole w/out insurability for a certain period
- waiver of premium - if payer totally disabled, premiums waived during that time
Whole Life Policies
-Premiums paid= lifetime protection
^ may be paid in cash throughout life of policy or from investment returns in cash value that has accrued
Whole Life Policy Provisions
Premiums -
typically same trhoughout policy
-Pre fund higher mortality costs - expensive when originated, coverage becomes inexpensive over time (compared to new policy)
-Vanishing Premiums: pay premiums with accrued cash value
Death Benefit
- Remains level while in force
- ***also called policy face value (bene receives when insured dies)
Cash Value
- Part of premium to DB and part to CV
- CV increases to the FV at age 100 or 120 (insured can receive this)
- CV can be used for loans or received if surrendered (get CV - surrender charges)
- CV usually has min guaranteed rate of int.
- Participating - receive dividends from insurer (Non-part does not)
Appropriate Use
- Perm life ins needs
- liquidity at death to pay taxes , provide income, pay off debts
- those with perm. disabled dependents, intent to leave charitable bequest, estate planning needs
Whole Life: Advantages and Disadvantages
Advantages
- tax def. growth of CV
- perm. protection to age 100
Disadv.
- expensive, inflexible high premiums
- gradual cash value growth and insured might not be able to purchase as much protection
Types of Whole Life
First to Die:
- benefit paid when first insured dies, provide for surviving spouse
- life exp. less than either single life
- more expensive, more likely to pay out
Second or Last to Die:
- paid when second insured dies
- provide estate liquidity or for surviving children/benes
- Life expectancy more than either single life, less expensive, less likely to pay out
Types of Whole Life
Oridinary Life: traditional, level premiums until age 100 or death (at 100 CV = FV)
Limited Pay Life: higher premiums than ^
-pre fund policy, only pay premiums for certain # of years
Variable Life: CV invested in stocks bonds MF (otherwise cv is in cash equiv. account)
- Riskier = higher returns
- DB and CV fluctuate
Dividends on Whole Life
Forms=
- cash
- reduction in premium
- paid up additions (accumulate at interest)
- increase CV
- one year term (5th dividend)
Surrender Charges and Non-Forfeiture Options for Whole Life
- receives the accumulated cash value when terminating less surrender charges
- reduced paid up ins. - receive CV in form of paid up policy with smaller FV
- extended term ins. - Receives cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.
UNIVERSAL Life Insurance
- Permanent
- DIFFERENCE FROM WHOLE LIFE- flexibility in premiums, face value, cash value
Basic UL: insured does not direct investment, CV can be used to pay premiums, must select either universal life A or B (how DB calculated)
A:flex premium, adjustable DB unbundled life contract…bene receives DB or CV
B: same as A except DB varies directly with CV (more expensive)
-bene receives cash value and DB
Variable Universal Life (VUL)
- Allows owner to direct the investment of the policy’s cash value - stocks bonds funds…which have no min guaranteed rate of int.
- often for young ppl - risk tol. and time
Life Insurance Policy Provisions
Grace Period: 31-61 days after premium due date - remains in force…if insured dies, insurer pays benefit less the premium
Incontestability: once policy in force for period of time (usually 2 years) insurer cannot cancel
Mistatement of gender/age: women and young pay less
-benefit paid up or down by what premiums would have been if accurate
Assignment: owner can assign rights to someone else
Absolute assigment: transfer all policy ownership (typically result of divorce)
Collateral assignment: used as collateral for debt, owner assigns limited ownership rights…terminates when debt is satisfied
Suicide: coverage excluded if suicide within one or two years
War is typically an exclusion (prem. returned with interest)
Reinstatement: after policy lapses, may allow reinstatement…avail. w/out evidence of reinsur. period after expiration of grace period
Policy Loan:
- When issued, no income tax conseq. for owner (as long as not MEC), low int rate
- Any loan at death of insured (plus interest) is deducted from DB
Life Ins. Settlement Options
Most common: single lump sum payment of DB
- Can leave DB with ins. company and receive installment payments of interest only
- Bene can use DB to purchase an annuity and receive annuity payments
Annuity Payment Options
Fixed Amount: bene receives fixed pmt. each year until proceeds depleted…should name contingent
Life Income: portion of pmt. representing the return DB received by bene. iss tax free…pmt. stops when beneficiary dies
Fixed Period: If the beneficiary dies prior to receiving all the fixed payments, a contingent beneficiary can be named to receive the remaining payments
If a contingent beneficiary is not named, the payments will be made to the primary beneficiary’s estate.
Life Income with Period Certain:
- combines the benefits of the life income method with the benefits of the fixed period method.
- This approach will transform the death benefit into a life annuity contract based on the age and health of the beneficiary, yet will promise to make a specified number of payments under the contract.
Joint and Last Survivor: annuity payments will be made over the joint lives of two individuals, and, when one of them dies, the survivor will receive a reduced payment for the rest of his or her life.
*bene wants to ensure another will continue to get benefits
