Life Insurance Policy Options Flashcards
Used to determine how the proceeds from a life insurance policy death benefit will be distributed to the beneficiary(s)
Settlement options
If the life insurance policy owner does not designate a specific settlement option to be paid upon death, the death benefits are distributed as a ____ ____
Lump sum
Life insurance settlement options:
-interest income only option
-fixed period option
-fixed amount option
-life income option
-life with period certain
-life with refund certain
-joint and survivor life
Under this settlement option, the insurer retains the death benefit and pays a stated amount of interest on the money that is paid to the beneficiary at regular intervals
Interest income (only) option
This option will pay both an amount of principal and interest to the beneficiary over a stated period of time
Fixed period option
Three factors are used to calculate each payment under the fixed period option
- Amount of death benefit
- A guaranteed interest rate
- The length of the chosen period
With this settlement option, the proceeds will be paid out in a fixed amount over time until both the principal and interest have been completely paid to the beneficiary
Fixed amounts settlement option
Under the fixed amount settlement option, the recipient of the payments has the ability to either
Increase or decrease the payment amount and if they choose, they could also even change to a different settlement option altogether
Three factors are used to determine the minimum length of the payment period under the fixed amount settlement option:
- Amount of death benefit
- A guaranteed interest rate
- The chosen payment amount
This settlement option is similar to an annuity; the policy beneficiary will be guaranteed to receive an income for the rest of their life, regardless of how long that may be
Life income option
Under the life income option, the actual amount of the income depends on:
The policy death benefit and the life expectancy of the beneficiary; their age and gender. The beneficiary can select to receive the entire annuity payout until they die or share it with another individual
This settlement option wil pay the largest amount to the beneficiary for as long as they live, regardless of how long that may be. Upon their death no further payments are made.
Life only (straight life) option
Straight life (life only) settlement option
-based upon beneficiary’s life expectancy
-guaranteed for life
-payments stop upon death of beneficiary
This settlement option also pays an income for as long as the beneficiary is alive. However, the beneficiary selects a payment period, typically 5, 10 or 20 years, and payments are guaranteed to be made for at least that number of years
Life with period certain option
Life income- period certain
-life income to beneficiary
-guaranteed for a minimum amount of time
This settlement option pays an income for as long as the beneficiary is alive, but also guarantees total payments will be at least the amount of the death benefit
Life with refund option
Life income- with refund option
-pays beneficiary an income for life
-guarantees payments will be at least equal the death benefit
-pays someone else balance of death benefit if beneficiary doesn’t live long enough
This option continues paying a benefit for as long as either beneficiary lives. After the death of the first beneficiary, the same or a reduced payment amount is paid to the survivor
Joint-and-survivor life settlement option
Joint and survivor settlement option
-pays two beneficiaries an income for life
-the survivor may receive the same or a reduced payment (100%, 75%, 66 2/3%, 50%)
If a policyowner needs cash but does not want to surrender their policy, they can access the cash value that is available using the _____ _____ provision
Policy loan
Permanent life insurance policies have 2 components:
The death benefit or face value and cash value (the savings element funded by a portion of the premium)
The main advantages of a policy loan over other loans is that:
There is no credit check, the interest rate is usually much lower, virtually any repayment schedule, policyholder is not even legally obligated to pay back the loan
When the policy loan and the accumulated interest exceed the cash value of the policy, it _______
Lapses
Automatic premium loan provision
If the insured fails to pay the policy premium by the end of grace period, then the insurer will pay the premium with a policy loan and will continue to do so until the cash value of the policy falls below the premium amount, in which cash the policy will lapse
Loans are subject to ____ _____ and any unpaid loan will be deducted from the death benefit upon the insured person’s death
Loan interest
Withdrawals, or partial surrenders, are allowed on _________ life insurance policies, but not _____ life policies
Universal; whole
A withdrawal may be subject to:
A pro-rata surrender charge and/or processing fee
A withdrawal, or partial surrender, cannot be ______
Repaid
Life insurance policies that pay policy ________ are referred to as participating policies
Dividends
Life insurance policies that do not pay policy dividends are referred to as ________ policies
Nonparticipating
A refund of a portion of the premium
Policy dividends
Policy dividends are based on the difference between
The gross premium charged and the activation experience of the insurer
Policy dividends are not _________
Guaranteed
Because policy dividends are a return of premium, they are not _______
Taxable
The dividend is not taxable, however the ______ credited to the account is taxable
Interest
The policy dividend can be left with the insurer to..
…earn interest in a savings account
The dividend can be applied and ______ the next premium due
Reduce
The paid-up additions option uses
Each annual dividend to purchase an additional amount of life insurance
The result of a paid-up addition is a
Larger amount of life insurance
In turn, each paid-up addition builds..
..its own cash value and also earns dividends
The cash value build-up of a paid-up attention is ___-_______ under the tax rules for life insurance cash value
Tax-deferred
Paid up insurance
Dividends plus interest on dividends are applied to the annual premium and are enough to pay the entire annual premium. In a high interest rate environment, this may allow the policyowner to not have to pay premiums out-of-pocket
The dividend may be used to buy
One-year term insurance equal to the policy’s cash value
Dividend options
-cash
-accumulate interest
-reduce next premium amount
-paid up additions at attained age
-paid up insurance sooner
-one year term insurance at attained age
The ______ ______ in an insurance policy allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse
Nonforfeiture clause
There are three nonforfeiture options:
-cash surrender
-reduced paid-up insurance
-extended term insurance
Cash surrender nonforfeiture clause
The policy is canceled and the policyowner receives the current cash value
Reduced paid-up insurance nonforfeiture option
The policyowner obtains a reduced amount of paid-up whole life insurance based on the insured’s attained age and the amount of guaranteed cash value available to buy a single premium policy. The policy will pay the reduced death benefit whenever the insured dies
Extended term insurance nonforfeiture options
The net cash surrender value is used to buy a term insurance policy with a death benefit the same as the original whole life policy and is based on the insured’s attained age. The policy will terminate after a stated number of years found in the non-forfeiture table.
If the policy fails to select one of the nonforfeiture options when premium payments cease, this option generally goes into effect automatically
Extended terms insurance option
