Life Insurance: Policy Options Flashcards
What are the 7 Settlement Options for Life Insurance Policies?
- Interest Income (Only)
- Fixed Period
- Fixed Amount
- Life Income (Only)
- Life (Period Certain)
- Life (Refund Certain)
- Joint and Survivor Life
Definition:
Interest Income (Only)
(Settlement Option)
2 Parts
Life Insurance: Settlement Options
- The Insurance Company keeps the Death Benefit and pays the interest to the beneficiary at regular intervals
- Good for those who do not need the insurance proceeds until a later date
Definition:
Fixed Period
(Settlement Option)
3 Parts
Life Insurance: Settlement Options
- The Policy pays Principal and Interest to the beneficiary over a specific period of time
- If the Primary Beneficiary dies before pay period has ended, the remainder is paid to the Contingent Beneficiary
- If interest is greater than the guaranteed rate, final payment will be larger
Definition:
Fixed Amount
(Settlement Option)
5 Parts
Life Insurance: Settlement Options
- The Policy pays out a fixed amount until the Principal and Interest are depleted
- The Beneficiary can increase/decrease the payment amount, if needed
- The Beneficiary can change to a different settlement option, if needed
- If interest is greater than the guaranteed rate, payments will last longer expected
- If the Primary Beneficiary dies before the money is depleted, there are 2 options:
* Payments continue to another person, until the funds are depleted
or
* The remaining funds are paid into the Primary Beneficiary’s Estate
Definition:
Life Income (Only)
(Settlement Option)
2 Parts
Life Insurance: Settlement Options
(a.k.a. Straight Life)
- The Policy will pay a specific amount to the Beneficiary for as long as they live
(regardless of how long that may be) - Once the Beneficiary dies, no additional payments are made
Definition:
Life (Period Certain)
(Settlement Option)
3 Parts
Life Insurance: Settlement Options
- The Beneficiary selects a specific number of Guarantee Pay Periods
- The Policy will pay benefits to the Beneficiary for their entire life
(regardless of how long that may be) - If the Beneficiary dies before the Guarnateed Pay Periods have been completed, the payments will continue to another person
Definition:
Life (Refund Certain)
(Settlement Option)
3 Parts
Life Insurance: Settlement Options
- The Policy will pay benefits to the Beneficiary for their entire life
(regardless of how long that may be) - If the Beneficiary dies before the Death Benefit has been fully paid out, the balance is paid to another person
- The residual balance can be paid as a lump sum or as installments
Definition:
Joint-and-Survivor Life
(Settlement Option)
3 Parts
Life Insurance: Settlement Options
- The Policy will pay benefits to two Beneficiaries for their entire lives
(regardless of how long that may be) - Once the first Beneficary passes, the benefit continues to be to the survivor
(The same amount or a reduced amount - depending on their choice) - Selecting a reduced payment for the 2nd beneficiary allows for larger payments while both beneficiaries are living
Definition:
Policy Loan Provisions
Life Insurance: Loan Provisions
If the policyowner needs cash, but wants to keep the policy active, they can access the “Cash Value”
Advantages:
Policy Loan Provisions
4 Parts
Life Insurance: Loan Provisions
- There is no credit check
- The Interest Rate is usually lower than standard rates
- Allowed to pay back the loan whenever they want
- No legal obligation to pay back the loan
Key Points:
Policy Loan Provisions
3 Parts
Life Insurance: Loan Provisions
- The value of the policy is reduced while the loan is outstanding
- If death occurs while the loan is outstanding, the Death Benefit is reduced by the amount still unpaid (plus interest)
- If the loan (and accumulated interest) exceed the cash value, the policy will lapse
Definition:
Automatic Premium Loan Provision
2 Parts
Life Insurance: Loan Provisions
If Policyowner does not pay the Premium (before the end of the grace period):
* The Insurance Company can use a Policy Loan to pay the Premum
- This can continue until the cash value no longer covers the Premium
(then the Policy will lapse)
Definition:
Partial Surrender/Withdrawals
3 Parts
Life Insurance: Loan Provisions
(Universal Life Policies only)
- Will reduce the Cash Value and the Death Benefit
- May be subject to a pro-rata surrender charge and/or processing fee
- Cannot be repaid
Definition:
Policy Dividends
6 Parts
Life Insurance: Dividend Options
- Dividends are a refund of a portion of the premium
- Dividends are not guaranteed
- Dividends are not taxable
- Based on the difference between the Gross Premium charged and the “actual experience of the insurer”
“Participating Policy” - Pays Dividends
“Non-Participating Policy” - Doesn’t Pay Dividends
What are the 6 ways a Dividend can be paid?
Life Insurance: Dividend Options
Remember “CARPPO”
- Cash
- Accumulate Interest
- Reduced Premium
- Paid-Up Additions
- Paid-Up Insurance
- One-Year Term Insurance
Dividend Options:
Cash
Life Insurance: Dividend Options
Insurer sends a check to the policyowner for the amount of the dividend
Dividend Options:
Accumulate Interest
Life Insurance: Dividend Options
Dividend is left with the insurer to earn interest (in a savings account)
* Dividend paid is not taxable
* Interest earned is taxable
Dividend Options:
Reduced Premium
Life Insurance: Dividend Options
Dividend is applied to reduce the next premium payment
Dividend Options:
Paid-Up Additions
2 Parts
Life Insurance: Dividend Options
The Dividend is used to purchase an additional amount of life insurance
Each “Paid-Up Addition”:
* Builds its own Cash Value (Tax-Deferred)
* Earns it’s own Dividends
Dividend Options:
Paid-Up Insurance
Life Insurance: Dividend Options
When Dividends (plus interest on the Dividends) are applied to the Annual Premium and are enough to pay the entire annual premium
Dividend Options:
One-Year Term Insurance
Life Insurance: Dividend Options
The Dividend is used to buy a One-Year Term Policy (equal to the Cash Value)
Definition:
Non-Forfeiture Clause
Life Insurance: Non-Forfeiture Clause
If the Policyholder misses enough payments, and caused the policy to lapse, they can receive:
* All or a portion of the benefits
or
* A partial refund on the premiums paid
What are the 3 Non-Forfeiture Options?
Life Insurance: Non-Forfeiture Clause
- Cash Surrender
- Reduced Paid-Up Insurance
- Extended Term Insurance
Non-Forfeiture Options:
Cash Surrender
2 Parts
Life Insurance: Non-Forfeiture Clause
- The Policy is canceled
- The Policyowner receives the current Cash Value
