Nontraditional Whole Life (Interest/Market - Sensitive) Flashcards
Current Assumption or Interest-Sensitive Whole Life
This is a form of whole life in which the insurance company can change the premiums or interest rate being credited to the account based on the current money market rates. Interest rate changes affect the policy premiums. The policy has a guaranteed minimum death benefit, but it may increase based on the growth of the cash value.
If cash values increase too quickly, this could cause the policy to mature prior to age 100. To prevent this from happening, the insurance protection will automatically increase to keep the policy from endowing. This increase is provided without evidence of insurability and is referred to as a corridor of protection.
Indexed Universal Life (Equity Indexed)
This policy gives policyowners the opportunity to decide the percentage of cash value that is invested in traditional fixed income securities. The remainder of the cash value is invested in an equity index account linked to a stipulated stock index, typically the S & P 500. When there is an increase in the market, a given percentage of the gain is used to determine the interest credited to the policy. When the market declines, the policy is credited with the minimum guaranteed interest rate or zero interest. The policy typically guarantees the principal amount in the indexed account.
Universal Life (Flexible Premium Adjustable Life Insurance)
Universal Life Insurance (UL) features insurance protection and a savings element, the cash value, that grows on a tax-deferred basis. UL is an “unbundled policy.” This means the individual elements of the policy and premium— which includes the mortality risk, policy expenses, and the cash value—are credited to the account separately, after the premium is paid.
The level of flexibility and the features of a UL policy include:
Adjustable Face Amount
Mortality charges are deducted monthly from the policy’s cash value. The mortality charge is the cost of pure insurance, and although it is deducted monthly, it is determined annually based on the mortality risk of each age group.
Expense charges used to cover administrative costs are also deducted monthly from the cash value.
Interest is credited to the cash value on a monthly basis at the current interest rate, but will never be less than the guaranteed minimum rate established at the time the policy was issued.
Flexible Premium – A target premium is established by the insurer, which is the minimum amount that must be deducted from the cash value to maintain the policy to age 100, based on current interest rates, mortality, and expense charges.
General Account
A portion of the premium is invested by the insurance company and held in their general account. The current return on the investments is credited to the UL policy.
Expenses, loans or withdrawals, and mortality charges (cost of insurance) are deducted from the cash value account.
Loans and Partial Withdrawals
Unlike other cash value policies, UL policies give the policyowner the option to take a policy loan, and also to take a partial withdrawal from the cash value, without terminating the contract.
A partial withdrawal is a permanent transaction, and cannot be reversed. The funds are paid from the general account. The cash value decreases, and the face amount may be affected as well. Depending on the policy, the withdrawal may also be taxable.
Death Benefit Options
Option A – Pays the face amount of the policy and provides a level death benefit. As the cash value increases, the company’s risk decreases. A universal life policy must include an amount at risk. If the cash value approaches the face amount, the death benefit must increase so as to provide for this amount at risk. This minimum separation between the cash value and the death benefit is called the “risk corridor.” This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early.
Option B – Pays the face amount stated in the contract, which is level term plus any cash values accumulated over the years. This provides for an increasing death benefit. The mortality charge for Option B is greater than Option A.
Individuals purchasing Option A will benefit from larger cash value accumulations while individuals purchasing Option B will benefit from greater death benefits.
Variable Life
Variable whole life is a whole life policy with certain benefits that will vary based on market conditions.
Characteristics of a Variable life
A Fixed Premium: The premium is determined by the insurer and remains fixed and level throughout the contract.
Accounts – The policy provides for both a general account and a separate account.
General Account (Guaranteed Values)
The general account is fixed, guaranteed, and provides for a guaranteed minimum death benefit to age 100. Policy loans are available from the general account.
Separate Account (Nonguaranteed Values)
The separate account is invested in equity securities offered by the insurance company. The owner may select which separate account they want their premium to be invested in. Cash value in the separate account will fluctuate based on the market conditions and the performance of the separate account, which is similar to a mutual fund. The policyowner has an opportunity to achieve higher investment returns. This policy may act as a protection against inflation.
Policy loans are available from either the general account or the separate account. Typically, 75-90% of the cash value can be borrowed. Partial surrender are not allowed from a variable whole life policy.
Variable Universal Life (VUL)
Variable Universal Life (VUL)
Variable Universal Life (VUL) is a combination of Variable and Universal Life Policies. Like Universal life, the policy provides for flexible premiums and adjustable death benefits. Options A and B are available to policyowners.
Variable Universal life does not have a general account, only a separate account. The premiums are credited to the separate account, and there is no guaranteed minimum death benefit.
