Unit 15 - Insurance Products Flashcards
Starts at Universal Life
Universal Life
Explain what it is and why it was created.
Characteristics
2 different interest rates
- Created to combat low whole life interest rates in periods of inflation.
- Guaranteed Death Benefit and has a cash value.
- resembles a 1 year renewable term policy
- Cash account grows by certain rate.
- Flexible premium payments, as long as there’s enough value in cash account. Can even skip payments.
- Policyowner can increase or decrease the death benefit during policy term.
- Interest payments will vary, but a guaranteed min.
Interest Rates (2): - Current Annual Rate - varies with current market conditions and may change every year. Rate you are getting paid currently.
- Contract Rate - The minimum guaranteed interest rate in the policy will never pay less than that amount
Universal Life Death Benefit Options
Option 1 (or Option A): level death benefit equal to the policy's face amount. As cash value increases, net death protection decreases. (Lower premiums but wil not keep pace with inflation.)
Option 2 (Option B): has an Increasing death benefit equal to the policy’s face amount plus the cash account. Higher initial premiums and lower initial death benefit make cash value raise more quickly bc greater portion goes towards cash in the beginning.
Deductions from the Premium and Deductions from the Separate Account
Deductions from the gross premium normally reduce the amount of money invested in the separate account.
Deductions from Gross Premium (SAS)
- Sales Load (max allowable is 9% over 20 years, so can be frontloaded or spread out)
- Administrative Fee
- State Premium Tax
Any other charges are from the separate account, deducted from the net premium - such as cost of insurance, expense risk fees, and investment management fees
Mortality risk fee - insured lives shorter than anticipated.
Expense risk fee - coast of administering the policy may be more expensive than assumed.
- Variable Life - Death Benefit vs. Cash Value
- AIR
- When is Death Benefit, Cash Value, and separate account calculated?
- = testable
Minimum death benefit, but no guaranteed cash value. Fixed portion is in general account, and variable portion is in separate account.
AIR has no effect on cash value accumulation in a variable policy. AIR effects the death benefit.
If the separate account return is higher than the AIR, death benefit increases. Same= stay, if separate accounts returns are lower = death benefit go down (but never below min.)
Death benefits calculated annually
Cash Value calculated monthly
Separate account calculated daily
*Testable - Variable Life Policy Loan Facts (4)
Minimum value
- A minimum of 75% of the cash value must be available for policy loan after the policy has been in force for 3 years. (no minimum before 3 years)
- The insurer is never required to loan 100% of the cash value. Full cash value is obtained by surrendering the policy to the issuer.
- If the insured dies with a loan outstanding, the death benefit is reduced by the amount of the loan.
- If the insured surrenders the contract with a loan outstanding, cash value is reduced by the amount of the loan.
- has voting rights
Variable Life - Insurance Contract Exchange (3)
*Testable
Changing from variable life to whole life typically:.
Points to remember (3):
- The contract exchange provision must be available for a minimum of 2 years.
- No medical underwriting (evidence of insurability) is required for the exchange.
- The new policy is issued as if everything were retroactive. That is, the age of the insured as of the original date is the age used for premium calculations for the new policy.
Variable Life Voting Rights vs. Variable Annuities and Mutual Funds Voting Rights
Variable LIFE gets one vote per $100 cash value.
Variable Annuities and Mutual funds are 1 vote per share.
What is the “face value?”
The death benefit
Separate Account
SubAccounts
It is the performance of the subaccounts that determines the investment return **
Maybe be 30 for an investor to choose from
(Variable annuity)
Variable annuity advantages
- tax deferred growth
- guaranteed death benefit (more of current value of account or amount invested)
- lifetime income
- IRS section 1035 exchanges (no tax consequence but may have a penalty)
- no age 70 1/2 restrictions or requirements. Can continue to contribute
- no contribution limits
- tax rate transferred between sub accounts
- no probate
Variable Annuity Disadvantages
- all earnings are taxed as ordinary income (even if held long term)
- fees are typically much higher than owning a mutual fund
- withdraws me before 59 1/2 will incur a penalty in addition to ordinary income tax
- most variable annuities carry a conditional deferred sales charge, so early years involve additional costs
Index Annuity
Equity index annuity
Overcome the purchasing power risk of fixed annuities but without the market risk of variable annuities.
Participation rate. If market is up, account gets 80% - 90% of that growth up to a cap rate. Small guaranteed minimum return, 1% - 3%. In a down market, the account does not lose value, and would get the minimum rate.
Longer surrender charges - as long as 15 years
Index Annuity Crediting Methods***
- Annual Reset
- High-water Mark
- Point-to-point
- Averaging
Different purchase and settlement options for annuities
Deferred Annuity
Periodic Payment Deferred Annuity
Immediate Annuity
Single Premium Deferred Annuity - annuity purchased with a single lump sum, (with payments deferred until a later date)
Periodic Payment Deferred Annuity - allows a person to make periodic payments (monthly, quarterly annually allowed) with payout of benefits deferred until owner is ready.
Immediate Annuity - deposits a single lump sum and begins benefits immediately - usually within 60 days.
Annuity surrender charges
Usually first 5-10 years of contract
15 years for index annuities
