Unit 3: Permanent Life Insurance Flashcards
death benefit
living benefits such as loan values, retirement income, and cash withdrawals that set certain policies apart from others.
two major tax advantage of life insurance
- the earnings on the cash value accumulate tax free unless and until with-drawn
- with certain exceptions, the proceeds paid at the insured’s death pass income tax free to the beneficiary
all policies can be placed into four basic types
permanent item, industrial, group, etc
permanent policy
one with some type of cash value accumulation
term life insurance
does not build any cash value accumulation; only death benefits are paid
in a whole life insurance policy, the insured policyowner pays the premiums for
his entire life
permanent life insurance policies procedure
As the policyowner continues to pay the premiums, the cash value in the policy accumulates year by year. The amount of pure insurance protection the insurance company must provide decreases. When the insured dies, the face amount of _____ called the death benefit, is paid to the beneficiary designated in the policy.
limited-pay life insurance policy
the policyowner can pay the premiums for a specified number of years or to a previously specified age and then stop, the insurance protection continues for the remainder of the insured’s life.
tax reform act of 1984:
any policy issued after January 1, 1985, that endows before age 95 will not qualify as life insurance
the most extreme version of a limited pay policy is one that
can be paid for with only one premium (single premium policy)
advantage offered by a single premium policy:
the policyowner will pay less for the policy than if the premiums stretched out over several years.
By the same token, the person insured by a single premium policy could die shortly after the single premium was paid, thus making the cost of insurance coverage much higher than it might have been had premiums been scheduled over a period of many years.
modified endowment contact (MEC)
any policy funded more rapidly than 7-pay life
once a policy fails to satisfy the 7-pay test…
it is considered to be a MEC from then on
rules for r=taxation of distributions from MECs
Money distributed from the policy is considered to come first from earnings (excess of cash value over cost basis) and is taxed as ordinary income. Only after the earnings have been taken out can the policyowner’s cost basis be recovered tax free.
If the policyowner is younger than age 59½ and is not disabled, these taxable distributions are considered to be premature and are subject to a 10% penalty tax in addition to the regular income tax.
according to the first-to-die joint life policy…
the contract comes to an end at the first death, and there is no further insurance protection for the other person or persons covered by the policy.
survivor life insurance
or second-to-die insurance, covers two lives and guarantees payment only when the second insured dies. Premiums are usually payable until the second death.
adjustable life insurance
is an intermediate insurance product, positioned between whole life and universal life.
Adjustments may be made to any or all of these policy provisions in adjustable life:
face amount of the policy (usually with evidence of insurability);
amount, frequency, or both of premium payments;
and period of insurance protection.
universal life
Universal life is a flexible premium, adjustable death benefit life insurance contract that accumulates cash values - current rates as interest
front end load
In earlier model universal life policies, a charge, or load, is deducted from each premium after the first-year premium to cover sales and administrative expenses.
back end load - normally in the form of service or surrender charges
More recent universal life policies have adopted a back end sales load. These back-end loads usually take the form of service charges for withdrawals from
policy, for policy surrenders, and for coverage changes.
the interest load
Not all of the cash value accounts receive interest at the current rate. For most policies, there is an additional annual load that is generated by simply not paying excess interest on the first $1,000 in the cash value account.
provides a level death benefittwo options concerning death benefits under a universal life policy
option A: which provides a level death benefit
option B: provides an increasing death benefit
risk corridor
This is shown at B in the illustration. At this point, any further increase in cash value must be reflected by an increase in death benefit over the face amount. At C, the cash value has increased even more and the death benefit reflects this increase, although the death benefit is still separated from the cash value by an amount at risk.
option B provides for…
an increasing death benefit that is made up of the policy face amount, plus the cash value account.
partial withdrawals
Another means of obtaining funds from the cash value account is the
variable life insurance
securities based whole life insurance product
in a variable life policy,
a separate account holds the assets that are used as a basis for variable policy benefits
the death benefit must never fall below…
the guaranteed minimum, the same face as the face amount of the policy
traditional variable life contracts provide
for a fixed premium
while there is guaranteed death benefit, there is no
guaranteed cash value
indeterminate premium policies
offer a low current premium at the beginning of the policy period, usually for two years. After that period, the premium can be adjusted to reflect the insurance company’s experience with regard to investment return, mortality, and expenses. This adjustment could result in a lower premium. It could also result in a higher premium, although it may not be increased above a stated maximum.
