Unit 4: Types Of Life Insurance Policies Flashcards
Term life insurance
•simplest type
•only offer a death benefit
•remain in force for a specified period of time, or “term”
•no death benefit is payable if the insured dies after the term expires
Level term life insurance
•death benefit equals the face amount throughout the term of coverage
•premium remains level during the term
•the policy’s term may be expressed in reference to either
-number of years
OR
-specified age
Decreasing term life insurance
•death benefit declines over the coverage period until it reaches zero at the end of term
•appropriate for financial obligations that decrease steadily over time, like home mortgages, bank loans, or financial obligations that require periodic payments
Increasing term life insurance
•death benefit begins near zero & grows over the term of coverage
•appropriate to cover financial obligations that increase steadily over time
•also helps keep life insurance death benefits current with inflation & keep pace with the rising cost of living expenses
Return of premium term life insurance
•return all or part of the premium paid for the policy if the insured is still alive at the end of the term
•premium is higher and dependent upon the % of premium that will be returned
Renewability
•feature with term life insurance
•guarantees that the policy will renew at the end of its term
•guarantees the same amount of death benefit, but the premium for the new renewal period will increase based upon the insurer’s age at renewal-the insured’s “attained age”
•the payment of the higher premium at each renewal results in a “step-rate premium”-(think going up stairs as the premiums increasing)
Convertibility
•feature with term life insurance
•allows a policyowner to convert a term policy to a permanent policy without evidence of insurability & without having to submit an application
•conversion must be made before the term policy expires
•based on 1 of 2 options:
1. Attained age-insured’s age at the time of conversion
2. Original age-age at the time the original term policy was written; a lump sum amount is required (down payment) that equals what the cash value would have been if a permanent policy was originally purchased instead of the term policy
What are the advantages of term life insurance?
•premiums are lower because it only provides a death benefit
•initially the least expensive form of life insurance
What are the disadvantages of term life insurance?
•term coverage lasts only for the term of the policy—>it’s like renting, not owning, the policy
•term premiums increase as the insured gets older
•renewability features expire before the age of average life expectancy
—>individuals may not be able to obtain or afford coverage at older ages when their risk of dying is greater
Whole life insurance
•permanent insurance policy which is guaranteed to remain in force for the insured’s entire lifetime (“whole life”) provided the required premiums are paid, or to the policy maturity date
•designed to remain in force for the whole life of the insured and the premiums will NEVER increase
What is the level premium feature of whole life insurance?
•purpose is to make lifetime coverage affordable at older ages
•results in overpaying for the risk of dying at younger ages & underpaying in later years toward the end of life expectancy
—>the premium amount paid for a whole life policy never increases from its original amount even if the insured lives to a very old age
What is the fixed premium schedule for whole life insurance?
•policyowner selects the mode of payment for the policy’s level premium on a fixed schedule
•can be monthly or another mode
•if a premium is not paid when it’s due, the policy will go out of force, or “lapse”
The death benefit of a whole life policy is _________ & ________, just like its premium.
Fixed, level
What is the cash value part of a whole life insurance policy?
•integral part of a whole life policy
•reflect the reserves necessary to assure payment of the guaranteed death benefit
What is guaranteed interest crediting in whole life insurance?
•policy cash value increases steadily over the life of the contract because it is regularly credited with a guaranteed (level) rate of interest
•the scheduled increases in the cash value are stated in the policy illustration
What is policy surrender of a whole life insurance policy?
•the “cash surrender” value of the whole life policy arises from the policyholder’s rights to quit the contract & reclaim a share of the reserve fund attributable to the policy
•by cashing in a policy, the policyowner gives up the death benefit
Policy loans
•life insurance policies with a cash surrender value usually have loan provisions (policy loan) that allow the policyholder to borrow up to the cash value of the policy
•policy & its death benefit remain in force when cash is loans & interest must be paid on the amount borrowed
•if a policy loan has not been paid back & the insured dies, the amount borrowed plus any interest charges are deducted from the policy’s death benefit
What are the 2 components of the death benefit of a whole life insurance policy?
- Cash value, sometimes referred to as the “savings element”
- An insurance protection element-
-must be paid in addition to the cash value so that the death benefit equals the policy’s face amount
—>this is known as the “net amount of risk to the insurance company”-represents the amount of money the insurer must have on hand to pay the death benefit
-the death benefit equals the cash value plus the net amount of risk at any given time
•cash values increase each year; the insurance protection element decreases each year
When does a whole life insurance policy usually mature or endow?
•usually at age 100 or 120
What happens if the insured is still living when a whole life insurance policy matures or endows?
•the cash value in the policy will equal the policy face amount & is paid to the policyowner
•at endowment; the policyowner will pay income tax on any taxable gain
What is continuous premium whole life insurance?
•premiums are the same each year for the duration of the contract
•also referred to as “straight life” or “ordinary life”
•if the policyowner discontinues making premium payments, they will receive the cash value of the policy
