Unit 6 - Life Insurance Policy Options Flashcards
What are the Settlement Options?
- Lump sum
- Interest Only Option
- Fixed period option
- Fixed amount option
- Life Income Option
- Life with period certain
- Life with refund certain
- Joint and Survivor Life
Interest Income (only) settlement option
The insurer retains the death benefit and pays a stated amount of interest on the money.
Fixed Period Option
Will pay both an amount of principal and interest to the bene over a certain stated period of time.
- If the primary bene dies before all of the proceeds are paid out the remainder of the money will be paid to the contingent that was named in the policy.
What are the three factors used to calculate each payment for Fixed Period Option?
- Amount of death benefit,
- A guaranteed interest rate; and
- The length of the chosen period.
* if interest is greater than the guaranteed rate, final payment will be larger.
Fixed Amount Option
The proceeds will be paid out in a fixed amount over time until both the principal and interest have been completely paid to the bene.
What are the three factors used to calculate each payment for Fixed Amount Option?
- Amount of death benefit;
- A guaranteed interest rate; and
- The chosen payment amount.
* if interest exceeding the guaranteed rate is earned, the money will last longer than expected.
Life Income Option
The policy bene will be guaranteed to receive an income for the rest of their life, regardless of how long that may be.
How is the amount paid on Life Income Option determined?
- policy death benefit
- life expectancy of the bene, their age and gender.
Life Only or Straight Life Option
Will pay the largest amount to the bene for as long as they live, regardless of how long that may be.
Upon their death no futher payments are made.
Life with Period Certain
Also pays an income for as long as the bene is alive, however the bene selects a payment period, typically 5, 10, or 20 years can be chosen and payments are guaranteed to be made for a least that number of years.
If the bene dies before the end of the selected period, payments continue to another person for the rest of the payment period.
Life with Refund
Pays an income for as long as the bene is alive, but also guarantees total payments will be at least the amount of the death benefit.
If the bene dies before the total of payments equals the death benefit, the balance is paid to another person.
Joint and Survivor Life Settlement Option
Continues paying as long as either bene lives. After the death of the first bene, the same or reduced payment amount is paid to the survivor.
Selecting a reduced payement for the second bene will allow a larger payment while both are alive.
With Joint and Survivor Life Option, what are the same or reduced payment amounts?
100%
75%
66 2/3%
50%
What is a Policy Loan Provision?
Permanent Life Insurance policies have two components, the death benefit or face value and cash value - the savings element funded by a portion of the premium.
If the policyowner needs cash but doesn’t want to surrender the policy, they can access the cash value.
What are the main advantages of a policy loan over other loans?
- No credit check
- Interest rate is usually much lower
- Can pay back according to any repayment schedule
- not even legally obligated to pay back the loan
If a policy loan is taken and death occurs how does that effect the payout?
If death occurs while the loan is outstanding, then the insurance proceeds are reduced by the amount of the loan outstanding plus interest.
What happens if the policy loan and accumulated interest exceeds the cash value of the policy?
it lapses
What is an Automatic Premium Loan Provision?
If the insured fails to pay the policy premium by the end of the grace period, then the insurer will pay the premium with a policy loan and will continue to do so until the cash value of the policy falls below the premium amount, in which case the policy lapses.
What policy is a Withdrawal allowed?
Withdrawals or partial surrenders are allowed on Universal Life insurance policies but not Whole Life policies.
How does a Withdrawal affect the policy?
- Will result in a reduction of the cash value and death benefit amount
- May be subject to a pro-rata surrender charge and or processing fee
- Cannot be repaid
What is a Participating Policy?
Life insurance policies that pay policy dividends.
What is a Nonparticipating Policy?
Life policies that do not pay policy dividends
Are Policy Dividends taxable?
No, because they are a return of a portion premium.
Dividend Options
Cash
Accumulation of Interest
Reduced Premium
Paid Up Additions
Paid Up Insurance
One Year Term Insurance at attained age
Dividend Options - Cash
The insurer can send a check to the policy owner in the amount of the dividend
Dividend Option - Accumulation of Interest
The dividend can be left with the insurer to earn interest in the savings account.
The dividend is not taxable, but the interest credited to the account is taxable.
Dividend Option - Reduced Premium
The dividend can be applied and reduce the next premium due
Dividend Option - Paid Up Additions
Uses each annual dividend to purchase an additional amount of life insurance.
Each cash addition is tax-deferred
Dividend Option - Paid up Insurance
Applied to the annual premium and are enough to pay the entire annual premium.
Dividend Option - One Year Term Insurance at attained age
The dividend may be used to buy one year term insurance equal to the policy’s cash value
What is a Nonforfeiture Clause?
Allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse
What are the three Nonforfeiture Options?
- Cash Surrender
- Reduced Paid-Up Insurance
- Extended Term Insurance
Nonforfeiture Options - Cash Surrender
The policy is cancelled and the policyowner receives the current cash value
Nonforfeiture Options - Reduced Paid-Up Insurance
The policyowner obtains a reduced amount of paid-up whole life insurance based on the insured’s attained age and the amount of guaranteed cash value available to buy a single premium policy. The policy will pay the reduced death benefit whenever the insured dies.
Nonforfeiture Options - Extended Term Insurance
The net cash surrender value is used to buy a term insurance policy with a death benefit the same as the original whole life policy and is based on the insured’s attained age.
