Unit 6: Life Insurance Policy Options

Question 1

What are the different settlement options for life insurance?

Answer 1

1. Interest income only option
2. Fixed period option
3. Fixed amount option
4. Life income option
5. Life with period certain
6. Life with refund certain
7. Joint & survivor life

Question 2

What happens if no settlement option is selected by the policyowner?

Answer 2

The death benefits are distributed as a lump sum

Question 3

What is the interest income only option?

Answer 3

•interest is paid on the death benefit
•death benefit paid at a later date

•insurer retains the death benefit & pays a stated amount of interest on the money
•the interest is paid to the beneficiary at regular intervals
•a good choice for those who do not need the life insurance proceeds until a later date
Ex. For a child’s future education expenses

Question 4

What is the fixed period option?

Answer 4

•death benefit + guaranteed interest over a set time
•if interest greater than the guaranteed rate, final payment will be larger

•pays both an amount of principal & interest to the beneficiary over a certain stated period of time
•if the policy’s primary beneficiary dies before all of the proceeds are paid out, the remainder of the money will be paid to the contingent beneficiary named in the policy
•3 factors used to calculate each payment:
1. Amount of death benefit
2. Guaranteed interest rate
3. Length of the chosen period

Question 5

What is the life income option?

Answer 5

•similar to an annuity
•beneficiary guaranteed to receive an income for the rest of their life
•actual amount of the income depends on the policy death benefit & the life expectancy of the beneficiary; their age & gender
•beneficiary can select to receive the entire annuity payout until they die or share it with another individual

Question 6

What is the life only option?

Answer 6

•straight life
-based upon beneficiary’s life expectancy
-guaranteed for life
-payments stop upon death of beneficiary

•pays the largest amount to the beneficiary for as long as they live

Question 7

What is the life with period certain option?

Answer 7

•life income to beneficiary
•guaranteed for a minimum amount of time

•pays an income for as long as the beneficiary is alive
•beneficiary selects a payment period, typically 5, 10, or 20 years can be chosen
—>payments are guaranteed to be made for at least that number of years
•if the beneficiary dies before the end of the selected period, payments continue to another person for the rest of the payment period

Question 8

What is the life with refund option?

Answer 8

•pays beneficiary an income for life
•guarantees payments will at least equal the death benefit
-pays someone else balance of death benefit if beneficiary doesn’t live long enough

•if the beneficiary dies before the total of payments reaches the death benefit, the balance is paid to another person
•the payment to the other person is either the remainder of the death benefit or in installments

Question 9

What is the joint-and-survivor life option?

Answer 9

•pays 2 beneficiaries an income for life
•continues paying a benefit for as long as either beneficiary lives
•after the death of the first beneficiary, the same or a reduced payment amount is paid to the survivor
—>selecting a reduced payment for the second beneficiary will allow a larger payment while both beneficiaries are alive

Question 10

What are the provisions of policy loans on permanent life insurance policies?

Answer 10

•if the policyowner needs cash but does not want to surrender their policy
•main advantages:
—>no credit check
—>interest rate usually lower than other loans
—>policyholder can pay back the loan according to virtually any repayment schedule
—>policyholder is not even legally obligated to pay back the loan
•value of the life insurance policy is reduced while the loan is outstanding
•if death occurs while the loan is outstanding, the insurance proceeds are reduced by the amount of the loan outstanding plus interest
•when the policy loan & the accumulated interest exceed the cash value of the policy, it lapses

Question 11

What is the automatic premium loan provision?

Answer 11

•on some permanent life insurance policies
•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 & will continue to do so until the cash value of the policy falls below the premium amount, in which case, the policy will lapse

Question 12

What are the parameters of withdrawals/partial surrenders?

Answer 12

•allowed on universal life insurance policies but NOT whole life policies
•will result in a reduction of the cash value & the death benefit amount
•may be subject to a pro-rata surrender charge and/or processing fee
•cannot be repaid

Question 13

What are participating policies?

Answer 13

Life insurance policies that pay policy dividends

Question 14

What are nonparticipating policies?

Answer 14

Life insurance policies that do NOT pay policy dividends

Question 15

What are policy dividends?

Answer 15

•a refund of a portion of the premium
•based on the difference between the gross premium charged & the actual experience of the insurer
•NOT guaranteed
•because policy dividends are a return of premium, they are NOT taxable

Question 16

What are the different dividend options?

Answer 16

CARPPO:

•Cash
•Accumulation of interest
•Reduced premium
•Paid-up additions
•Paid-up insurance
•One-year term insurance

Question 17

What is the cash dividend option?

Answer 17

•insurer can send a check to the policyowner in the amount of the dividend

Question 18

What is the accumulation of interest dividend option?

Answer 18

•dividend can be left with the insurer to earn interest in a savings account
•dividend is NOT taxable, but the interest credited to the account is TAXABLE

Question 19

What is the reduced premium dividend option?

Answer 19

•dividend can be applied & reduce the next premium due

Question 20

What is the paid-up additions dividend option?

Answer 20

•uses each annual dividend to purchase an additional amount of life insurance
•result is a larger amount of life insurance
•each paid-up addition builds its own cash value & also earns dividends
•cash value build-up is tax-deferred under the tax rules for life insurance cash value

Question 21

What is the paid-up insurance dividend option?

Answer 21

•dividends plus interest on dividends are applied to the annual premium & are enough to pay the entire annual premium
•in a high interest rate environment, this may allow the policyowner to not have to pay premiums out-of-pocket
•since dividends are not guaranteed, a producer cannot tell a policyowner the policy is “paid up”

Question 22

What is the one-year term insurance dividend option?

Answer 22

•the dividend may be used to buy one-year term insurance equal to the policy’s cash value

Question 23

What is the nonforfeiture clause in an insurance policy?

Answer 23

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

Question 24

What are the 3 nonforfeiture options in an insurance policy?

Answer 24

1. Cash surrender
2. Reduced paid-up insurance
3. Extended term insurance

Question 25

What is the cash surrender nonforfeiture option?

Answer 25

•policy is canceled & the policyowner receives the current cash value

Question 26

What is the reduced paid-up insurance nonforfeiture option?

Answer 26

•new single premium policy
•premium based on attained age
•less face value than old policy
•immediate cash values

policyowner obtains a reduced amount of paid-up whole life insurance based on the insured’s attained age & 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

Question 27

What is the extended term insurance nonforfeiture option?

Answer 27

•single premium term insurance
•same face amount as old policy
•only for a stated term of time
•default option selected by the insurer

•net cash surrender value is used to buy a term insurance policy with a death benefit the same as the original whole life policy & is based on the insured’s attained age
•the policy will terminate after a stated # of years found in the nonforfeiture table
•if the policyowner fails to select one of the nonforfeiture options when premium payments cease, this option generally goes into effect automatically