Whole Life Insurance Flashcards
List 8 Whole Life insurance products..
And what are the 2 guarantees?
IWhole life insurance features more guarantees than any other form of permanent life insurance available today.
Whole life insurance includes the following products:
- traditional straight (ordinary)
- limited payment life
- modified premium whole life
- graded premium whole life
- changing premium whole life
- indexed life
- variable life
Whole life insurance is distinguished by two features:
- Guaranteed death benefit protection for the insured’s whole life. No matter when the insured dies, the policy pays the face amount stated in the policy. Under most whole life policies, the covered lifespan extends to age 120.
- Guaranteed cash value that gradually builds inside the policy. The cash value forms part of the death benefit, but it is also accessible while the insured is alive.
While all forms of whole life have these two guaranteed features, the various types of whole life differ in
- the length of time over which premiums are paid and/or
- how the policy’s cash values are invested and grown.
2 characteristics of Ordinary (Straight) Whole Life
The most basic type of whole life insurance is called either ordinary whole life or straight whole life policy.
With whole life,
- Death benefits remain level, and
- Level premiums are paid until the insured dies or until he or she reaches age 120
3 characteristics of Permanent Life Guaranteed Cash Value
- With whole life insurance the cash value grows at a contractually guaranteed rate (this is necessary to support the guaranteed level death benefit and premiums).
- The cash value is is partly funded by the policyowner, as part of the premium.(Permanent life premiums are generally higher than term premiums at any issue age, which is due in part to funding the cash value.
- The policyowner owns the cash value and may borrow against it while the policy is in force (though doing so will result in a reduced death benefit if not repaid).
At policy maturity (age 120 for policies issued since 2009) the policy face amount is paid to the policyowner since it equals the cash value and there is no more pure insurance protection.
How does the The Level Premium Concept work with ordinary whole life products?
Ordinary whole life policy owners pay the same (level) premium over the life of the policy.
The older one gets, the greater the risk of death, which would normally mean higher premiums. “Leveling” the premium avoids extremes in premium cost.
As the policy’s cash value increases, the net amount at risk decreases at the same rate so that the death benefit remains level.
What are the characteristics of a Limited Payment Life?
What is a Ten-Pay Life Policy?
What is a life-paid-up-at-65 policy?
Like ordinary whole life, limited payment whole life insurance provides
- level death benefit protection for the insured’s whole life.
- level premiums
The main difference between ordinary life and limited payment life is the time period over which premiums are paid.
Premiums for limited payment life insurance policies are higher and payable for a shorter time than ordinary life premiums.
Limited payment whole life policies appeal to customers who want permanent coverage but wish to pay for it within a finite period of time (not one’s entire life).
A policy with a ten-year premium period would be called a ten-pay life policy.
One that requires premiums to age 65 would be called a life-paid-up-at-65 policy.
Single Premium Life is also called a ….
It is an extreme version of a …
The most extreme example of limited pay life is the single premium life insurance policy, which is paid up with one premium payment at the time the policy is bought.
Such a policy is often called a Modified Endowment Contract, or MEC.
Tax law changes in 1988 diminished the appeal of single premium life by removing from it some of the tax advantages normally enjoyed by life insurance.
Modified and Graded Premium Whole Life Insurance
What are the 2 key characteristics?
What are the key differences?
Who are they get suited for?
Both of these products feature
- a lower initial premium than straight whole life of the same face amount,
- but premiums increase to a higher level after a designated period of time.
The differences are …
- With modified premium whole life there is a single increase (typically five years after policy issue) with premiums remaining level thereafter.
- With graded premium whole life starts with an even lower premium, but premiums increase in a series of steps until they, too, become level for the remainder of the premium period.
The grade-in period during which premiums increase may range anywhere from 10 to 15 years.
Like all whole life policies, modified and graded premium policies issued since 2009 mature at age 120. (Policies issued before 2009 may continue to mature at age 100.)
Modified and graded premium whole life policies appeal to consumers who want the guarantees of whole life insurance and lower premiums in the early years (with a willingness to pay more later on). They are ideally suited for younger people who are just beginning their careers and who expect their incomes to increase in the future.
Non-Fixed Whole Life Products
Why did non-fixed products develop?
List 3 names for variable, non-fixed products?
Beginning in the 1970s, when market interest rates were at historically high levels, consumers began demanding a whole life insurance product that was based on current interest assumptions. And variable products were born.
The first products to feature something other than fixed guaranteed rates and benefits were whole life policies that allowed flexibility in the premiums (based on current interest experience).
They are called
- indeterminate premium whole life
- current assumption whole life
- interest-sensitive whole life
Indeterminate Premium Whole Life
Indeterminate premium whole life insurance is issued with two premium rates:
- lower fixed rate
- maximum guaranteed rate
The policyowner pays the lower fixed rate for a specified number of years (such as the first 5 or 10). At the end of that period, the premium rate then moves up or down based on the investment earnings the insurer experiences.
If earnings are good, then the premium will be lower.
Current Assumption and Interest-Sensitive Whole Life Insurance
- premium rates can change over time in response to the insurer’s actual mortality, interest, and expense experience.
- sets a minimum interest rate to be credited to the policy and a maximum premium rate.
- current assumption policy guarantees a minimum _____________.
- current assumption whole life, the policyowner has no control over how or when the premium changes, and the death benefit (face amount) does not vary.
- interest-sensitive policy, the interest credited to the policy is not ____________\_, and thus the cash value is not guaranteed.
- interest-sensitive life policyowners do have some control over the premium and face amount. If the insurer’s redetermined assumptions result in a higher premium, then the policyowner can choose to accept the higher premium. Or, the policyowner can choose to reduce the face amount of the policy and keep the same premium level.
The process insurers use to evaluate their actual experience and to apply the changes to their premium rates is called _________________ .
Current assumption whole life (CAWL) and the closely related interest-sensitive whole life are characterized by
- premium rates that can change over time in response to the insurer’s actual mortality, interest, and expense experience.
- it sets a minimum interest rate to be credited to the policy and a maximum premium rate.
If the insurer’s actual experience is good, then premium rates are lowered.
After a few years, both the interest and premium rates can change based on a review and revaluation of the insurer’s assumptions.
The process insurers use to evaluate their actual experience and to apply the changes to their premium rates is called redetermination.
The length of the period before redetermination varies among insurers. Some current assumption and interest-sensitive life insurance products redetermine their variable elements every two years. Others make a redetermination every 5-7 years.
While they share many of the same policy features, there are some notable differences between interest-sensitive whole life insurance and current assumption whole life insurance.
Both types of policies credit interest to the policy’s cash value at a rate based on the rise and fall of the stock or bond index linked to the policy.
- current assumption policy guarantees a minimum cash value level.
- interest-sensitive policy, the interest credited to the policy is not guaranteed, and thus the cash value is not guaranteed.
Control over the premium and face amount also differs between the two products.
- current assumption whole life, the policyowner has no control over how or when the premium changes, and the death benefit (face amount) does not vary.
- interest-sensitive life policyowners do have some control over the premium and face amount.
If the insurer’s redetermined assumptions result in a higher premium, then the policyowner can choose to accept the higher premium. Or, the policyowner can choose to reduce the face amount of the policy and keep the same premium level.
Indexed Whole Life
Indexed whole life insurance is a fairly new product that ties its death benefit and premiums to a specified index, most commonly the consumer price index (CPI). Over time, the policy’s face amount increases automatically with CPI increases.
Insurers offer two pricing methods for the premiums associated with a face amount that increases over time:
- The premium increases every year to a new fixed amount to provide for the increased coverage.
- A premium is set at policy inception and is based on assumptions about expected increases. This premium is higher at the front end but averages out over time.
With an indexed policy, the policyowner knows the face amount will increase over time. However, he or she does not need to prove insurability each time it increases.
2 characteristics of Variable Life
Consumer pressure on insurers to develop a product that truly reflects the investment performance of its underlying assets in the early 1980s led to the development of a new class of whole life insurance: variable life insurance.
Unlike traditional whole life, variable life insurance
- includes an investment feature and therefore variable life policies are
- considered a security (like stocks, bonds, and mutual funds).
The Nature of Variable Life Insurance (VLI)
VLI policy values are invested in investment accounts, known as subaccounts, which are managed in a separate account that keeps them apart from the insurer’s general account.
Like all securities, separate account investments are not guaranteed, which means VLI cash values are subject to declines as well as increases.
In early VLI policies, the policyowner had only three variable subaccounts to choose from:
- stock fund
- bond fund
- money market fund
VLI policies offer a wide variety of subaccount options, in some cases 20 or more.
VLI policyowners can transfer funds between each subaccount.
They can also transfer funds between subaccounts and the insurer’s general account.
2 primary characteristics of a Varible Life Insurance policy?
Like traditional whole life, standard VLI policies
- require a fixed premium on a scheduled basis.
- guarantees a death benefit
The death benefit will fluctuate up and down but will never be less than the guaranteed face amount.
What does Non-Guaranteed Cash Value mean with regard to VLI?
Unlike the VLI death benefit, the cash value is not guaranteed.
A variable life policy’s cash value at any time is equal to
- the value of the policy’s shares in its chosen subaccounts
- the value of funds allocated to the guaranteed fixed account.
If the VLI insured dies with a diminished cash value, the insurer effectively makes up the difference so that the minimum guaranteed death benefit can be paid.
