renewable term policy
issued for a specified term and may be renewed at the end of that term without evidence of insurability. Renewable term policies may be limited in the number of renewals or to a specified age beyond which renewals will not be available. The renewal policy
nonrenewable term policy
is issued for a specified term and may not be renewed. (An insured may always apply for a new policy at the end of the term, but there are no guarantees and the risk may be accepted or rejected based on current underwriting standards.)
convertible term policy
allows a policyowner to convert or exchange the temporary protection for some form of permanent protection without evidence of insurability. The conversion must be made prior to expiration of the term. When a policy is converted, the premium will be based
reentry term policy
gives the insured the opportunity to provide evidence of insurability at the end of the term and qualify for reduced premium rates (lower than the guaranteed rate that is available for a renewable term policy).
Level term policies
are issued for a fixed face amount, which remains the same during the term of coverage. A level term policy may be issued for an annual period, for a specified number of years, or until a specified age. Premiums may increase annually or be level for the t
Decreasing term policies
are issued for an initial face amount that declines during the term period and reaches zero at policy expiration. For example, a 20-year decreasing term policy issued for $100,000 may only provide a death benefit of $50,000 after 10 years. This type of po
Increasing term policies
begin with little or no insurance protection, and the face amount grows over time. Although not very common, increasing term insurance is sometimes sold as a rider to another type of policy in order to provide an additional death benefit equal to total pr
interim term
When a person wants immediate protection and is thinking of starting a permanent insurance policy in the near future, interim term may be used to cover the period before permanent protection is to begin.
Disadvantages to Term
*Over time, renewable term insurance becomes more and more expensive. Although initially the level term premium is low, it increases with each renewal on the basis of the increased age of the insured and the increased risk of mortality for the insurance c
Advantages of Term
provide a substantial amount of coverage at a minimum cost. Since term insurance provides pure protection, it allows a person with a limited income to purchase more coverage than might otherwise be affordable. This is particularly important when there is
Whole life is also called permanent insurance
maturity date is beyond the life expectancy of most individuals. However, a whole life policy actually consists of a combination of a savings element (the advancing cash value) and a decreasing amount of net insurance. When a whole life policy reaches its
Level face amount
The face amount of the policy (the amount payable upon death at any age) is fixed and will not change while the policy remains in effect.
Level Premiums
Premiums for permanent insurance policies are designed to remain level during the entire period the policy is in force. In the early years of the contract, the insured actually pays in more premium than is needed to provide the current year's insurance pr
Accumulated cash value
Once an insured has accumulated cash value, it cannot be forfeited. An insured may cash in a policy at any time by surrendering it in exchange for its cash value.
Nonforfeiture Value
The cash value in the policy belongs to the policyowner. If the policyowner wishes, some or all of the cash value may be withdrawn from the policy. Any withdrawal of cash value will reduce both the face value of the policy and the amount of cash value ava
Types of Whole Life Policies
*Continuous premium whole life
*Limited-payment whole life policies
*Single Premium Whole Life
Continuous premium whole life
is the most common type of whole life insurance sold. These policies stretch the premium payments over the whole life of the insured (to age 100). This type of policy is often referred to as straight life insurance.
Limited-payment whole life policies
allow the policyowner to pay for the entire policy in a shorter period of time or to a specific age. Common forms of limited payment whole life are 20-payment life (meaning payments spread out over 20 years), 30-payment life, and life paid-up at age 65.
Single Premium Whole Life
is simply a whole life policy with one premium payment (a lump sum amount which, together with the interest it will earn, will be sufficient to cover all future premium payments). The entire cost of this policy is paid up at the time of purchase. Single p
economatic policy
is a whole life-type policy with a term rider that uses dividends to purchase additional paid-up insurance.
Current assumption whole life policies (also known as interest-sensitive whole life)
offer flexible premium payments that are tied into current interest rate fluctuations. The insurance company reserves the right to increase or decrease the premium within a certain range depending on interest rate fluctuations. During a period of relative
Advantages and Uses of Whole Life
*The principal advantage of whole life is that it is permanent insurance and can be used to satisfy permanent needs such as the cost of death, dying, and final burial expenses.
*The level premium allows the policyowner to know exactly what the cost of ins
Disadvantages of Whole Life Insurance
Two of the disadvantages of whole life insurance are the following.
*The premium-paying period may last longer than the insured's income producing years.
*It does not provide as much protection per premium dollar as term insurance does.
Characteristics of Flexible Policies
offer the policyowner the opportunity to change one or more of these components in response to changing needs and circumstances.
Adjustable Life Insurance
Adjustable life insurance is a policy that offers the policyowner the option to adjust the policy's face amount, premium, type of protection, and/ or length of protection, without having to complete a new application or actually exchange policies.
Universal life insurance
similar to a whole life policy in the sense that it has the same two components: death protection and cash value. However, instead of being fixed and guaranteed amounts, the death protection resembles one-year renewable term insurance and the cash account
Universal life insurance
Premium payments are separated and paid toward the insurance protection; the loading cost and the remaining balance is used to build the cash value (with interest).
The policyowner may increase or decrease the death benefit during the policy term, subject
current annual rate varies
current annual rate varies with current market conditions and may change every year.
contract rate
contract rate is the minimum guaranteed interest rate, and the policy will never pay less than that amount.
Option 1 (also known as option A)
provides a level death benefit equal to the policy's face amount. As the policy's cash value increases, net death protection actually decreases over the life of the policy, which making the policy structure similar to a whole life contract.
Option 2 (also known as option B)
provides for an increasing death benefit equal to the policy's face amount plus the cash account. In terms of policy structure, this contract is more like a combination of level term insurance and increasing cash value than whole life insurance.
cash withdrawal, also called a partial surrender
, from the cash account. This is not treated as a loan. A partial surrender is not subject to any interest and will reduce the total cash value in the account (rather than the face amount). If this withdrawal is later repaid, it will be treated as a premi
Variable life insurance, also called variable whole life
*They have a guaranteed minimum death benefit (the actual death benefit may be higher and will vary with the success of the investments).
*They have cash values that are not guaranteed (these vary with investment success and may change daily).
*These cont
general account,
also called a general asset, that consists primarily of safe and conservative investments (such as high grade bonds, real estate, and certificates of deposit)
an insurer must establish a separate account, also called a separate asset,
an insurer must establish a separate account, also called a separate asset, for its variable products. Premiums paid for variable life insurance must be placed in the insurer's separate account, which consists primarily of a portfolio of common stocks and
Advantages and Uses of Flexible Policies
*Flexible policies provide the opportunity to customize the policy to the needs and wants of the insured.
*Flexible policies may include a securities component, which is considered an effective hedge against inflation.
*Premium flexibility allows policy o
Disadvantages of Flexible Policies
*Flexible policies that include a securities component may not have guaranteed returns. Returns may be low, or even negative, in policies based on separate securities accounts.
*Some policy owners need the forced discipline of a mandated premium schedule
The industrial policy
is written for a small face amount, usually $2,000 or less, and the premiums are payable as frequently as weekly and, occasionally, monthly
home service life insurance
Another variation in the industrial life concept is known as home service life insurance. Policies are usually modest in size, ranging from $10,000 to $15,000 in face value, and are typically sold on a monthly debit plan (automatic bank draft) or payments
Credit life insurance
is designed to insure the lives of debtors for the benefit of a creditor (who is the policyowner). In the event that the insured debtor dies, it pays the outstanding balance of the loan.
Credit Life Policy Provisions
The number of insureds under the policy must be maintained at a specified level (usually 100); if participation drops below that number, the insurer may not insure new debtors.
Unlike standard group insurance policies, the policy does not have a conversio
An endowment policy
An endowment policy provides for the payment (to the beneficiary) of the face amount upon the death of an insured during a specified period or the payment of the face amount at the end of the specified period if the insured is still alive, whichever comes
A retirement endowment
was one of the most commonly sold endowment contracts. This type of policy was issued to mature at age 65 when the insured planned to retire. Like whole life insurance, the face value was payable as a death benefit if the insured died before the maturity
Endowment life insurance
The pure endowment provided for the payment of the policy's face amount only if the insured lived to the maturity date. If the insured died before the endowment date, all benefits were forfeited. Because this was essentially a high-risk savings plan (all
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was a combination of a pure endowment plus term insurance for a specified period. The pure endowment provided a living benefit at the end of the endowment period. The term insurance paid a death benefit if the insured died before the end of the endowment
Juvenile endowment policies
were designed to mature at a specific age, such as age 18, to help fund a college education.
Family income policy
Combining whole life insurance with decreasing term coverage, the family income policy provides an income to be paid upon the death of the bread winner. This policy combines decreasing term insurance with a permanent policy. Income payments begin when the
retirement income policy
A retirement income policy accumulates a sum of money for retirement while providing a death benefit. Upon retirement, the policy pays an income such as $10 per $1,000 of life insurance for the insured's lifetime or a specified period.
joint life policy
A joint life policy is a whole life contract written with two or more persons as named insureds. Most commonly, the policy is issued on two lives with the insured amount payable on the death of the first insured. A variation of the joint life policy is th
Juvenile life insurance
is any form of coverage written on the lives of minors. One type of policy is commonly called the jumping juvenile policy because it automatically increases in face amount at a given age, usually 21, but the premium remains level.
Graded premium whole life policies
are slightly different than modified life policies. A graded premium whole life policy is a gradual increase in premiums compared with a modified life, which has just one increase. With a graded premium whole life policy, the premium increases each year d
Modified whole life policies
are distinguished by premiums that are lower than typical whole life premiums during the first few years (usually three to five years) and then higher than typical thereafter. During the initial period, the coverage and premium are based as if it was a te
The mortgage redemption policy or rider
The mortgage redemption policy or rider is simply decreasing term insurance. The benefit amount of the term element is intended to be sufficient to pay off the unpaid remainder of the mortgage loan if the insured dies before paying it off.
Multiple protection policies
are combinations of whole life and term in which the amount of protection is higher in the early years of the policy and less in the later years.
Deposit term insurance
is a level term insurance policy that has a much higher premium for the first year than for subsequent years. The initial premium is significantly higher than the average premium needed to cover the cost of mortality during the term period. The excess fro
Advantages and Uses of Specialized Policies
*Specific combinations of term and permanent insurance can be used to match the need exactly.
*The cost of the policy may be lower than ordinary whole life insurance.
Disadvantages of Specialized Policies
*Policies set up to meet a specific need may become obsolete if the need changes over time.
*Certain policies, if not set up carefully, may incur negative tax consequences.
A life settlement transaction
is a transfer of an ownership interest in a life insurance policy to a third party for compensation less than the expected death benefit under the policy or the sale of a life insurance policy for a dollar amount that is less than the policy's face.
entire contract provision is also referred to as the entire contract clause.
provision states that the policy and a copy of the application constitutes the entire contract between the insurer and the insured. A copy of the life insurance application is attached to the policy.
automatic premium loan (APL)
provision may be added to a cash value life insurance contract and protects the policyowner against the inadvertent lapsing of the contract. If the cash value is sufficient, a loan in the amount equal to the premium due is subtracted from the cash value t
incontestable clause
incontestable clause of a life insurance policy states that after a specified period of time (two years), the insurer may not dispute or contest the validity of the contract or the statements. After the contract has been in effect for a specific length of
Suicide Clause
clause is inserted in a life insurance contract, death by suicide is not covered during the policy's first two years.
If suicide occurs during this initial two-year period, premiums are refunded but no face amount (death benefit) is paid.
voluntary assignment
policyowner decides to sell or make a gift of a life insurance policy by assigning all rights in the policy to the assignee. This type of assignment is made voluntarily
absolute or complete assignment
A voluntary assignment usually involves turning all rights�including the right to use the cash value�over to the assignee. For this reason, it can be called an absolute or complete assignment.
A trust
A trust is formed when the owner of property (the grantor) gives legal title of that property to another (the trustee) to be used for the benefit of a third individual (the trust beneficiary).
inter vivos trust
is one that takes effect during the lifetime of the grantor.
testamentary trust
is a trust created after the grantor's death, according to the provisions of the grantor's will.
Status-type clause
If this clause is included in a life insurance contract, the policy will not pay in the event of death while the insured is in the military, regardless of the cause of death. This would hold true even if the insured were home on leave and the death had no
Results-type clause
This type of clause is much less restrictive than the status type clause. A contract that includes this clause would not provide coverage for a member of the military if the member was killed as a result of military exercises or service in general. Howeve
Irrevocable Beneficiary'
A beneficiary in a life insurance policy or segregated fund contract whose compensation cannot be changed without his or her consent.
'Revocable Beneficiary'
The ability of a policy owner either to change who will receive the compensation from his or her policy or to terminate the policy without having to get consent from the current beneficiary. Most life insurance policies have this feature.
The Consideration Clause
This provision or clause in a life insurance policy provides that the insurance coverage is granted in consideration of the application and the payment of the initial premium. The payment of the initial premium is required to place the insurance coverage
Ownership Rights
owner of a life insurance contract is usually the applicant, the insured, or the premium payer. The owner of a policy has several stipulated rights in the contract. Some of these rights include:
changing the beneficiary;
receiving dividends if any are pai
grace period
Generally, the grace period in life insurance contracts is 31 days
Policy Change Provision (Conversion Option)
The policy may contain a provision that permits the insured to exchange a policy for another type of policy form permitted by the company.
If the exchange is to a policy with a higher premium, the insured merely has to pay the higher premium and no proof