Term and Permanent Life insurance
-Term life insurance is temporary life insurance provided for a specific period of time. AKA Pure life insurance
-Permanent Life is a general term used to refer to various forms of whole life insurance policies that remain in effect to age 100, as long as
Term Policies
-provide for the greatest amount of coverage for the lowest premium.
-provides pure death protection
-if death happens, beneficiary is payed
-if policy is canceled or expires prior to death nothing is payable at the end of the term
-no cash value or other
3 basic types of term coverage available
-level
-increasing
-decreasing
Level Insurance
is the most common type of temporary protection purchased
-term level refers to the death benefit that does not change throughout the life of the policy
Annually renewable term
is the purest form of term insurance
-death benefit remains level and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as probability of death increases
Level Premium Term
provides a level death benefit and a level premium during the policy term.
-if policy renews at end of term, the premium will be based on the insureds attained age at the time of renewal
Re-entry Option
-upon the end of a term policy with guaranteed renewable option may answer medical questions to prove insurability and qualify for a discounted premium rate
Decreasing term
-feature a level premium and a death benefit that decreases each year over the duration of the policy.
-primarily used when the amount of needed protection is time sensitive, or decreases over time
-commonly purchased to insure the payment of a mortgage o
Increasing Term
-features level premiums and a death benefit that increases each year over the duration of the policy term.
-amount of increase is usually expressed as a specific amount or a % of the original amount
-often used by insurance companies to fund certain ride
Convertible Term
-provides the policy owner with the right to convert the policy to a permanent insurance policy WITHOUT EVIDENCE OF INSURABILITY.
Whole life Insurance
-provides lifetime protection and includes a savings element or cash value.
-premiums for whole life policies usually are higher than term insurance
Characteristics of Whole life insurance (4)
1. Level Premium
2. Death benefit: guaranteed and remains level
3. Cash value: created by the accumulation of premium, and scheduled to equal the face amount of the policy when the insured age reaches 100 and paid to policy owner
4. living benefits: polic
Straight life (continuous premium whole life)
-basic whole life policy.
-policy owner pays the premium from the time the policy is issued until the insureds death or age 100.
-of the common whole life policies straight life will have the lowest annual premium
Limited Payment
-premiums for coverage will be completely paid-up well before age 100.
-common ones are 20 pay life and life paid up at 65.
-shorter premium-paying period than straight life so the annual premium will be higher
-well suited for those insured who do not wa
Single Premium
-to provide a level death benefit to the insureds age 100 for a one-time lump sum payment
-completely paid up after one premium and it generates immediate cash
-most companies require a minimum premium for a single premium policy
Modified Life
-type of whole life policy that charges a lower premium in the first few years usually 3-5 years then a higher premium for the remainder of the insureds life.
-the higher subsequent premium typically is higher than a straight life premium would be for sam
Graded Premium Whole life
-somewhat similar to modify life in that premiums start off relatively low and then level off at a point in the future.
-typically starts with a premium that is approximately 50% or lower than the premium of a straight life policy.
-then the premium gradu
Interest-sensitive whole life
-aka current assumption life
-fixed premium whole life policy that provides a guaranteed death benefit to age 100
-credits the cash value with the current interest rate that is usually comparable to money market rates.
-provides for a minimum guaranteed r
Equity-indexed whole life
is that the cash value is dependent upon the performance of the equity index such as the S&P 500 although there is a guaranteed minimum interest rate
-premium is fixed and the death benefit is guaranteed
Adjustable Life
-type of flexible premium policy that was developed in effort to provide the policy owner with the best of both worlds (term and permanent)
-insured typically determines how much coverage is needed and the affordable amount of premium
-insurer then determ
Universal Life
-AKA flexible premium adjustable life
-implies that the policy owner has the flexibility to increase the amount of premium going paid into the policy and to later decrease it again
-can skip paying a premium and the policy will not lapse as long as there
Two components of a Universal Life policy
-Insurance component: always annually renewable term insurance
-cash account
Statutory definition of life insurance
-applies to all life insurance contracts issued after december 31 1984
-must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy
Variable Whole life insurance
-level, fixed premium, investment-based product.
-fixed premiums and guaranteed minimum death benefit but cash value is not guaranteed and fluctuates with the performance of the portfolio
-company not sustaining the investment risk, the assets of the cont
Regulation of Variable Products (SEC and FINRA)
-dually regulated by the State and Federal Government
-due to the element of investment risk, the federal government has declared that variable contracts are securities thus regulated by the SEC, FINRA (NASD) and or federal bodies.
-also regulated by the
Joint Life (first to die)
-single policy that is designed to insure two or more lives.
-can be in the form of term insurance or permanent
-premium would be less than the same type and amount of coverage on the same individuals
-benefit is paid upon the first death only
-premium is
Survivorship Life (Second to Die)
-pays on the last death rather than first
-the joint life expectancy in a sense is extended resulting in a lower premium than that which is typically charged for joint life.
-often used to OFFSET THE LIABILITY OF THE ESTATE TAX upon the death of the last
Juvenile Life
-any life insurance written on the life of a minor.
-jumping juvenile: face amount increases at a predetermined age often 21. face amount jumps but the premium remains level
Family protection policy
-combines whole life with term insurance to cover family members in a single policy, providing coverage on every member of a family
-spouse has the opportunity to convert his or her term coverage to permanent coverage up until age 65
-children are automat
Credit Life insurance
-special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor.
-usually written as a decreasing term insurance and may be written as a group plan or an individual policy.
Taxation of Personal Life Insurance
-premiums: personal expense and are not tax deductible by the individual
-Death Benefit/Policy proceeds: not subject to income tax even if it exceeds the premiums paid
-Cash Value: policy owner is not taxed on the annual increase in cash value as this acc
Policy loans, with interest, can be repaid in any of the following ways
-by the owner while the policy is in force
-at policy surrender or maturity; subtracted from the cash value
-at the insureds death; subtracted from the death benefit
Modified Endowment Contracts (MECs)
-single premium life insurance remained as one of the few financial products offering significant tax advantages
Seven-Pay Test
-established by the IRS to determine if an insurance policy is overfunded
-cumulative premiums paid during the first 7 years of the policy must not exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed
Taxation rules that apply to MEC's Cash value
-tax-deferred accumulations
-any distributions are taxable, including withdrawals and policy loans
-distributions are taxed on LIFO basis known as interest first rule
-distributions before age 59 1/2 are subject to a 10% penalty