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chapter_5-9.pptxTerm Life Insurance
Life and Health Insurance FIN 3660
Chapter 5
Outline
Needs Met by Life Insurance
Personal Needs
Business Needs
Term Life Insurance
Characteristics of Term Life Insurance Products
Plans of Term Life Insurance Coverage
Features of Term Life Insurance Policies
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Needs Met by Life Insurance
Personal Needs
Most common personal needs that life insurance can meet are:
Dependents’ support
Estate planning
Paying debts and final expenses
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Dependents Support
Life insurance can provide funds to support the family members of a deceased loved one until they obtain new methods of support or until they adjust to living on a lower income.
The proceeds can also be used to supplement the family’s income.
In many jurisdictions, the beneficiary of a lump sum of money after the death of a loved one is usually not taxed on the money they receive.
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Estate Planning
Estate- the accumulated assets an individual owns when he/she dies.
Will- a legal document that directs how the individual’s property is to be distributed after his death.
The executor is the person who is a personal representative of the person who has died with a valid will. (administrator if they person died without a valid will)
Estate Plan- considers the amount of assets and debts that he/she is likely to have when he/she dies and how best to preserve those assets so that they can be distributed as she desires.
Life insurance is an important part of the estate plan.
Can leave home to one child and life insurance policy to the other.
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Debts and Final Expenses
A person’s death generally does not extinguish his/her debts.
In some cases the deceased estate isn’t large enough to pay his/her debts and final expenses.
If a life insurance policy is included in the estate plan, the proceeds can help pay those remaining debts.
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Business needs
Two reasons for a business to purchase life insurance:
To provide funds to ensure that the business continues in the event of the death of an owner, partner, or other key person.
To provide benefits for its employees.
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Business Continuation Insurance
An insurance plan designed to enable a business owner(s) to provide for the business’ continued operation if the owner or a key person dies.
Key Person Life Insurance- individual life insurance that a business purchases on the life of a key person.
The business owner is the beneficiary of the insurance policy if the person dies.
Buy-Sell Agreement- an agreement in which one party agrees to purchase the financial interest that a second party has in a business following the second party’s death and the second party agrees to direct his estate to sell his interest in the business to the purchasing party.
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Characteristics of Term Life Insurance Products
Provides a death benefit only is the insured dies during the period specified in the policy.
The length of the policy term varies considerably from one policy to another.
Another common type of term life insurance cover the insured until he/she reaches a specified age, usually 65 or 70.
Referred to as term to age___.
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Level Term Life Insurance
Most common plan of term insurance.
AKA Level face amount term life insurance or guaranteed level premium term insurance.
Provides a policy benefit that remains the same over the term of the policy.
Amount of initial premium and each renewal premium payable for a level term policy remains the same throughout the stated policy term.
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Decreasing Term Life Insurance
Provides a policy that decreases in amount over the term coverage.
The amount of each renewal premium payable for a decreasing term insurance policy usually remains level throughout the policy term.
Three common plans of decreasing term insurance are mortgage life insurance, credit life insurance, and family income insurance.
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Mortgage Life Insurance
A plan of decreasing term insurance designed to provide a benefit amount that corresponds to the decreasing amount owed on a mortgage loan.
The beneficiary is often a family member of the insured.
Joint Mortgage Life Insurance- provides the same benefit as a mortgage life insurance except the join policy insures the lives of two people.
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Credit Life Insurance
A type of life insurance designed to pay the balance due on a loan if the borrower dies before the loan is repaid.
Generally the loan must be a type of loan that can be repaid in 10 years or less
Premiums for credit life insurance may be level over the duration of the loan or, in cases in which the amount of the loan varies, may increase or decrease as the amount of the outstanding loan balance increases or decreases
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Family Income Coverage
A plan of decreasing term life insurance that provides to the beneficiary a stated monthly income benefit amount if the insured dies during the term of coverage.
A form of decreasing term life insurance
Most commonly purchased as a policy rider to a cash value life insurance policy.
Policy Rider is an amendment to an insurance policy that becomes apart of the insurance contract and either expands or limits the benefits payable under the contract.
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Increasing Term Life Insurance
Provides a death benefit that starts at one amount and increases by some specified amount of percentage at stated intervals over the policy term.
Often purchased as a rider to a life insurance policy and usually is just for a limited time.
Premium generally increases as the amount of coverage increases.
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Renewable Term Insurance
A term life insurance policy that gives the policyowner the option to continue the coverage at the end of the specified term without presenting evidence of insurability (proof that the insured person continues to be an insurable risk).
Renewal Provision- the provision in the policy that gives the insured the right to continue coverage without presenting evidence of insurability.
Most common limitations on renewals
The coverage may be renewed only until the insured attains a stated age.
The coverage may be renewed only a stated maximum number of times.
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Convertible Term Insurance
Gives the policyowner the right to convert the term policy to a cash value life insurance policy.
Conversion Privilege- allows the policyowner to change the term insurance policy to a cash value policy without providing evidence that the insured is an insurable risk.
Premium rate is higher when a term policy is converted into a cash policy.
Attained age conversion- premium is based on insured’s age
Original age conversion- premium rate is based on insured’s age when original term policy was issued
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Return of Premium Term Insurance
A form of term life insurance that provides a death benefit if the insured dies during the policy term and promises a return of premiums if the insured does not die during the policy term.
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Cash Value Life Insurance and Endowment Insurance
Life and Health Insurance FIN 3660
Chapter 6
Cash value life insurance vs. whole life insurance
Cash value life insurance – (permanent life insurance) provides life insurance coverage throughout the insured’s lifetime and provides a savings element, known as cash value.
Provides protection for the entire lifetime of the insured
Provides both insurance coverage and a savings element that a policyowner can use to meet financial needs during the insured’s lifetime.
Whole life insurance – a type of cash value life insurance that provides lifetime insurance coverage usually at a level premium rate that does not increase as the insured ages.
Whole life – refers to the broad classification of insurance products that are considered to be cash value insurance.
Also used to refer to a specific type of cash value insurance product.
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Whole Life Insurance
Policy loan – a loan a policyowner receives from an insurer using the cash value of a life insurance policy as security.
Cash surrender value – the amount of the cash value that a policyowner is entitled to receive upon surrender.
Premium Payment Periods
Continuous-premium whole life policy: premiums are payable until the death of the insured.
Most whole life insurance policies sold today are continuous-premium policies.
Also known as a straight life insurance policy or an ordinary life insurance policy.
Limited-payment whole life policy: a whole life policy for which premiums are payable only for a stated period of time or until the insured’s death, whichever occurs first.
They are designed to meet a policyowner’s need for life insurance coverage that continues throughout the insured’s lifetime and that is funded over a limited time.
Paid-up policy – requires no further premium payments but continues to provide coverage.
Single-premium whole life policy: a type of limited payment policy that requires only one premium payment.
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Whole Life Insurance
Modified Whole Life Insurance
Modified-premium whole life policy: a whole life policy for which the annual premium amount changes after a specified initial period (typically 5 or 10 years).
The face amount of a modified-premium policy remains level throughout the life of the policy.
Graded-premium policies - whole life policies for which premium payments are modified even more frequently.
Modified coverage policy: a whole life policy under which the amount of insurance provided decreases by specific percentages or amounts either when the insured reaches certain stated ages or at the end of stated time periods.
The annual premium for a modified coverage whole life policy is lower than for a continuous-premium whole life policy having the same initial face amount.
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Whole Life Insurance
Whole Life Insurance Covering More Than One Insured
Joint whole life insurance: same features and benefits as individual whole life insurance, except that it insures two people under the same policy.
Referred to as fist-to-die life insurance
Because coverage under a joint whole life policy ends once the policy death benefit is paid, the surviving insured may be left uninsured.
Last survivor life insurance: a variation of joint whole life insurance under which the policy benefit is paid only after both people insured by the policy have died.
Also known as second-to-die life insurance or survivorship life insurance
Family Policies: a whole life insurance policy that includes term life insurance coverage on the primary insured’s spouse and children.
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Universal Life Insurance
Universal Life (UL) Insurance – a form of cash value life insurance that is characterized by its flexible premiums, its flexible face amount and death benefit amount, and its separation of the three primary policy elements.
Separation of Policy Elements
Mortality Charges: the amount needed to cover the risk the insurer has assumed in issuing the policy.
“Cost of insurance”
Periodically deducted from a universal life insurance policy’s cash value.
Interest Rate
Universal life insurance policy guarantees that the insurer will pay at least a stated minimum interest rate on the policy’s cash value each year.
Insurer will pay a higher interest rate if economic and competitive conditions warrant.
Usually the insurer determines the current interest rate for universal life policies based on the return that its own investments are earning.
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Universal Life Insurance
Separation of Policy Elements
Expenses
A flat charge during the first policy year to cover sales and policy issue costs.
A percentage of each annual premium (such as 7 percent) to cover expenses.
A monthly administration (management) fee, sometimes referred to as a policy fee.
Surrender charges, which are specific charges imposed if the owner surrenders the policy for its cash surrender value.
Specific charges for other services such as coverage changes or policy withdrawals.
Operation of a Universal Life Insurance Policy
When an insurance company receives a universal life premium payment, the insurer first deducts the amount of any applicable expense charges. The insurer then credits the remainder of the premium to the policy’s cash value.
The policyowner can increase the cash value of a universal life policy by making additional or larger-than-required premium payments.
If the cash value of any universal life policy is not sufficient to pay the periodic mortality and expense charges, the policy will lapse, unless the policyowner takes action to keep the policy in force.
Lapse: the termination of a life insurance policy for nonpayment of premium.
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Universal Life Insurance
Flexibility Features
A universal life insurance policy gives the policyowner a great deal of flexibility, both when he purchases the policy and over the life of the policy.
Face Amount and Death Benefit: when a person buys a universal life policy, he specifies the policy’s face amount and decides whether the amount of the death benefit payable will remain equal to the face amount (as with most traditional whole life policies or will vary with changes in the policy’s cash value.
Premiums: a universal life policy may be either a flexible premium policy or a fixed premium policy.
Flexible premium universal life insurance policy – allows the policyowner to alter the amount and frequency of premium payments, within specified limits.
Fixed premium iniversal life insurance policy – requires a series of scheduled premium payments of a specified amount for a specified length of time (typically 8 to 10 years) or until the insured’s death, whichever comes first.
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Universal Life Insurance
Periodic Reports
Generally include:
The amount of the death benefit payable
The amount of the policy’s cash value
The amount of the cash surrender value, if different from the cash value
The amount of interest earned on the cash value
The amount of the mortality charges deducted
The amount of the expense charges deducted
The amount of premiums paid during the reporting period
The amount of policy loans outstanding
The amount of any cash value withdrawals
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Variable Life Insurance
Variable Life (VL) Insurance - a form of cash value life insurance in which premiums are fixed, but the death benefit and other values may vary, reflecting the performance of investment subaccounts that the policyowner selects.
Subaccount: an undivided investment account in which an insurer maintains funds that support its contractual obligations to pay benefits under its guaranteed insurance products, such as whole life insurance and other nonvariable products.
Separate account: (segregate account) an investment account the insurer maintains separately from its general account to isolate and help manage the funds placed in its variable products.
General account: an undivided investment account in which an insurer maintains funds that support its contractual obligations to pay benefits under its guaranteed insurance products, such as whole life insurance and other nonvariable products.
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Variable Universal Life Insurance
Variable Universal Life (VUL) Insurance – (flexible-premium variable life insurance) combines the premium and death benefit flexibility of universal life insurance with the investment flexibility and risk of variable life insurance.
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Endowment Insurance
Endowment Insurance – provides a policy benefit payable either when the insured dies or on a stated date if the insured is still alive on that date.
Maturity date: the date on which the insurer will pay the policy’s face amount to the policyowner if the insured is still living.
Reached either (1.) at the end of a stated term, such as 20 years, or (2.) when the insured reaches a specified age.
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Life and Health Insurance FIN 3660
Chapter 7
Supplemental Benefits
Objectives
Identify and describe three types of supplemental disability benefits that life insurance policies may provide.
Explain the coverage that an accidental death benefit rider provides and give examples of common exclusions.
Identify three types of accelerated death benefit riders and describe the differences among those riders.
Describe three types of insurance riders that expand a life insurance policy’s coverage to insure more than one individual.
Identify two types of insurability benefit riders and explain how they allow a life insurance policyowner to purchase additional insurance coverage.
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The Basics
Supplemental benefits are benefits that can be added to individual life insurance policies.
An additional premium amount is usually charged for each benefit.
Sometimes supplemental benefits are provided by a policy provision, but usually they are provided by adding riders to a life insurance policy.
This helps when customizing a policy, because a new contract is not needed to add coverage.
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Supplemental Disability Benefits
Disability benefits can be added to a life insurance policy.
One of the most common supplemental benefits is the waiver of premium for disability (WP) benefit.
Under this, the insurance waives its right to collect premiums that become due while the insured is totally disabled. The insurer pays the premiums, so a policy that builds a cash value will continue to increase.
In participating policy the insurance company continues to pay policy dividends as if the policyowner were paying premiums.
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WP Benefits
The policyowner must notify the insurance company in writing of a claim and provide proof that the insured is totally disabled as defined by the WP benefit.
Total disability is the insured’s inability to perform the essential duties of their own occupation or any other occupation for which they are reasonably suited by education, training, or experience.
The insured must be totally disabled for three to six months before the insurer will waive premium payments.
Disabilities resulting from self-inflicted injuries and injuries suffered while committing a crime are typically excluded.
In cases with variable premiums (universal and variable life insurance policies), charges that are waived vary depending on the terms of the WP benefit rider.
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Waiver of Premium for Payor Benefit
Waiver of premium for payor benefit provides that the insurance company will waive its right to collect a policy’s renewal premiums if the policyowner dies or becomes totally disabled.
Usually this is included as a rider to a juvenile insurance policy, one that is issued on the life of a child but owned and paid for by an adult.
Premium payments are only waived until the insured reaches a certain age.
A policyowner is totally disabled during the first two years of disability if they are unable to perform the essential duties of their own occupation. After that, they are considered totally disabled if they cannot perform the essential duties of any occupation for which they are reasonably suited by education, training, or experience.
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Disability Income Benefit
The disability income benefit provides a monthly income benefit to the policyowner-insured if they become totally disabled while the policy is in force.
Definition for total disability is the same as WP, as is the wait period.
Usually the income is a certain percentage of the policy’s face amount.
Generally this goes hand in hand with WP.
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Accidental Benefits
Accidental death benefit a supplemental life insurance policy benefit that provides a death benefit in addition to the policy’s basic death benefit if the insured dies as a result of an accident.
Double indemnity benefit when the amount of accidental death benefit is equal to the face amount of the life insurance policy.
Determining the precise cause of an insured’s death can sometimes be quite difficult.
Some exclusions: suicide, war related accidents, aviation-related accidents if the insured was not a passenger, and accidents resulting from the insured committing a crime.
Accidental death and dismemberment (AD&D) provides accidental death benefits and provides a dismemberment benefit payable if an accident causes the insured to lose any two limbs or sight in both eyes.
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Accelerated Death Benefits
Also known as a living benefit, this provides that a policyowner may elect to receive all or part of the policy’s death benefit before the insured’s death under certain conditions.
Usually only offered on policies with larger face amounts.
Three commonly offered types of accelerated death benefits: terminal illness benefit, dread disease benefit, and long-term care benefit.
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Accelerated Death Benefits
Terminal illness (TI) benefit a benefit under which the insurer pays a portion of the policy’s death benefit to a policyowner-insured who suffers from a terminal illness and has a physician-certified life expectancy of less than a stated time, generally 12 or 24 months.
Typically paid for by an administrative charge that the insurer assesses when a policyowner-insured elects to exercise the TI benefit.
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Accelerated Death Benefits
Dread disease (DD) benefit an accelerated death benefit under which the insurer agrees to pay a portion of the policy’s face amount to the policyowner if the insured suffers from one of a number of specified diseases.
Diseases included: life-threatening cancer, coronary artery bypass surgery, heart attack, stroke, end-stage kidney failure, AIDS
Some DD benefits include organ transplants and Alzheimer’s disease.
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Accelerated Death Benefits
Long-term care (LTC) insurance benefit ab accelerated death benefit under which the insurer agrees to pay a monthly benefit to a policyowner if the insured requires constant care for a medical condition.
The care given and the medical condition required to qualify are specified in the LTC policy rider or provision.
Premiums generally are waived on both the long-term care benefit and the basic life insurance policy.
The amount paid is generally a percentage of the policy’s face amount.
Typically there is a 90 day waiting period before benefits are payable.
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Benefits for Additional Insureds
Spouse insurance rider a supplemental life insurance policy benefit that provides term life insurance coverage on the insured’s spouse. Typically sold on the basis of coverage units. Most insurance companies do not offer more than 5 or 10 coverage units.
Children’s insurance rider a supplemental life insurance policy benefit that provides term life insurance coverage on the insured’s children. Some insurers combine spouse and children’s insurance coverage into one rider, a spouse and children’s insurance rider.
Second insured rider a supplemental life insurance policy benefit that provides term insurance coverage on the life of a person other than the policy’s insured. Can be spouse, another relative, or an unrelated person. Typically the coverage is greater than the spouse’s insurance rider.
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Insurability Benefits
Guaranteed insurability (GI) benefit a supplemental life insurance policy benefit that gives the policyowner the right to purchase additional insurance of the same type as the basic life insurance policy. The premium for the additional coverage is based on the insured’s attained age when the additional insurance is purchased. If the policyowner does not exercise the option to buy extra coverage on the specified dates, that option is lost forever, though the policyowner is permitted to exercise the next option when it comes due.
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Insurability Benefits
Paid-up additions option benefit a supplemental life insurance policy benefit that allows the owner of a whole life insurance policy to purchase single-premium paid-up additions to the policy on stated dates in the future without providing evidence of the insured’s insurability.
Premiums for the paid-up additions are based on the insured’s attained age at the time the paid-up additions are purchased.
Most riders state that if the policyowner does not exercise the purchase option for a stated number of years, then the rider will terminate. At that time, the paid-up additions already purchased remain in force, but the policyowner can no longer exercise the option to purchase new paid-up additions.
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Life and Health Insurance FIN 3660
Chapter 8
Individual Life Insurance Policy Provisions
Objectives
Describe the free-look provision of an insurance policy.
Identify the documents that make up the entire contract between the owner of a life insurance policy and the insurer.
Explain the purpose and operation of the incontestability provision.
Apply the terms of the standard grace period provision in a given situation to determine whether a life insurance policy has lapsed for nonpayment of premium.
Identify situations in which a life insurance policy can be reinstated and the conditions the policyowner must meet to reinstate the policy.
Describe the rights provided by a policy loan provision and a policy withdrawal provision, and explain the differences between a policy loan and a commercial loan.
Identify and describe the nonforfeiture options typically included in cash value life insurance policies.
Identify the exclusions that insurers sometimes include in individual life insurance policies
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Standard Policy Provisions
Free-Look Provision (“free-examination provision” or “cooling-off provision”) – gives the policyowner a stated period of time – usually 10-30 days – after the policy is delivered in which to examine the policy
The free-look period runs from the date the policy is delivered to the policyowner, not from the date of issue
During the free-look period, the policy owner has the right to cancel and receive a refund of the premium
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Entire Contract Provision
Entire Contract Provision – defines the documents that constitute the contract between the insurance company and the policyowner
Closed Contract – a contract for which only those terms and conditions that are printed in – or attached to – the contract are considered to be part of the contract
Open Contract – a contract that identifies the documents that constitute the contract between parties, but all the enumerated documents are not necessarily attached to the contract
Declaration of Insurability – a form in which a proposed insured answers specific questions about his medical history
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Contact Provision (Cont.)
In addition to defining the documents that make up the contract, the entire contract provision usually state that:
Only specified individuals – such as certain officers of the insurer – can change the contract
No change is effective unless made in writing
No change will be made unless the policyowner agrees to it in writing
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Incontestability Provision
Insurance laws in many jurisdictions impose two important limits on an insurer’s right to avoid an insurance contract on the basis of misrepresentation:
Only certain misrepresentation – referred to as material misrepresentations – give the insurer the right to avoid an insurance contract
The insurer has only a limited amount of time in which to avoid an insurance contract
Incontestability Provision – describes the time limit within which the insurer has the right to avoid the contract on the ground of material misrepresentation in the application
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Material Misrepresentation
Misrepresentation – a false or misleading statement in an application for insurance
Material Misrepresentation – a misrepresentation that is relevant to the insurance company’s evaluation of the proposed insured
A misrepresentation is considered material if, had the truth been known, the insurer would not have issued the policy or would have issued the policy on a different basis, such as with a higher premium or a lower face amount
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Operation of the Incontestability Provision
Fraudulent Misrepresentation – a misrepresentation that was made with the intent to induce the other party to enter into a contract and that did induce the innocent party to enter into the contract
Obtaining sufficient evidence to prove that a misrepresentation was fraudulent usually is quite difficult
“During the lifetime of the insured” is an important part of the incontestability clause
This phrase makes the policy contestable forever if the insured dies during the contestable period
If this phrase were not included and the insured died during the contestable period, the beneficiary could possibly delay making a death claim until after the contestable period expired
The incontestability provision is to assure policyowners and beneficiaries that, after the contestable period has ended, the insurer cannot avoid the policy on the basis of a material misrepresentation in the application for insurance.
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Grace Period Provision
Grace Period Provision- Specifies a length of time following each renewal premium due date within which the premium may be paid without loss of coverage.
Grace period- the specified time; typically 30 or 31 days. Coverage remains in force throughout that period.
If a required renewal premium is not paid by the end of the grace period, a life insurance policy typically lapses; however, cash value life insurance policies contain a nonforfeiture provision that typically allows a policyowner to continue coverage under specific circumstances even if a renewal premium is not paid by the end of the grace period.
The grace period provision contained in a universal life insurance policy applies when the cash value is insufficient to meet the policy’s monthly mortality and expense charges.
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Reinstatement Provision
Reinstatement Provision- describes the conditions that the policyowner must meet to reinstate a policy.
Reinstatement- the process by which a life insurance company puts back into force a life insurance policy that either has been terminated because of nonpayment of renewal premiums or has been continued under the extended term or reduced paid-up insurance nonforfeiture option.
The following conditions typically must be met to reinstate a policy:
The policyowner must complete a reinstatement application within the time frame stated in the reinstatement provision.
The policyowner must provide the insurance company with satisfactory evidence of the insured’s continued insurability.
The policyowner must pay a specified amount of money; the amount required depends on the type of policy being reinstated.
The policyowner may be required to either pay any outstanding policy loan or have the policy loan, including any additional accrued interest, reinstated with the policy.
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Misstatement of Age or Sex Provision
A misstatement of the insured’s age or sex is a significant error.
Most life insurance policies include a misstatement of age or sex provision that describes the action the insurer will take to adjust the amount of the policy benefit in the event that the age or sex of the insured is incorrectly stated.
Insurers adjust the face amount of the policy when they discover a misstatement of age or sex after the death of the insured.
If the misstatement is discovered before the death of the insured, the insurer may give the policyowner the option to pay- or receive as a refund- any premium amount difference caused by the misstatement instead of having the insurer adjust the policy’s face amount.
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Policy Loans and Policy Withdrawls
Cash value life insurance policies typically grant the policyowner the right to borrow money from the insurer by using the cash value of the policy as security for the loan.
Policy Loan Provision- specifies the terms on which the policyowner of a cash value insurance policy can obtain a loan against the policy’s cash value.
Some policy loan provisions allow the policyowner to take out a loan in an amount that does not exceed the policy’s cash value less one year’s interest on the loan.
Policy loan vs. commercial loan:
The policyowner is not legally obligated to repay a policy loan.
Policy loan can be repaid at any time.
The insurance company does not perform a credit check on the policyowner for a policy loan.
Policy Withdrawal Provision-permits the policyowner to reduce the amount of the policy’s cash value by withdrawing up to the amount of the cash value in cash.
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Nonforfeiture Provision
Nonforfeiture Provision- sets forth the options available to the owner of a cash value policy if the policy lapses or if the policyowner decides to surrender- or terminate- the policy.
Nonforfeiture options: cash payment nonforfeiture option, two continued insurance coverage options, and the automatic premium loan option.
Most policies include an automatic nonforfeiture benefit which is a specific nonforfeiture benefit that becomes effective automatically when a renewal premium for a cash value life insurance policy is not paid by the end of the grace period and the policyowner has not elected another nonforfeiture option.
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Cash Payment Nonforfeiture Option
Cash Payment Nonforfeiture Option- states that a policyowner who discontinues premium payments can elect to surrender the policy and receive the policy’s cash surrender value in a lump-sum payment.
Cash value policies include a chart that lists cash surrender values at various times, and these policies describe the method used to compute those values.
The amount of cash value actually available to the policyowner upon surrender of the policy may not be the exact cash surrender value amount described in the policy.
After additions and subtractions have been made, the amount the policyowner receives is called the net cash surrender value.
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Nonforfeiture (Cont.)
Reduced paid-up insurance nonforfeiture option- the policy’s net cash surrender value is used as a net single premium to purchase paid-up life insurance of the same plan as the original policy.
The premium charged for the paid-up insurance is based on the insured’s attained age when the option goes into effect.
Policies including this option typically contain a chart listing the amount of reduced paid-up insurance that is available each year for the first 20 years the policy is in force.
Any supplemental benefits that were available on the original policy are not usually available when the policy is continued as a reduced paid-up insurance.
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Nonforfeiture (Cont.)
Extended Term Insurance Nonforfeiture Option- the insurance company uses the policy’s net cash surrender value to purchase term insurance for the full coverage amount provided under the original policy, for as long a term as the net cash surrender value can provide.
Life insurance policies that contain the extended term insurance option typically contain a chart showing the length of time the original face amount of the policy will be continued in force under the extended term option for each of the first 20 policy years.
Because of the way they usually operate, universal life insurance policies typically do not include an extended term insurance nonforfeiture option.
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Automatic Premium Loan Option
Automatic Premium Loan (ALP) Option- the insurer will automatically pay an overdue premium for the policyowner by making a loan against the policy’s cash value as long as the cash value equals or exceeds the amount of the premium due.
The use of the ALP option keeps the original policy in force for the full amount of coverage, including all supplemental benefits.
Universal life insurance policies usually do not include an ALP provision because a similar benefit is already provided in these policies as apart of their monthly cash value deduction mechanism.
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Life Insurance Policy Exclusions
Exclusions- provisions that describe circumstances under which the insurer will not pay the policy proceeds following the death of the insured.
Suicide Exclusion Provision- states that policy proceeds will not be paid if the insured dies as the result of suicide as defined by the policy within a specified period following the date of policy issues.
Other exclusion can include:
War Exclusion Clause- the insurer will not pay the policy proceeds if the insured’s death results from war or an act of war.
Hazardous Activities Exclusion Provision- the insurer will not pay the policy proceeds if the insured’s death results from specified dangerous activities such as mountain climbing, sky diving, or scuba diving.
Aviation Exclusion Provision- the insurer will not pay the policy proceeds if the insured’s death results from aviation-related activies.
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Sample Whole Life Insurance Policy
Insured John Doe
Age 35
Face Amount $100,000
Policy Date August 1, 2015
Type Whole Life Paid Up at 90
Participating
Premium $1533/year for 55 years
Policy Terms
Owner John Doe
Beneficiary Jane Doe
Sample Table of Guaranteed Values
End of $100,000
Policy August Cash Paid-Up Extended Term
Year 1 Value Insurance Insurance To
10 2015 11,411 37,400 Oct 13, 2043
15 2030 19,629 51,900 Jun 19, 2051
Life Insurance – Example 1
John Doe terminates the policy on August 1, 2025.
He selects the extended term option.
John dies on December 12, 2043.
How much does Jane receive?
A) 0
B) $11,411
C) $37,400
D) $100,000
E) None of the above
Life Insurance – Example 2
What if John Doe had selected the Paid-Up
insurance option instead? How much does Jane receive?
A 0
B $11,411
C $37,400
D $100,000
E None of the above
Statement of Policy Costs and Benefit Information
Dividend Choices
Reduce Premium
Paid-Up Additions
Section 1 - The Contract
Life Insurance Benefit
Entire Contract; Changes
Incontestability
Suicide
Misstatement of Age or Sex
Life Insurance – Example 3
John Doe commits suicide on August 2, 2015, the day after the policy was issued? How much does Jane receive?
A 0
B $1533
C $50,000
D $100,000
E None of the above
Section 2 - Ownership
The Owner
Transfer of Ownership
Collateral Assignment
Section 3 - Premiums and Reinstatement
Premium Payment
Payment
Frequency (Assume annual)
Grace Period - 31 days
Premium Refund at Death (Ignore for assignment)
Reinstatement
Section 4 - Dividends
Annual dividends
Use of dividends
Paid-up additions
Dividend accumulations
Premium payments
Dividend at death
Cash Values, Extended Term and Paid-Up Insurance
Cash Value
Extended Term Insurance
Paid-Up Insurance
Cash Surrender
Table of Guaranteed Values
Life Insurance – Example 4
John keeps the policy in force for 15 years and then surrenders it for the cash value. During that time he has paid a total of $22,995 in premiums (15 x $1533) and received a total of $7,995 in dividends. How much of the policy proceeds are taxable income?
A) 0
B) $4,629
C) $36,900
D) $85,000
E) None of the above
Loans
Loans
Policy Loan
Premium Loan
Loan Value
Policy Debt
Loan Interest
Specified Rate (4%)
Variable Rate
Life Insurance Policy Ownership Rights
Life and Health Insurance FIN 3660
Chapter 9
Life Insurance Policy Ownership Rights
An insurance policy is a contract between the insurer and the policyowner and is subject to the rules of contract law.
Property – a bundle of rights a person has with respect to something.
Real Property – land and whatever is growing on or attached to the land.
Personal Property – all property other than real property.
Tangible Property – property that has physical form, such as automobiles, jewelry, or clothing.
Intangible Property – property that represents ownership of a legal right, such as a contractual right.
Ownership of Property – the sum of all the legal rights that exist in that property.
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Naming the Beneficiary
Class designation – a beneficiary designation that identifies a certain group of persons, rather than naming each person.
Primary and Contingent Beneficiaries
Primary (first) Beneficiary – the party designated to receive the policy proceeds following the death of the insured.
Contingent (second or successor) Beneficiary – receives the policy proceeds only if all designated primary beneficiaries have predeceased the insured.
Insurers usually prefer that policyowners name at least a primary and a contingent beneficiary.
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Naming the Beneficiary
Changing the Beneficiary
Right of revocation – the right to change the beneficiary designation.
Revocable beneficiary – a beneficiary designation is said to be revocable if the policyowner has the unrestricted right to change the designation during the life of the insured.
Vast majority of beneficiaries of life insurance policies are revocable beneficiaries.
Can only be made during the insured’s lifetime.
Vested interest – a property right that has taken effect and cannot be altered or changed without the consent of the person who owns the right.
Irrevocable beneficiary – a beneficiary designation is said to be irrevocable if the policyowner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.
Policyowner may at any time designate a beneficiary as an irrevocable beneficiary.
Under certain circumstances, a policyowner may be able to name a new beneficiary, even if the original beneficiary designation is irrevocable.
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Mode of Premium Payment
Most individual life insurance policyowners pay periodic renewal premiums to keep their policies in force.
Premium payment mode – the frequency at which renewal premiums are payable.
Renewal premiums for an individual life insurance policy generally are stated as an annual premium amount due.
Insurers seek to keep their administrative costs down by requiring scheduled renewal premium payments to be at least equal to a stated minimum amount.
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Policy Dividends
Participating policy: (par policy) is a type of policy under which the policyowner shares in the insurance company’s divisible surplus.
Nonparticipating policy: (nonpar policy) is a type of policy under which the policyowner does not share in the insurer’s surplus.
Divisible surplus: a portion of an insurance company’s surplus set aside specifically for distribution to owners of participating policies.
Policy dividend: a policyowner’s share of the divisible surplus.
Dividend options: specified methods by which the owner of a participating life insurance policy or participating annuity may receive policy dividends.
Automatic dividend option: a specified policy dividend option that the insurer will apply if a policyowner does not choose an option.
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Policy Dividends
Cash Dividend Option – the insurance company sends the policyowner a check in the amount of the policy dividend that was declared.
Premium Reduction Dividend Option – the insurer applies policy dividends toward the payment of renewal premiums. Unless a policy has been in force for many years, the annual policy dividend usually is not large enough to pay an entire annual renewal premium.
Policy Loan Repayment Dividend Option – the insurer applies policy dividends toward the repayment of an outstanding policy loan. The amount of the policy dividend usually is applied first to repay any outstanding interest on the loan and then to repay the loan principal.
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Policy Dividends
Accumulation at Interest Dividend Option – the policy dividends are left on deposit with the insurer to accumulate at interest.
Paid-up Additional Insurance Dividend Option – the insurer uses any declared policy dividend to purchase paid-up additional insurance on the insured’s life.
Additional Term Insurance Dividend Option – the insurer uses each policy dividend to purchase one-year term insurance on the insured’s life.
Insurers often limit to the amount of the policy’s cash value the maximum amount of one-year term insurance that can be purchased each year.
Before a policyowner is permitted to change from another dividend option to the additional term insurance option, insurers usually require evidence of the insured’s insurability.
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Transfer of Policy Ownership
If the owner of a life insurance policy has contractual capacity, then she has the right to transfer ownership of some or all of her rights in the policy.
Transfer of Ownership by Assignment
Assignment: an agreement under which the policyowner transfers some or all of his ownership rights in the policy to another party.
To make a valid assignment of an insurance policy, the policyowner must have contractual capacity.
May not infringe on the vested rights of an irrevocable beneficiary.
An assignment that is made for illegal purposes, such as speculating on a life, is invalid.
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Transfer of Policy Ownership
Types of Assignment – an assignment may take one of two forms:
Absolute Assignment: an assignment under which a policyowner transfers all of his policy ownership rights to the assignee.
Collateral Assignment: a temporary assignment of the monetary value of a life insurance policy as collateral—or security—for a loan.
The collateral assignee’s rights are limited to those ownership rights that directly concern the monetary value of the policy.
The collateral assignee has a vested right to the policy’s monetary values, but that right is limited.
The collateral assignee’s rights to the policy values are temporary.
Assignment Provision – describes the roles of the insurer and the policyowner when the policy is assigned.
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Transfer of Policy Ownership
Transfer of Ownership by Endorsement
Many life insurance policies issued today specify a simple, direct method of transferring all the policy’s ownership rights.
Endorsement method – policy ownership is completely transferred without requiring the policyowner to enter into a separate assignment agreement.
The right to change the policy’s owner is generally specified in the change of ownership provision in the policy.
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Right to Receive Policy Proceeds
Upon an insured’s death, the beneficiary has a vested right to receive the policy proceeds.
Identifying Who is Entitled to Policy Proceeds
No Surviving Beneficiary : if no beneficiary has been named or none of the named beneficiaries is living when the insured dies, then the policy proceeds typically are paid to the policyowner, if the policyowner is living. If the policyowner is deceased, then the proceeds are paid to the policyowner’s estate.
-- preference beneficiary clause (succession beneficiary clause): states that if the policyowner does not name a beneficiary, then the insurer will pay the policy proceeds in a stated order of preference.
Insured and Beneficiary Die in a Common Disaster
-- common disaster: the insurer and the beneficiary die in the same accident; the accident or disaster was common to more than one person.
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Right to Receive Policy Proceeds
Insured and Beneficiary Die in a Common Disaster
-- Simultaneous death act: governs how insurance companies are to evaluate common-disaster situations.
-- Survivorship clause: states that the beneficiary must survive the insured by a specified period, usually 30 or 60 days, to be entitled to receive the policy proceeds.
Beneficiary Wrongfully Kills the Insured
-- Permitting someone to profit from the wrongful killing of another person is not in the public interest.
-- Laws in many countries disqualify a beneficiary from receiving the policy proceeds if the beneficiary wrongfully and intentionally killed the insured.
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Calculating the Amount of the Benefit Payable
The insurer first adds together the following items:
Basic death benefit payable – the policy’s face amount. However, if the policy was in force under the reduced paid-up insurance nonforfeiture option when the insured died, then the amount of the basic death benefit payable is less than the face amount.
The amount of any accidental death benefits payable
The amount of any declared but unpaid policy dividends
The amount of any accumulated policy dividends, including interest, left on deposit with the insurer
The face amount of any paid-up additions
The amount of any unearned premiums paid in advance. Policyowners sometimes pay premiums before those premiums are due.
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Calculating the Amount of the Benefit Payable
After totaling the amount of the foregoing items, the insurer then subtracts the following items from that total:
The amount of any outstanding policy loans, including any unpaid interest.
The amount of any premium due and unpaid at the time of the insured’s death. This item appears when the insured dies during the policy’s grace period before the premium due has been paid.
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Paying Policy Benefits Under a Settlement Option
Settlement option (optional modes of settlement) – alternative methods that the owner or beneficiary of a life insurance policy can elect for receiving payment of the policy proceeds.
Settlement option provision – grants a policyowner or a beneficiary several choices as to how the insurance company will distribute the proceeds of a life insurance policy.
Payee – the person or party who is to receive the policy proceeds under a settlement option.
Contingent payee (successor payee) – receives any proceeds still payable at the time of the payee’s death.
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Paying Policy Benefits Under a Settlement Option
Interest Option
A settlement option under which the insurance company invests the policy proceeds and periodically pays interest on those proceeds to the payee.
Fixed Period Option
A settlement option under which the insurance company agrees to pay policy proceeds in equal installments to the payee for a specified period of time.
Fixed Amount Option
A settlement option under which the insurance company pays equal installments of a stated amount until the policy proceeds, plus the interest earned, are exhausted.
Life Income Option
A settlement option under which the insurance company agrees to pay the policy proceeds in periodic installments over the payee’s lifetime.
Life annuity: an annuity that provides periodic income payments for at least the lifetime of a named individual.
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Interest Option
Interest Option
A settlement option under which the insurance company invests the policy proceeds and periodically pays interest on those proceeds to the payee
The payee generally has the right to withdraw all or part of the policy proceeds at any time or to place all of the proceeds under another settlement option.
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Fixed Period Option
Fixed Period Option
A settlement option under which the insurance company agrees to pay policy proceeds in equal installments to the payee for a specified period of time.
The amount of each installment paid under the fixed period option depends primarily on the amount of the policy proceeds, the interest rate, and the length of the payment period that the policyowner or beneficiary chooses.
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Fixed Amount Option
Fixed Amount Option
A settlement option under which the insurance company pays equal installments of a stated amount until the policy proceeds, plus interest earned, are exhausted.
The number of installments that the insurer will pay depends on the amount of the policy proceeds, the interest rate, and the fixed amount selected.
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Life Income Option
Life Income Option
A settlement option under which the insurance company agrees to pay the policy proceeds in periodic installments over the payee’s lifetime.
Life Annuity
An annuity that provides periodic income payments for at least the lifetime of a named individual.
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