Chapter 3: Types of Policies and Riders

Question 1

Endow (Mature)

Answer 1

The maturity date or time at which the policy’s CASH VALUE EQUALS FACE AMOUNT and the proceeds are paid to the policy owner.

Question 2

Face Amount (Death Benefit/Limit of Liability/Policy Proceeds)

Answer 2

The death benefit amount payable on a life insurance policy. In other works, the amount of coverage the policy provides. This is sometimes referred to as the limit of liability.

Question 3

Cash Value

Answer 3

Money accumulated in a permanent policy that the policyowner may borrow as a policy loan or receive if the policy is surrendered before it matures.

Question 4

Rider

Answer 4

An added benefit attached to the policy that modifies existing coverage. A rider is usually added at the time of application and typically requires an INCREASE in premium.

Question 5

Term Insurance

Answer 5

• Considered PURE INSURANCE and provides a PURE DEATH BENEFIT
• Does not offer any cash value or living benefits
• Premiums paid strictly purchase death benefits, and because of this, term policies are less expensive in the early years compared to permanent forms of insurance.
• Offers TEMPORARY life insurance protection for a specified period of time (as short as 1 year or for a specific number of years, such as 5, 10, or 20 years.)
• Can also be purchased to provide coverage up to a specific age, such as 65.
• Premium is LEVEL for duration of stated term. The low, initial premium outlay when the insured is young can increase at renewal or upon conversation, and as the insured’s age advances, the policy can become more expensive.
• Coverage can be written separately or as a rider. Rates based on underwriting class, age and gender of insured, and upon the length of time protection is provided.

Ex. Rates are higher for a 10-year level term than for a 5-year level term.

Question 6

Types of Term Policies

Answer 6

• Level
• Decreasing
• Credit Life Insurance
• Increasing
• Annual Renewable Term
• Re-Entry Term Option

Question 7

Level Term

Answer 7

The death benefit and the premiums REMAIN LEVEL during the policy term. MOST group life insurance is written with a level term death benefit.

Question 8

Decreasing Term

Answer 8

Death benefit DECREASES, but premiums REMAIN LEVEL for the policy term; often utilized to pay off outstanding mortgage balances. Often such policies are sold as mortgage protection, with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies, the proceeds of the policy can be used to pay off the mortgage. The premiums paid for decreasing term are LOWER than the premiums payable for level term since the benefit decreases throughout the term of the policy.

Question 9

Credit Life Insurance

Answer 9

A special form of DECREASING TERM. Unlike the standard decreasing term policy, credit life automatically names the CREDITOR AS THE BENEFICIARY - there is no option.The policy cannot be written for more than the outstanding debt, since that is the limit of the creditor’s insurable interest. Once the load is paid, the policy ends.

Can be obtained as an individual, but it is usually sold on a group basis to a creditor, such as a bank, finance company, or a company selling high priced items on an installment plan. Policy generally pays outstanding balance of debt at the time of the borrower’s death, subject to policy maximums. Debts covered in this way include:

• Personal loans
• Loans to cover the purchase of appliances, motor vehicles, mobile homes, and farm equipment
• Educational loans
• Bank credit and revolving check loans
• Mortgage loans, etc.

Question 10

Increasing Term

Answer 10

The death benefit INCREASES over the life of the policy while the premiums REMAIN LEVEL. This type of term is normally written as a rider to provide cost of living or return of premium benefits.

Question 11

Annual Renewable Term

Answer 11

The simplest form of term life insurance is for a term of ONE YEAR. The death benefit REMAINS LEVEL and the premiums INCREASE ANNUALLY as the policy renews. While it is very inexpensive initially compared to other types of life insurance, over time it can become cost prohibitive. The death benefit is paid by the insurer if the insured dies ONLY while the policy is in force.

Question 12

Re-Entry Term Option

Answer 12

Term policies with this option allow the insured, upon the end of the original term, to renew based on ATTAINED AGE and may qualify at a discounted rate by providing evidence of insurability. Typically, with an annual renewable term policy, the term automatically renews as long as the premiums are paid. However the Re-Entry term option will allow the insured to renew at a LOWER RATE than renewable term, as long as the insured meets the qualifications of insurability.

Question 13

Renewable

Answer 13

Benefit that will renew the contract on a renewal date WITHOUT evidence of insurability. The policy may be a one (annual), five, ten, or twenty year renewable contract, with premiums increasing at the beginning of each renewal period. The renewal premium is based upon ATTAINED AGE. Renewability is important because the risk is that the insured’s health may deteriorate and the insured may be unable to obtain a policy at the same rates, or even at all, leaving the insured without coverage. Level term policies may offer the option of being renewable for an additional premium.

Question 14

Convertible

Answer 14

The right to convert an existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract. Premium can be based upon attained or issue age. Premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond. If the conversion is based on the issue or original age, back premiums plus interest will be required to be paid at the time of conversion.

Question 15

Special Features

Answer 15

• Renewable
• Convertible

These special features are typically available only on LEVEL TERM insurance policies, and an additional premium may be charged. A renewable and convertible term policy will cost MORE than a level term policy.

Question 16

Permanent Insurance - Traditional Whole Life Characteristics

Answer 16

• Policy matures (endows) at insured’s age 100 (or 121 if based on 2001 Mortality Table). If insured is still living at this time, face amount is paid to owner.
• As cash value increases, net amount at risk decreases
• Level premium AND level face amount
• Traditional policies earn a specified guaranteed rate of return
• Owner can borrow against the policy, once cash value accumulates for certain number of years (typically 3)
• Cannot be convertible or renewable

Question 17

Ordinary Whole Life

Answer 17

• Provides protection and cash value accumulation to age 100
• Fixed level premium payments, which may be structured as:
• Straight Life or Continuous Premium
• Limited Payment
• Single Premium

Question 18

Straight Life (or Continuous Premium)

Answer 18

Premium is level and payable to age 100 or the death of the insured, whichever comes first. The face amount REMAINS LEVEL throughout the life of the policy. This policy has the HIGHEST total premium outlay.

Question 19

Limited Payment

Answer 19

• Premium payments are for a specified period of time, such as 20-Pay Life or 30-Pay Life, or a specified age, like Life Paid up at 65.
• Face amount (death benefit) REMAINS LEVEL and cash value continues to earn interest and mature at age 100
• Annual premium is higher than Straight Life, but it is paid for a shorter period of time and will have a lower premium outlay**

Question 20

Single Premium

Answer 20

• Entire premium is paid in a lump sum at time of purchase and creates immediate cash value.
• Face amount (death benefit) REMAINS LEVEL and cash value continues to ear interest and mature at age 100.
• LOWEST total premium outlay for the life of the policy

Question 21

Indeterminate Premium

Answer 21

• Provides adjustable premiums
• Company will charge a “current” premium based on its current estimate of investment earnings, mortality, and expense costs. If estimates change in later years, company will adjust the premium accordingly, but never above the maximum guaranteed premium stated in the policy.

Question 22

Modified Premium Whole Life

Answer 22

• Provides LEVEL death benefit (face amount) and requires that premiums be paid for the life of the policy, to age 100.
• Premiums DO NOT remain level - begins with lower premium and then increases after 5 years and remains level throughout the balance of the policy.
• This policy was designed for individuals who cannot afford premiums of ordinary whole life in the earlier years.
• Policy DOES NOT offer immediate cash value and will take longer to accumulate. due to lower premiums in the first few years.

Question 23

Adjustable Life

Answer 23

• Type of permanent life insurance that combines features of term and whole (permanent) life coverage, giving policyowners the ability to change characteristics as their needs over time.
• Most appropriate for those whose income is expected to fluctuate from year to year.
• All common features of level premium cash value life insurance are still present.
• Limit period of protection (to age 100 or shorter), include (with evidence of insurability) or decrease the face amount with insurability, raise or lower premium amount, and change length of premium payment.
• Changes can be exercised ANNUALLY and are not retroactive and changes can only be made on policy anniversary date, if approved by insurer.

Question 24

Nontraditional Whole Life (interest/Market - Sensitive) -

Current Assumption or Interest-Sensitive Whole Life

Answer 24

• Insurance company can change premiums or interest rate being credited to the account based on current money market rates
• Policy has a guaranteed minimum death benefit, but may increase based on the growth of the cash value
• if rates increase, policy owner pays a reduced premium or cash value will increase at faster rate
• If cash value increases too quickly, the policy could mature prior to age 100
• To prevent this from happening, insurer will provide corridor of protection to keep policy from endowing. This increase is provided with no evidence of insurability.

Question 25

Nontraditional Whole Life (interest/Market - Sensitive) - Indexed Universal Life (Equity Indexed)

Answer 25

• Gives policyowners the opportunity to decide the percentage of cash value that is invested in traditional fixed income security. Remainder of the cash value is invested in an equity index account linked to a stipulated stock index (usually a S & P 500.)
• Policy typically guarantees the principal amount in the indexed account.

Question 26

Nontraditional Whole Life (interest/Market - Sensitive) - Universal Life (Flexible Premium Adjustable Life Insurance)

Answer 26

• Features insurance protection and savings element, the cash value grows on a tax-deferred basis.
• UL is an “unbundled policy” meaning the individual elements of the policy and premium are credited to the account separately, after premium is paid.
• Level of flexibility and features include:
• • Adjustable face amount
• • Mortality charges deducted monthly from cash value. Maximum charge established. Protection is considered annual renewable term.
• • Expense charges deducted from the cash value (monthly). Maximum charge established.
• • Interest is credited to the cash value on a monthly basis - will never be less than guaranteed minimum.
• • Flexible premium
• • General account
• • Loans and partial withdrawals

Question 27

Universal Life Death Benefit Options

Answer 27

Allows two death benefit options - Option A or Option B:
Option A - Pays face amount of policy and provides a level death benefit. As cash value increases, company’s risk decreases. If cash value approaches face amount, death benefit must increase to provide for the required amount at risk. Minimum separation between cash value and death benefit is called “risk corridor” which is automatic and does not require evidence of insurability. Prevents policy from maturing too early. Will benefit from larger cash value accumulation.
Option B - Pays face amount stated in contract, which is level term plus any cash values accumulated over the years. This provides for an increasing death benefit. mortality charge is greater for this option. Will benefit from larger death benefits.

Question 28

Risk Corridor

Answer 28

Minimum separation between cash value and death benefit - prevents policy from maturing too early.

Question 29

Variable Life

Answer 29

• Benefits VARY based on market conditions
• FIXED premium determined by insurer and remains fixed and level throughout contract
• Accounts (General AND Separate)
• No guaranteed minimum return on cash value in separate account
• Can take out policy loan, typically 75-90% of cash value can be borrowed
• Need additional FINRA registration to sell

Question 30

Variable Universal Life (VUL)

Answer 30

• Combination of Variable and Universal policies
• Flexible premiums and adjustable death benefits - Option A and Option B available to policyowners
• DOES NOT have a general account, only a separate account. Values in policy will fluctuate based on performance of separate account.
• Can take out policy loan, typically 75-90% of cash value can be borrowed
• Need additional FINRA registration to sell

Question 31

Juvenile Insurance

Answer 31

• Any policy written on the life of a minor
• Popular type is called “Jumping Juvenile” because ti automatically increases the face amount at a given age (usually age 21 to 25) without evidence of insurability.
• Premium remains level for life of the policy, and the usual increase in the face amount is 5 times the issue amount
• Protects the insured’s future insurability, and a parent is usually the premium payor

Question 32

Joint Life (FIRST TO DIE)

Answer 32

• Whole life policy that is written to cover 2 or more lives.
• Death benefit is paid when FIRST insured dies. Once payment is made, policy no longer exists.
• Premiums based upon a joint age (average age of both insureds, resulting in a lower premium than two separate policies)
• Provides income protection for both spouses when both have earned income.

Question 33

Joint Survivorship Life (LAST TO DIE)

Answer 33

• Whole life policy that is written to cover 2 or more lives.
• Death benefit is paid when LAST insured dies. - Premiums based upon a joint age (average age of both insureds, resulting in a lower premium than two separate policies)
• Policy is often purchased to provide a lump sum benefit to pay estate taxes once the second spouse dies.

Question 34

Return of Premium Term (ROP)

Answer 34

TERM policy is written for specified number of years (20-30 years.) If insured is still living at the end of the term, the policy will provide a refund o all the premiums paid into the policy. Typically, these policies have a higher premium than level term insurance.

Question 35

Disability Riders

Answer 35

• Waiver of Premium
• Payor Benefit (Waiver of Payor’s Premium)
• Disability Income Benefit
• Waiver of Cost of Insurance

Question 36

Waiver of Premium

Answer 36

• If insured becomes totally disabled, company waives premiums for the duration of disability
• Usually a maximum 6-month elimination period before premiums are waived
• Rider drops at an age stipulated in the contract, such as age 65, which means disability must have occurred prior to this age for premiums to be waived.
• Once on claim, waiver continues until disability ends or policy ends.
• Cash value and dividends continue as under normal premium payments

Question 37

Payor Benefit (Waiver of Payor’s Premium)

Answer 37

If payor (policyowner) dies or becomes disabled and is unable to make premium payments, insurer will waive the premiums for a specified period of time. Because rider is commonly added to a juvenile policy, the payor (usually a parent) typically must show evidence of insurability before rider can be added to policy.

Question 38

Disability Income Benefit

Answer 38

• In the event of total disability, and after initial waiting period (such as 6 months), premium are waived and the insured is paid a monthly income.
• The monthly disability income benefit is typically limited to a percentage, usually 1% of the face value (death benefit).
• Benefit paid from the rider DOES NOT reduce death benefits paid upon death.

Question 39

Waiver of Cost of Insurance

Answer 39

Waives the deduction of the monthly cost of insurance and expense charges associate with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability. Typically, the disability must occur prior to a stipulated age.

Question 40

Term Riders

Answer 40

May be attached to any permanent, interest sensitive, or term policy to provide additional insurance protection for a FIXED period of time. If need for additional coverage is temporary, a term rider is more cost effective than buying another policy.

Question 41

Riders Covering Additional Insureds

Answer 41

• Spouse (Other Insured) Rider
• Child Rider
• Family Rider
• Nonfamily Rider

Question 42

Spouse (Other Insured) Rider

Answer 42

Provides level term coverage on the life of an insured’s spouse. Under the basic policy, this rider also provides a conversion provision that permits the spouse to convert to permanent coverage without evidence of insurability prior to the termination of the rider or upon death of the insured.

Question 43

Child Rider

Answer 43

Provides level term coverage on the life of ALL the insured’s children. this rider is usually offered at one premium rate and may cover newborns after 14 days of life.

Adopted children can be added to the coverage without increasing the premium. The children have coverage to a specified age (21 to 25) and are usually given the option to convert to a permanent policy without evidence of insurability.

Question 44

Family Rider

Answer 44

Combination of writing both Spouse and Child Rider on one policy. This may be written as a policy or a rider, but in the market today it is normally written as a rider.

Usually family members are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse, and $1,000 on each child.

Question 45

Nonfamily Rider

Answer 45

Covers an additional insured with an insurable interest, such as a business partner

Question 46

Riders Affecting the Death Benefit Amount

Answer 46

• Accidental Death Benefit (Double or Triple Indemnity)
• Accidental Death and Dismemberment
• Guaranteed Insurability
• Return of Premium (ROP)
• Return of Cash Value
• Cost of Living (COL)

Question 47

Accidental Death Benefit (Double or Triple Indemnity)

Answer 47

• In the event of a claim, the policy normally pays double or triple the face amount if death was a result of an accident.
• This rider may be called a multiple indemnity rider and pay multiple times the face amount.
• Benefit is payable only if death occurs before a specific age, within 90 days of the accident.
• Does not add any additional values to the base policy, but may be added to ANY TYPE of individual policy.
• Among other exclusions, death due to sickness is excluded.
• Rider typically expires at age 65

Question 48

Accidental Death and Dismemberment

Answer 48

• This rider provides a benefit in addition to the base of the policy
• Rider pays 100% of amount of the rider, known as the principal sum, upon accidental death.
• If insured suffers an accidental dismemberment loss (such as loss of limb or eyesight) rider pays up to 50% of the rider amount, known as capital sum
• Double dismemberment (loss of 2 limbs or total eyesight) are provided at 100% of the rider.
• Benefits of the rider are only payable if the loss is accidental and occurs within 90 days of the accident
• Typically expires at age 65

Question 49

Guaranteed Insurability

Answer 49

• Allows insured to purchase stated amounts of additional insurance every 3 years based on certain ages (specifically 25, 28, 31, 34, 37 and 40), events, or specified dates without evidence of insurability, up to a maximum age (usually 40).
• Premiums are based on attained age
• Events for which allow for insured to obtain additional coverage in between the specified ages, include marriage and birth or adoption of a child
• Rider normally limits insured to acquire additional amounts of the same type of coverage already in force and the insurer often limits the amount of coverage that may be added.
• Rider drops at 40

Question 50

Return of Premium (ROP)

Answer 50

Uses Increasing Term insurance to provide coverage equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount of the policy plus the benefit of the rider, equaling the total amount of premiums paid.

Question 51

Return of Cash Value

Answer 51

Increasing Term insurance equal to the cash value. This rider provides the payment of term insurance equal to the cash value amount at time of death. However this DOES NOT relieve the obligation to pay loans from the claim proceeds at time of death.

Question 52

Cost of Living (COL)

Answer 52

Enables the insured to purchase more insurance each year to help offset increasing insurance needs due to inflation. The amount that can be purchased is based on increases in the cost of living index. This additional coverage is usually available at low rates, and evidence of insurability does not need to be provided for such increases.

Question 53

Accelerated Death Benefit Riders

Answer 53

Provide for an early payment of a portion of the face amount (death benefit) PRIOR TO DEATH. Provides tax free access to policy benefits based on an insured qualifying as terminally ill (death is expected within 12-24 months), or chronically ill, such as permanent confinement in a nursing home, LTC if they are unable to perform activities of daily living or another acute illness that requires LTC, such as AIDS or the need for an organ transplant. Benefits DO NOT include disability income and accelerated death benefits do not need to be repaid if insured’s health improves.
Two riders include:
- Living Needs Rider
- Long-Term Care Rider

Question 54

Living Needs Rider

Answer 54

• Allows the early payment of a portion of the face amount before death if the insured becomes terminally ill, usually with 12-24 months of life expectancy.
• Typically equal to 50-90% of the policy’s face amount
• Upon death, early payment will be deducted from the benefit PAID TO THE BENEFICIARY
• Rider is normally provided without a premium charge because it is an advance of the death benefit.

Question 55

Long-Term Care Rider

Answer 55

• Provides up to 100% of the policy benefits if the insured qualifies for long-term care benefits as defined in the rider, such as the inability to perform 2 out of the 6 activities of daily living.
• Any payout is an acceleration of the death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary
• Amount of protection is determined at the time of policy purchase
• LTC benefits are paid income tax free after the insured meets the qualifying requirements

Question 56

Accelerated Death Benefit Rider Effect on Death Benefit

Answer 56

After the accelerated death benefits are paid an any lost interest to the insurer is deducted, the insurer must pay the balance of the face amount to the beneficiary.

Question 57

Accelerated Death Benefit Rider Exclusions and Restrictions

Answer 57

• The accelerated death benefit cannot contain exclusions or restrictions that are not also exclusions or restrictions in the policy.
• Typically exclusions apply to suicide, intentional self-inflicted injury, war, or engaging in illegal occupations or activities.

Question 58

Viatical Settlement

Answer 58

Agreement between a third party who specializes in such transactions (viatical settlement provider) and a life insurance policyowner (viator) insuring the life of an individual with a life-threatening or terminal illness.

Normally the terminally-ill insured must have a life expectancy of 2 years or less.

The first purchases the policy at 60 to 80% of the dace amount (death benefit), expecting to profit as the new policyowner at the time of claim. The insured is provided with a tax exempt discounted value during the terminal illness, but must relinquish all ownership rights to the buyer.

***The risk to the purchaser is that the insured does not die within the time period anticipated and could lose money on the transaction.

Question 59

Life Settlement

Answer 59

Similar to a viatical settlement, but there is NO requirement for the insured to be terminally ill in order for this to occur. A policyowner may choose to sell their policy because premiums are too high or they want to purchase a different policy.