Chapter 2 - Types of Life Insurance Policies Flashcards
Types of Life Insurance Policies
Term:
- temporary coverage
- no cash value, ever
- pure insurance protection
- lower costs
Permanent:
- permanent coverage - designed to last your whole life
- builds cash value
- death benefit consists of cash value and risk
- higher costs
Term Life Insurance
Provides a large amount of death benefit for a low price
Primary characteristics:
- low premiums
- temporary coverage
- no living benefits
Term expires or becomes too expensive due to age
Level Term
Death benefit remains level for the term
The premium remains level throughout the term
Protection ends at the end of the term
Terms may vary (5 yrs; 10 yrs; to age 65)
Decreasing Term
Death benefit decreases throughout the term of the policy
Level premiums
Mostly used for debts and decreasing obligations
Increasing Term
Death benefit increases each year
Used to fund “return of premium” or “return of cash value” riders
Renewable Term
Death benefit does not change at renewal
Insurability does not have to be established
Premiums throughout the term are level, but increase at renewal based on attained age
Renewal may be limited based upon age
Convertible Term
Allows the insured to convert from term to permanent without proving insurability
Attained age rate - conversion premium is based upon the current or attained age rate
Original age rate - conversion premium is based upon
Maturity and Taxation
A life insurance policy matures when its death benefit is paid out
Death benefit is income tax free
Whole Life Insurance
Death benefit remains level
Accumulates cash value
- equity
- nonforfeiture value
- a living benefit
Death benefit = risk + cash value
Risk is greatest at the beginning of the policy
Cash value is greatest at the end of the policy
Cash value equals the death benefit at age 100
Cash Value, Loans, and Full Withdrawals
Load value is based upon cash value
Maximum loan is cash value - first years interest
Interest is charges
Loans must be paid back, either:
- through payments
- out of the death benefit
- when cashed in
Loans will not be taxed
Full withdrawals will be taxed about the cost basis
Premium Obligations
Straight Life premium - paid each year up to age 100 or death of the insured
Limited Pay Whole Life - limits payment to a designated period of years while still providing life protection
Single premium - one payment into the policy and pay up the protection for life
Waiver of Premium Rider - if the insured is permanently and totally disabled the insurer will waive the premium
Universal Life
Premium Payments:
- the insured’s responsibility to keep money in the account
- how much and how often is flexible
- if the account ever reaches zero, coverage would end
Cash value account postings
- the cost of protection is first deducted (debited) monthly
- current interest is credited last
Universal Life:
Loans and Withdrawals
Loans are treated like any other permanent policy
Full withdrawals are treated like other permanent policies
Partial withdrawals are allowed
- a withdrawal of over funded premium payments
- no interest will be charged
- the amount will not have to be paid back
- if will be taxed over its cost basis
Universal Life:
Waiver
Waiver of cost of insurance rider:
- the cost of protection is waived due to disability
- the premium payment is not waived, the cost is waived
Universal Life:
Option A vs. Option B
Option A, level death benefit:
- level death benefit that may raise if overfunded to protect itself from the IRS
- death benefit = risk + cash value
- a risk corridor keeps the insurer at risk up till at least age 95
Option B, increasing death benefit:
- risk remains constant instead of decreasing
- death benefit equals the cash value plus the original death benefit amount
