Life insurance Flashcards
Revocable beneficiary
A beneficiary is a revocable beneficiary when the owner can change the initial beneficiary selected, but an irrevocable beneficiary cannot be changed.
Irrevocable beneficiary
An irrevocable beneficiary can prevent the policy owner from taking any action that would reduce their own interest in the policy, such as borrowing from the policy or assigning the policy as security for a loan.
Taxation on Life Insurance
The beneficiary receives the death benefit income tax-free. An employee does not have to report any income for the first $50,000 of life insurance coverage provided by a group plan but must pay taxes on coverage in excess of $50,000.
Credit Insurance
Credit Life insurance is a special type of life insurance. Lending institutions, such as banks and credit unions, or retail stores selling merchandise on credit, offer credit insurance to their customers to cover debtors’ obligations if they die or become disabled.
Cost of credit insurance
Most experts agree that, dollar for dollar, credit life insurance is much more expensive than traditional life insurance. Unfortunately, credit life is packaged and sold at a time when consumers are making expensive purchases and may feel obligated. Companies selling credit life insurance know this, and are offering a limited product at high cost. Generally, it is best to avoid credit life insurance, and build the amount of protection into your overall life insurance need.
Term Life Insurance
Term life insurance furnishes protection for a limited number of years at the end of which the policy expires, meaning that it terminates with no maturity value. The face amount of the policy is payable only if the insured’s death occurs during the stipulated term and nothing is paid in case of survival.
Renewability
Renewability is a feature of term life insurance that permits the policy owner to continue, or renew, the policy upon expiration of the term period, for a limited number of additional periods of protection. For example, a 20-year term policy may allow renewal for another 20 years at the end of the initial 20-year period.
Convertibility
Most term insurance policies include a convertible feature. This feature is a call option that permits the policy owner to exchange the term policy for a cash-value insurance contract, without evidence of insurability. Often the period during which conversion is allowed is shorter than the maximum duration of the policy.
Whole Life Insurance
Whole life insurance is intended to provide insurance protection over one’s entire lifetime. It should be viewed as permanent protection for long-term needs, like estate planning or planning for a disabled child. It provides for the payment of the face amount upon the insured’s death regardless of when death occurs.
Whole Life Cash Value
One of the major advantages of any cash value type of life insurance contract is that the cash value grows on a tax deferred basis. The funds in the savings part of the contract grow every year, and there is no income tax due unless the owner takes out more money than has been paid in.
Participating whole life insurance
Insurance companies owned by policyholders are called mutual insurance companies. Participating (par) whole life policies, which are typically sold by mutual companies, provide their owners with the right to share in surplus funds accumulated by the insurer because of deviations of actual experience from assumed experience. This provision is known as the Annual Apportionment of Divisible Surplus. If there is a divisible surplus, the insurer must pay dividends. The participating plan involves a relatively large initial premium followed at the end of the year by a dividend.
Non participating whole life insurance
Nonparticipating policies are life insurance policies issued by insurance companies that are owned by stockholders, rather than policyholders. Nonparticipating whole life policies fix policy elements, that is, the premium, the face amount and the cash values, if any, at policy inception. These elements are guaranteed and make no allowance for future values to differ from those set at inception. Nonparticipating (nonpar) policies use more realistic projections of operating results and require a lower initial premium, although, in the long run, participating policies may prove less costly.
Universal Life Insurance
In 1979, a new type of policy, called Universal Life insurance, was created in an attempt to meet the interests of those consumers who liked the low cost nature of term insurance, and the tax deferred cash value features of whole life insurance.
Policyholders could actually see where their money was going, as the Universal Life contract “unbundles” the protection and savings components.
Variable Life Insurance
Unlike whole life and universal life policies, variable life policies are contracts in which the insured has the right to direct how the cash value will be invested. Typical choices in a variable life policy for investments are stock and bond mutual funds, as well as money markets and guaranteed interest accounts.
What provisions appear in life insurance contracts?
Grace period
Incontestable clause
Entire-contract provision
Misstatement-of-age provision
Annual apportionment of surplus
Lapse life insurance tax consequences
Realized losses are not tax-deductible and realized gains are subject to ordinary income tax rates.
