Attained age - the insured’s age at the time the policy is renewed or replaced
Cash value - a policy’s savings element or living benefit
Deferred - withheld or postponed until a specified time or event in the future
to have the cash value of a whole life policy reach the contractual face amount
- the amount of benefit stated in the lite insurance policy
Fixed life insurance products - contracts that offer guaranteed minimum or fixed benefits
Lapse - policy termination due to nonpayment of premium
premium - the premium that does not change throughout the life of a policy
Nonforfeiture values - benefits
in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses
Policy maturity - in life policies, the time when the face value is paid out
Securities - financial instruments that may trade for value (for example, stocks
: bonds, options)
Variable life insurance products - contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance
Term life insurance
There are many types of life insurance products available for consumers. Although all life insurance products offer death protection,
each type also includes its own unique features and benefits and is designed to serve different insureds needs.
Regarding the length of coverage, all life insurance policies fall into 2 categories: temporary and permanent protection.
Term insurance is temporary protection because it only provides coverage for a specific period of time. It is also known as pure life
insurance. Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of
protection. There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed.
Term insurance provides what is known as pure death protection:
If the insured dies during this term, the policy pays the death benefit to the beneficiary;
If the policy is canceled or expires prior to the insured’s death, nothing is payable at the end of the term; and
• There is no cash value or other living benefits.
Know This! Term insurance provides the greatest amount of coverage for the lowest premium.
know This. Term insurance has no cash value.
Threee type of coverage with term life
• Increasing and
Regardless of the type of term insurance purchased, the premium is level throughout the term of the policy; only the amount of the
death benefit may fluctuate, depending on the type of term insurance. Upon selling, renewing, or converting the term policy, the
premium is figured at attained age the insured’s age at the time of transaction).
Level term insurance is the most common type of temporary protection purchased. The word leve/refers to the death benefit that
does not change throughout the life of the policy.
Know This! “Level” in level term insurance refers to the death benefit, which does NOT change.
I evel Premium Term
Level premium term, as the name implies, provides a level death benefit and a level premium during the policy term. For example, a
$100.000 10-year level term policy will provide a $100,000 death benefit if the insured dies any time during the 10-year period. The
premium will remain level during the entire 10-year period. If the policy renews at the end of the 10-year period, the premium will be
based on the insureds attained age at the time of renewal.
Annuallv Renewable Term
Annually renewable term (ART) is the purest form of term insurance. The death benefit remains level (in that sense, it’s a level term
policy), 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 the probability of death increases.
In New York, the maximum age above which coverage will not be offered is 80.
- Special Features: Renewable and Convertible
Most term insurance policies are renewable, convertible, or renewable and convertible (R&C).
The renewable provision allows the policyowner the right to renew the coverage at the expiration date without evidence of
insurability. The premium for the new term policy will be based on the insured’s current age. For example, a 10-year term policy that is
renewable can be renewed at the end of the 10-year period for a subsequent 10-vear period without evidence of insurability.
However the insured will have to pav the premium that is based on their attained age. If an individual purchases a 10-year term policy
at age 35, the will pay a premium based on the age of 45 upon renewing the policy.
The convertible provision provides the policyowner with the right to convert the policy to a permanent insurance policy without
evidence of insurabilitv. The premium will be based on the insured’s attained age at the time of conversion
B. Whole Life Insurance
Permanent life insurance is a general term used to refer to various forms of life insurance policies that build cash value and remain in
effect for the entire life of the insured (or until age 100) as long as the premium is paid. The most common type
insurance is whole life.
Whole life insurance provides lifetime protection, and includes a savings element (or cash value). Whole life policies endow at the
insured’s age 100, which means the cash value created by the accumulation of premium is scheduled to equal the face amount of the
policy at age 100. The policy premium is calculated assuming that the policyowner will be paying the premium until that age.
Premiums for whole life policies usually are higher than for term insurance.
The following are key characteristics of whole life insurance.
• Level premium - the premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life
of the policy.
• Death benefit - the death benefit is guaranteed and also remains level for life.
Cash value - the cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when
the insured reaches age 100 (the policy maturity date), and is paid out to the policyowner. (Remember: the insured and the
policyowner do not have to be the same person.) Cash values are credited to the policy on a regular basis and have a guaranter
Continuous Premium (Straight Life)
Straight life (also referred to as ordinary life or continuous premium whole life) is the basic whole life policy (illustrated above). The
policvowner pays the premium from the time the policy is issued until the insured’s death or age 100 (whichever occurs first). Of the
common whole life policies, straight life will have the lowest annual premium
Unlike straight life, limited-pay whole life is designed so that the premiums for coverage will be completely paid-up well before age
100. Some of the more common versions of limited-pay life are 20-pay life whereby coverage is completely paid for in 20 years, and
life paid-up at 65 (LP-65) whereby the coverage is completely paid up for by the insured’s age 65. All other factors being equal, this
type of policy has a shorter premium-paying period than straight life insurance,
so the annual premium will be higher. Cash value
builds up faster for the limited-pay policies.
Limited-pay policies are well suited for those insureds who do not want to be paying premiums beyond a certain point in time. For
example, an individual may need some protection after retirement, but does not want to be paying premiums at that time. A limited
dav (paid-up at 65 policy purchased during the person’s working years will accomplish that objective
Single premium whole life (SPWL) is designed to provide a level death benefit to the insured’s age 100 for a one-time, lump-sum
payment. The policy is completely paid-up after one premium and generates immediate cash.
- Fixed (Equity) Indexed Life
The main feature of indexed whole life (or equity index whole life) insurance is that the cash value is dependent upon the performance
of the equity index, such as S&P 500 although there is a guaranteed minimum interest rate. The policy’s face amount increases
annually to keep pace with inflation (as the Consumer Price Index increases) without requiring evidence of insurability. Indexed whole
life policies are classified depending on whether the policvowner or the insurer assumes the inflation risk. If the policyowner assumes
the risk, the policy premiums increase with the increases in the face amount. If the insurer assumes the risk, the premium remains
C. Flexible Premium Policies
There are several other types of whole life policies. While they all have the same key characteristics, they may also offer unique
features based on how the policyowner pays the premium or how the premium is invested. Flexible premium policies allow the
policyowner to pay more or less than the planned premium.
- Universal Life
Universal life insurance is also known by the generic name of flexible premium adiustable life. That implies that the policyowner has
the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policyowner may even
skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly
deductions for cost of insurance. If the cash value is too small. the policv will expire.
Since the premium can be adjusted, the insurance companies may give the policyowner a choice to pay either of the two types of
The minimum premium is the amount needed to keep the policy in force for the current year. Paying the minimum premium will
make the policv perform as an annuallv renewable term product.
The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection
and to keep the policy in force throughout its lifetime.
Know This! If an insured skips a premium payment on a universal life policy, the missing premium may be deducted from the policy’s
cash value. The policy will NOT lapse.
As well as being a flexible premium policy, universal life is also an interest-sensitive policy. Although the insurer guarantees a contract
interest rate (usually 3 to 6%), there is also potential for the policyowner to get a current interest rate, which is not guaranteed in the
contract but may be higher because of current market conditions.
A universal life policy has two components: an insurance component and a cash account. The insurance component of a universal life
policy is always annually renewable term insurance.
Universal life offers one of two death benefit options to the policyowner. Option A is the level death benefit option, and Option B is the
increasing death benefit option.
Under Option A (Level Death Benefit option), the death benefit remains level while the cash value gradually increases, thereby
lowering the pure insurance with the insurer in the later years. Notice that the
pure insurance is actually decreasing as time passes,
lowering the expenses, and allowing for greater cash value in the older years. The reason that the illustration shows an increase in the
death benefit at a later point in time is so that the policy will comply with the “statutory definition of life insurance” that was
established by the IRS and applies to all life insurance contracts issued after December 31, 1984. According to this definition, there
must be a specified “corridor” or gap maintained between the cash value and the death benefit in a life insurance policy. The
percentages that apply to the corridor are established in a table published by the IRS and vary as to the age of the insured and the
amount of coverage. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes and
consequently loses most of the tax advantages that have been associated with life insurance.
Under Option B (Increasing Death Benefit option), the death benefit includes the annual increase in cash value so that the death
benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will
always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer
remains level for life, the expenses of this option are much greater than those for Option A, thereby causing the cash value to be lower
in the older vears all else beins equal).
Variable life insurance (sometimes referred to as variable whole life insurance is a level. fixed premium. investment-based product
Like traditional forms of life insurance, these policies have fixed premiums and a guaranteed minimum death benefit. The cash value
of the policy, however, is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been
invested by the insurer. The policyowner bears the investment risk in variable contracts
Know This! In variable contracts, the policyowner bears the investment risk (assets in a separate account)
Because the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be
kept in the insurance companys general account. These assets must be held in a separate account, which invests in stocks, bonds,
and other securities investment options. Any domestic insurer issuing variable contracts must establish one or more separate
accounts. Each separate account must maintain assets with a value at least equal to the reserves and other contract liabilities. Assets
in the separate account cannot be commingled with assets in the general account.
- Regulation of Variable Products (SEC, FINRA and New York)
Variable life insurance products are 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, and are thus regulated by the Securities and Exchange
Commission (SEC), and the Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities
Dealers (NASD). Variable life insurance is also regulated by the Insurance Department as an insurance product.
Agents selling variable life insurance products must:
Be registered with FINRA;
• Be licensed by the state to sell life insurance; and
• Have received a securities license.
The Superintendent has the sole authority to regulate the issuance and sale of variable contracts and to issue related rules and regulations
Joint Life (First-to-die)
Joint Life (First-to-die) Joint life is a single policy that is designed to insure two or more lives. Joint life policies can be in the form of term insurance or permanent insurance. The premium for joint life would be less than for the same type and amount of coverage on the same individuals. It is more commonly found as joint whole life, which functions similarly to an individual whole life policy with two major exceptions: The premium is based on a joint average age that is between the ages of the insureds; and The death benefit is paid upon the first death only. A premium based on joint age is less than the sum of 2 premiums based on individual age, so it is common to find joint life policies issued on spouses. This is particularly so if the need for insurance is such that it does not extend beyond the first death. Joint life policies are used when there is a need for two or more persons to be protected: however, the need for the insurance is no longer
- Survivorship Life (Second-to-die)
Survivorship life (also referred to as "second-to-die" or "last survivor" policy) is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life, which pays upon the first death. This type of policy is often used to offset the liability of the estate tax upon the death of the last insured. Know This! Joint life = first to die: Survivorship life = second to die (last survivor)
- Life Insurance for Minors
New York insurance law deems a minor at or above the age of 14½ competent to contract for, own, and exercise all rights relating to a
life insurance policy. Minors below 14½ are prohibited from owning life insurance policies. The beneficiary of the policy may be only
the minor or the parent, spouse, brother, sister, child or grandparent of the minor.
A policy on a minor under 14½ may not be in excess of $50,000, or 50% of the amount of life insurance in force upon the life of the
person effectuating the insurance at the date of issue, whichever limit is the greater. If the person who owns the policy on the minor
reduces the amount of insurance on his own life, the amount on the minor will still be considered acceptable. In the case of a child
under 4½, the limit is $50,000 or 25% of the amount on the life of the owner of the policy. Any amount over the limit will not be pai
as long as the minor is under 14½
The policy on the life of a minor under 14½ may exceed the limits stated above for the following reasons:
• If the policy is purchased by and the premiums are paid by a person having an insurable interest in the life of the minor, and
• If the minor is not dependent upon the owner of the policy for support and maintenance.
- Credit Life
Credit insurance is a 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. Credit life is usually written as decreasing term insurance, and it may be written as an individual policy or as a
group plan. When written as a group policy, the creditor is the owner of the master policy, and each debtor receives a certificate of
The creditor is the owner and the beneficiary of the policy although the premiums are generally paid by the borrower (or the debtor).
Credit life insurance cannot pay out more than the balance of the debt, so that there is no financial incentive for the death of the
insured. The creditors may require the debtor to have life insurance; they cannot, however, require that the debtor buys insurance
from a specific insurer.
Know This! Credit life insurance cannot pav out more than the balance of the debt.
Group life insurance
F. Group Life Insurance
In contrast to individual life insurance, which is written on a single life, and in which the rate and coverage is based upon the
underwriting of that individual, group life insurance is issued to the sponsoring organization, and covers the lives of more than one
individual member of that group. Group insurance is usually written for employee-employer groups, but other types of groups are a
for coverage. It is usually written as annually renewable term insurance. Iwo features that distinguish group insurance from individual insurance are
Evidence of insurability is usually not required (unless an applicant is enrolling for coverage outside the normal enrollment
Participants (insureds) under the plan do not receive a policy because they do not own or control the policy.
Instead. each insured participant under the group plan is issued a certificate of insurance evidencing that they have coverage. The
actual policy, or master policy/contract, is issued to the sponsor of the group, which is often an employer. The group sponsor is the
policyholder and is the one that exercises control over the policy.
Know This. Group insurance is written as annuallv renewable term insurance
Know This! In group insurance, the master contract is for the employer, and certificates of insurance are for individual insureds
- Characteristics of Group Plans
Group underwriting differs from that of individual insurance, and is based on the group characteristics and makeup. Some of the
characteristics of concern to a group underwriter include the following:
Purpose or nature of the group - The group must be created for a purpose other than to obtain group insurance.
Size of the group - The larger the number of people in the group, the more accurate the projections of future loss experience will
be. This is based on the Law of Large Numbers of similar risks.
Turnover of the group - From the underwriting perspective, a group should have a steady turnover: younger, lower-risk
employees enter the group, and older, higher-risk employees leave.
Financial strength of the group - Because group insurance is costly to administer, the underwriter should consider whether or
not the group has the financial resources to pay the policy premiums, and whether or not it will be able to renew the coverage.
Another unique aspect of group underwriting is that the cost of the coverage is based on the average age of the group and the ratio
of men to women. In addition, in order to reduce adverse selection, the insurer will require a minimum number of participants in the
group, depending on whether the employer or employees pay the premium
2. Types of Plan Sponsors
Group life insurance plans may be sponsored by employers, debtor groups, labor unions, credit unions, associations, and other
organizations formed for a reason other than purchasing insurance. Insurance companies may establish a required minimum number
of persons to be insured under a group plan.
- Group Underwriting Requirements
Group life insurance is underwritten on a group basis as opposed to an individual basis. Each participant completes a short application
that clearly identifies the insured and the insured’s beneficiary. Generally, if the group is large enough, there are no medical questions
since the plan will be issued based upon the nature of the group and the groups past claims experience.
- Conversion to Individual Policy
Another characteristic of group insurance is the conversion privilege. If an employee terminates membership in the insured group,
the employee has the right to convert to an individual policy without proving insurability at a standard rate, based on the individual’s
attained age. The group life policy can convert to any form of insurance issued by the insurer (usually whole life), except for term
insurance. The face amount or death benefit will be equal to the group term face amount, but the premium will be higher. The
employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time,
the employee is still covered under the original group policy.
Other rules that apply to conversion involve the death or disability of the insured, and termination of the master policy. If the insured
dies during the conversion period, a death benefit equal to the maximum amount of individual insurance which would have been
issued must be paid by the group policy, whether or not the application for an individual policy was completed. If the master contract
is terminated. ever individual who has been on the plan for at least 5 years will be allowed to convert to individual permanent
insurance of the same coverage.