Life Insurance Policy PDF

# The Application * **Human Life Value Approach:** Probable future earnings of the insured using: * Wages * Inflation * Years to retirement * Time value of money * **Needs Approach:** The predicted needs of the family using: * **DIME** * Debt * Income * M...

# The Application * **Human Life Value Approach:** Probable future earnings of the insured using: * Wages * Inflation * Years to retirement * Time value of money * **Needs Approach:** The predicted needs of the family using: * **DIME** * Debt * Income * Mortgage * Expenses * **Parts of the Application:** * I. General Information * II. Medical * III. Agent's report * **Risk Classifications:** * **Preferred:** Healthier than the standard risk; usually issued policies on a discounted premium basis * **Standard:** A normal or average risk; no special conditions are required in the policy * **Substandard:** A higher risk; requires special conditions included in the policy or policy issued with higher/ rated premiums # Life Insurance Policies ## Term Life Insurance * **Level Term:** Pure protection that lasts for a specific term, most insurance for the least premium. Coverage stays the same for the specified period. * **Annual Renewable Term:** Policy renews every year without proof of insurability, premiums increase each year because they are based on attained age. * **Decreasing Term (Usually used for credit life):** Coverage decreases as your debt decreases. Best used when the need for protection declines from year to year. ## Whole Life Insurance (Cash Value) * **Straight Life:** Basic policy, level death benefit - insured pays level premiums until death or age 100, whichever occurs first. * **Limited Pay:** Premiums are paid until a certain age or time. Although premiums are paid up, coverage remains until death or age 100. * **Single Premium:** Premiums paid in one lump sum and coverage continues to age 100. ## Flexible Premium Policies (Cash Value) * **Adjustable Life:** Three parts of the policy are adjustable (flexible): Coverage, premium, and type of plan. The insured chooses two and the insurer one. * Interest sensitive cash value * Flexible coverage and premiums * Two death benefit options, A & B * Can make partial surrender/ cash withdrawal * Mortality charge deducted each month from cash value for cost of insurance & also expenses. * **Universal Life:** ## Specialized Policies * **Joint Life (First-to-die):** 2 or more insureds on the same policy. The policy pays the death benefit when the FIRST insured dies * **Survivorship Life (Second-to-die):** 2 or more insured on the same policy. The policy pays the death benefit when the LAST/SECOND insured dies. * **Group Life:** * Master Contract goes to the sponsor; usually employer * Certificate of Insurance goes to member * Usually written for employee-employer groups * Underwritten as a group * Contributory-members pay * Noncontributory-owner pays * Ratings-previous group claims experience determines premiums * Conversion to individual policy in 31days-same face amount at higher premiums due to attained age. # Special Coverages * **Mortgage Redemption:** * Insures borrower for an amount equal to their mortgage * If the insured/ borrower dies, the insurer assumes responsibility for paying the outstanding loan balance to the insureds creditor * **Family Maintenance:** A life insurance policy based on a family income policy which combines whole life with level term * **Family Policy (Family Protection):** Combines whole life with term insurance to cover family members in a single policy. Provides coverage on each member of the family * **Family Income Policy:** A combination of decreasing term insurance and whole life insurance on the breadwinner of the family. Designed to provide an income period which begins from the effective date of the policy & commonly runs for twenty years. * **Jumping Juvenile:** Any life insurance written on the life of a minor. Face amount increases at a predetermined age, often 21. The face amount jumps but the premium remains level. # Policy Provision Terms * **Insuring clause:** Company's promise to pay benefits * **Consideration clause:** Application and initial premium = applicant's consideration * **Grace Period:** 30/31 days after due date. Still covered when premium is not paid on time. * **Reinstatement Clause:** Returning a lapsed policy to a premium-paying status. * Payback back all premium plus interest * Payback any loans (if cash value policy) * Proof on insurability * **Incontestable period:** 2 years for insurer to contest death benefit * **Misstatement of Age and Sex:** Make it right; adjust the face amount * **Free Look:** Full refund of policy premium; 10 days new policy, 20 days replacement policy- varies by state * **Ownership clause:** owner has all rights to the policy i.e. make changes * **Assignment clause:** Owner can assign policy owner ship either: * Permanently = Absolute * Temporarily = Collateral # Beneficiary * **Beneficiary:** The person who receives the proceeds from the policy when the insured dies * **Primary beneficiary:** first beneficiary listed * **Contingent beneficiary:** An alternate beneficiary designated to receive the policy proceeds in the event that the primary beneficiary dies before the insured * **Revocable:** Policy owner can change beneficiary whenever they choose * **Irrevocable:** Policy owner can't change beneficiary without their written consent * **Common disaster provision:** if insured and sole beneficiary are in a common disaster and sole beneficiary out lives insured by less than a state specified number of days, Death Benefit (DB) is paid to the estate of the insured * **Spendthrift clause:** Creditors of the insured CANNOT go after beneficiary's death benefit * **Premium Modes:** Frequency of premium payments (monthly, quarterly, semi-annually, or annually). The more often the premium is paid, the higher the total annual cost. # Policy Options ## Settlement Options (CLIFF) * **Cash Payment (Lump Sum):** Not taxable to beneficiary. * **Life Income:** Pays guaranteed installments as long as the recipient lives. Principal is forfeited upon death. Principal is made up of principal and interest; interest is taxable. * **Interest Only:** Temporary option, until proceeds are paid. Interest is taxable. * **Fixed Period:** Deplete funds over a fixed period. * **Fixed Amount:** Fixed amount until proceeds are exhausted. ## Dividend Options (OCRAP): * **Return of excess premiums, non-taxable and nonguaranteed.** * **One-year term -** company uses the dividend to purchase additional insurance in the form of one-year term insurance that increases the overall policy death benefit * **Cash option –** The insurer sends the policy owner a check for the amount of the dividend as it is declared; usually annually. * **Reduction of premium –** Insurer used the dividend to reduce next year's premium * **Accumulation at interest** - Insurance company keeps the dividend in an account where it accumulates interest * **Paid-up additions –** Dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. ## Policy Loans/ Withdrawal Options * **Cash Loans –** loans are not subject to income tax * **Automatic Premium Loan –** Prevents the policy from lapse due to nonpayment of premiums * **Withdrawal or Partial Surrender –** Universal life insurance products only, surrender charge applies on withdrawals, & could be taxed ## Non-forfeiture Options (REC) * **Reduced paid-up – ** reduced face amount * **Extended term – ** same face amount/ turns into term policy * **Cash –** interest taxable, surrender charge (decreases over time) # Policy Riders * **Extra provisions attached to a policy that cost extra to the insured** ## Disability Riders * **Waiver of premium** - waives premium if insured becomes totally disabled; 6 month waiting period before benefit begins (expires at age 65) * **Accelerated benefit rider**- early payment if insured is diagnosed with a specified catastrophic illness; benefit is a specified percentage or dollar amount of death benefit. The death benefit is reduced by the amount paid to insured. ## Riders Covering Additional Insureds – Term Riders * **Spouse** - allows for addition of spouse for a limited time and limited coverage; usually expires when spouse turns 65 * **Children's term rider –** allows for addition of children for a limited time and limited amount. Most provide option to convert to a permanent policy. * **Family term rider**- incorporates spouse and children into one rider * **Payor benefit/ disability (juvenile insurance) –** If payor become disabled or dies, insurer will pay premiums until child is no longer a minor ## Riders Affecting the Death Benefit Amount * **Accidental death** - usually pays double or triple indemnity if he accidental death occurs as defined in the policy; death must occur within 90 days of accident. * **Guaranteed insurability** - allows purchase of additional insurance at specified times without evidence of insurability; additional coverage is purchased at the insureds attained age * **Cost of living** - Increases or decreases the face value by a cost of living factor (usually inflation) each year * **Return of premium** - not only is the death benefit payable to the beneficiary but all premiums paid as well # Annuities * **An annuity is a retirement plan, NOT life insurance, used to liquidate an estate.** Prevents the risk of outliving your money and earnings grow tax-deferred. * **Owner, annuitant, and beneficiary** * **Owner-** purchases the annuity contract and pays the premium * **Annuitant –** receives the payments which are based on amount, age, and gender * **Beneficiary** - receives cash value or premiums, whichever is higher, if the annuitant dies during the accumulation phase. Interest is taxable. ## Accumulation Period * **Pay-in period** * **Building your estate** * **Grows tax - deferred** * **Money belongs to the policy owner** ## Annuity Period * **Pay-out period** * **Money belongs to the company** * **Policy owner gets the payout** ## How are premiums paid? * **Single premium –** one lump sum * **Level premium –** same payment frequency * **Flexible premiums –** periodic or many * **PREMIUMS ARE NOT TAX DEDUCTIBLE** ## Annuity payment options * **Cash one-time payment** - interest immediately taxed; penalty of 10% before age 59 2 * **Annuity certain** - Guaranteed for a fixed period or fixed amount * **Straight life** - guaranteed payments for life; payment ceases at annuitants death * **Life with period certain –** the annuity payments are guaranteed for the lifetime of the annuitant and for a specified time for the beneficiary ## Exclusion ratio: * **Nonqualified annuity –** portion of the payout is taxable (interest) & a portion is not (premiums paid); premium was paid in on an after- tax basis and growth was tax deferred * **Qualified annuity –** all of the payout is taxable, interest and premium paid; the premium was paid in on a pre-tax basis and the growth was tax deferred # Fixed, Variable and Equity Indexed Annuities | Type | Description | |---|---| | **Fixed Annuities** | * Interest rates are guaranteed * Income payments do not vary from one payment to the next * Premiums are held in the company's general account * Company guarantees the specified dollar amount for each payment; length is determined by the settlement option chosen by the annuitant. Inflation may decrease purchasing power | | **Variable Annuities** | * Growth is NOT guaranteed * Premiums are held in a separate account * Is a security * Level benefit payout * Policy owner assumes the risk. Can keep pace with inflation | | **Equity Indexed Annuities** | * Like fixed annuities that invest on a relatively aggressive basis to aim for a higher return * Has a guaranteed minimum interest rate * Less risky than a variable annuity or mutual fund but are expected to earn a higher interest rate | # Immediate vs Deferred Annuities | Type | Description | |---|---| | **Immediate Annuities** | * Payment begins WITHIN 12 months * Single premium payment only | | **Deferred Annuities** | * Payment begins AFTER 12 months * Single, level, or flexible payments |