INSU 432 LIFE INSURANCE CHAPTER 13 LIFE INSURANCE POLICIES

LIFE INSURANCE POLICIES The purpose of the previous chapter is how much life insurance a person or family would need to provide adequate coverage. Life insurance policies provide protection against the financial problems associated with premature death, provide a savings funds for retirement or other purposes.

LIFE INSURANCE POLICIES Medical expense insurance and disability insurance provide payment for medical expenses or replace income lost because of disability. Annuities provide a guaranteed income that annuitants cannot outlive.

THREE WAYS LIFE INSURANCE DISTRIBUTED Group Life Insurance Industrial or Debt Life Insurance Individual Life Insurance

GROUP LIFE INSURANCE It is provided to a well-defined group of people who are associated for some purpose other than purchasing life insurance. Most commonly groups are employee groups such as the local schools or of the General Electric Corporation.

CREDIT LIFE INSURANCE It is a special type of group life insurance purchased by a lender for its group of debtors. Banks, credit unions or retail stores selling merchandise on credit often purchase life insurance to their customers. If the debtor dies within the loan outstanding, the life insurance proceeds repay the debt. It is a term insurance and does not provide a savings value.

INDUSTRIAL LIFE INSURANCE ( debit Life Insurance or burial Insurance) People purchase such type of insurance in small amounts, usually $2,000 or less. Typically, the premiums are collected at the insured`s home on a regular basis, generally weekly or monthly, by debit agents. The purpose of the insurance is to provide a burial fund. The benefits are small however , the cost is high.

INDIVIDUAL LIFE INSURANCE(Ordinary Life Insurance) Unlike industrial insurance , consumers may purchase hundred-thousand dollar (and larger) individual life insurance policies. There are TERM and WHOLE LIFE insurance policies.

Individual Life Insurance Insured may pay premiums annually, quarterly or monthly. Insured – Owner –Beneficiary are the parties of life insurance. If the owner has the right to change beneficiaries after initial choice, the beneficiary is called REVOCABLE BENEFICIARY. IRREVOCABLE BENEFICIARY, once named, can not be changed by the owner. Beneficiary should be stated instead of stating as my wife or my children. This can lead to litigation in cases of multiple marriages.

TERM INSURANCE When a life insurer sells a term life insurance policy, it promises to pay the beneficiary if the insured dies within a specified period. If the insured outlives the period, the insurer makes no payment. The term insurance is often spoken of as providing “pure death protection”.

TYPES OF TERM LIFE INSURANCE Single-year term policies promise to pay if the insured dies within the one-year policy term. Five-year term policies pay if death occurs within five year of the policy`s purchase. Longer-term policies may last for 10,15, or 20 years. Term-to- a specified age (such as 60 or 65) policies pay if death occurs before the designated age.

Decreasing term life insurance Multiyear term policies may have benefit decrease, increase or remain level. Decreasing term life insurance provides the beneficiary with less proceeds each year while the policy is in force. The premiums remain the same but pay less proceed each year.

Increasing Term Life Insurance Such policies provide proceeds that increase each year. If death occurs in the first year, the insurer pays the face amount of the policy. Such policies are attractive in inflationary economies.

A level term insurance It pays the same amount of benefits if death occurs at any point while the policy in force.

RENEWABLE TERM Renewable policy allows the insured to continue the coverage up to a specified age regardless of the statue of the insured`s health or other relevant factors including occupation.

CONVERTIBLE TERM Convertible term policies allow the insured the option converting the policy to a whole life policy.

RE-ENTRY TERM INSURANCE RE-ENTRY Term insurance is a relatively new policy type. This policy required the insured to pass regular medical examinations to qualify for lower rates.

USES OF TERM INSURANCE It can be used when the need for life insurance is temporary. It is also useful when people need the maximum coverage and have limited financial resources. Premature death Mortgage purposes Permanent dependent , permanent disability

WHOLE LIFE INSURANCE Whole life insurance policies promise to pay the beneficiary whenever death occurs. Specified age such as 100 or 120 Cash Value is a savings value is produced by the level-premium method of paying whole life insurance. The insurer initially charges a larger premium than it is necessary to pay early death claims. The additional charge continues during the first portion of the policy`s duration. This additional charge continues during the first portion of the policy`s duration.

WHOLE LIFE INSURANCE Life insurers invest their insureds` cash value in relatively safe investments such as federal government debt issues or mortgage loans. These safe investments allow the insurer to guarantee an increase in cash values, and traditional whole life policies always contain a table presenting these guaranteed values. The purpose of the savings values is to finance the large premiums needed to keep the policy in force in the years when the probability of death is high. Another point is that policyowners can withdraw all their cash value if they want to end the policy.

TYPES OF WHOLE LIFE INSURANCE POLICIES Single premium whole life policies in exchange for one premium, the insurer promises to pay the claim wherever death occurs. Continuous premium whole life insurance policies require insured to pay the same premium as long as they live or until they reach age 100. Insurers also call these policies level premium whole life and straight premium whole life.(level premium or straight-premium whole life insurance)

TYPES OF WHOLE LIFE INSURANCE POLICIES Limited- Payment Whole Life –The protection continues until the insured dies. With this, premiums are paid only for a limited no of years; such as 10 to 20 years. Combination whole life insurance- policies decreasing term insurance with a whole life policy. The scheduled decreases in the term insurance portion but offset by additions to the whole life portion. While the policy face remains constant, the underlying term or whole life proportion changes until the term insurance finally disappears.

THE USES OF WHOLE LIFE INSURANCE Whole life insurance policies meet people`s needs for protection combined with savings. Life insurance used in estate plans and in business continuation arrangements often are cash value insurance. Such permanent needs generally cannot be met by term insurance because tern insurance becomes unaffordable and not available after age 65.

UNIVERSAL LIFE INSURANCE Due to inflation the face amount of insurance and the cash value has been eroded. Relatively high-yield alternative investment opportunities, with equal or less risk were available. New life insurance products emerged; universal life and variable universal life.

UNIVERSAL LIFE INSURANCE Universal life insurance allows to buy term insurance and invest an additional amount with the insurance company. The insurer`s investments supporting universal life insurance are typically in short-term (six months or less) federal government debt issues.

UNIVERSAL LIFE INSURANCE The policy allows the insured to determine both the amount and the frequency of the premium payments within limits. The minimum premium is the amount needed to keep a term insurance policy in force

UNIVERSAL LIFE INSURANCE Typically the insurer subtracts a monthly(term insurance) charge and an expense charge from the insured`s accumulated premium fund. Neither the mortality charge nor the expense charge is guaranteed; they may fluctuate based on the insurer`s experience. The accumulated premium deposits less expense and mortality charges produce a cash value. This cash value then earns two types of interest.

INTEREST RATE A guaranteed interest rate is specified in the contract. It produces a guaranteed minimum cash value. The insurer also credits an excess interest rate if the conditions are met. The excess interest rate is determined by a formula or by company declaration. When a formula is used, it is usually tied to the interest rate on short-term US treasury securities.

UNIVERSAL LIFE INSURANCE DEATH BENEFITS Universal life insurance death benefits take one or two formats, usually identified as Plan A or Plan B. See figure 13.3 Plan B is easier to describe because the death benefit is equal to the initial amount of insurance plus any accumulated cash value at death. Insurers base the term insurance charge on the death benefit which they call the amount at risk. The initial death benefit is guaranteed , regardless of operating results. Under plan A, the death benefits remains level until the cash value exceeds a specified amount.

USES OF UNIVERSAL LIFE INSURANCE Flexibility of Premium Payments : within min. And max.limitis the insured can choose the frequency and the amount of premium. Ability to Earn a Greater Return When Interest Rates Rise: During inflation rates can rise Flexibility of Death Benefits: can make a shift from Plan A to B. Breakdown of Component Costs and Returns:annual statement availabe for mortality costs, expense loadings and investment earnings.

Variable Life Insurance Variable Life Insurance is a nontraditional cash value life insurance policy introduced in the late 1970s. Subject to both state and federal regulation. The underlying investments are securities and the policyowner has some investment choice, the federal government regulates variable life insurance.

Variable Universal Life Insurance Since 1986, variable life policies have allowed flexible premium payments and the modern version of the policy is called variable universal life insurance(VUL). Many provisions of the variable life policy follow the traditional whole life level-premium plan. That is, a cash value develops when premiums exceed mortality charges and expenses.

Variable Universal Life Insurance When the cash value develops, the insured can choose one or more underlying investment funds, called separate accounts. Separate accounts include money market, common stock and bond funds. These separate accounts are comparable to the mutual funds available to all investors. The cash value earns a return(positive or negative) based on the performance of an underlying separate account. Insurers do not guarantee a minimum cash value; however, they do guarantee a minimum benefit.

ENDOWMENT INSURANCE Endowment life insurance is no longer popular in USA due to eliminations in tax advantages. An endowment life insurance policy creates two rights for the insured. The first is to have the beneficiary paid if the insured dies before the policy matures or “endows”. The second is for the insured to collect the endowment if he or she is alive when the policy matures. Fig 13-4

ENDOWMENT INSURANCE The insured-owner may choose an endowment period as a specific number of years or may choose to have the policy endow at a specified age. The two promises made in an endowment life insurance policy may sound attractive. If the insured lives, the beneficiary collects the proceeds. If the insured lives, the insured collects the endowment. This policy type is expensive. The premium is charged for both living and dying.