Copyright © 2008 Pearson Education Canada 5-1 Credit Life Insurance A variation of group term insurance Purchased & arranged by lenders Borrower ultimately pays premium Benefits must be used to pay debt Insurer must reimburse creditor Unlike decreasing term life insurance Where there is no obligation to pay mortgage company

Copyright © 2008 Pearson Education Canada 5-2 Whole Life Insurance Whole life insurance Limited payment life insurance

Copyright © 2008 Pearson Education Canada 5-3 Whole Life Insurance Also known as Straight life Ordinary life Premiums Constant for life May be prepaid Lifelong duration Accumulation of policy reserves Cash reserves/cash surrender value

Copyright © 2008 Pearson Education Canada 5-4 Cash Surrender Value Early payments > pure cost of insurance Reserves are created Cash value + any dividends Calculated from table of guaranteed values

Copyright © 2008 Pearson Education Canada 5-5 Uses of Cash Surrender Value 1. Surrender of policy 2. Policy loan 3. Automatic premium loan 4. Collateral for a loan 5. Paid up policy

Copyright © 2008 Pearson Education Canada Policy Loan Borrow from cash surrender value Usually lower rate If insured dies Loan balance & interest deducted from face value

Copyright © 2008 Pearson Education Canada Automatic Premium Loan If policyholder stops paying premiums Cash surrender value used to pay premiums Face value of policy diminished By premiums paid

Copyright © 2008 Pearson Education Canada Collateral for Loan Transfer right to cash surrender value To creditor If policyholder defaults on loan payments Creditor cashes policy Retains what is owed If insured dies Insurance proceeds pay creditor

Copyright © 2008 Pearson Education Canada Paid up Policy Use cash surrender value To buy a smaller Face value, paid-up policy Policy with a single premium

Copyright © 2008 Pearson Education Canada 5-10 Limited Payment Life Insurance A variation of whole life Completely paid for during a specified period Shorter time/higher premiums In force for life Appropriate for people with high income For a short period of time

Copyright © 2008 Pearson Education Canada 5-11

Copyright © 2008 Pearson Education Canada 5-12 Universal Life Insurance Flexible payments Withdrawal privileges Flexible coverage Regular statements

Copyright © 2008 Pearson Education Canada 5-13 The Insurance Policy Contract between the insuring company and the policy holder Not a contract in indemnity Unlike property insurance Whereby insured is returned to financial position before loss Life insurance policies pay a predictable sum of money

Copyright © 2008 Pearson Education Canada 5-14 Features of Life Insurance Policies Description of policy Grace period Dividends Incontestability Policy loans Ownership rights and assignment Beneficiary

Copyright © 2008 Pearson Education Canada 5-15 Grace Period One month after premium’s due date Insurance remains in force Premium paid without penalty

Copyright © 2008 Pearson Education Canada 5-16 Dividends Refund on a participating policy Depends upon Company’s efficiency ROI Amount paid in claims Policy cancellations

Copyright © 2008 Pearson Education Canada 5-17 Ownership Rights and Assignment Stipulates rights of policy owner To name beneficiary To change name of beneficiary To use the cash surrender value To receive dividends To transfer (assign) ownership of policy

Copyright © 2008 Pearson Education Canada 5-18 Beneficiary Identifies receiver of proceeds upon death of insured person Proceeds not distributed through will Go directly to beneficiary Free from claims of estate’s creditors

Copyright © 2008 Pearson Education Canada 5-19