Life Insurance Policies- Provisions, Options, and Riders
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Created by:
Chelseanicolas on February 28, 2012
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Chapter 3
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53 terms
Terms | Definitions |
|---|---|
 Provisions | stipulate the rights and obligations of an insurance contract; fairly universal from one policy to the next |
| Riders | modify provisions that already exist; used to increase/decrease policy benefits and premiums |
| Options | offer insurers and insureds ways to invest or distribute a sum of money available in a life policy |
| Individual policy | written on a single life; rate/coverage based on underwriting of that person |
| Group policy | written as a master policy, issued to the sponsoring organization, covering the lives of more than one individual member of that group; individuals receive certificate of insurance from master policy; amount of coverage determined by nondiscriminatory rules; all individuals covered for same amount and rate; cost of coverage paid by employer in excess of $50k is taxed to the employee |
| Industrial/home service insurance | written on individual basis; small amounts (FV<$1k); weekly or monthly premiums collected by rep. of insurance company at home of insured; written as nonmedical (no med-exam required, but med history) |
| Ordinary life insurance | written on individual basis; larger FV (at least 1k); paid annually, semiannually, quarterly, or monthly; paid by insured directly to insurance company; physical exam may be required |
| Term protection | temporary life insurance for specific period of time (pure life insurance); provide greatest amount of coverage for lowest premium; maximum age |
| Pure death protection | if insured dies during term policy pays death benefit, no cash value or other living benefits |
| Permanent life insurance | general term refers to forms of whole life insurance policies in effect to age 100 as long as premium is paid; lifetime protection, includes savings element (cash value) |
| 3 types of term coverage | level, increasing, decreasing |
| Level term insurance | most common, death benefit doesn't change throughout life of policy |
| Annual renewable term | death benefit remains level, premium increases annually because of attained age |
| Re-entry option | upon end of a policy, insured has a guaranteed renewable option pending answers to medical questions to qualify for discounted premium rate |
| Decreasing term | level premium, decreasing death benefit; usually bought to insure payment of mortgage or other debt; convertible, but not renewable |
| Renewable provision | allows policy owner opportunity to renew coverage without evidence of insurability at attained age |
| Convertible provision | allows policy owner to convert policy to permanent without evidence of insurability at attained age |
| Nonforfeiture value | cash value of a whole life policy; doesn't accumulate 'til 3rd policy year and grows tax deferred; policy owner may borrow against; insurer may defer payment of any loan request for up to 6 months |
| Tax treatment of premium life | premiums= not tax deductible; cash value >premiums= taxable at surrender; policy loans= not income taxable; dividend interest= taxable in year earned; policy dividend= not taxable; lump-sum death ben= not income taxable |
| Straight life | lowest annual premium, pays premium for entire life of policy |
| Limited-pay life | shorter premium-paying period, so higher annual premium |
| Single premium life | policy is paid up after one premium payment |
| Graded premium life | premiums start out low and level off at a point in the future (typically starts with premium payments 50% or less than those of straight life) |
| Modified life | lower premium in 1st few years, then higher for rest of insureds life |
| Intermediate premium | 2 premium rates: guaranteed max- stated in contract; non-guaranteed lower rate which policy owner pays during initial period; after initial period, insurer establishes new rate, never higher than max |
| Enhanced ordinary life (economatic) | combines whole life and term for a constant death benefit at lower premium; over time annual dividends from a participating policy are used to purchase single premium paid up insurance to replace the term insurance |
| Indexed whole life | death benefit is linked to CPI, additional premium is charged by either 1) insurer increases premium when it increases coverage or 2) charge slightly higher premium from original inception date |
| Endowment policies | differ from whole life policies in that endowment matures at an earlier age (before 100), higher premium because higher cash value; sooner policy endows, higher the premium will be |
| 7-pay test | cumulative premiums paid during 1st 7 years of policy can't exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality cost and interest |
| Modified endowment contract (MEC) | life policy that fails 7 pay test; loses standard tax benefits of insurance contract, death benefit is tax free |
| Special uses policies | when insurer packages two or more coverages (usually permanent and term) to fit needs of client |
| Joint Life | single policy for two or more lives; usually joint whole life, but differs from individual whole life in that premium is based on joint average age, and death benefit is paid upon first death only (husbands & wives) |
| Juvenile life | "jumping juvenile" premium remains level, face amount increases at predetermined age, often 21 |
| Family maintenance policy | family income policy that combines whole life with level term to provide monthly salary to beneficiary for specified time period (15-20 yrs); only paid if insured dies within period, otherwise expires and only permanent life protection is paid |
| Family (protection) policy | provides coverage on every family member; typically whole life on breadwinner and convertible term on rest of family; spouse can convert to perm. up to age 65, children when they turn 21 |
| Survivorship life (second-to-die) | similar to joint life except benefit isn't paid 'til last death; lower premium than joint life; often used to offset the liability of the estate tax upon death of 2nd spouse |
| Credit life insurance | insures life of debtor and pays off balance of loan in event of death; usually decreasing term, may be written as individual or group; when group, creditor is owner of master policy, although premiums are paid by debtors |
| Adjustable life | offer policy owner best of both worlds (perm. and term); policy owner can make adjustments as their needs change by +/- premium or premium-paying period or +/- face amount with proof on insurability; can change period of protection, convert policy type, cash value only develops when premiums paid are > cost of the policy |
| Universal life | (flexible premium adjustable life) premium can be adjusted, so insurer gives policy owner 2 options: minimum premium or target premium |
| Statutory definition of life insurance | established by IRS, applies to all life contracts issued after dec. 31, 1984; states that there must be specified corridor/gap maintained between cash value and death benefit in life policy |
| Increasing death benefit option | death benefit includes annual increase in cash value so death benefit gradually increases each year by amount cash value increases |
| Death benefit | FV + cash value |
| Equity indexed universal life | universal life policy with equity index as its investment feature; policy's cash value is dependent upon performance of equity index, cash value and death benefit; not guaranteed; sale of this product doesn't require securities license |
| Difference between traditional permanent and variable life insurance | reserves for traditional are held in insurance company's general accounts; variable cash value is invested by policy owner, reserves are held in insurer's special separate account (riskier investments) |
| Variable universal life | combo of universal and variable; like universal, policy owner has flexible premiums and adjustable death benefits |
| Variable whole life | fixed premium policy with addition of underlying investment account; policy owner may allocate premium into subaccount held by insurer called separate account |
| 3rd party ownership | when the policy owner and insured aren't the same person |
| Assignment provision | policy owner's right to assign the policy; 2 types: absolute assignment- transfer all rights of ownership, permanent, new policy owner doesn't need insurable interest in insured; collateral assignment- transfer of partial rights, usually done to secure a loan, partial and temporary 'til debt is repaid |
| NAIC | national association insurance commissioners create uniformity among life policies |
| Entire contract | policy, copy of application, any riders or amendments, modifications must be attached to policy in writing over signature of executive officer of insurer, not an agent |
| Right to examine (Free look) | policy owner has a few days from receipt to look over and return for full refund of premium |
| Premium mode | manner/frequency premiums are paid, anything other than annual requires additional charge |
| Grace period | time from when premium is due to when policy lapses (30 days in FL) insurer may charge up to 8% per year interest for # of days passing before premium is paid |
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