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28 Cards in this Set
- Front
- Back
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Life Insurance Policy Options
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Life insurance policy options give the life
insurance contract flexibility to meet the needs of the insuring public |
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Settlement Options pt 1
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The owner has the right to select a settlement
option while the insured is alive, but the final decision is often done at the time of death so that the beneficiary’s financial situation at the time can be taken into consideration |
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Settlement Options pt 2
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– Unless the policyowner specifies an irrevocable
settlement option, the beneficiary may select any of the same options available to the policyowner when the proceeds become payable, even if that option differs from that originally selected by the policyowner |
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Lump-Sum Payment or Cash
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• Beneficiary receives the death benefit as a
single, lump-sum payment • Benefit received free of income tax – Only tax-free option • Probably most commonly chosen option |
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Interest or Interest Only Option
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• Beneficiary leaves the benefit on deposit with
the insurer • The insurer invests these proceeds and pays the earned interest as income to the beneficiary – Interest received is taxable income to the beneficiary |
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Interest or Interest Only Option
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• Based upon whatever has been stipulated by
the applicable person (either the insured or the beneficiary), any money still on deposit with the insurer at the time of the beneficiary’s death will typically go to either of two places – To the deceased beneficiary’s estate – To a secondary beneficiary (or beneficiaries) named in the policy |
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Fixed Period Option
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• Benefit received consists of a regular income for
a specified period • Payments comprised of both principal and interest – Principal amount gradually decreases to zero • Actual amount of regular payment not known • Factors that determine the amount that will be received are – The principal amount – The interest earned on the principal – The length of time the payments are to be made |
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Fixed Amount Option
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• Benefit received consists of a specified regular
amount, but not a specified time period • Payments comprised of both principal and interest – Payments continue until combination of principal and interest are exhausted • Factors that determine how long the payments will be received are – The specified amount of each payment – The principal amount – The interest earned on the principal |
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Life Income Option pt. 1
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• Provides for payment of installments for the
entire lifetime of the payee • Insurer’s offer different options in which these installments can be paid • Common options include – Straight life/pure life/ life only • Payee receives a specified monthly income for life • Upon death of payee, payments cease |
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Life Income Option pt. 2
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• Common options include (continued)
– Life income with period certain • Payee receives a specified monthly income for life • If payee dies before the end of the years specified in the certain period (i.e. 5, 10, 15, 20), a second payee receives the payments for the remainder of the certain period specified |
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Life Income Option pt. 3
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• Common options include (continued)
– Life income with refund • Payee receives a specified monthly income for life • If payee dies before having received an amount equal to the full proceeds of the policy, proceeds will go to a second payee • Both cash refund (lump-sum) and installment refund options available |
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Life Income Option pt. 4
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• Common options include (continued)
– Joint and survivor life income • Two or more payees are recipients of the lifetime income • Upon death of first payee, payments go to second payee, and so forth • Amount of payment to additional payees could either reduce or stay the same, based upon the option chosen when setting up this settlement option |
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Nonforfeiture Options:
Guaranteed Values pt. 1 |
• Almost all states operate under a law known as
the standard nonforfeiture law, which prescribes that any cash value accumulation or its equivalent must be made available to the policyowner if the policyowner stops paying the premiums for any reason • Amount of cash value and its rate of accumulation vary by company and type of policy, but many states require permanent policies to have at least a small cash value by the end of the policy’s third year |
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Nonforfeiture Options:
Guaranteed Values pt. 2 |
• The following are common nonforfeiture options
in cash value policies – Cash surrender value – Extended term insurance – Reduced paid-up insurance |
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Cash Surrender Value
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• Is the amount a policyowner is entitled to when
the policy has been surrendered before maturity • Policyowner takes the accumulated cash value as a single lump-sum payment • Coverage ends when the policy is surrendered • Surrender value up to the amount of premiums paid received tax free; any amount above that is taxable to the policyowner • Insurer may delay payment of the cash surrender value for up to six months |
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Reduced Paid-Up Insurance Option pt. 1
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• Accumulated cash value used to purchase a
single premium paid-up whole life insurance policy – Face amount reduced from original policy’s face amount, remains the same for the duration of the contract (provides protection up to age 100) – Insured’s attained age used to compute face amount of new paid-up policy • Can be determined from a specially formulated “Table of Guaranteed Values” |
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Reduced Paid-Up Insurance Option pt. 2
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• Accumulated cash value (continued)
– New policy builds cash value, endows at age 100 – Since it is a paid up policy, no further premiums needed – New reduced paid-up policy will not include any riders or supplementary benefits |
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Extended Term Insurance pt.1
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• Accumulated cash value used as a single
premium to purchase a paid-up term insurance policy – Face amount of term policy equal to the face amount of the original whole life policy – Length of term depends on the net cash value that is applied as a single premium at the insured’s attained age • Can be determined from a specially formulated “Table of Guaranteed Values” – The extended term insurance will not include any riders or supplementary benefits |
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Extended Term Insurance pt. 2
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• This nonforfeiture option is typically the one that
goes into effect automatically if the policyowner isn’t available to make a choice or simply fails to exercise an option – Policy lapses and policyowner neither makes an effort to reinstate nor requests a specific nonforfeiture option |
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Dividends
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• Participating policies, usually issued by mutual
insurance companies, may pay dividends to their policyowners • Dividends are not guaranteed and are only payable when declared by the board of directors of the insurance company • Are considered a return of excess premium, so they are not taxable • Through declaring a dividend, the insurer allows policyowners to participate in the favorable experience of the insurance company |
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Cash Dividend Option
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Policyowner receives a check from the insurer
for the dividend amount |
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Accumulation at Interest Dividend Option pt. 1
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• Policyowner lets dividends accumulate at
interest with the company – Company invests policyowner’s money from the dividends and adds the interest earnings to the initial amount as earnings accrue – Interest earnings are taxable to the policyowner in the year received • If insured dies with a credit to the policy for accumulated dividends and interest, this amount also paid to the beneficiary in addition to the death benefit |
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Accumulation at Interest Dividend Option pt. 2
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• Leaving dividends to accumulate at interest has
nothing to do with the cash value accumulation of a permanent policy • Accumulated dividends may be withdrawn at any time by the policyowner |
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Paid-Up Additions Dividend Option pt.1
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• Policyowner uses the dividends to purchase
additional, fully paid-up whole life insurance • Amount of paid-up addition is based on the insured’s age at the time the paid-up additions are purchased and the actual amount of the dividend • Paid-up additions are single premium whole life policies purchased with dividends – One purchased each year (if dividend declared) – Each paid-up addition also develops cash value |
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Paid-Up Additions Dividend Option pt. 2
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• No new policies issued, base policy simply
amended to reflect the additional paid-up values – If insured dies, the base policy face amount and the paid-up additions make up the total death benefit – If insured surrenders policy, the cash values of the base policy and the paid-up additions are paid |
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Reduce Premium Dividend Option
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• Policyowner uses the dividend to pay all or part
of the next premium due on the policy • If this option chosen, premium notice typically will show the gross premium amount minus the dividend and the policyowner pays the net amount due • Annual premium payment mode usually required when this dividend option chosen |
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Paid-Up Insurance Dividend Option
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• Dividends used to pay up a policy earlier than
otherwise expected • For example: – By using the dividends in this manner over the life of the policy, a 20-year pay policy may be paid up after 16 or 17 years instead of the full 20 years – If used in this manner on a traditional whole life contract, policyowner would not have to pay on the policy to age 100 • Policyowner must request this option |
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One-Year Term Dividend Option
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• Dividends used to purchase additional one-year
term insurance – Amount of term insurance usually limited to the current cash value of the policy – Cost of term insurance based on the attained age of the insured – If this dividend option has been in effect since the original policy went in force, insurer usually will not require additional proof of insurability |
