Life Insurance Basics

Front 1

Insurance Contract

Back 1

Insuring Clause (insured, owner, beneficiary, benefit)

Consideration Clause (premium and due date)

Execution Clause (date started)

Front 2

Entire Contract

Back 2

Insurance Contract

Copy of Application

Endorsements

Front 3

Buy and Sell Agreement

Back 3

Legal agreement between business partners; life insurance funds purchase of business by surviving partner

Front 4

Key Person

Back 4

Life insurance by business owner on key employee. Benefit offsets revenue decrease from death of key person.

Front 5

Term Life Insurance

Back 5

Temporary protection.

Only death benefit (no cash value)

Riders include renewability (w/o evidence of insurability) and convertibility (to whole life, w/o evidence of insurability)

Front 6

Level Term Life

Back 6

Death benefit and premium remain constant

Front 7

Decreasing Term Life

Back 7

Death benefit DECREASES while premium stays level.

Cheapest term life option.

Front 8

Return of Premium

Back 8

Death benefit and premiums are level, but insurer returns portion of premium at end of term.

Higher premium vs. other term life options.

Front 9

Whole Life

Back 9

Level premiums

Constant face amount

Coverage to age 100

Front 10

Advantages of Whole Life

Back 10

Cash value

Permanent protection

Front 11

Disadvantages of Whole Life

Back 11

Higher premium (vs. term)

Premiums may outlast income

Risk of low return on cash value

Front 12

Non-forfeiture Law

Back 12

Created cash value.

Cash value also called non-forfeiture value.

Front 13

Ordinary Whole Life

Back 13

Endows at age 100 (cash value = face value)

If owner is alive at age 100, policy will pay owner cash

Front 14

Limited Pay Whole Life (like LP65)

Back 14

Premiums stop at 65, but coverage continue to age 100.

Premiums are level, but higher than ordinary.

Front 15

Endowment Whole Life

Back 15

Policy ends at age before 100.

20-year endowment and Endowment at 65 are most common.

Premium is level, but much higher than other whole life policies.

Provides death benefit until specified age or cash at specified age.

Front 16

Life Insurance Rate Making Factors

Back 16

Mortality

Interest

Expenses

Front 17

Participating Policies

Back 17

May pay dividends (not taxed, not guaranteed).

Front 18

Joint Life

Back 18

"First to die"

Death benefit usually paid upon death of first insured.

Front 19

Survivorship

Back 19

"Second to die"

Death benefit pays on last to die

Front 20

Interest Sensitive Whole Life

Back 20

Fixed premiums, minimum cash value.

Excess return may increase cash value or lower premium.

Front 21

Indexed Life Insurance

Back 21

Earned return determined by index performance.

Index increase will increase cash value up to a cap.

Index decline does not decrease cash value

Front 22

Variable Whole Life

Back 22

Insured determines investments and takes all investment risk.

Separate accounts.

Cash value can increase or decrease.

Agent needs insurance and securities licenses.

Regulated by KID and SEC

Front 23

Universal Life aka Flexible Premium Adjustable

Back 23

Flexible premium, flexible death benefit

Premium recalculated annually, and either paid of out pocket or deducted from cash value

Front 24

Universal Life - Level Benefit Option

Back 24

Death benefit includes any cash value.

Death benefit must be at least 250% of cash value before age 40.

After age 40 the death benefit will shrink gradually until it's 100% of cash value

Front 25

Universal Life - Increasing Benefit Option

Back 25

Death benefit is face value + cash value

Premiums on this option are MUCH higher

Front 26

Modified Endowment Contract

Back 26

If whole life policy is overfunded in first 7 years of contract life, it become a MEC.

MECs are subject to taxes. If funds are withdrawn or borrowed before age 59.5, ordinary income tax rates + 10% penalty apply.

Policy can also become MEC if it is "substantially modified" (like death benefit is materially reduced).

Once a MEC, always a MEC.

Front 27

1035 Exchange

Back 27

Non-taxable exchange of contracts (insured must be same).

Allowed:

Life for life, annuity or endowment

Endowment for annuity

Annuity for annuity

But NOT annuity for life policy.

Front 28

Taxes

Back 28

Death benefit included in estate tax but not income tax

Accidental death usually tax exempt

Earnings on cash value are tax deferred

Cash surrender = earnings on premiums are taxed as ordinary income

Policy loans: interest is not deductible

Withdrawals: return of cost basis is tax free

Front 29

Grace Period

Back 29

Usually 30 days after default of premium payment.

Death during grace period: insurer will pay but deduct owed premium.

Front 30

Reinstatement

Back 30

Allowed within 3 years, providing payment of owed premiums plus interest, proof of insurability, and repayment of any policy loans

Front 31

Incontestibility

Back 31

Two years after date of application.

If reinstated, two year clock starts on any new information

Front 32

Suicide Clause

Back 32

Within two years of policy purchase, insurer can deny claim but must pay back premiums (without interest)

Front 33

Policy loan

Back 33

Max interest rate is 8%.

Interest can be fixed or variable.

Variable rate must be declared annually.

If loan + interest > cash value, policy lapses.

Front 34

Accelerated Benefits Clause

Back 34

Portion of death benefit paid for "qualifying condition" like disease

Front 35

Misstatement of Age

Back 35

Insurer will adjust premium or benefit accordingly

Front 36

Group Life

Back 36

Amount of coverage based on non-discriminatory classes

31 day grace period

Can convert to individual whole life w/o evidence of insurability if loss of group coverage (31 days to apply)

Front 37

Exclusions

Back 37

Policy must state any exclusions like

War

Hazardous activities/jobs (paragliding)

Aviation (small planes, etc.)

Front 38

Irrevocable Beneficiary

Back 38

No cash surrender without beneficiary consent.

Reversion: policy rights can revert back to owner if beneficiary dies first

Front 39

Common disaster clause

Back 39

Primary beneficiary must life for a specified period of time after insured's death or proceeds go to contingent beneficiaries

Front 40

Minor Children as Beneficiaries

Back 40

Minor children cannot be direct beneficiaries.

Insurer will ask court to name guardian if no trust exists.

Front 41

Accidental Death Rider

Back 41

Death from accident--including murder--within 90 days pays an additional amount (double is typical)

Front 42

Payor Waiver of Premium Rider

Back 42

On juvenile policy; waives premium if payor (parent) dies or becomes disabled

Front 43

Waiver of Premium Rider

Back 43

Premium waived if disabled before age 65 for 6 months or longer

Front 44

Guaranteed Insurability Rider

Back 44

Can purchase additional insurance up to face value at specified times/events without underwriting.

Premium will adjust to attained age.

Front 45

Cash Value Options

Back 45

Assumes policy is in effect and insured is living:

1) Cash

2) Paid up, e.g. buy single premium life with lower face value

3) Extend term, e.g. buy level premium, same face value for Y years.

Front 46

Dividend Options

Back 46

1. Cash

2. Reduce premium

3. Accumulate at interest (rate stated in policy; interest is taxable)

4. Paid up, e.g. leave dividends to accumulate until sufficient to pay up policy

5. Paid up additions, e.g. buy more insurance (no underwriting)

6. Annual term, e.g. buy term insurance

7. Accelerated endowment, e.g. increase cash value to move up endowment date

Front 47

Settlement Options

Back 47

1. Lump sum payment of death benefit

2. Interest only (money left with insurer to accumulate interest)

3. Fixed period, e.g. payments made for specified no. of periods until exhausted

4. Fixed amount

5. Life income (aka straight or pure annuity): death benefit buys annuity

6. Life income, period certain: annuity with guaranteed no. of periods (beneficiary)

6. joint and survivor; can include period certain

Front 48

Probate Expenses

Back 48

Do not reduce life policy death benefit

Front 49

Waiver of Monthly Deductions Rider

Back 49

Waives costs (defined in contract; could include premium) if insured is disabled (under 65, disabled for >6 months)

Front 50

Long-term Care Rider

Back 50

Accelerated benefit (reduces death benefit) for qualifying conditions

Front 51

Automatic Premium Loan Rider

Back 51

Premium automatically paid from cash value after grace period

Front 52

Paid Up Cash Value Option

Back 52

Buy single premium (equal cash value) whole life with lower face value.

Front 53

Extended Term Cash Value Option

Back 53

Using cash value, buy term insurance for level premium and same face value as original whole life policy for Y years.