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118 Cards in this Set
- Front
- Back
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Life Risk Exposures
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Financial planner called upon to recognize and address financial exposures related to the death of a client, the client's family members, and others whom the client will interact.
Clients may have objectives that need funding in the event the client dies, life insurance is one funding alternative. |
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Life Exposures 3 Main Categories
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1: Personal Needs
2: Family and Survivor Needs 3: Business Needs |
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Risk Exposures - Personal Needs
Finance |
> Finance: Risk - Dying before loan paid off...
Many banks require you to hold insurance collaterally assigned to the bank in order to take out loans. Seldom take out loans = buy temporary insurance. Take out loans often = permanent insurance. Life insurance bought to pay off mortgage would not be assigned to lender since house acts as collateral. |
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Risk Exposures - Personal Needs
Retirement - Outliving Pure life Annuitant |
Retirement: Risk - Spouse outliving pure life annuitant...
Clients with Pension plans must choose life only vs Joint and full survivor payout plans. Life only: Pays for life of one person, stops when they die. Higher payout over single life...May want to purchase life insurance for spouse in event owner dies. Joint / Survivor: Pays for life of owner and spouse. Lower payout option... |
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Risk Exposures - Personal Needs
Retirement - Person paying your retirement dies or becomes disabled before you die, causing default. |
EX. You own a small business and all your assets are tied up in business. Little or no savings/retirement assets outside of business assets. Must find someone to purchase the business to fund your retirement. If purchaser must make payments to buy the business (Funding your retirement) What happens if they die prematurely?
Cash sale, lump sum, safest option... can be tax burden, impractical. Buyer must make payments...risk of default. If buyer is fully capable of running business...biggest risk could be buyer dying or becoming disabled. To protect...Buyer must have life and disability insurance. |
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Risk Exposures - Personal Needs
Personal Goals - Risk death before accomplishing personal goal / when insurance is the best funding vehicle. |
- Charitable giving ... or any goal that the client wants funded.
Life insurance obvious way to fund this goal. A few thousand dollars can result in $1,000,000 endowment or gift. |
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Family Needs
Risk Exposure - Death of Primary Income Earner |
Final Expenses: Must be paid before probate of estate is complete. Includes funeral, medical bills, legal, accounting fees, death notice, and outstanding debts.
If estate is large enough estate taxes must be paid...federal tax paid unless money passing to spouse. Marital Deduction is unlimited. Also many states have death tax... Can be a problem if estate has few liquid assets... If estate has little liquid assets Life insurance can be solid funding option. |
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Death of Primary Income Earner
Contingent Liabilities |
Notes on which client has cosigned ... partial ownership of closely held business.
Business liabilities that the client has personally guaranteed could end up being very large liabilities for the estate in the future. |
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Death of Primary Income Earner
Dependent Income |
Even in two income families...loss of one income earner can be devastating.
Both income earners should carry life insurance in event they pass away. Must take retirement needs of surviving spouse into account when calculating insurance needs. |
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Death of Primary Income Earner
Education |
Cost of educating children, grandchildren, or spouse that hasn't worked in many years and must return to school must be taken into account when considering life insurance for income earner.
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Death of Primary Income Earner
Adjustment Fund |
Fund used by surviving spouse to adjust to new life after spouse passes away. Used for travel, taking a leave from work, etc.
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Death of Primary Income Earner
Parents Needs |
More people now caring for aging parents...
Many families care for elders at home as long as possible...then becomes too much a burden and parents for to long term care facilities ... very expensive. LTC insurance and life insurance popular ways to help deal with aging parents |
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Business Needs -
Closely Held Business Risk - Death of Partner or Co-shareholder |
If partner dies and remaining families inherits partial ownership, running the business with existing partners will be very difficult.
Often Buy-sell agreements are in place for surviving partners to buy out remaining family. Should be funded with life insurance. Technically when a partner dies, without existing written agreement, the business should be liquidated and proceeds distributed. |
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Business Needs
Closely Held Business Death of Key Employee |
An employee, if lost, would have a material effect on the earnings of the business.
If employee could be replaced in a timely manner without much affect on earnings little planning is needed. If employee very hard to replace... Cross train employees now, have written manuals, or automate some systems. Life insurance placed on employee is also option to help business replace lost earnings. Also important is retaining key employees from leaving business... Use benefits programs to retain key employees...deferred comp, split-dollar programs |
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Business Needs
Closely Held Business Death of Owner & Estate liquidity |
Not uncommon for owner of business to sell company stock to fund estate costs.
Company should carry life insurance on to purchase shares of company stock |
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Business Needs
Closely Held Business Buy-Sell Agreements |
Used to transfer ownership interest of deceased business owner. Require attorney to draft formal documents.
Allows business to buy deceased owner's share of business from the owner's estate. Provides money for deceased's family and allows deceased's family to stay out of operation of business. Life insurance used to fund agreements... |
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Forms of Buy-Sell Agreements
Business continuity |
Stock Redemption - Business buys deceased shareholders stock
Cross purchase - Each owner agrees to buy out the interest of deceased owner 2 other methods of business continuity... Wait and see - After death of one owner, other owners wait and see the best way to move forward Third-party buyout - Non-related party agrees to buy deceased owner's interest |
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Traditional forms of Life Insurance - origin of whole life insurance
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Originally life insurance was only offered in term, as people got older, premiums increased and insurance became prohibitively expensive.
People would simply be unable to afford insurance as they got older and would die uninsured. Public demanded level premium...Whole life was born... Paid excess premiums early in life...excess premiums put into Insurance company cash account which is invested in the general account. Term Insurance useful for short-term needs... Whole Life for Permanent needs... |
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Term Life Insurance
Annually Renewable Term Insurance |
Temporary Insurance
ART & YRT - Annually and Yearly Renewable Term, provides death protection one year at a time. Policy renews each year with payment of premiums due. Allows for very low initial premiums... Premiums based on estimated costs of insuring person for one year at a time. Mortality costs increase with each year ... as you get older... increases at increasing rate...accelerates. Generally have guaranteed max premium and renewable for some period of time. Many guarantee level premium for first years of term 5 to 30 years....longer the guarantee level premium the higher it will be. |
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Annual renewal vs Reentry Term Policy
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Annual Renewal = Insured simply pays premium every year and term policy continues.
Reentry Term Policy = Incentive offered to insured to re qualify for coverage every couple years. Insured is underwritten every 5 years. If insured is in same physical condition premiums would be cheaper than under auto renewal program. If insured in worse physical condition than premiums would go up. |
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Regulation XXX
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Requires higher reserve requirements for Term Insurance writers...
Created by National Association of Insurance Commissioners Addresses long term guarantees of term insurance...helps assure solvency of term providers |
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Decreasing Term Life Insurance
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Term life which premiums stay level, but death benefits decreases.
Generally sold to cover home mortgages. Has some problems Addressed on Page 21 |
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Death Benefits of Term Insurance
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"Best life insurance policy is the one in-force when you die"
Term insurance in all of its forms provides most of the death protection at any given point in time. Most term policies lapse prior to insured's death; majority of death claims paid on permanent forms of insurance. Term policies generally larger in amount than permanent policies. Generally term policies either converted to permanent insurance or allowed to lapse prior to death. |
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Permanent Life Insurance
Endowments |
Endowment Policy: Death benefit and cash surrender value are the same at specific date (20 Years from date of issue)
Formerly used for specific goals...known value at known date in future. College tuition, wedding, retirement. Tax law changed in 1984 and stopped most sale of endowment policies that endowed before age 95 Not the same as modified endowment contract or MEC. MEC failed "seven-pay test" created by congress. MEC had poor tax implications. |
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Permanent Life Insurance
Whole Life |
Standard of Permanent Insurance.
Fixed Premium Guaranteed Cash Value Guaranteed Death Benefit Minimum guaranteed interest rate to hold product together Generally higher initial premiums than term...excess premiums put into cash value account...has other uses to insured. Have reserve maintained by insurance company used to pay benefits. Non-forfeiture policy...provides benefit to owner if they stop paying premiums Standard form of whole life provides guaranteed death benefit for the life of insured and requires premiums to be made until death or policy maturity. |
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Insurance Companies structure
Stock Companies vs Mutual Companies |
Stock Companies: Owned by shareholders and trade on financial markets. Do not normally pay dividends to policy holders.
Mutual Companies: Owned by policyholders, pay their dividends to policy owners. Policy that receives dividends called...participating. Dividends considered return of excess premium. Tax free income... Explanation page 24 |
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Limited Pay Policies
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Between endowment and whole life policies
AKA Limited pay life policies Whole life policies with shortened premium-paying period. Benefits continue for life but premium payments stop earlier. Most common is life paid-up at 65. Stop paying premiums at age 65. Others 10-pay, 20-pay, or 30-pay. Because of shorter payments, premiums higher than whole life. |
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Variations
Modified Whole life |
Whole life policy proceeded by term life policy.
Low term like premiums for first years, then automatically increase to whole life levels. Ultimate premiums normally lower than would be if insured waited until age at which premiums automatically increase to purchase whole life policy. 2nd type modified whole life = sold on lives of children. Term life insurance until child reaches certain age, 18 to 25. At the specific age policy converts to whole life or limited pay-life at lower premium than if child simply waited to that age to purchase. This protection can be added very inexpensively as a Children's Level Term Rider. |
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Graded Premium Life
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Designed to ease people into whole life premium.
Starts low and increases over 5-7 years, reaches ultimate premium. Ultimate premium level rest of the life of insured. |
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Hybrid Life
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Very confusing... several variations.
Uses the dividend to effect the death policy. Variable Universal Life (VUL) Death benefit and other guarantees are added to provide more security if market returns are poor. Guarantees include minimum withdrawal and distribution options and guarantees against lapsing. Hybrid policies also combine life insurance with long term care. Cash value used to pay LTC expenses. |
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Universal life: UL
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AKA Flexible Premium Adjustable life...
Elements of insurance "Unbundled" Mortality, risk charge/cost of insurance, expense charges, admin fees, credited interest, are visible to insured not just actuary. Elements are kept separate and shown on contract / statements. Has some marketing advantages, makes performance look more predictable, easier to show UL as investment. Biggest advantage is flexibility.... Premiums flexible and can be varied. Money not used to pay mortality & expense charges put into cash value of product. Detailed explanation Page 28... |
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Universal Life
Option 1 / A Vs. Option 2 / B |
Option 1 / A = If net amount at risk is difference between the death benefit and the cash value.
Policyowner actually buying tax-deferred cash value fund and decreasing amount of term insurance. Option 2 / B: Death Benefit equal initial face amount plus the cash value. Buying term insurance equal to the additional death benefit. If death benefit equals initial face amount plus cash value, net amount of risk never changes. Policy effectively consists of level term policy with increasing cash value. |
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Universal Life
Policy Features Premiums |
Minimum: Premiums large enough to cover expenses and mortality.
Target Premium: Based on interest rate that is expected to remain constant over life of contract. Maximum: The most money contract can accept without violating IRS restrictions on life insurance. |
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Universal Life
Policy Features Credited Interest |
Minimum Guaranteed: Rate guaranteed by contract to be credited to the cash value. 3.5 - 5 %. UL is built on term chassis, this cash value what distinguishes from term.
Current Rate: Interest credited on this deposit / premium. Set by insurance company, indexed to T-bills / some money market instrument. Usually guaranteed for one year. Blended Rates: Last year's premium may receive different rate than current premiums. Prior premiums blended with pools of interest rates reflecting earlier economic conditions. Interest Credited on loan amounts: Dollar equivalent of loan based on the contract may receive current credited interest or some other lower rate as defined by contract. - Some credit one interest rate on specified level of cash accumulation, and higher rate on cash accumulations above that amount. Dividends: UL policies have ability to adjust credited interest rate, its rare for company to pay dividends on UL policy. Even mutual companies seldom share in dividend surplus. |
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Universal Life
Policy Features Mortality Charges |
Guaranteed: Schedule of charges included in contract, states maximum charge against contract at each age. Based on Commissioners Standard Ordinary Mortality Table. Rates are monthly charge per thousand dollars net amount at risk.
Current: This years current charge against the contract. Lower than guaranteed rate, usually rate shown in illustration. Based on companies actual experience. Projected: Some UL contract illustrations use projection of company's mortality experience rather than current rates. |
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Universal Life
Policy Features Administrative Expenses |
Guaranteed: Max amount / % withdrawn from contract. Can be flat amount per month or per year, or percentage or premium, or cost per thousand of face amount at risk.
Current: Current Charges against cash fund or premium paid. Banded: Charges may vary according to face amount. Banding IDs range of face amounts. Beath benefits in one band = one charge, BDs in higher band = different amount. |
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Universal Life
Policy Features Other Charges |
Surrender Charges: Charge applied against cash value if policy terminated before insured dies. AKA back end charge, vary from 5 to 15 year sliding scales.
Policy Fees: Fist year only or annual Premium Fees: % of premium, or fixed dollar amount State Premium Tax: 2 - 3% of premium paid. Some companies charge same amount regardless of state tax, low tax states subsidize high tax states. Some companies charge state specific premium tax. Withdrawal charges: Fee for taking money out of contract. |
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Additional Policy Benefits of UL Policy
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Tax deferred accumulation major attraction...
Flexible premium payments Adjustable death benefits Unbundled structure full disclosure cost advantages Flexibility of UL policy to adjust to owners ever-changing needs, one policy to satisfy needs over insured's lifetime. |
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Flexible Premium Payments
Disadvantage of flexible premiums |
Policy owner decides when and amounts of payments...
Pay for lifetime insurance in whatever payment schedule they choose. Only requirement: Cash value must be large enough to cover next month's policy reserve to cover cost of next month's charges. First year premium usually has minimum level. Disadvantage: If policy owner pays too little in premium, company will issue notice, stating minimum premium payment must be made. Now its really expensive term policy. If additional premium not added to build cash value, required minimum increases each year. |
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Adjustable Benefits
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Policy owner can increase or decrease face amount of benefit to suit their needs.
Ex: With young children family needs more coverage. Once children have left home less coverage is needed. If had to write new policies each time coverage changed, flat admin fees for new policies would add up. Being flexible and changing benefits on same policy saves admin costs. |
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Unbundled Structure
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Insurance contract is broken down into its components.
Owners know exactly where premium dollars are going Effect of interest rate on cash value more visible... |
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Full Disclosure
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Transparency is unique to UL policies
Owner knows how cash values are developed Policy outlines and explains different components. Annual statements very detailed...shows all charges, loans, withdrawals, payments, etc. Major step to providing what consumers wanted... Easier to understand insurance. |
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Costs
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Cost of UL based on net amount at risk plus expense charges.
Expense charges: many components, fixed dollar amount, level % of premiums, origination fee, possible first year load. Charges deducted from either cash value or monthly premium. Because UL so unique can be argued they cost more to administer. UL policies can have wide range of charges depending on options... |
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Disadvantages of UL
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Since product is one package, can end up with neither most competitive savings vehicle or insurance coverage.
- Clients that are not likely to make consistent payments not good candidates, pay too little and cost of insurance becomes greater than cash reserve and must increase payments or drop policy. Contract becomes expensive term insurance. - Changing interest rate conditions can cause illustrations to be very inaccurate and cause lawsuits. - Annual statements can also be problematic, visibility of cash value / surrender value can tempt owner to cash in policy and do something else with the money. - Policies based on short term interest rates, values react quickly to changing current interest rates. - Performs poorly in falling interest rate environment, - Performs well in rising interest rate environment |
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Why not buy term and invest the difference?
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Permanent products in affect composed of increasing cash value and decreasing term element. There's tendency to assume no reason to purchase permanent product.
- People assume the can do better investing than insurance company - Tax treatment of insurance is preferable to buying term and investing difference, growth of cash value generally tax deferred. - Can compare "safe" returns of UL product to "risky" returns of investing in equity markets - Many people aren't capable of successfully investing money on own, end up with lots of money in CDs anyways. - Waiver of premium provisions, pays premiums or charges in event owner is disabled, allows cash value to grow even if owner disabled. - Another vehicle for forced savings, must pay the insurance bill - Many people think accessing money in permanent contract too difficult, which is untrue. - Instead of buying term and investing difference, client often buys term and spends difference |
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Adjustable Life
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Unique product that combines aspects of Whole Life, term, and universal life.
Provides owners flexibility to adjust policy as needs change. |
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Structure of Adjustable life
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Combo or term and whole life...
Or Whole life policy with adjustable cash value and death benefit guarantees.... Or Changeable life When policy issued - face amount and premium chosen...guaranteed period is issued. Guaranteed period = number years death benefit guaranteed to be in place. Premium can be changed at will, within max/min, so guarantee period lengthened or shortened. Dividends paid used to extend guarantee period and increase cash value...unique to AL Determine premium that will show death benefit extended to age chosen by client, based on current dividend scale. As economy/dividends change premium adjust to keep policy in force till target age. - Owner can change face amount, premiums, & length of coverage. - Unscheduled premium contributions, partial withdrawals are allowed. 2 options for waiver of premium rider Cost of living rider - COL - Policy owner can increase policy every 3 years to adjust for CPI. |
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Advantages of Adjustable life
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Exceptional flexibility biggest advantage
Nature of policy lets owner know how long benefits are guaranteed, unlike UL |
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Disadvantages of Adjustable Life
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Similar to those of UL
Can end up being expensive term policy if only minimum premium payments are made. Flexibility gives poorly motivated client chances to inadvertently lapse policy Flexibility makes more expensive than whole life, Minimum term premium higher than normal term premiums |
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Traditional Variable Life
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Variation built on whole life model.
Owner invests cash value in mutual funds - sub-accounts. Traditional variable life - whole life features, guaranteed premium and guaranteed death benefit. |
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Structure of Variable Life
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Combine protection & savings function of traditional life insurance with growth potential of mutual funds.
Cash value not guaranteed, invested in separate account (not Insurance general account) Premiums are fixed Face amount & cash value varies in relation to contract's earnings. Guarantee death benefit never less than initial face value. Higher premiums than same amount of whole life insurance. Prospectus included / must be included |
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Inherent risk of variable life
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Must be willing to give up guarantee of stated cash value, exchange for possibility of enhanced death benefit and cash value.
Many people not willing to take risk in death protection All investment risk falls on policy holder |
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Variable Universal Life VUL
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VUL - Built on unbundled universal life platform.
AKA - Flexible premium variable life Combines flexibility of universal life with investment selection of variable life. Unlike variable life, VUL guarantees only mortality rate and right the keep policy in force. Owner must be experienced with investing Typical terms of VUL policy page 42. |
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Variable Universal Life - Terms
Investment account charges Policy Loan Effect |
Investment account charges: Few companies offer volume discount since policies are subject to CDSC.
Policy Loan Effect: If you take out loan, cash value of account is used as collateral and moved to the guaranteed return account (Safer) but will earn much less money. Works against general purpose of having variable product.q |
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Joint Life Policies
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Some policies cover more than one life...
First-to-die or second-to-die policies / survivorship policy. Normally whole life, but current assumption whole life & UL on two lives becoming more popular. |
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Joint Life -
First-to-Die Policies |
Used in personal or business decision...
Pays when first of group dies... Used to fund buy-sell business agreements. For husband and wife, they can have one policy instead of two. Used to cover mortgage or education fund for family. Premiums generally more than cost of insurance on one person, but less than combined premiums on two separate policies. - Not among best selling insurance, can be hard to find in market. |
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Second-to-Die policies
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Survivorship life - pays when last person dies.
Attractive for estate planning situations when unlimited marital deduction is used. Ex: Husband dies, assets go to wife untaxed, wife dies insurance covers estate taxes. Premiums generally lower than cost of two separate policies. Advantageous when one insured is highly rated and older, since underwriting focuses on who will likely be 2nd to die. Traditionally whole life is used, but some companies now offer term survivorship policies. |
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Indeterminate Premium Whole Life
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One form of permanent insurance sold by stock life insurance companies to compete with dividend-paying policies.
Death benefit and cash value guaranteed, premiums fluctuate. As dividends go up and down with economy, so does the premiums in this form of insurance Most specify max/min premium amount |
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Interest-Sensitive Whole Life
AKA Current Assumption Whole Life (CAWL) |
Whole life policy and universal policy combined.
When issued, premium and death benefit fixed. But both can change... Interest & policy charges ID'd in separate accumulation account. Not considered participating policies, but values and or premiums are affected by interest rate changes throughout life of policy. |
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Tax Treatment
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Lots of Federal activity in tax treatment of life insurance...limiting use of life insurance as investment.
Now Significant tax implications in way products are designed and paid for by client. If cash value become too large relative to death benefit, policy ceases to be considered life insurance. Growth in cash value no longer tax deferred. Owner must report cash value gain as taxable income. Policy death still income tax free when paid. |
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Modified Endowment Contract
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In late 70s UL policies debuted and people gamed system, put in lots of cash into small life policy, let it grow, pull out money though FIFO and borrow rest, creating tax free investments.
In 1988 Congress passed Technical and miscellaneous Revenue Act 1988 (TAMRA '88) it created Modified Endowment Contract (MECs) MEC - if policy fails the seven-pay test loans and withdrawals become subject to tax and penalties. Policy classified as MEC if owner deposits equivalent of more than total net annual premium payments at any time during the first seven years. EX: Annual premium = $2,000, total max deposit in year 3 cannot exceed $6,000. But if deposits were $1,000 in year 1 and 2, then max that amount can be deposited in year 3 is $4,000. Once classified as MEC, always MEC. Withdrawals from MEC taxable on gains/earnings of policy. Gain = any cash value amount in excess of premiums paid (less dividends received). |
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Group Life Insurance
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Life Insurance generally paid for by employer
Employer can cancel the policy at any time. Employee can convert to whole life if they leave the job Don't have all your insurance tied to your job Employer can deduct premiums that benefit employees Employees don't report up to $50,000 of premiums paid as income Death benefits remain income tax free to beneficiary. |
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Franchise of Payroll Deduction Life Insurance
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Offering same insurance products to employees of same firm..
Premiums automatically come out of pay check. Be aware of billing schedule, admin costs, product, and underwriting required. Products are similar to all other life products. Can be more or less expensive than buying insurance off the street. Advantages = Convenient, relaxed underwriting, pricing advantages. |
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Low-Load Life Insurance
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Sold by fee-only type advisers
Can be any type of insurance product Simply sold without sales commission Result is lower premiums higher cash surrender value |
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Family policies
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Family Income policy: Base policy of whole life with decreasing term insurance rider. Provides monthly income til specified date. Decreasing term terminates at end of income period and family left with the whole policy.
Family maintenance policy: Similar to income policy, except income benefits last specified number of months, doesn't change. Term rider is level term, terminates at given date in future. Family protection: Covers everyone in family for different amounts. Priced on number of covered adults and whether there are children. |
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Private Placement Policies
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Offered through domestic and foreign insurers to high net worth individuals.
Highly customized, structure more as investment vehicles. Cash can be invested in way more than just mutual funds. Lots of possible tax benefits Premiums typically very high, Millions $$, Typically structured as VUL policies retain tax benefits of Non-PPLI: Tax deferred growth tax free death benefit In order to satisfy tax requirements must give up great deal of control of assets. If fall outside of tax guidelines may no longer qualify as life insurance. Lose tax deferred growth. Some death benefit may become taxable. |
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Chapter 3: Parts Provisions & Issues
Declarations Page |
Cover page and declarations page often combined
Shows = type of insurance, Company name, policy number All that is needed to file insurance claim is name and policy number Don't keep your own insurance documents in your own safety deposit box, when you die it can be hard for your beneficiaries to reach documents |
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Standard Provisions
Ownership Clause |
Ownership: States who owns the policy and who has rights to transfer ownership of policy.
Policies can be used as collateral for loans. Beneficiary Clause: Lists primary and secondary beneficiaries. Tertiary beneficiaries. |
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Per Capita vs. Per Stirpes
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To avoid undesired distributions...Avoid dilution of benefits to primary benes
Clarifies who gets money if a primary beneficiary dies. Children are primary bene w/ grandchildren as secondary. What if one child dies... one grandchild could end up with equal share as primary. Per Capita Distribution. Per Stirpes = multiple benes in same class receive equal portion. Each grandchild would receive equal share. Example page 57. |
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Revocable vs Irrevocable
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Most beneficiary designations are revocable.
Policy owner can change benes at any time. Irrevocable = policy owner must get written permission from bene to change, borrow against, or surrender. |
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Entire Contract clause
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States that the policy and application makes entire contract.
Changes must be in writing and signed by officer of company. |
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Grace Period
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Premium received withing 30 days after due date are treated as received in time.
After 30 days policy will lapse. |
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Reinstatement Clause
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States what must be done to reinstate policy after it has lapsed.
Pay off all premiums due and provide proof of insurability |
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Misstatement of Age Clause
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If at death the insured if found to be different that age stated on application, then payments can be adjusted to reflect actual age.
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Contestable Clause
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Insurance company has 2 years to figure out if contract is valid. After the 2 years contract must stay in place.
If insured dies before 2 years the company can take reasonable amount of time to determine if contract was valid. Determine that no fraud was present. |
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Suicide Clause
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Most policies pay benefit even if owner commits suicide.
If commits suicide with 2 years of contract date, company returns premiums paid. After 2 years has passed suicide treated as any other death. |
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Non forfeiture options
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If owner doesn't want to continue paying premiums there is some amount that will be returned to the owner.
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Policy Loans
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2 types: Standard Policy & Automatic Premium Loans
Loan made by insurance company using policy as collateral. Like equity loan on home. Cash value of policy used as equity |
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Standard Policy Loan
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Generally can borrow entire cash value...
Many charge interest in arrears or in advance... Know distinction and how stated interest rate affects cost. Interest fixed or variable |
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Automatic Premium Loan
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Prevent lapse of contract if premiums aren't paid on time.
Policy loan is created to cover missed premiums |
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Settlement Options
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Typically death benefit paid as lump sum
There are many different options that the benes could use to receive $$$ |
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Dividends
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Policies issued by mutual life insurance companies must have provision to deal with dividends
If company has profit must pay dividend to policy owners. Participating policies receive dividends Options for payment: Cash, reduced premiums, accumulate at interest, paid up dividend additions, one year term insurance |
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Conversion Clause
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Term policies generally allow you to convert to permanent insurance.
May limit you to certain types of permanent insurance. |
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Viatical Agreements
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Policy owner sells policy to someone for more than cash value, but less than death benefit.
Policy owner may have terminal illness and not eligible for accelerated death benefits. Policy owner could surrender policy for 30% of death benefit or could enter into a viatication agreement and sell to someone for 70 % of death benefit. Owner gets money upfront ... Viatical agreement partner receives 100% of death benefit when policy owner dies. Prices paid are set by National standards Estimate present value of death benefit subtract present value of premiums due until date of death. Viatical company must pay premiums after agreement is signed Tax to policy owner same as if death benefit was paid. To qualify owner must be determined terminally ill by doctor. |
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Senior of Life Settlements
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Allows seniors, with Life expectancy longer 2 years to sell their life insurance
Must be at least 65 and have poor health. But can have much longer life expectancy that in viatical settlements |
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Chapter 4: Life Insurance Policy Options
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Dividend Options
Non forfeiture options Settlement options |
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Dividends options
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1. Cash: Company sends check on policy anniversary
2. Reduced Premiums: Premium reduced by dividends due. Or pay down interest or loan balance due 3. Accumulate at Interest: Like savings account. Company hold dividends in separate account and pays interest on them. Interest on dividends paid are taxable. 4. Paid-Up Additions Dividend option: One of most popular choices. Small amount of insurance is purchased with dividends. Increases interest rate for entire policy. Future dividends are paid to the Paid-Up Additions. 5. One year term: AKA Fifth dividend Option: Dividend is used to buy one-year term insurance in amount equal to guaranteed cash value. |
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Paying premiums with Dividends
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Several options to pay policy premiums with dividends...
Simplest is Reduced Premium Dividend option... Also could have participating whole life policy with paid up additions or accumulating dividends... Pays full premiums for number of years depending on dividend scale, can switch to reduced premium options and accumulated dividends are used to pay entire premium. Depending on interest rates and dividends policy could continue without any out of pocket expense. Works when interest rates are high. |
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Nonforfeiture Options
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1) Cash = Most common option, value on nonforfeiture table times number of thousands of $s of Insurance, plus dividends, minus loans and premium due. Table shows Cash value of $138 has $100,000 DB. Cash surrender value = $13,800. (Multiply 138 by 100)
2) Reduced Paid up Insurance = For those who want to stop paying premiums and keep whatever insurance they can for life. Treated as smaller limited pay life policy. $100,000 policy, reduced paid-up value $447, would have $44,700 paid up policy using $13,800 as single premium. 3) Extended Term: Don't want to pay premium but keep full $100,000 DB. $13,800 cash value is given to insurance company in exchange for full $100,000 coverage for next 20 years, more or less single pay premium term policy. |
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Settlement Options
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Interest Only: Insurance company holds DB and only pays out interest earned on DB. Normally only a parking place until Bene figures out what to do with $. Eventually another option is chosen. Interest paid is taxable.
Installments for fixed period: Bene chooses period of time that payments are received. Company uses interest rate assumptions to determine amount paid. Installments for fixed amount: Pays same amount for as long as funds last. Life Income Options: |
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Settlement Options:
Life Income Options |
Straight Life Income: Payments made in equal amounts over life of recipient. One options chosen very hard to change. Payments stop when recipient dies.
Life Income with Period Certain: Period certain is minimum years payments can be made, even if recipient dies. 10 c&c. = 10 years certain and continuous. Life Income with Refund: If recipient dies without receiving amount equal to death benefit then benes will receive refund of difference. Joint and life survivor: Life income option that lasts for two lives. Pays as long as either one is alive. Joint and one half survivor.... Joint life: Uncommon, pays only when both are alive, stops when one dies. |
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Which Life Income Option pays the most?
know ex. pg 77 |
Straight pure life income pays the most. But rarely used because principal is lost when recipient dies.
Pure life makes sense of recipient has no living relatives or dependents or wants non of the proceeds to go into their estate. |
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Chapter 5: Optional Provisions and Riders
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Life Insurance generally not loaded with automatic benefits, these must be chosen and paid for separately
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Disability Waiver of Premium
General |
Most common rider included with life insurance.
If owner becomes disabled and cannot pay premiums and qualifies, insurance company will waive premiums and insurance contract will continues. Must be disabled for 6 months before waiver begins, then premiums paid over the 6 months are refunded. Qualifying disability must prevent owner from working. If owner can work, but for reduced income, premiums must still be paid. |
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Presumptive Disability
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May result in waiver of premium being effective without total disability of policy owner.
Policy owner losses their sight, hearing, both hands, both feet, disability presumed total and premiums are waived. Requirements differ widely by insurance company. |
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Accidental Death Benefit
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Benefit paid as result of freak accident. Normally lower than the basic death benefit.
People who die as result of accidental death normally not is as good financial condition as someone older who dies as result of stroke / heart attack. ADB normally expensive and lots of restrictions on what qualifies. |
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Guaranteed Insurability Option
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AKA Purchase option: Allows owner to purchase more insurance in future under same policy, regardless of condition.
Certain limits apply to amount and frequency that can be purchased under same conditions as original contract. |
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Common Disaster Clause
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Included with bene agreement
AKA payment delay clause... States that if insured and primary bene die in a common disaster, the proceeds are automatically given to secondary beneficiary. Prevent secondary beneficiary from being disinherited. |
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Spendthrift Clause
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Prevents beneficiary from assigning benefits they will eventually get from policy.
Prevents only while insurer has money, once bene has money they can do whatever. |
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Chapter 8: Annuities
Definitions: Single Premium Fixed premium Immediate Annuity Deferred Annuity Individual Annuitant Joint and Survivor Joint Life Pure Life Life and Period Certain Refund Annuity Fixed Annuity Variable Annuity |
Single Premium: Upfront lump sum premium
Fixed premium: Premium paid annually Flexible Premium: Premium payments can be changed by owner, within restrictions Immediate Annuity: Income payments start shortly after premium payment made. Deferred Annuity: Income payments start in future Individual Annuitant: Payments to one person Joint and Survivor: Made while both annuitants alive or in reduced fashion after one dies Joint Life: Income lasts only as long as both are alive Pure Life: Income last for lifetime annuitant, no residual estate value. Life and Period Certain: pays for life and with some amount guaranteed to pay for minimum number years to bene. Refund Annuity: If value of income paid doesn't equal value of annuity at date of annuitization, difference is paid to a bene. Fixed Annuity: Interest rate on invested dollars has minimum rate of return Variable Annuity: Annuity invested by owner in separate accounts similar to mutual funds |
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Single Premium Immediate Annuity
SPIA's |
Guaranteed income for life of the annuitant
Monthly payments begin one month after policy issued and continue of life. Advantages: Ensures lifetime income, without outliving money. Disadvantages: Benefits are fixed, don't increase with inflation. Rate of Return: Premium = $100,000 Monthly Payment = $1,000 Age = 65 20 year life expectancy Rate of return = 10.5% Income Taxation of Benefits = Each payment of non-qualified annuity considered two parts. 1 = Return of principle (no tax) 2 = Return of interest (taxable) Each payment adjusted by the exclusion ratio. Ratio total investment in contract bears to total expected rate of return. Ex page 92. |
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Deferred Annuities: Fixed
Single Premium (SPDA) Flexible Premium (FPDA) |
Fixed SPDA or FPDA carries basic guarantee rate. Excess current rate guaranteed for period time extending one month to ten years.
Tax deferred until withdrawal. Features to look out for... > How excess interest determined? > How new deposits credited with excess interest > annual contract fees > Surrender charges > Guaranteed immediate annuity rates and discounts upon annuitization > bailout provisions; Excess rate fails to remain competitive, possible to surrender without penalty? > Market Value Adjustments: Advantages: Accelerates savings growth through tax deferred nature. Reasonableness of rates given current market rates Disadvantages: Contract fails to keep up and owner wants to move the investment, may be imposed with surrender charges, early withdrawals can be tax penalzed 10%. |
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Deferred Annuities: Variable
Single Premium (SPDA) Flexible Premium (FPDA) |
Variable: Created because in long run equities outperform inflation and fixed interest rate investments.
Each payment into contract purchases units of open ended investment company. Units accumulate in separate account . Investment choices are varied and allow transferring. Advantages: Offers tax deferred growth, diversification, professional management, long term savings. Virtually all guarantee value at death will at least equal amount of investment Disadvantages: If features of annuity company not desired, your simply adding insurance admin to cost of investing money. Value fluctuates just like mutual fund investments, early surrender or withdrawal penalties apply. can make income unpredictable. |
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Annuity Variations
Market Value adjusted Indexed Annuities |
Market Value Adjusted - MVA: Significant downside risk. Have ability to adjust annuity rate of return from very start if annuity surrendered prior to maturity date.
Equity Indexed Annuity: Offer some growth of stock market with protection of guaranteed annuity. Have minimum interest rate and interest rate tied to market index. Participation rate determines how much index gain is applied to account. 90% participation rate, S&P index rises 10% gain is 9%. Many have rate cap that maxes index gains. If index goes down, client doesn't lose money and doesn't earn interest. |
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Private Annuities
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Used in estate planning...
Similar to PPLI with no pure insurance aspect Income assets, cash, or gold put into structure Donor can remove those assets from their estate eliminating some estate taxes for family. Donor gets stream of income from annuity when alive. If income stream equal to value of original assets, donor won't pay gift taxes on transfer. Payments received taxed as ordinary income. IRS closely scrutinizes PAs Very complex to setup and maintain. |
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Structured settlements, Non-annuities
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Look like but are not annuities
Series of payments from insurance company to injured party. |
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Chapter 7 Policy Fundamentals - Choosing the right policy
Pricing Fundamentals Mortality and Morbidity |
Mortality = losing life
Morbidity = losing health to illness or injury Mortality Rates = average how long group people live, rates of life expectancy. Policy premiums based on three factors - 1: Mortality Rates 2: Investment Income 3: Expenses Companies use - 1980 or 2001 Commissioners Standard Ordinary mortality table Premiums affected by actual experience of company as well as official tables Morbidity - rate of disability, affects cost of premium waiver riders and premiums on disability insurance. |
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Illustrations -
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Financial Planner asked to make quantitative and qualitative judgements on insurance illustrations, evaluation called taking DUE CARE (Not due diligence)
Due Care= obtaining what information there is and passing it along to client objectively Remember illustrations only show what is currently known. Not all information will be accurate - dividend scales etc. Be sure illustration pertains to the client, age and sex, risk classification, riders, tobacco, Basic illustrations makes some assumptions about client. Underwriting determines if assumptions stand. |
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Dividend Scales
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New dividend scale each year, based on profits and surplus of insurance, shows how much many can be paid as dividends.
always look for "Dividends show at current scale and neither guarantees nor projections of the future" Law prevents guaranteeing dividends |
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Individual Product Illustrations
Whole Life |
One of few products that truly illustrates guaranteed values.
Policy has guaranteed premiums, guaranteed death benefit, and guaranteed cash values. Dividend values should show on any illustrations, if scale hasn't been lowered in last couple years it should be questioned. Illustrations can deviate up or down from real company returns - can be done by... Assuming mortality costs decline, assuming life expectancy gets longer, reduction in costs passed onto insurance holders, Assuming greater lapse rate - Company can show higher dividends in later years. Assuming unreasonable increase in investment returns. Some companies set dividend scale at number too large to maintain, |
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Product Illustrations
Variable Life (Traditional) |
Looks much like whole life policy....
Guaranteed premium and a guaranteed death benefit. Death Benefit can increase with return on policy. Generally no guaranteed cash value - equity investment Beware of expected charges... Due Diligence appropriate. |
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Product Illustrations
Universal Life |
Unbundled structure of Universal life lends itself to manipulation of illustration. Can show guaranteed values that are not truly guaranteed.
Only guarantees would be by using the max mortality and max expense rates. Companies rarely will since they say they rarely need to charge max rate. Don't use the credited interest rate to compare two policies. Use the illustrations with the current credited interest rate. Many companies can jack up one number and make up for it in other places, backhanded. Charge a low mortality rate, but charge higher expenses else ware. |
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Product Illustrations
Variable Universal Life |
Equity Product = Due Diligence
Most same variables from UL apply illustrated returns vs historical returns for investment accounts. Various policy fees shown in VUL prospectus, easily IDed. |
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Product Illustrations
Joint Life |
First to die and last to die
Compare the same way you would a basic policy Last-to-die = for estate liquidity, have lower lapse rate than individual policies, high future dividend may not be realized if company uses accelerated lapse rate to support future dividends or interest assumptions Joint policy = base policy with term aspect, term aspect increases with age, some policies show increasing cost covered by dividends, but in interest rates decline the dividends will not be enough to cover term premiums. Keep term portion small. |
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Model Illustration
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NAIC created = Life Insurance Disclosure Model Regulation, sets guidelines for life insurance policy illustrations.
Regulation includes requirements that must be included in illustration, Buyer's Guide must be delivered before sales presentation or at least 5 days before delivery of policy. Before sales presentation, must make it clear you are sales agent for insurance company. |
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Using the Illustrations
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Start with establishing basic parameters of acceptance for insurance companies - ratings, size, product mix, etc. - reduce number of acceptable illustrations.
timeliness, accuracy of illustration taken into account. Illustration used as initial screen. Company behind illustration is of major importance, numbers must have legitimacy. Things to keep in mind page 109. |
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Choosing the right policy
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How do you know which one is right?
Normally no clear winner... What is most appropriate to suit goal? What is most appropriate for time frame? |
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Insurability
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Everyone begins with line of insurability, if you cross that line you will lose access to life insurance.
Don't wait until insurance is truly needed, too late then. Sick people definitely want insurance, but can't get it. |
