280qr_lesson_06.ppt

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Lesson 6
LESSON SIX *
LOMA 280
LESSON 6
LESSON SIX *
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Lesson 6
LESSON SIX *
The policyowner can use the cash value of the policy as collateral for a loan from another financial institution.
The policyowner can receive a loan, known as a policy loan, from the insurer. If the insured dies before a policy loan is repaid, the unpaid amount of the loan—plus any interest outstanding—is subtracted from the policy benefit.
Cash Value Life Insurance
A cash value life insurance policy grants the policyowner certain ownership rights.
The policyowner generally has the right to surrender—or terminate—a cash value life insurance policy for its cash value during the insured’s lifetime.
The amount of the cash value that a policyowner is entitled to receive upon policy surrender is referred to as the cash surrender value or the surrender value.
The policyowner has the right to use the policy’s accumulated cash value as security for a loan.
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Lesson 6
LESSON SIX *
whole life insurance: a form of cash value life insurance that provides lifetime insurance coverage at a level premium rate that does not increase as the insured ages
Traditional Whole Life Insurance
Whole life insurance policies include a table that illustrates how the policy’s cash value will grow over time.
If the policy does not remain in force until the insured’s death, the insurer agrees to refund the cash value to the policyowner—less any surrender charges and outstanding policy loans.
Despite their common characteristics, cash value plans differ widely in their features and benefits.
Lesson 6
LESSON SIX *
continuous-premium whole life policy (sometimes called a straight life insurance policy or an ordinary life insurance policy): a whole life policy under which premiums are payable until the death of the insured
Because premiums are payable over the life of the policy, the amount of each premium payment required for a continuous-premium whole life policy is lower than the premium amount required under any other premium payment schedule for a whole-life policy.
Whole life policies can be classified on the basis of the length of the policy’s premium payment period. Most whole life policies are classified as either continuous-premium policies or limited-payment policies.
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LESSON SIX *
limited-payment whole life policy: a whole life policy for which premiums are payable only until some stated period expires or until the insured’s death, whichever occurs first
Premiums payable for a specified number of years
Example: premiums payable for 20 years (called a 20-payment whole life insurance policy)
Premiums payable until the insured reaches a specified age
Example: premiums payable until the insured reaches the policy anniversary closest to or immediately following the insured’s 65th birthday, when premium payments cease but coverage continues (called a paid-up-at-age-65 policy)
paid-up policy: a policy that requires no further premium payments but continues to provide coverage
single-premium whole life policy: a type of limited payment whole life policy that requires only one premium payment
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LESSON SIX *
Modified Whole Life Insurance
the amount of the required premium payments changes at some point in the life of the policy (modified premiums)
or
the face amount of the coverage changes during the life of the policy (modified coverage)
As we have seen, traditional whole life policies provide a constant face amount of coverage in exchange for a series of level premiums or a single premium.
Lesson 6
LESSON SIX *
joint whole life insurance: a type of insurance that has the same features and benefits as individual whole life insurance, except that it insures two lives under the same policy
Joint Whole Life Insurance
To allow the surviving insured to obtain coverage, joint whole life policies usually provide a specified period—such as 60 or 90 days—following the first insured’s death within which to purchase an individual whole life policy of the same face amount without evidence of insurability.
Some joint whole life policies provide the surviving insured with temporary term insurance during the specified period.
Joint whole life insurance is often referred to as first-to-die life insurance because, upon the death of one of the insureds, the policy death benefit is paid to the surviving insured and the policy coverage ends.
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monthly debit ordinary (MDO) policy: a whole life insurance policy marketed under the home service distribution system and paid for by monthly premium payments
Monthly Debit Ordinary
The home service distribution system is a method of selling and servicing insurance policies through commissioned sales agents, known as home service agents, who sell a range of products and provide specified policyowner services, including the collection of renewal premiums, within a specified geographic area.
A home service agent’s assigned territory is referred to as a debit, agency, or account.
MDO policies have many of the same characteristics as traditional whole life insurance, but MDO policies tend to be sold in smaller face amounts than other whole life policies.
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LESSON SIX *
Universal Life Insurance
universal life (UL) insurance: a form of cash value life insurance characterized by its flexible premiums, its flexible face amount and death benefit amount, and its unbundling of the pricing factors
Term life insurance and most forms of whole life insurance state the gross premium that the policyowner must pay to keep the policy in force. However, some policies—most notably universal life insurance policies—list each of the three pricing factors (mortality, interest, and expenses) separately.
Lesson 6
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Mortality charges. The insurer periodically deducts a mortality charge from the universal life policy’s cash value. This mortality charge is the amount needed to cover the mortality risk the insurer has assumed by issuing the policy.
The amount of the mortality charge is based on the insured’s risk class; it typically increases each year as the insured ages.
The policy guarantees that the mortality charge will not exceed a stated maximum amount.
Usually, the policy provides that the mortality charge will be less than the specified maximum if the insurance company’s mortality experience is more favorable than expected.
The policy expresses the mortality charge as a charge per thousand dollars of net amount at risk.
The net amount at risk for most life policies is the policy’s face value minus its reserve, but the net amount at risk for a universal life policy depends on whether the death benefit payable is level or varies with changes in the policy’s cash value.
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LESSON SIX *
Interest. A universal life insurance policy guarantees that the insurer will pay at least a stated minimum interest rate on the cash value each year. It also provides that the insurer will pay a higher interest rate if conditions warrant. For example, the policy may state that the interest rate paid will
Reflect current interest rates in the economy or
Be tied to the rate paid on a standard investment, such as a specified category of U.S. government Treasury Bills or
Be at the guaranteed interest rate on cash values up to a stated amount, such as $1,000, and be at the higher current interest rate on cash values greater than the stated amount
Most universal life policies provide that any portion of the cash value that is being used as security for a policy loan will earn interest at a rate lower than the current rate, but this reduced rate will not fall below the guaranteed minimum interest rate.
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LESSON SIX *
Expenses. Each universal life insurance policy lists the expense charges that the insurer will impose to cover the costs it incurs to administer the policy. The following expense charges may apply:
A flat charge during the first policy year to cover sales and policy issue costs
A percentage of each annual premium (such as 5 percent) to cover expenses
A monthly administration fee
Specific service charges for coverage changes and cash withdrawals
A charge—called a surrender charge—which reduces the policy’s cash value if the policyowner surrenders the policy
In policies with a surrender charge, state regulators may require insurers to use a term such as account value, reserve value, or accumulation value, to describe the accumulated cash value.
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Face Amount and Amount of Death Benefit. At the time of purchase, the policyowner specifies the policy’s face amount and decides whether the amount of the death benefit payable will be level or will vary with changes in the policy’s cash value.
Under an Option A plan (also known as an Option 1 plan), the amount of the death benefit is level; the death benefit payable is always equal to the policy’s face amount.
Under an Option B plan (also known as an Option 2 plan), the amount of the death benefit at any given time is equal to the policy's face amount plus the amount of the policy’s cash value.
The net amount at risk for an Option A plan decreases as the amount of the cash value increases. The net amount at risk for an Option B plan is always equal to the policy’s face amount.
A universal life policy gives policyowners a great deal of flexibility to decide (1) the policy's face amount and the amount of the death benefit payable and (2) the amount of premiums they will pay.
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After a universal life policy has been in force for a specified minimum time—often one year—the policyowner can request an increase or decrease in the policy’s face amount.
Flexible premiums. The owner of a universal life policy can determine, within certain limits, how much to pay for the initial premium and for each renewal premium. The policyowner also has great flexibility to decide when to pay renewal premiums.
The insurer imposes maximum limits on premium amounts so the policy will maintain its status as an insurance product.
The insurer requires at least a stated minimum initial premium.
As long as the policy’s cash value is large enough to pay the periodic mortality and expense charges, the policy remains in force even if the policyowner does not pay renewal premiums.
If the policy’s cash value is insufficient to cover the periodic charges, the policy lapses unless the policyowner pays an adequate renewal premium.
Lesson 6
LESSON SIX *
When an insurer receives a premium payment, it first deducts the amount of any applicable expense charges and then credits the remainder of the premium to the policy's cash value.
Each month, the insurer deducts the periodic mortality charges from the cash value and credits the remainder of the cash value with interest.
The more a policyowner pays in premiums above the amount needed to pay the policy's costs, the greater the cash value.
If the cash value is not sufficient to pay periodic charges, the insurer gives the policyowner a stated amount of time—at least 60 days—in which to pay a premium to cover those charges.
If the policyowner does not make the premium payment, the policy lapses.
How a Universal Life Policy Operates
Lesson 6
LESSON SIX *
In the U.S., the difference between a policy’s face amount and the cash value required to qualify as a life policy is often called the Section 7702 corridor in reference to the section of the Internal Revenue Code that establishes the applicable limits.
Insurers do not allow a policyowner to pay a premium amount that would result in the policy’s cash value exceeding the legislatively defined percentage of the face amount.
Most universal life policies provide that if the cash value exceeds the specified percentage, then the face amount automatically is increased to an amount that meets the legislative requirements.
U.S. federal tax laws treat life insurance more favorably than investments. These laws establish limits on the size of a life insurance policy’s cash value in relation to its face amount. If the cash value exceeds regulatory limits, then the policy is treated for tax purposes as an investment rather than an insurance product.
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Interest earned on cash value
Many aspects of a universal life policy change over the course of a year, so insurers send each policyowner an annual, semiannual, or quarterly report providing the policy’s current values and benefits. Generally, the report shows the following amounts:
Mortality charges deducted
Expense charges deducted
Policy loans outstanding
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Variable Life Insurance
subaccount: one of several alternative pools of investments to which a variable life insurance policyowner allocates the premiums paid and the cash values that have accumulated under the policy
separate account (also known as a segregated account): the subaccounts in which variable insurance premiums and cash values are invested; the insurer maintains this investment account separately from its general account to isolate and help manage the funds placed in its variable products
general account: an undivided investment account in which an insurer maintains funds that support its contractual obligations to pay benefits under its guaranteed insurance products, such as whole life insurance and other nonvariable products; the funds in the general account are placed in relatively secure investments
variable life (VL) insurance: a form of cash value life insurance in which premiums are fixed, but the face amount and other values may vary, reflecting the performance of the investment subaccounts selected by the policyowner
Lesson 6
LESSON SIX *
Variable Life Insurance
Most variable life policies permit the policyowner to select from several subaccounts and to change selections at least annually.
The insurer follows a different investment strategy for each subaccount. For example, some subaccounts concentrate on investing in high-growth stocks, while others invest in bonds.
The amount of the policy’s death benefit and cash value depend on how well the separate investments perform. Most variable life policies guarantee that the amount of the death benefit will not fall below the amount initially purchased. However, variable life policies do not guarantee either investment earnings or a minimum cash value.
Because the policyowner, not the insurer, assumes the investment risk of a variable life policy, the U.S. Securities and Exchange Commission (SEC) has determined that variable life policies are securities and, thus, are subject to federal securities regulation.
In addition, variable life products must comply with applicable state insurance regulatory requirements.
Lesson 6
LESSON SIX *
Variable Universal
Life Insurance
variable universal life (VUL) insurance (also called universal life II and flexible-premium variable life insurance): a form of cash value life insurance that combines the premium and death benefit flexibility of universal life insurance with the investment flexibility and risk of variable life insurance
Under a variable universal life (VUL) insurance policy, the policyowner chooses from among several subaccounts and may change the chosen options at least annually.
Most insurers allow the policyowner to choose whether the policy’s death benefit will remain level (an Option A account) or will vary along with changes in the investment earnings of the subaccounts (an Option B account).
Lesson 6
LESSON SIX *
Variable Universal
Life Insurance
Like a universal life policy, a variable universal life policy allows the policyowner to choose the premium amount and face amount.
Like a variable life policy
The cash value of a variable universal life policy is placed in the separate account.
A variable universal life policy does not guarantee investment earnings or cash values.
A variable universal life product is considered a security in the U.S. and, thus, must comply with federal securities laws.
Lesson 6
LESSON SIX *
indeterminate premium life insurance policy (also known as nonguaranteed premium life insurance policy and variable-premium life insurance policy): a type of nonparticipaing whole life policy that specifies two premium rates—a maximum guaranteed premium rate and a lower premium rate
Indeterminate Premium
Life Insurance
The insurer charges the lower premium rate when the policy is issued and guarantees that rate for at least a stated period of time, such as 1, 2, 5, or 10 years.
After that period, the insurer uses its actual mortality, interest, and expense experience to establish a new premium rate that may be higher or lower than the previous premium rate.
In no case, however, will the new premium rate exceed the maximum rate guaranteed in the policy.
Lesson 6
LESSON SIX *
interest-sensitive whole life insurance (also called current assumption whole life insurance): a type of whole life policy in which (1) premium rates vary to reflect changing assumptions regarding the mortality, investment, and expense factors and (2) the cash value can be greater than that guaranteed if changing assumptions warrant such an increase.
Interest-Sensitive
Whole Life Insurance
Policyowners usually decide whether they want favorable changes in pricing assumptions to result in a lower premium or a higher cash value; they can change the decision after the policy is in force.
If changes result in a higher premium, then the policyowner may choose to (1) lower the policy’s face amount and maintain the original premium amount or (2) pay the higher premium and maintain the original face amount. But in no event can the premium rate increase above the guaranteed rate in the policy.
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at the end of a stated term (e.g., 20 years) or
when the insured reaches a specified age (e.g., age 65)
Endowment Insurance
Endowment insurance provides a specified benefit amount whether the insured lives to the end of the term of coverage or dies during that term.
Each endowment policy specifies a maturity date, which is the date on which the insurer will pay the policy’s face amount to the policyowner if the insured is still living. The maturity date is reached either
Because of the maturity date, an endowment policy’s cash value builds rapidly. Also, the cash value of an endowment policy is large in relationship to the policy’s face amount.
For these reasons, endowment policies in the U.S. do not maintain the required Section 7702 corridor and do not receive favorable federal income tax treatment, which has resulted in dwindling sales of endowment policies in the U.S.
Lesson 6
LESSON SIX *

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