Chapter Three LEARNING OBJECTIVES OVERVIEW. 3.1 General Policy Definitions

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1 Chapter Three Types of Policies and Riders LEARNING OBJECTIVES Upon the completion of this chapter, you will be able to: 1. Define the terms endow, face amount, cash value and rider 2. Compare and contrast the 3 types of term 3. Identify the characteristics of whole life insurance 4. List the characteristics of universal life 5. Distinguish between variable and universal life 6. Explain the purpose of life insurance policy riders OVERVIEW The purpose of this chapter is to acquaint the student with the types of life insurance products, their features, characteristics, and uses. There are no standard life insurance policies. However, all policies are either temporary or permanent, and can also be fixed or variable. The chapter concludes with a discussion of various riders that can be utilized to alter, amend, or modify the underlying policy. 3.1 General Policy Definitions Term Endow (Mature) Face Amount Cash Value (Living Benefit) Rider Definition The maturity date or time at which the policy s cash value equals the face amount and the proceeds are paid to the policyowner. The death benefit amount payable on a life insurance policy. In other words, the amount of coverage the policy provides. This is sometimes referred to as the limit of liability. Money accumulated in a permanent policy which the policyowner may borrow as a policy loan or receive if the policy is surrendered before it matures. An added benefit attached to the policy that modifies existing coverage. A rider is usually added at the time of application and typically requires an increase in premium. 1. When a whole life policy endows, what happens to the policy cash value? a. The cash value reverts to the insurance company b. The cash value is deducted from the death benefit and the remainder is paid to the policyowner c. The face amount of the policy is paid to the policyowner d. Cash value is only found in term life policies, not whole life 2. What is the face amount of insurance? a. The cash value b. The limit of liability c. The cash surrender value d. The maximum loan value 38

2 3.2 Term Insurance Characteristics Types of Policies and Riders Chapter Three Term insurance is temporary life insurance protection for a specified period of time. This period could be as short as one year, or provide coverage for a specific number of years such as 5, 10, 20 years. It also could be up to a specified age. The premium is level for the duration of the stated term, which represents the average level of risk over the course of the policy. It can expire at an attained age (Term to 65) or after a specified period of time (10-year term). However, it does not have a cash or loan value; it purely provides protection. The face amount is paid out to the named beneficiary if the insured dies during the specified term of the policy. The low, initial premium outlay when the insured is young can increase at renewal or upon conversion, and as the insured s age advances, the policy can become more expensive. Coverage can be written separately or with other types of insurance (as a rider) to suit individual needs. Rates charged are based upon underwriting class, the age and gender of the insured and upon the length of time protection is provided; rates are higher for a 10-year level term than for a 5-year level term. Types of Policies Level The death benefit remains level and the premiums remain level during the policy term. Most group life insurance is written with a level term death benefit. Decreasing The death benefit decreases, but premiums usually remain level for the policy term; often utilized to pay off outstanding mortgage balances. Often such policies are sold as Mortgage Redemption or Credit Life Insurance with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies the proceeds of the policy can be used to pay off the mortgage. Since the policy owner has control of the policy, it can remain in force for the benefit of his or her survivors after any loan is paid off. Credit Life Insurance Credit life insurance is a special form of decreasing term. Unlike the standard decreasing term policy, credit life automatically names the creditor as the beneficiary. There is no option. The policy cannot be written for more than the outstanding debt, since that is the limit of the creditor s insurable interest. Once the loan is paid, the policy ends. Although credit life insurance (term) can be obtained as an individual, it is usually sold on a group basis to a creditor, such as a bank, finance company or a company selling high priced items on the installment plan. The policy generally pays the outstanding balance of the debt at the time of the borrower s death, subject to policy maximums. Debts covered in this way include: Personal loans Loans to cover the purchase of appliances, motor vehicles, mobile homes, farm equipment Educational loans Bank credit and revolving check loans Mortgages loans, etc. Increasing The death benefit increases over the life of the policy while the premiums remain level. This type of term is normally written as a rider for the return of premium on a permanent policy over a set number of years. Re-Entry Term An existing term life insurance policy may be exchanged typically one time for a new term life policy on the re-entry date. The new policy s premiums will be based on the insured s attained age, the rates in effect by the insurer at the time of re-entry, and the premium class approved by the company. Once the new policy is issued, the original policy terminates. The reason this option would be considered is if the new policy would offer a lower premium than the original one. 39

3 Annually Renewable Term The simplest form of term life insurance is for a term of one year. The death benefit remains level and the premiums increase yearly as the policy renews. While it is very inexpensive initially compared to other types of life insurance, over time it can become cost prohibitive. The death benefit is paid by the insurer if the insured dies only while the policy was in force. Simplified Issue A life insurance policy that undergoes a simplified underwriting process that does not require a medical exam to issue. Typically they offer face amounts of $250,000 or less in coverage. Term insurance might be used to cover loans, business and personal. The insured may purchase large amounts to cover a specific time, liability or need at the least amount of premium. Special Features Renewable A benefit that will renew the contract on the renewal date without evidence of insurability. The policy may be a one (annual), five, ten, or twenty year renewable contract, with premiums increasing at the beginning of each renewal period. The renewal premium is based upon attained age. Renewability is important because the risk is that the insured s health may deteriorate and may be unable to obtain a policy at the same rates or even at all, leaving the insured without coverage. Level term policies may offer the option of being renewal for an additional premium. Convertible The right to convert the existing term policy to a permanent policy without evidence of insurability during the conversion period specified in the contract. The premium can be based upon attained age or issue age. The premiums will be higher than the original policy since the permanent policy will provide a cash value and coverage can last to age 100 or beyond. If the conversion is as of the issue or original age, back premiums plus interest will be required to be paid at the time of conversion. NOTE 1: Group life is usually written as term and is both renewable and convertible. A term policy that does not contain these two options would cost less than one that does. NOTE 2: Conversion periods vary among insurance companies. NOTE 3: The greatest advantages of term insurance are the Convertible and Renewable provisions that may be exercised without any proof of insurability. 3. Which of the following is not a feature of term life insurance? a. Cash surrender value b. Low cost c. Limited duration d. Pure protection 4. A level term policy means that the remains the same throughout the lifetime of the policy, including any renewal periods. a. Premium b. Pure cost of insurance c. Policyowner d. Policy proceeds 3.3 Permanent Insurance Traditional Whole Life Characteristics While term insurance is designed to provide protection for a specified time period, permanent insurance is designed to provide coverage for an entire lifetime. Whole life is permanent protection that matures at the insured s age 100. At that point the cash value equals the face amount and is paid. The insurer pays the face amount to owner if insured lives to age 100. Insurers assume that the insured will not ordinarily live to age 100. A policy matures when the face amount equals the cash value. If the insured is still living at age 100 the insurer pays the face amount to owner. 40

4 Types of Policies and Riders Chapter Three In many jurisdictions, life insurance companies are required to show some cash value in permanent cash value policies by the end of the third policy year. The policy builds nonforfeiture values, such as cash surrender values, reduced paid-up insurance, and extended term insurance. The policy can be used as collateral for a loan from the insurance company, but is limited to the amount of cash value in the policy. The net amount at risk is the face value minus the cash value. As the cash value increases, the net amount at risk decreases, but the face amount of the policy would remain the same. The policyowner may borrow from the insurance company using the policy as collateral for the loan. Policy loans carry a fixed or variable loan interest rate. If the policy is surrendered or a death claim is paid, it is only after the insurer recovers the outstanding policy loan and policy loan interest. If the policy lapses due to nonpayment of premium, nonforfeiture values are available for use by the policyowner. Each policy contains a nonforfeiture table showing the guaranteed value of these benefits. There is a grace period for late premiums typically it is 31 days (or one month) in which coverage will remain in effect. If premiums have not been paid during the grace period the policy will, unless specified otherwise, become extended term insurance for a specified number of years and days as listed on the non-forfeiture table in the policy. Some policies offer an automatic premium loan feature to keep the policy in force if there are sufficient cash values to do so. The policy has a level premium and level face amount. To keep the premium rate level, the premium at the younger ages exceeds the actual cost of protection. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises above the premium. Whole life policies stretch the cost of insurance over a longer period of time in order to level out the otherwise increasing cost of insurance. Under some policies, premiums are required to be paid for a set number of years such as 10, 20 or to a specified age, for example age 65 or 80. Under other policies, premiums are paid throughout the policyholder s lifetime. The shorter the premium paying period, the higher the premium (a Limited Pay Life of 20 years would have a higher premium than a 30 pay life or a Straight Whole Life). Settlement options are available upon the death of the insured or upon the policy s maturity. This allows for a payout other than a lump sum. The policyowner may add a term rider to this policy to provide additional coverage on the primary insured, a spouse, or children. A whole life policy cannot be converted to a term life policy. Ordinary Whole Life Straight Life or Continuous Premium The premium is level and payable to age 100 or death of the insured, whichever comes first. The face amount remains level throughout the life of the policy. This policy has the highest total premium outlay over the life of the plan, but has the lowest regular premium payment. Limited Payment Premium payments are for a specified time, such as 20-pay, 30-pay or to a specified age such as 65 or 85. However, the face amount (death benefit) remains level to age 100. The annual outlay is higher than Straight Life but paid for a shorter period of time. Single Premium The entire cost of the policy is paid at the time of purchase. The face amount (death benefit) remains level to age 100. The cash value builds more quickly than in Straight Life or Limited Life because the amount of premium paid-in upfront is more than the others. Lowest overall premium. NOTE: The only difference in each of these whole life policies is the premium structure. TEST TIP Single Premium Policies require the LEAST amount of OVERALL premium over the life of the plan. 41

5 Indeterminate Premium An indeterminate premium whole life policy is like a non-participating whole life plan of insurance, except that it provides for adjustable premiums. The company will charge a current premium based on its current estimate of investment earnings, mortality, and expense costs. If these estimates change in later years, the company will adjust the premium accordingly but never above the maximum guaranteed premium stated in the policy. Adjustable Life Adjustable Life is a level-premium, level-death benefit policy that can assume the form of Term or Whole Life within a single policy while remaining within certain guidelines. All the common features of level premium cash value life insurance are still present. The policyowner may change or make adjustments without adding or exchanging existing policies. The type or amount of coverage and the premium amount may be changed. These policies allows policyowners to manipulate the period of protection (to age 100 or shorter), increase or decrease the face amount with insurability, raise or lower the premium amount, and change the length of the premium payment period. These policies also provide cash value, although reducing the premium could stop the cash value from increasing therefore adjusting the coverage to term insurance. These changes can be exercised annually and are not retroactive. For example, a policyowner is not allowed to decrease the premium starting on a previous date. Adjustable Life is most appropriate for those whose income is expected to fluctuate from year to year or those persons who may have a fluctuation in needs. 5. A producer is explaining the concept of limited-pay life insurance to her client. Which of these statements is incorrect? a. By paying over a shorter period of time, each of the payments will be higher b. Paying over a longer period of time will make the total payments higher c. A policy fully paid up at age 65 will not endow until age 100 d. By paying over a shorter period of time, the total paid in premiums will be lower 3.4 Interest/Market Sensitive Whole Life Products Current Assumption or Interest-Sensitive Whole Life A form of whole life in which the insurance company can change the premiums or interest rate being credited to the account based on current money market rates. Interest rate changes affect the policy premiums. The policy has a guaranteed minimum death benefit, but may increase based on the growth of the cash value. If current rates increase, either the policyowner pays a reduced premium or the cash value will increase at a faster rate. It is possible that the cash value will increase too quickly and could cause the policy to mature prior to age 100. To prevent this from happening, the insurer will add a corridor of insurance protection to keep the policy from endowing. This increase is provided without evidence of insurability. Equity-Indexed Life Most of the premium (generally 80 to 90%) is invested in traditional fixed income securities. The remainder of the premium is invested in contracts (options and hedges) tied to a stipulated stock index, for example, the S & P 500. When there is an increase in the market, a given percentage of the gain is used to determine the interest credited to the policy. When the market declines, the policy is credited with the minimum guaranteed interest rate or zero interest. The policy s values can never be impaired due to negative index performance. This policy requires fixed premiums and has a guaranteed death benefit. 42

6 Types of Policies and Riders Chapter Three Universal Life (Flexible Premium Adjustable Life Insurance) Universal Life Insurance (UL) is also called Flexible Premium Adjustable Life Insurance. Like ordinary Whole Life, Universal Life Insurance features insurance protection and a savings element that grows on a tax-deferred basis. Unlike whole life insurance, UL is an unbundled policy. This means the individual elements of the policy and premium the pure protection element, which includes the mortality risk and policy expenses, and the cash value are both transparent to the policyowner. Universal Life allows the policyowner to select the face amount, within an insurer s allowable minimum and maximum. The frequency of premium is also chosen by the policyowner within the limits set by the insurer. Adjustments to the face amount, up or down may be requested by the policyowner to reflect changes in need. Like whole life, they have built in guarantees regarding the cost of insurance and the interest rates applied to cash values. Unlike whole life insurance, the premium is not merely adjustable, it is totally flexible. It can not only be altered, it can also be skipped if there is sufficient cash value to pay the cost. On the other hand, the policy owner may also make unscheduled lump sum payments (within limits) to take advantage of current interest rates or personal tax flow. The level of flexibility is described in the features below. The features of a UL policy include: An adjustable face amount The insured can increase or decrease the face amount. Any increase in the face amount will require evidence of insurability. A flexible premium The premium paid can be increased, decreased or even skipped. As long as there is enough accumulation in the general account to cover the cost of insurance, premiums can vanish. A target premium is established by the insurer, which is the minimum amount that must be deducted to maintain the policy to age 95/100 based on the currently credit interest rates, mortality charges and expense factor. This premium is a benchmark and may or may not be adopted by the policyowner. If the factors change, the amount needed to extend coverage to age 95/100 changes. Because of the flexibility built into the product, the cash value may never equal the death benefit (mature), even if the policy endures to age 95/100. NOTE: A UL policy does not enter the grace period until the cash value is $0. Monthly mortality charges are deducted from the policy s cash value. The mortality charge is determined annually based on age. The insurance protection is calculated like annual renewable term. It may also be affected within limits by the loss experience of the insurer. If the people insured by the policy live on average longer than anticipated, the mortality risk for each age of those insured can drop. If those insured die on average sooner than expected, then the mortality risk for each age can increase. This increase is limited to a policy maximum. This is why UL is sometimes considered to be annual renewal term combined with a side fund. Expense charges from the policy are also deducted monthly. This is the insurance company s cost of maintaining the policy and does not change with age but can be impacted by the overall administrative costs associated with a plan. Like with mortality charges, there is a maximum established within the plan. Interest is credited to the cash value. The interest is credited at the current interest rate with a guaranteed minimum rate established. However, the amount of cash value is never guaranteed. TEST TIP: Know what 2 activities occur to the cash value account every month on a universal life policy: Current interest is credited to the cash value account. Cost of insurance is charged to the cash value account. 43

7 General Account A portion of the premium is invested by the insurance company and held in their general account. The current return on the investments is credited to the UL policy. A guaranteed minimum interest rate applied to the policy (usually around 3%-4%) means that, no matter how the investments perform, the insurance company guarantees a certain minimum return on the cash value. If the insurance company does well with its investments, the current interest rate will be credited to the cash value causing the cash value to grow at a faster rate. This policy has a general account, so the producer needs only a life insurance license to sell it. Premiums are paid into and interest is credited into the general cash value account. Expenses, loans or withdrawals, mortality charges (cost of insurance) are deducted from the cash value account. Loans and Partial Withdrawals As noted above the individual elements of a UL policy are individually viewable, subject to change, and accessible. This gives it increased flexibility. Unlike other policies, the policyowner not only has the option to take a policy loan, he or she may also take a partial withdrawal from the cash value without terminating the contract. Partial withdrawals are different than loans. A loan is taken against cash value remaining in the policy. The cash value secures loan and cannot be used for other purposes, but it remains in the policy. The loan itself neither decreases the total cash value, nor the face amount. The amounts payable would decrease if the loan is not paid back before the insured dies or the policy terminates. A partial withdrawal is a permanent transaction, and cannot be reversed. The funds are paid from the general account. The cash value decreases, and the face amount may be affected as well. Depending on the policy, the withdrawal may also be taxable. Surrender charges Any surrender charges must be stated in the policy showing the costs upon policy surrender, also referred to as a back-end load. EXAMPLE: A back-end load is a percentage surrender charge that applies based on a specified number of years (5, 10, 15 or 20) to discourage the surrender of the policy in the early years. Death Benefit Options Universal Life allows you to choose from two death benefit options, Option A or Option B. Option A Pays the face amount of the policy and provides a level death benefit. As the cash value increases, the company s risk decreases. A universal life policy must include an amount at risk. If the cash value approaches the face amount, the death benefit must increase so as to provide for this amount at risk. This minimum separation between the cash value and the death benefit is called the risk corridor. This corridor of insurance is automatic and does not require insurability. This prevents the policy from maturing too early. Option B Pays the face amount stated in the contract which is level term, plus any cash values accumulated over the years. This provides for an increasing death benefit. The mortality charge for Option B is greater than Option A. Individuals purchasing Option A will benefit from larger cash value accumulations while individuals purchasing Option B will benefit from greater death benefits. Variable Life Variable whole life is a whole life policy with certain benefits that will vary based on market conditions. Variable life characteristics include: A fixed premium The premium is determined by the insurer and remains fixed and level throughout the contract. 44

8 Types of Policies and Riders Chapter Three General Account The policy provides for both a general account and a separate account. The general account is fixed and guaranteed and provides for a guaranteed minimum death benefit to age 100. Policy loans are available from the general account. Separate Account The separate account is invested in equity securities as offered by the insurance company. The owner may select which separate account they want their premium to be invested in. Cash value in the separate account will fluctuate based on the market conditions and performance of the separate account, which is similar to a mutual fund. The policyowner has an opportunity to achieve higher investment returns. This policy may act as a hedge against inflation. There is no guaranteed minimum return on the cash value in the separate account. The death benefit is tied to the separate account and also varies along with the performance of the separate account. Death benefits are recalculated annually. While the separate account values may decrease, the policy will never pay less than the guaranteed death benefit in the general account. Since there is no guaranteed return on the separate account, the owner bears all investment risk. All variable products are subject to FINRA regulation. Variable Life is considered a security and can only be sold by producers registered with FINRA with a Series 6 or 7 registrations. This registration is in addition to a life insurance license and in some states a variable contracts insurance license. A prospectus must be provided prior to the sale of a variable policy and there are suitability requirements that must be met before a variable policy can be sold. Policy loans are available from either the general account or the separate account. Typically 75-90% of the cash value can be borrowed against. Partial surrender is not allowed from a variable whole life policy. Variable Universal Life (VUL) A Variable Universal Life (VUL) is a combination of Universal and Variable Life Policies. Like Universal life, the policy provides for flexible premiums and adjustable death benefits. Options A and B are available to policyowners. But like Variable life, a separate account is maintained and the investment return fluctuates based on the performance of the separate account. Since all premiums are credited to a separate account, there is no guaranteed minimum death benefit. Since there is no guaranteed return on the separate account, the owner bears all investment risk. The policyowner make take a policy loan or a partial withdrawal from the cash value without terminating the contract. A partial withdrawal is paid from the separate account. Policy loans are available based on the amount in the separate account. Typically 75-90% of the cash value can be borrowed against. All variable products are subject to FINRA regulation. Variable Life is considered a security and can only be sold by producers registered with FINRA with a Series 6 or 7 registrations. This registration is in addition to a life insurance license and in some states a variable contracts insurance license. A prospectus must be provided prior to the sale of a variable policy and there are suitability requirements that must be met before a variable policy can be sold. Since Variable Universal life does not have a general account, all values will fluctuate based on the performance of the separate account. 45

9 Variable Life Universal Life Death Benefit Cash Value Premiums Fixed Guaranteed minimum Adjustable; Guaranteed minimum Not guaranteed Guaranteed minimum Loans/Partial Surrenders Risk Fixed Loans available Policyowner Flexible Loans and Partial surrenders Insurer Variable Universal Life Adjustable; No guaranteed minimum Not guaranteed Flexible Loans and Partial surrenders Policyowner Whole Life Fixed Guaranteed Fixed Loans available Insurer 6. Which of the following are characteristics of universal life insurance policies? a. Fixed death benefit for life, premiums may be increased or decreased b. Adjustable death benefit, premiums are fixed for life c. Death benefit options, premiums fixed for life d. Death benefit options, death benefit and premiums may be changed 7. A policy has death benefit that can increase or decrease over time based on stock market performance, but with a guaranteed minimum death benefit, a choice of subaccounts in which cash value may be allocated, and a fixed premium. a. Variable Life b. Variable Universal Life c. Equity indexed Universal Life d. Investment Grade Whole Life 3.5 Specialized Policies Family Income (Policy or Rider) This policy is a combination of Whole Life and Decreasing Term insurance. Its purpose is to provide a specified monthly income from the date of the insured s death until a specified future date. The income period begins from the effective date of the policy. If the insured dies within the term period the benefits are paid for the remainder of the term followed by the Whole Life benefits. If the insured lives beyond the income period, only the Whole Life benefits remain to be paid upon death. The Family Income Rider may be added to any permanent policy. EXAMPLE: Policy is purchased on 1/1/05 and 20-year term ends on 1/1/25. If the Breadwinner dies 1/1/20, the beneficiaries will receive monthly income from term policy until 1/1/25 (5 years/time left in the term). If the Breadwinner dies 1/1/26, the beneficiaries only receive death benefit of the whole life (no additional term income). Family Maintenance This policy is a combination of Whole Life and Level Term insurance. The Family Maintenance insurance policy provides monthly payments for a selected period of years beginning from the date of death of the insured, if death occurs during the stated term. The amount of term insurance is calculated using a multiple thousands in the face amount. $20 monthly income/thousand would be $20 X 100 = $2,000 for a $100,000 policy. 46

10 Types of Policies and Riders Chapter Three The Whole Life death benefit is paid at the time of death. It is not paid at the end of the monthly payments as in a Family Income policy. If the insured lives beyond the term, only the face amount of the Whole Life is paid upon death. The Family Maintenance policy is more expensive than a Family Income policy of a like amount. EXAMPLE #1: Mrs. Breadwinner dies after the 20-year term of her family maintenance policy is no longer in force. The policy will pay her beneficiaries a death benefit under the whole life portion. EXAMPLE #2: Mrs. Breadwinner dies while the 20-year term coverage under her family maintenance policy is in force. The policy will pay her beneficiaries a death benefit under the whole life portion plus her monthly income benefit each month for 20 years under the level term portion. Family Policy (Family Protection Plan) The Family Policy provides life insurance in a single contract for all members of the family. A Whole Life policy is written on the head (wage earner) of the family. It may have riders attached (waiver of premium, accidental death, etc.). Level Term coverage is written on the spouse and the child or children, known as the Family Rider in some states. The Spousal coverage is generally Term to age 65, at which time it expires. This coverage is guaranteed convertible while in force. The Child Rider provides coverage for all children who are 14 to 15 days old and a dependent member of the insured s family. The maximum age of coverage is age 25. Those children born to the primary insured after the policy is issued are covered automatically after 14 or 15 days of age at no additional premium. Adopted and stepchildren are also covered. Upon reaching the maximum age, the coverage is convertible without evidence of insurability. The premium paying period of the base plan is usually longer than the Term Rider(s). If the primary insured dies while the Family Rider is in force, the rider is paid up until each family member s term of coverage expires. Juvenile Juvenile insurance is any policy written on the life of a minor. A popular type is commonly called Jumping Juvenile because it automatically increases the face amount at a given age (usually age 21 to 25) without evidence of insurability. The premium remains level for the life of the policy, and the usual increase in the face amount is 5 times the issue amount. It protects the insured s future insurability, and a parent is normally the premium payor. NOTE: The Payor Benefit Rider is commonly used on juvenile policies to provide protection in the event the premium payor were to become disabled or die. Modified Whole Life Premiums for this policy are lower than a typical Whole Life policy in the early years. In the later years, the premiums are slightly higher than a typical Whole Life policy. The purpose of Modified Whole Life is to make the purchase of permanent insurance more attractive for individuals who have limited finances presently, but have the potential for an improved position in the future, such as a new college graduate. TEST TIP: Utilizes convertible term insurance to help reduce premium cost initially and allow the purchase of permanent insurance later. 47

11 Graded Premium This policy is similar to Modified Whole Life, except the premium increases each year during the early years of the policy and then remains level. In the later years of the policy, the premium would be greater than a Whole Life policy. NOTE: Premiums are more affordable in the early years. Joint Life (First to Die) Joint Life is a whole life policy that is written to cover 2 or more lives. The death benefit is paid upon the first insured to die. Once payment is made, the policy no longer exists. Premiums are based upon a joint issue age; which is obtained by an average of both insureds ages resulting in a lower premium than two separate policies. This policy provides income protection for spouses when both have earned income. Joint Survivorship Life (Last to Die) This whole life policy is written to cover 2 or more lives, and the death benefit is not paid until the last insured dies. Premiums are based upon a joint issue age determined from a special table. Couples who plan to defer estate taxes until the second spouse dies purchase this policy and have the policy owned typically by an irrevocable life insurance trust. Rates are lower than 2 separate policies and coverage is in larger amounts. 8. What jumps in a jumping juvenile policy? a. The premium jumps five times over the life of the policy, beginning at age 21 or 25 b. The face amount jumps one time, usually to five times the amount of insurance, at age 21 or 25 c. The premium increases by a factor of five on the child s 21st or 25th birthday d. The premium and the face amount jump by a factor of five after the child s 21st or 25th birthday 9. A Last-to-Die policy would be the most appropriate recommendation for which of the following? a. A husband and wife concerned about paying estate taxes after they have died b. A business owner who wants to make sure his wife has enough money to buy the business from his partner if he should die before his partner does c. A corporation concerned that its CEO might die before the end of his employment contract d. Two business partners who are concerned about the future success of the business and want to provide funds to purchase the business from the decedent s family 3.6 Life Insurance Policy Riders An amendment or rider modifies conditions of the policy by expanding or decreasing its benefits, or excluding certain conditions from coverage, and are at the option of the insured. Policy riders are available for an additional premium in most cases. Riders are provided for a specified period of time as stated in the policy. It is typical for a rider to end at a specified age (such as the insured s age 65). Once a rider drops from the policy, the additional premium will also drop. Most riders are added at the time of policy issue. Any riders added after the policy has been issued usually require evidence of insurability. 48

12 Disability Riders Types of Policies and Riders Chapter Three Waiver of Premium If the insured becomes totally disabled, the company waives premiums for the duration of the disability, therefore the policy remains in force. There is usually a 3-6 month waiting period before premiums are waived but the waiver is retroactive and the insurer will reimburse for premiums paid during the waiting period. The Waiver of Premium rider drops at an age stipulated in the contract, such as age 65. This means that the disability must have occurred prior to this age in order for premiums to be waived. Once on claim the waiver continues either until the disability ends or the policy ends. Cash value and dividends continue as under normal premium payments. Additional premium charged for the rider is not applied to policy cash values. The rider is not affected by any change of occupation once issued. The rider usually expires at age 60. Once the rider expires, the policy premium is reduced by the additional cost of the rider. NOTE: The rider is NOT affected by any change of occupation once issued. Occupation change is a consideration in health and disability insurance, but not life insurance or in the waiver of premium rider. TEST TIP: Know these for the exam: a. Must be totally disabled. b. Has a 3-6 month waiting period. c. Expires at age 60. d. Once the rider expires, the premium is reduced by the cost of the rider. e. Additional premiums charged for the rider do not increase the cash value of the policy. f. A change of occupation after policy issue will not affect the Waiver of Premium rider at all. NOTE: The owner need not repay any premiums paid by the company during the disability. Payor Benefit (Waiver of Payors Premium) A rider that waives the premium payment if the owner dies or becomes disabled and is unable to make the premium payment on behalf of the insured. For example, this rider may be available on a juvenile insurance policy. In this case, the premium is waived if the premium payor becomes totally disabled or dies prior to the juvenile s reaching the age of majority. When added to a juvenile policy, the waiver normally cancels at the insureds age 21 to 25 meaning if the payor has not died or become totally disabled. The payor typically must show evidence of insurability before the rider can be added to the policy. TEST TIP 1: Payor benefit is commonly used on jumping juvenile policies. TEST TIP 2: Payor benefit only takes effect if the policyowner dies or becomes disabled before the insured attains the age of 21 or 25. Disability Income Benefit In the event of total disability and after an initial waiting period, premiums are waived and the insured is paid a monthly income, such as $10 per month for each $1,000 of face amount. The monthly disability income benefit is typically limited to a percentage of the death benefit. Waiver of Cost of Insurance A rider that waives the deduction of the monthly cost of insurance and expense charges associated with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability. Usually, the disability must occur prior to a stipulated age. Term Riders Term riders may be attached to virtually any permanent policy, interest sensitive, or term policy to provide an amount of temporary extra insurance protection for a fixed period of time. These riders are useful when an insured needs more insurance or a decreasing amount of coverage for a limited time. Example: Mortgage protection. 49

13 Riders Covering Additional Insureds Spouse (Other Insured) Rider This type of rider will provide level term coverage on the life of the insured s spouse. Such rider will also provide a conversion provision permitting the spouse to convert to permanent coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy. Child Rider This type of rider will generally provide level term coverage on the life of all of the insured s children. Such riders are usually offered at one premium rate and may cover newborns after 14 days of life and adopted children who can be added to the coverage without increasing the premium payable. The children may remain covered up to age 21, with some insurers offering the coverage to the child s 25th birthday. If the primary insured should die while the rider is in force the rider becomes a term policy and will be in force until the maximum age stated in the policy. Upon reaching the maximum age, the rider will also provide a conversion provision, which will permit each child to convert to a permanent plan of coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured under the basic policy. Usually this amount is a multiple of the coverage in force, for example, if the child rider was covered for $5,000 and the multiple was 5, then the conversion would be into a $25,000 permanent policy. Family Rider This is the combination of writing both the Spouse and Child Rider on one policy. This may be written as a policy or a rider; in the market today, it is normally written in the form of a rider. Usually family riders are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse and $1,000 on each child. Nonfamily Rider Covers an additional insured with an insurable interest, such as a business partner. Riders Affecting the Death Benefit Amount Accidental Death Benefit (Double, Triple Indemnity or Multiple Indemnity) In the event of a claim, the policy normally pays double or triple the face amount if death was a result of an accident. (May be called multiple indemnity rider, paying multiple times face amount). The benefit is payable only if death occurs before a specific age and within 90 days of the accident. It does not add any additional values to the base policy. It may be added to any type of individual life policy. Among other exclusions, death due to sickness is excluded. This rider typically expires at age 65. Accidental Death and Dismemberment This rider provides an additional benefit than the base of the policy. The rider pays 100% of the amount of the rider (principal sum) upon accidental death and it also pays 50% of the rider amount (capital sum) accidental dismemberment losses, such as the loss of a limb, or eyesight. Double dismemberment benefits are provided at 100% of the rider (2 times the capital sum). Benefits are only payable if the loss is accidental and occurs within 90 days of the accident. This rider typically expires at age 65. Guaranteed Insurability Allows the insured to purchase stated amounts of additional insurance every 3 years based on certain ages (specifically 25, 28, 31, 34, 37, and 40), events, or specified dates without evidence of insurability up to a maximum age, usually 40. The premiums are based on attained age. The events which will allow for the insured to obtain additional insurance in between the specified ages include marriage and the birth or adoption of a child, when the need for insurance coverage may increase. It normally limits the insured to acquire additional amounts of the same type of coverage already in force. The insurer often limits the amount of coverage that may be added. This rider drops at age 40. Return of Premium Increasing Term insurance equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount plus an amount equal to the premiums paid. It adds flexibility when added to a whole life policy. It is also seen with term life insurance policies where for an additional premium the policy will provide for a partial or total refund of all premiums paid depending upon when the policy is cancelled or converted. 50

14 Types of Policies and Riders Chapter Three Return of Cash Value Increasing Term insurance equal to the cash value. This rider provides the payment of term insurance equal to the cash value amount at time of death. This does not relieve the obligation to pay loans from the claim proceeds at time of death. Cost of Living (COL) The cost of living rider enables the insured to purchase more insurance each year to help offset increasing insurance needs due to inflation. The amount that can be purchased is based on increases in the cost of living index. This additional coverage is usually available at low rates and evidence of insurability need not be provided for such increases. Accelerated Death Benefits A benefit that provides for an early payment of a portion of the face amount prior to death. These benefits could be provided based on an insured qualifying as terminally ill (expected within 24 months), catastrophic illness, such as the need for an organ transplant, permanent confinement in a nursing home, long-term care if unable to perform activities of daily living or other acute illness that require long-term needs, such as AIDS. These benefits do not include disability income. Accelerated death benefits do not have to be repaid if the insured s health improves. Two Riders that provide Accelerated Death Benefits are: Living Needs Rider - Allows the early payment of a portion of the face amount before death, should the insured become terminally ill, usually less than 2 years to live. Typically it is an amount equal to 50-90% of the policy s face amount. Upon death, the early payment will be deducted from the benefit paid to the beneficiary. The rider is normally provided without a premium charge because it is an advance of the death benefit. TEST TIP: Upon death, the death benefit would deduct any benefits advanced out of the death benefit prior to death. Long-Term Care Rider Provides up to 100% of the policy benefits if the insured qualifies for longterm care benefits as defined in the rider, such as the inability to perform 2 out of 6 activities of daily living. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary. The amount of protection is determined at the time of policy purchase. Long-term care benefits are paid income tax free after the insured meets the qualifying requirements. Effect on the Death Benefit The insurer must pay the balance of the face amount after the accelerated benefits are paid and any lost interest to the insurance company is deducted. Exclusions and Restrictions The accelerated death benefit shall not contain exclusions or restrictions that are not also exclusions or restrictions in the policy. Typical exclusions apply to suicide, intentional self-inflicted injury, war, or engaging in illegal occupations or activities. 10. Which of these best describes a disability income rider? a. Waives payment of future premiums if the insured is disabled and has no income b. Pays a percentage of the annual premiums as monthly income to the insured if she is totally disabled c. Pays a percentage of the death benefit as monthly income to the insured when totally disabled d. Automatically creates an unlimited loan fund in the amount of the death benefit, secured by the cash value, when an insured is totally disabled 51

15 11. What does a long-term care rider do that a Living Needs (Terminal Illness) rider does not? a. Provides money equal to a portion of the death benefit to an insured expected to die in the next 2 years b. Establishes a trust fund for the insured s family so that home health care can be paid for with insurance premiums instead of paying the money to the life insurance company c. Pays a percentage of the death benefit as monthly income for an insured who cannot perform any one of the six activities of daily living d. Provides up to 100% of the death benefit in a daily or monthly amount for the non-hospital expenses of a chronically ill person who cannot perform any two of the six activities of daily living 3.7 Viatical Settlements and Life Settlements Definitions Viatical Settlement Purchaser a person who gives a sum of money as consideration for a life insurance policy or an interest in the death benefits of a life insurance policy or a person who owns, acquires, or is entitled to a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy which has been or will be the subject of a viatical settlement contract for the purpose of deriving an economic benefit. Viatical Settlement Representative a person who is an authorized agent of a duly licensed viatical settlement provider or viatical settlement broker, as applicable, and who acts or assists in any manner in the solicitation of a viatical settlement on behalf of such viatical settlement provider or viatical settlement broker. Viator the owner of a life insurance policy or a certificate holder under a group policy insuring the life of an individual with a catastrophic, life threatening or chronic illness or condition who enters or seeks to enter into a viatical settlement contract. A viatical settlement is an agreement between a third party (specializing in such transactions viatical settlement provider) and a life insurance policyowner (viator) insuring the life of an individual with a lifethreatening or terminal illness, normally with a life expectancy of 2 years or less. The firm purchases the policy at 60 to 80% of the face amount, expecting to profit as the new policyowner at the time of claim. The insured is provided with tax exempt discounted value during the terminal illness, relinquishing all ownership rights to the buyer. For example, an insured has a $100,000 policy and the Viatical Agreement is $60,000. Upon the insured s death, the new owner could profit up to $40,000, less any business expenses, and any premiums paid up to the time of claim. There are substantial up-front costs paid for by the purchaser of the policy in terms of legal documents, medical records, and life expectancy reports. The risk to the purchaser is that the insured does not die within the time period anticipated and therefore could lose money on the transaction. The discounted proceeds are received by the insured at the time of the agreement. The policy must be in force when the agreement takes place. TEST TIP: Know the following terms well for the exam: Viator The owner of the life policy who seeks to sell it to the viatical company. Viatical Settlement Purchaser The company or person that purchases the life policy for the insured. Who pays the premium once the viatical agreement is entered into? Answer: The viatical company. 52