Chapter Three TYPES OF POLICIES AND RIDERS. 3.1 General Policy Definitions LEARNING OBJECTIVES OVERVIEW. Retention Question 1

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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 endow, face amount, cash value and rider 2. Compare and contrast the types of term life insurance 3. Identify the characteristics of whole life insurance 4. List the characteristics of universal life insurance 5. Distinguish between variable and universal life insurance 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 Cash Value Face Amount Endow (Mature) Rider Definition Money accumulated in a permanent whole life policy that is considered a living benefit which the policyowner may borrow against or receive if the policy is surrendered before the insured dies The death benefit amount payable or coverage provided on a life insurance policy. This is also referred to as the limit of liability. The point at which the policy s cash value in a whole life policy accumulates to equal the face amount and the proceeds are paid to the policyowner. An added benefit attached to the policy that supplements existing coverage. A rider is usually added at the time of application and typically requires a small increase in premium. Retention Question 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 40 A.D.Banker&Company

2 CHAPTER THREE Retention Question 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 3.2 Term Insurance Characteristics Term insurance is considered pure insurance and provides a pure death benefit. Term insurance does not offer any cash value or living benefits. Premiums paid for these types of policies purchase strictly death benefits. For this reason, term insurance policies are less expensive in the early years as compared to permanent forms of insurance. Term insurance offers temporary life insurance protection for a specified period of time. This period could be as short as 1 year, or provide coverage for a specific number of years such as 5, 10, 20 years. It also could be purchased to provide coverage up to a specified age, such as 65. 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). 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 gets older, 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. For example, 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. Decreasing The death benefit decreases, but premiums remain level for the policy term. Often such policies are sold as mortgage protection 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. The premiums paid for decreasing term are lower than the premiums payable for level term since the benefit decreases throughout the term of the policy. 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. 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: A.D.Banker&Company 41

3 LIFE AND HEALTH 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 to provide cost of living or return of premium benefits. Annually Renewable Term The simplest form of term life insurance is for one year. The death benefit remains level and the premiums increase yearly as the policy renews up to a specified age. 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 while the policy is in force. Re-Entry Term Option Term policies with this option will allow the insured, upon the end of the original term, to renew based on attained age and may qualify at a discounted rate by proving evidence of insurability. Typically with an annual renewable term policy the term automatically renews as long as the premiums are paid. However, the Re-Entry Term option will allow the insured to renew at a lower rate than renewable term as long as the insured meets the qualifications of insurability. Special Features Renewable A benefit that will renew the contract on the renewal date without evidence of insurability. The policy may be a 1 (annual), 5, 10, or 20 year renewable contract up to a specified age, 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 the insured 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 renewable 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 based on the issue or original age, back premiums plus interest will be required to be paid at the time of conversion. These special features are typically available only on level term insurance policies and an additional premium may be charged. A renewable and convertible term policy will cost more than a level term policy. Retention Question 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 42 A.D.Banker&Company

4 CHAPTER THREE Retention Question 4 A level term policy means that the remains the same throughout the lifetime of the policy. a. Cash value 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 (endows) at the insured s age 100 (or to age 121 if the policy is based on the 2001 Mortality Table) when the face amount equals the cash value. Insurers assume that the insured will not live to age 100. If the insured is still living at age 100, however, the insurer pays the face amount to owner. In a traditional whole life policy, the net amount at risk is the face value minus the cash value. As the cash value increases over time, the net amount at risk decreases. This does not affect the face amount of the policy as that remains level. Since the cash value equals the face amount at maturity, as the cash value grows, the amount of risk to the insurance company decreases. These policies have a level premium and level face amount. To keep the premium rate level, the premium at younger ages exceeds the actual cost of protection. Whole life policies stretch the cost of insurance over a longer period of time in order to level out the increasing cost of insurance. 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. The cash value provides an accumulation element in the policy. Traditional policies earn a specified guaranteed rate of return. Once the cash value has accumulated for a certain number of years (typically 3 years), the owner can borrow against the policy. Unlike term insurance, a whole life policy cannot be convertible or renewable. Types of permanent traditional whole life policies include: Ordinary Whole Life Ordinary whole life insurance provides insurance protection to age 100, cash value accumulation to age 100, and fixed level premium payments. The premium payments may be structured as follows: 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. Limited Payment Premium payments are for a specified time (20-Pay Life or 30-Pay Life) or to a specified age (Life Paid up at 65). The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. While the annual premium is higher than Straight Life, it is paid for a shorter period of time and will have a lower total premium outlay. A.D.Banker&Company 43

5 LIFE AND HEALTH Single Premium The entire premium is paid in a lump sum at the time of purchase and creates immediate cash value. The face amount (death benefit) remains level and cash value continues to earn interest and mature at age 100. This policy has the lowest total premium outlay for the life of the policy. 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. Modified Premium Modified premium whole life insurance provides a level death benefit and requires that premiums be paid for the life of the policy (to age 100). The premiums do not remain level. A modified premium policy begins with a premium lower than ordinary whole life for the initial 5 years. After the first 5 years, the premium will increase and remain level throughout the balance of the life of the policy. This type of policy was designed for individuals who cannot afford the premiums of ordinary whole life in the earlier years. Because the premiums are lower in the first few years, the cash value will take longer to accumulate. This policy does not offer immediate cash value. Adjustable Life Adjustable Life is a type of permanent life insurance that combines features of term and whole life coverage, giving policyowners the option to change the characteristics of their policies. Adjustable Life is most appropriate for those whose income is expected to fluctuate from year to year or those persons who may have a change in needs. All the common features of level premium cash value life insurance are still present. These policies allow policyowners to manipulate the period of protection (to age 100 or shorter), increase (with insurability) 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. Changes can only be made on a policy anniversary date as approved by the insurer. Retention Question 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, each of the payments will be lower 44 A.D.Banker&Company

6 CHAPTER THREE 3.4 Interest/Market Sensitive Whole Life Products (Nontraditional Whole Life) Current Assumption or Interest-Sensitive Whole Life This is 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. If cash values increase too quickly, this 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. Indexed Universal Life (Equity Indexed) This policy gives policyowners the opportunity to decide the percentage of cash value that is invested in traditional fixed income securities. The remainder of the cash value is invested in an equity index account linked to a stipulated stock index, typically 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 typically guarantees the principal amount in the indexed account. Universal Life (Flexible Premium Adjustable Life Insurance) Universal Life Insurance (UL) features insurance protection and a savings element (cash value) that grows on a tax-deferred basis. UL is an unbundled policy. This means the individual elements of the policy and premium which includes the mortality risk, policy expenses, and the cash value are credited to the account separately after the premium is paid. Universal life has built in guarantees regarding the cost of insurance (mortality risk) and the interest rates applied to cash values. The level of flexibility and the features of a UL policy include: Adjustable Face Amount The insured can increase or decrease the face amount of the policy. Any increase in the face amount will require evidence of insurability. Mortality charges are deducted monthly from the policy s cash value. The mortality charge is the cost of pure insurance and although it is deducted monthly, it is determined annually based on the mortality risk of each age group. The increases in the cost of the mortality charge is limited to a policy maximum. The insurance protection is considered annual renewable term. Expense charges to cover administrative costs are also deducted monthly from the cash value. This is the insurance company s cost of maintaining the policy and can be impacted by the overall increasing administrative costs associated with a plan. Like mortality charges, there is a maximum established within the plan. Interest is credited to the cash value on a monthly basis at the current interest rate, but will never be less than the guaranteed minimum rate established at the time the policy was issued. Flexible Premium A target premium is established by the insurer, which is the minimum amount that must be deducted from the cash value to maintain the policy to age 100, based on current interest rates, mortality and expense charges. Because mortality and expense charges are deducted from the cash value monthly, the policyowner has more flexibility with universal life premium payments. The premiums can be increased, decreased, or even skipped at the policyowner s discretion as long as there is sufficient cash value to cover these deductions. A.D.Banker&Company 45

7 LIFE AND HEALTH The flexible premium feature also allows the policyowner to increase premiums during working years to accumulate enough cash value to make future premium payments in later years. This is known as a vanishing premium. If the cash value becomes insufficient to pay the monthly deductions, however, the owner will be required to start paying premiums to keep the policy from lapsing. General Account A portion of the premium is invested by the insurance company and held in its 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, and mortality charges (cost of insurance) are deducted from the cash value account. Loans and Partial Withdrawals Unlike other cash value policies,ul policies give the policyowner the option to take a policy loan, but also to 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 the 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. Death Benefit Options Universal Life allows a policyowner 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. 46 A.D.Banker&Company

8 CHAPTER THREE Accounts The policy provides for both a general account and a separate account. General Account (guaranteed values) 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 (nonguaranteed values) The separate account is invested in equity securities as offered by the insurance company. The owner may select which separate account they want the premium to be invested in. Cash value in the separate account will fluctuate based on 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 individuals with a life insurance license and a FINRA registration, Series 6 or Series 7. 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. Partial surrenders are not allowed from a variable whole life policy. Variable Universal Life (VUL) 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 may 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. All variable products are subject to FINRA regulation. Variable Life is considered a security and can only be sold by individuals with a life insurance license and a FINRA securities registration, Series 6 or Series 7. 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. A.D.Banker&Company 47

9 LIFE AND HEALTH Death Benefit Cash Value Premiums Whole Life Fixed Guaranteed Fixed Loans/Partial Surrenders Loans available Risk Insurer Universal Life Adjustable; Guaranteed minimum Guaranteed minimum Flexible Loans and Partial surrenders Insurer Variable Life Fixed; Guaranteed minimum Not guaranteed Fixed Loans available Policyowner Variable Universal Life Adjustable No guaranteed minimum Not guaranteed Flexible Loans and Partial surrenders Policyowner Retention Question 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 Retention Question 7 A policy has a 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 Juvenile Juvenile insurance is any policy written on the life of a minor. A common form of juvenile insurance is a Jumping Juvenile policy. This policy provides an automatic increase in 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. 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 is designed to provide income protection for the surviving spouse when both have earned income. 48 A.D.Banker&Company

10 Joint Survivorship Life (Last to Die) CHAPTER THREE 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 which is obtained by an average of both insureds ages resulting in a lower premium than two separate policies.this policy is often purchased to provide a lump sum benefit to pay estate taxes once the second spouse dies. Return of Premium Term This policy provides for a full refund of premiums if the insured is still living at the end of the term. These policies charge a higher premium than level term insurance. Retention Question 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 Retention Question 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. Disability Riders Waiver of Premium If the insured becomes totally disabled, the insurer will waive premiums for the duration of the disability or the end of the policy, whichever occurs first. To qualify for the waiver, the insured must be disabled for a waiting period of 3-6 months. The policyowner must continue to pay premiums during the waiting period, but once eligible, the waiver is retroactive to the start of the disability. During the disability, the insurer will credit the premiums to the policy and all benefits, such as cash value accumulation and dividend payments, will continue. Unless the insured is disabled, the Waiver of Premium rider drops at age 65. A.D.Banker&Company 49

11 LIFE AND HEALTH Payor Benefit (Waiver of Payors Premium) If the payor (policyowner) dies or becomes disabled and is unable to make the premium payments, the insurer will waive the premiums payments for a specified period of time. Because this rider is commonly added to a juvenile policy, the payor (usually a parent) typically must show evidence of insurability before the rider can be added to the policy Disability Income Benefit In the event of total disability and after an initial waiting period (such as 6 months), premiums are waived and the insured is paid a monthly income. The monthly disability income benefit is typically limited to a percentage, usually 1% of the face value. The benefit paid from the rider does not reduce the death benefits paid out upon death. 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 any permanent policy, interest sensitive, or term policy to provide additional insurance protection for a fixed period of time. If the need for additional coverage is temporary, a term insurance rider is more cost effective than buying another policy. For example: An individual takes out a loan and wants additional coverage to pay the debt if death occurs before the loan is repaid. A decreasing term rider could be added to an existing policy to meet this need. 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 Provides level term coverage on the life of all of the insured s children. This rider is 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. The children have coverage to a specified age (21 to 25) and are usually given the option to convert to a permanent policy without evidence of insurability. 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 Provides coverage on an additional insured, other than a spouse or child, such as a business partner. Insurable interest must exist at the time the rider is added. Riders Affecting the Death Benefit Amount Accidental Death Benefit (Double or Triple 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 the 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 A.D.Banker&Company

12 CHAPTER THREE Accidental Death and Dismemberment This rider provides a benefit in addition to the base of the policy. The rider pays 100% of the amount of the rider, known as the principal sum, upon accidental death. If the insured suffers an accidental dismemberment loss, such as loss of a limb or eyesight, the rider pays 50% of the rider amount, known as the capital sum. Double dismemberment benefits (loss of 2 limbs or total eyesight) are provided at 100% of the rider. Benefits of the rider 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 This rider uses Increasing Term insurance to provide coverage equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount of the policy plus the benefit of the rider equaling the total amount of premiums paid. 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. However, 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 Riders Accelerated Death Benefits provide for an early payment of a portion of the face amount prior to death. This rider provides tax free access to policy benefits based on an insured qualifying as terminally ill (death expected within months), or chronically ill such as 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 care, such as AIDS or the need for an organ transplant. These benefits do not include disability income. Accelerated death benefits do not have to be repaid if the insured s health improves. There are two riders that provide Accelerated Death Benefits: 1. Living Needs Rider Allows the early payment of a portion of the face amount before death, should the insured become terminally ill, usually months life expectancy. Typically, it is an amount equal to 50F-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. 2. Long-Term Care Rider Provides up to 100% of the policy benefits if the insured qualifies for long-term 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. A.D.Banker&Company 51

13 LIFE AND HEALTH Effect on the Death Benefit After the accelerated benefits are paid and any lost interest to the insurer is deducted, the insurer must pay the balance of the face amount to the beneficiary. Exclusions and Restrictions The accelerated death benefit cannot 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. Retention Question 10 Which of these best describes a disability income rider? a. Provides for double the face amount 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 Retention Question 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 nonhospital 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 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 life-threatening 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. 52 A.D.Banker&Company

14 CHAPTER THREE 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. A Life Settlement is similar to a viatical settlement in that it is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its death benefit. There is no requirement for the insured to be terminally ill in order for a life settlement to occur, whereas, there is with a viatical settlement. A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy. Note If your state has particular Viatical or Life Settlement licensing and solicitation laws, they will be addressed in the state law chapter. Retention Question 12 A viatical settlement is made between a purchaser of a person s life insurance policy and. a. The terminally ill insured person s spouse and children who don t want to wait until the insured dies to collect the death benefit b. The terminally ill insured who must receive at least as much as would be available from the insurance company under any full cash surrender or living needs rider c. The agent representing the family of the terminally ill insured d. The lender who owns the mortgage on the terminally ill insured home or business property CHAPTER THREE LIGHTNING FACTS 1. Life insurance endows or matures when the cash value equals the face amount The face amount of a whole life policy is paid to the policyowner if the policy matures or endows The cash value in a whole life policy is a living benefit which the policyowner may borrow against or receive if the policy is surrendered before the insured dies Term insurance provides a pure death benefit and is sometimes referred to as temporary insurance because it is issued for a specified number of years or to a specified age Decreasing term insurance provides a decreasing balance that is often sold as mortgage or debt protection Renewable term policies will automatically be renewed at the end of the original issue duration without new proof of insurability up to a specified age Premiums for renewed policies will be based on the insured s attained age at the time of renewal Term insurance is pure insurance and does not build any cash value Term insurance may be written separately or added as a rider to other types of insurance Level, decreasing, and increasing term insurance describes the death benefit, not the premium A level term policy has the same level death benefit in all years the policy is in force The death benefit in a decreasing term policy will reduce each year until the policy ends. The premium remains for the term. Premiums for decreasing term are less expensive than level term Re-entry term is a level term policy with a provision that the renewal premium will be reduced if the insured meets certain underwriting qualifications. Otherwise the policy is renewable at the regular renewal premium based on the insured s attained age. 3.2 A.D.Banker&Company 53

15 LIFE AND HEALTH 14. Traditional whole life policies earn a guaranteed rate of return on the cash value Ordinary Whole Life policies can be sold as Straight Life, Limited Pay Life, and Single Pay Life Universal life insurance has a flexible premium and adjustable death benefit. The contract permits the owner to raise, lower, or skip premium payments and/ to increase or decrease the death benefit as described in the policy. Increasing the death benefit usually requires insurability Premiums paid for universal life are added to the policy s cash value from which monthly expenses and mortality charges are deducted. Interest is credited to the cash value so it will continue to increase each month after all charges are deducted The current interest rate in a universal life policy may fluctuate but cannot be lower than the minimum rate guaranteed by the policy. The potential advantage of universal life insurance is that the policy could earn current interest higher than the rate of fixed interest in a traditional whole life policy Universal life cash value is held in a general account and.a life license is required to sell the policy Loans from universal life policies do not decrease the total cash value or the policy face amount. Partial withdrawals do reduce cash value and may also affect the face amount Universal life insurance offers Death Benefit Options (A and B). Option A pays the face amount and provides a level death benefit. Option B pays the face amount plus any accumulated cash values therefore providing an increasing death benefit Variable whole life ( variable life ) is a fixed premium policy, but the cash surrender value is in a separate account that permits the policyowner to earn stock market rates of return (positive or negative) by allocating the cash value to mutual fund-like subaccounts A variable life policy separate account has no guaranteed interest rate, but does have a guaranteed minimum death benefit Variable universal life ( VUL ) is a variation of universal life that permits the policyowner to direct the cash value into the stock market and to earn stock market rates of return (positive or negative) instead of fixed interest rates. VUL policies have no interest rate or death benefit guarantees Insurance producers must have an insurance license and a securities registration in order to sell variable insurance contracts Juvenile policies are available for minor children. They often automatically increase the face amount at a given age, usually age Joint-life or First-to-Die policies are usually cash value policies, and pay a death claim when the first of two or more named insureds dies. Once the death claim is paid, the policy no longer exists Joint-and-Survivor or Last-to-Die policies are usually cash value policies, but only pay a death claim when the last named insured dies. Usually used to provide funds to pay estate taxes Riders in life insurance are used to add benefits or other flexibility options to a life insurance contract A Waiver of Premium rider suspends premium payments during the time the insured is totally disabled, following an elimination period of 6 months. If the insured is no longer disabled, the premiums will resume. In a whole life policy, cash value continues to increase as if premiums were being paid. The insured and the owner must be the same A Waiver of Cost of Insurance rider is used in Universal Life policies (instead of Waiver of Premium) to cover the cost of all monthly deductions A.D.Banker&Company

16 CHAPTER THREE 32. A Payor benefit rider waives the monthly premium on a juvenile policy if the payor (usually the parent) dies or becomes totally disabled. Premiums will resume when the policy ownership transfers to the child at age 21 or A Disability Income rider pays a monthly income to a totally disabled insured based on a percentage of the death benefit such as 1% of face amount. The monthly income benefit does not reduce the death benefits Additional Insured riders may be added to include term insurance coverage for a spouse or children or a family rider that covers the whole family under one rider Accidental Death Benefit and Accidental Death and Dismemberment riders add additional benefits for death caused by an accidental injury, or for loss of limbs or eyesight due to an accidental injury Double or Triple Indemnity refers to an Accidental Death rider that provides double or triple the face amount of insurance. The death must occur before a specific age and within 90 days of the accident Guaranteed Insurability riders permit the policyowner to purchase additional amounts of insurance every three years based on certain ages and also following life events such as marriage or the birth or adoption of a child. The cost for each addition is at the insured s attained age and the rider ends once the insured reaches age A Cost-of-Living rider provides death benefit increases tied to periodic changes in a cost of living index such as the CPI. Evidence of insurability is not required for these increases A Return of Premium rider on a term policy provides a benefit where if the insured dies while the policy is in force, the premiums paid to date are added to the death benefit. The rider provides increasing term insurance protection A Living Needs Rider provides the policyowner with access to a portion of the death benefit if the insured is diagnosed with a terminal illness expected to result in death within months Triggered by impairment in two or more of the six federally recognized Activities of Daily Living ( ADLs ) due to chronic illness or other disability, a Long-Term Care rider permits access of up to 100% of the death benefit at specified daily or monthly rates for certain expenses Viatical life settlements are agreements between a policyowner and a third-party buyer to purchase the life policy covering a person who is diagnosed as terminally ill, and with less than 24 months of remaining life expectancy. 3.7 A.D.Banker&Company 55