3 Types of Policies and 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 supplement the underlying policy. Upon the completion of this chapter, you will be able to: Define endow, face amount, cash value and rider Compare and contrast the types of term life insurance Identify the characteristics of whole life insurance List the characteristics of universal life insurance Distinguish between variable and universal life insurance Explain the purpose of life insurance policy riders 3.1 General Policy Definitions Cash Value Face Amount or Limit of Liability Endow (Mature) Rider 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. In a cash value policy, the date on which the contract ends. A whole life policy is expected to have cash value equal to the face amount (if no loans are taken and all premiums are paid) on the endowment date, and the policy value is paid to the owner. An added benefit attached to the policy that supplements existing coverage. A rider is usually added at the time of application and may result in 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 A.D.Banker&Company 39
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 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. All term insurance policies expire at either a specified age (Term to 65) or after a specified period of time (10-year term). The face amount is paid out to the named beneficiary only if the insured dies during the specified term of the policy. The low, initial premium outlay when the insured is young will increase at renewal or upon conversion, and as the insured gets older, the policy becomes 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 during the policy term. The types of level term include: Guaranteed Level Premium The policy premium is guaranteed to be level throughout the term of the policy Non-guaranteed Level Premium The premium can be increased to a new premium level for the remainder of the term Indeterminate Premium Term The premium may fluctuate between the current charge and a maximum rate stated in the policy based on the insurer's mortality, expenses, and investment returns 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 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. 40 A.D.Banker&Company
TYPES OF POLICIES AND RIDERS Credit life 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. Mortgage Redemption When credit life insurance is used to protect against the unpaid balance of a mortgage, it is referred to as Mortgage Protection or Mortgage Redemption Insurance. In this case, the amount of protection decreases along with the balance of the mortgage. 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 term policy over a set number of years. 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 initially is very inexpensive 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. Uses of Term Term insurance might be used to cover loans, or business or personal obligations. The insured may purchase large amounts to cover a specific 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 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. Some term policies include a "reentry" provision, which offers the insured an opportunity to obtain a new policy at a reduced premium based on new underwriting. 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 either attained age or original (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. There is usually a premium increase associated with adding these special features to a policy. A renewable and convertible term policy will cost more than a level term policy. A.D.Banker&Company 41
CHAPTER THREE 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 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 at the insured s age 100, and the cash value will equal the face amount (when no loans or withdrawals are taken, and all premiums are paid on time). 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. Note Policies written in more recent years may mature at age 121. In a traditional whole life policy, the net amount at risk is the face value minus the cash value. As the cash value accumulates 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. Traditional whole life policies have a level premium and level face amount. The premium at 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. Traditional policies earn a guaranteed rate of return. Once the cash value has accumulated for a certain number of years the owner can borrow against the policy. Unlike term insurance, a whole life policy cannot be convertible or renewable. 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. 42 A.D.Banker&Company
TYPES OF POLICIES AND RIDERS Limited Payment Premium payments are for a specified time (Example: 20-Pay Life or 30-Pay Life) or to a specified age (Example: 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. 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. 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 3.4 Nontraditional Whole Life (Interest/Market Sensitive) 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 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 insured's age. The increase in 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 guaranteed amount that can be charged. 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. The current interest rate is controlled and set by the insurance company and can be changed as often as monthly without prior notice to the policyowner. 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. 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. A.D.Banker&Company 43
CHAPTER THREE General Account Universal Life cash accumulation is held in the insurer's General Account, and may be invested as reserves according to the requirements of the Insurance Code. When the insurance company obtains higher than expected interest, it may credit excess interest credits in the form of a "current" interest rate which is higher than the policy's "guaranteed minimum" interest rate (typically 3% to 4%). When premiums are paid, the amount is credited to the policy's cash accumulation. Each month, interest is credited on the prior month's cash value, and all expense and cost of insurance amounts are deducted. The cash value will rise or fall accordingly. To remain in force, the policy must always have a positive cash value after all monthly deductions are taken. Loans and Partial Withdrawals UL policies give the policyowner the option to take a policy loan or 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 cash value is collateral if the loan is not paid back before the insured dies or the policy terminates and the unpaid loan balance and loan interest is deducted from a death claim or surrender. A partial withdrawal is a permanent deduction of the cash value and cannot be reversed. 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. If the cash value increases to the point it equals the death benefit, the death benefit will automatically become the greater of the cash value or face amount of insurance. 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. Guaranteed Universal Life A Guaranteed Universal Life policy is also referred to as "Universal Life with a No-Lapse Guarantee". This product provides the guarantee of term insurance for life. As long as the minimum required premiums are paid, the policy is guaranteed not to lapse. There is minimal cash value growth, but if the owner uses the cash value to cover the premium, or misses a premium payment, the "no-lapse guarantee" is removed from the policy. 44 A.D.Banker&Company
TYPES OF POLICIES AND RIDERS Indexed Universal Life (Equity Indexed) Indexed Universal Life (IUL) policies are a more recent evolution from traditional UL policies, and base interest crediting on one or more "strategies" linked to the performance of a known stock or similar index (such as S&P 500), which is not under the control of the insurance company. There is no direct investment in any stocks or indexes. In exchange for the potential of higher interest crediting, these policies offer a minimum interest rate guarantee (which could be 0%) to avoid cash value decreases due to negative index performance. IUL policies also offer a "fixed rate" option, which is not affected by changes in the index performance. The insurer controls and sets the fixed rate 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. Accounts The policy cash accumulation is split between the insurer's General and Separate Accounts. General Account (guaranteed values) The general account provides a fixed rate of interest and the cash value in the general account provides for a guaranteed minimum death benefit to age 100. Policy loans are available from the general account but will decrease the guaranteed death benefit by the amount of the loan plus unpaid interest. Separate Account (nonguaranteed values) The separate account is invested in debt or equity securities as offered by the insurance company. The owner may select which subaccounts they want the premium to be invested in. Cash value in the separate account will fluctuate based on market conditions and performance of the subaccounts, which are similar to a mutual fund. The policyowner has an opportunity to achieve higher investment returns. This policy may act as a hedge against inflation but will decrease the guaranteed death benefit by the amount of the loan plus unpaid interest. There is no guaranteed minimum return on the cash value in the separate account and the policy may lose both cash value and death benefit if there are market losses. 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 supported by 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 SEC 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 7 and Series 63. 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. A.D.Banker&Company 45
CHAPTER THREE Variable Universal Life (VUL) Variable Universal Life (VUL) offers the added attraction of the investment component seen in Variable Life policies through the insurer's Separate Account. Like Universal life, the policy provides for flexible premiums and adjustable death benefits. Options A and B are available to policyowners. However, like variable life, the entire cash value is held in the insurer's separate account 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 SEC 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 7 and a Series 63. 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, the cash values will fluctuate based on the performance of the separate account. Death Benefit Cash Value Premiums Loans/Partial Surrenders Risk Whole Life Universal Life Variable Life Variable Universal Life Fixed; Guaranteed minimum Adjustable; Guaranteed minimum Variable; Guaranteed minimum Variable and Adjustable; No Guaranteed minimum Guaranteed Fixed Loans available Insurer Guaranteed minimum Not guaranteed Not guaranteed Flexible Loans and partial surrenders Insurer Fixed Loans available Policyowner 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 46 A.D.Banker&Company
TYPES OF POLICIES AND RIDERS 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 sub-accounts 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 Policies The special needs of families with young children can be addressed with Family Income or Family Maintenance policies. Both type of policies begin with a base policy of whole life insurance usually written on the parent with the largest income and greatest risk of death. This provides insurance protection to the insured s age 100. To this base policy, a term insurance rider is attached that is designed to provide a monthly income to the survivor if the insured dies during the specified term. This greatly increases the total insurance amount without affecting the cash accumulation feature of the base policy. Each of these policies only provides insurance protection on one parent. A third policy, the Family Protection Plan, provides insurance protection on the entire family. Family Income A Family Income policy combines whole life insurance with a Decreasing Term rider. The length of the rider is based on the number of years until the youngest child is no longer a dependent, such as age 21. If the insured dies while the rider is in force, the death benefit of the rider is paid in equal monthly installments (including interest) for the remaining number of years the rider would have been in effect. This benefit is in addition to the face amount of the whole life policy. If the insured is still living at the end of the decreasing term, the rider drops and the premium decreases. Example An insured owns a Family Income policy with a $100,000 20-year decreasing term rider. If the insured dies with five years left to expiration, the rider would provide monthly income (60 installments) based on the decreasing benefit for the remaining five years. The face amount of the underlying whole life policy will be paid in a lump sum at the end of the installments unless the beneficiary chooses to receive it at the time of death. Family Maintenance A Family Maintenance policy combines whole life insurance with a Level Term rider. If the insured dies while the rider is in force, the death benefit of the rider is paid in equal monthly installments (including interest) for the full number of years for which the rider was issued. This benefit is in addition to the face amount of the whole life policy. If the insured is still living at the end of the level term, the rider drops and the premium decreases. Example An insured owns a Family Maintenance policy with a $100,000 20-year level term rider. If the insured dies at any time before the expiration, the rider would provide monthly income (240 installments) based on the face amount of the rider for the next 20 years. The face amount of the underlying whole life policy will be paid in a lump sum. A.D.Banker&Company 47
CHAPTER THREE Family Plan (Family Protection Plan) A Family Plan, or Protection Plan, provides a base policy of whole life insurance on the primary insured and the spouse and children are covered by level term riders. The spouse s coverage is written to a specified age, such as 65, and is usually convertible to a whole life policy any time prior to expiration without proof of insurability. The children are covered by a single level term insurance rider with one premium covering all of the children under age 18 who meet underwriting guidelines. Newborn or adopted children will automatically be covered once they are 15 days old without an additional premium as long as the insurer is notified in writing. The children s coverage is also convertible to a whole life policy at a specified age (up to age 25) without proof of insurability. 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 or 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 and the policy terminates. 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. 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 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. The additional premium paid for this benefit provides a nonforfeiture value which will offer a nominal return of premiums paid if the policy is not held to the end of term. Policies Linked to Indexes Index-linked life insurance policies offer the potential for increasing death benefits that are linked to the Consumer Price Index. These policies provide benefits that automatically increase to keep pace with inflation and are designed to avoid being underinsured. 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 48 A.D.Banker&Company
3.6 Methods of Premium Payment TYPES OF POLICIES AND RIDERS Premium methods can vary depending on the type of policy issued. All of the following are types of premium payment methods: Single Premium The entire cost of the policy is paid in a lump sum at the time of purchase. Limited Payment The premium is payable for a specified time, such as 20-pay, 30-pay or to age 65. Modified Premium The premium is payable for the first few years of the policy (3-5) are lower than an ordinary whole life policy to make it more affordable. Level (Guaranteed) Premium The premium remains level for the duration of the contract. Fixed Premium The premium amount is determined by the insurance company. Fixed premiums do not have to be level, but cannot be changed by the policyowner. Adjustable Premium The premium can be increased or decreased by the policyowner on an annual basis. Premiums must be paid and adjusting the premium will affect other features of the policy. Flexible Premium The premium can fluctuate at the policyowner s discretion. It can be increased, decreased, or even skipped at any premium due date. Universal and Variable Universal have flexible premium. Initial and Guaranteed Maximum Premium The initial premium will be guaranteed but only for the first year, then the premium may increases due to the mortality costs. A guaranteed maximum premium table must be included in the policy showing projections of future maximum premiums. 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 3.7 Life Insurance Policy Riders An amendment or rider modifies the policy by expanding its benefits, 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. A.D.Banker&Company 49
CHAPTER THREE 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 and the premiums will be refunded. 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. Payor Benefit (Waiver of Payor s 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 of the face value (for example, $10 per month for each $1,000 of face amount). 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. The disability must occur prior to 65, and if disabled, the rider typically terminates at age 65. While the rider is in effect, only the monthly deductions are covered and no additional amount is added to cash value other than monthly interest credits. When the rider terminates, premiums must once again be paid. Term Riders Term riders may be attached to any individual life 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. Example An individual purchases a new home with a 20 year mortgage. Instead of purchasing a decreasing term policy to cover the mortgage, the insured adds a 20-year term rider to his existing life policy for the amount of the mortgage. Adding the term rider requires new underwriting for the additional insurance. Riders Covering Additional Insureds Spouse (Other Insured) Rider Provides level term coverage on the life of the insured s spouse. This rider will also provide a conversion provision allowing 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 covered under the main 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 will 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. 50 A.D.Banker&Company
TYPES OF POLICIES AND RIDERS Family Rider Provides a combination of coverage on the spouse and children. 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. Additional Insured Rider Provides coverage for another person, 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 only if the insured's 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 65. 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 or whenever the principal sum has been paid. 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. Guaranteed No-lapse Rider This rider is attached to a universal life insurance policy and ensures the policy will not lapse if the cash value is reduced to zero. It relieves the policy owner of responsibility to monitor cash value and comes with a required payment schedule, effectively hybridizing the universal policy with whole life insurance. As long as the policyholder adheres to the payment schedule, the policy will not lapse. 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. A.D.Banker&Company 51
CHAPTER THREE Accelerated Death Benefit 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 or chronically ill. A person is considered terminally ill when a physician has certified that person has a condition which would is expected to result in death within 24 months. A person is considered chronically ill if a licensed health care professional has determined within the last 12 months that person is unable to perform at least 2 activities of daily living for at least 90 days without substantial assistance. Accelerated benefits can be received as a lump sum or in periodic payments provided for a certain period only. Accelerated death benefits do not have to be repaid if the insured s health improves but the amount received reduces the remaining death benefit.. There are two riders that provide Accelerated Death Benefits: 1. Living Needs Accelerated Benefit Rider Allows the early payment of a portion of the face amount before death should the insured become terminally ill with less than 24 months to live. This rider is not designed to provide services to the insured. 2. Long-Term Care Rider Provides up to 100% of the policy benefits if the insured qualifies for long term care benefits based on being chronically ill as defined in the rider. 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. Note Specific California long-term care training is required for life-only agents when selling a rider or policy that requires services to the chronically ill as a condition prior to providing payments. 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 selfinflicted 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 52 A.D.Banker&Company
TYPES OF POLICIES AND RIDERS 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. A long-term care rider provides an advance payment of the death benefit for the covered expenses of long-term care a chronically ill person may incur. 3.8 Life Settlements and Viatical Settlements Definitions Viatical Settlement An agreement between a policyowner and a third-party buyer to purchase the life policy covering a person who is diagnosed as terminally ill with less than 24 months remaining life expectancy. California Insurance Laws for viatical settlements are referenced under the life settlement laws. Life Settlement Contract A financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than the cash surrender value and less than the face value. A written agreement is entered between a life settlement provider and the owner of the policy. The contract establishes that compensation is paid in return for the owner s assignment of an insurance policy. Life Settlement Broker A life settlement broker, for a fee or commission, offers to negotiate life settlement contracts between an owner and providers. A life settlement broker represents only the owner and owes a fiduciary duty to the owner to act in the best interest according to the owner s instructions, regardless of the manner in which the broker is compensated. Life Settlement Licensing Regulations Broker Licensing A life insurance producer licensed as a life agent for at least 1 year or as a licensed nonresident producer meets the licensing requirements and is permitted to operate as a Life Settlement Broker by notifying the Commissioner and paying the life settlement broker license fee. Individuals who have not been licensed life agents for at least 1 year who intend to transact life settlements must first complete at least 15 hours of education on life settlement transactions, complete and submit an application and pay the life settlement broker license fee. A person licensed to act as a viatical settlement broker or provider is qualified for licensure as a life settlement broker or provider. A Life Settlement Broker license is not required for a licensed attorney, certified public accountant, or accredited financial planner who represents the owner and whose compensation is not paid directly or indirectly by the life settlement provider. The Commissioner has the power to suspend or revoke a Life Settlement Broker license for cause after the appropriate hearing procedure. A licensee that intends to discontinue transacting life settlements must notify the commissioner and surrender their license. A.D.Banker&Company 53
CHAPTER THREE Required Disclosures At the time of the application, it must be disclosed to a life settlement contract applicant that: There are possible alternatives to life settlements, including accelerated benefits options that may be offered by the life insurer. Some or all of the proceeds of a life settlement may be taxable and the policyowner should seek advice from a qualified tax professional. The proceeds from a life settlement could be subject to the claims of creditors. Entering into a life settlement contract may cause other rights or benefits, including conversion rights and waiver of premium benefits to be forfeited. A change in ownership of the settled policy could limit the insured s ability to purchase insurance in the future on the insured s life because there is a limit to how much coverage insurers will issue on one life. The owner has a right to rescind a life settlement contract within 30 days of the date it is executed by all parties and the owner has received all required disclosures, or 15 days from receipt by the owner of the proceeds of the settlement, whichever is sooner. Proceeds will be sent to the owner within 3 business days after the provider has received acknowledgment that ownership of the policy has been transferred and the beneficiary has been designated in accordance with the terms of the life settlement contract. The funds will be available to the owner and the transmitter of the funds on a specified date. Fraudulent Life Settlements Fraudulent life settlements include acts or omissions committed by a person, including: Presenting or preparing false material information, or concealing material information, with respect to: life settlement solicitations, applications, underwriting, premiums, claims, and change of ownership. Entering into stranger-originated life insurance (STOLI) Employing any device to defraud in the business of life settlements 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 54 A.D.Banker&Company