Life Insurance

Permanent Insurance

Note: Any reference to the word guarantee is based on the claims paying ability of the underlying insurance company.

Permanent insurance provides lifelong protection and is known by a variety of names. These policies are designed and priced for you to keep over a long period of time. If you don’t intend to keep the policy for the long term, it could be the wrong type of insurance for you.

Most permanent policies including whole, ordinary, universal, adjustable and variable life have a feature known as “cash value” or “cash surrender value.” This feature, which is not found in most term insurance policies, provides you with some options:

• You can cancel or “surrender” the policy — in total or in part — and receive the cash surrender value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value.
• If you need to stop paying premiums, you can often use the cash surrender value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live if there is sufficient cash value.
• Usually, you may borrow from the policy, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.
• The interest crediting rate and therefore cash values of many life insurance policies may be affected by your carrier’s future experience, including mortality rates, expenses and investment earnings.
• Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash surrender value is the amount of available cash when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity.

What are the Types of Permanent Insurance?

There are many different types of permanent insurance. The major ones are described below:

Whole Life or Ordinary Life

• This was the most common type of permanent life insurance. It was sold by Mutual Life Insurance Companies, however, some stock life insurance companies do offer a derivative product they call Whole Life. It is Life insurance that is kept in force for a person’s whole life as long as the scheduled premiums are maintained. All Whole Life policies build up cash values. Most Whole Life policies are guaranteed* as long as the scheduled premiums are maintained. The variable in a whole life policy is the dividend which could vary depending on how well the investments and other business criteria of the insurance company are doing. If the company is doing well and the policies are not experiencing a higher mortality than projected, values are paid back to the policyholder in the form of dividends. Policyholders can use the cash from dividends in many ways. It can be used in three main areas: to lower premiums, to purchase more insurance or to pay for term insurance.

Universal Life or Adjustable Life

• This variation of permanent insurance allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the amount of the death benefit more easily than under a traditional whole life policy. (To increase your death benefit, you usually will be required to furnish the insurance company with satisfactory evidence of your continued good health.)(Decreasing does not lower premiums.)

Variable Life

• This type of permanent policy provides death benefits and cash values that vary with the performance of an underlying portfolio of investments held in a separate account. You can choose to allocate your premiums among a variety of investments which offer varying degrees of risk and reward. You will receive a prospectus in conjunction with the sale of a variable product.
• The cash value of a variable life policy is not guaranteed*, and the policyholder bears that risk. However, by choosing among the available fund options, the policyholder can create an asset allocation that meets his or her objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. On the other hand, poor investment performance will lead to reduced cash values and death benefits.
• Some policies guarantee* that death benefits cannot fall below a minimum level. There are both universal life and whole life versions of variable life.

Advantages and Disadvantages of Permanent Insurance

Advantages

• As long as the necessary premiums are paid, protection is guaranteed* for your entire life or to a specific age / maturity.
• Premium costs can be fixed or flexible to meet personal financial needs.(Loans, withdrawals and other transactions may affect the premiums required)
• Policy accumulates a cash value that grows on a tax-deferred basis that you can borrow against. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy’s cash surrender value to pay premiums or use the cash surrender value to provide paid-up insurance.
• The policy’s cash surrender value can be surrendered — in total or in part — for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person’s life-time or for a specific period of time.)

Disadvantages

• Required premium levels may make it hard to buy enough protection.
• It may be more costly than term insurance if you don’t keep it long enough.

Permanent Policy – Points to Consider

• Are the premiums within my budget? Be sure you want to spend the money for this type of long-term coverage.
• Can I commit to these premiums over the long term?
• If you don’t plan to keep the product for many years, consider another type of policy.
• Cashing in a permanent policy after only a couple of years can be a costly way to get insurance protection for a short term.

What does the policy illustration show?

An illustration shows policy premiums, death benefits, cash values and information about other items that can affect your cost of obtaining insurance. Your policy may provide for dividends to be paid to you as either cash or paid-up insurance. Or it could provide for interest credits that could increase your cash value and death benefit or reduce your premium. These items are not guaranteed*. Your costs or benefits could be higher or lower than those illustrated, because they depend on the future financial results of the insurance company. With variable life, your values will depend on the results of the underlying portfolio of investments.

Some figures are guaranteed* and some are not. Remember that the insurance company will honor the guaranteed* figures, subject to its financial strength.

If your policy is a variable life policy, be sure that the interest rate or rate of return assumed is reasonable for the underlying investment accounts to which you choose to allocate your premiums. It is important to keep in mind that an illustration is not a legal document. Legal obligations are spelled out in the policy itself.

Here are additional questions to ask about the policy illustration:

• Is the illustration up to date? Is it based on current experience?
• Is the classification shown in the illustration appropriate for me (i.e., smoker/non-smoker, male/female)?
• When are premiums due annually, monthly or otherwise? Which figures are guaranteed* and which are not?
• Will I be notified if the non-guaranteed* amounts change?
• Does the policy have a guaranteed* death benefit, or could the death benefit change depending on interest rates or other factors?
• Does the policy pay dividends or provide for interest credits? Are those figures incorporated into the illustration?
• Will my premiums always be the same? Is it possible that the premium will increase significantly if future interest rates are lower than the illustration assumes?
• If the illustration shows that, after a certain period of time, I will not have to make premium payments, is there a chance I could have to begin making payments again in the future?
• Is the premium level illustrated sufficient to guarantee* protection for my entire life?

Purchasing Tips

Here are a few tips to keep in mind when purchasing a life insurance policy:

• Take your time. On the other hand, don’t put off an important decision that would protect your family. Make sure you fully understand any policy you are considering and that you are comfortable with the company and product.
• After you have purchased an insurance policy, keep in mind that you may have a “free-look” period usually 10 days after you receive the policy during which you can change your mind. During that period, read your policy carefully. If you decide not to keep the policy, the company will cancel the policy and give you an appropriate refund. Review the copy of your application contained in your policy. Promptly notify your agent or the company of any errors or missing information.
• Review your policy periodically or when your situation changes to be sure your coverage is adequate.

Here are some additional items to consider when you are selecting a term or permanent policy:

• What happens if I fail to make the required payments? If you miss a premium payment, you typically have a 30- or 31-day grace period during which you can pay the premium with no interest charged. After that, the company can, with your authorization, draw from a permanent policy’s cash surrender value to keep that policy in force as long as there is sufficient cash surrender value. In some flexible premium policies, premiums may be reduced or skipped as long as sufficient cash surrender values remain in the policy. However, this will result in lower cash surrender values.
• What if I become disabled? Provisions or riders that provide additional benefits can be added to a policy. One such rider is a “waiver of premium”** for disability. With this rider, if you become totally disabled for a specified period of time, you do not have to pay premiums for the duration of the disability.
• Are other riders available?
  • “Accidental death benefit”, provides for an additional benefit in case of death as a result of an accident. This rider, if available, would require additional premium. Availability and specifics varies by carrier and state.
  • “Accelerated benefits”, also known as “living benefits.” This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care or confinement to a nursing home. This rider, if available, may require additional premium. Availability and specifics varies by carrier and state.
  • “Child rider”, provides insurance for all your children, usually ranges from $1,000 to $20,000 of death benefit. This rider, if available, would require additional premium. Availability and specifics varies by carrier and state.
• When will the policy be in effect? If you decide to purchase the policy, find out when the insurance becomes effective. This could be different from the date the company issues the policy.

*Guarantees are based on the claims paying ability of the issuing insurance company.

** Availability, specifics, and costs of these riders vary by carrier and state

Term Insurance

Note: Any reference to the word guarantee is based on the claims paying ability of the underlying insurance company.

Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Level term products are the most popular plans purchased today. The level term can be from 5 years to 30 years. The premium and death benefit are designed to stay level during the term of the contract. The premiums can be either guaranteed* or not guaranteed. When purchasing a level term life insurance policy be sure you are aware of the guaranteed* premium period. Once you have been approved and placed the policy in force with the first payment, the insurance company is obligated to keep the policy in force as long as you keep paying the premiums. You are not obligated to pay, but once you stop paying, the policy will lapse after usually a 30 day grace period. Some term insurance policies can be renewed when you reach the end of a specific period which can be from one to 30 years. The premium rates increase at each renewal date. Most policies require that evidence of insurability be furnished at renewal for you to qualify for the lowest available rates.

Advantages and Disadvantages of Term Insurance

Advantages

• Initially, premiums are generally lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest.
• It’s good for covering specific needs that will disappear in time, such as mortgages or car loans.
• The new 20 and 30 year products can provide coverage as long as most people might need life insurance.

Disadvantages

• Premiums increase as you grow older, after the term selected expires, providing it renews past that term.
• Coverage may terminate at the end of the term or may become too expensive to continue.
• Generally, the policy doesn’t offer cash value or paid-up insurance.

Questions to Consider When Considering a Term Policy

• How long can I keep this policy? If you want the option to renew the policy for a specific number of years or until a certain age, what are the terms of renewal of the contract.
• When will my premiums increase? Annually? Or after a longer period of time, such as five or 10, 15, 20, 30 or even 40 years?
• Can I convert to a permanent policy? Some policies allow you to convert the policy to permanent insurance without a medical exam, regardless of your physical condition at the time of the conversion. These policies are known as “convertible term.”

Purchasing Tips

Here are a few tips to keep in mind when purchasing a life insurance policy:

Take your time. On the other hand, don’t put off an important decision that would protect your family. Make sure you fully understand any policy you are considering and that you are comfortable with the company and product.

After you have purchased an insurance policy, keep in mind that you may have a “free-look” period usually 10 days after you receive the policy during which you can change your mind. During that period, read your policy carefully. If you decide not to keep the policy, the company will cancel the policy and give you an appropriate refund. Review the copy of your application contained in your policy. Promptly notify the agent or the company of any errors or missing information.

Review your policy periodically or when your situation changes to be sure your coverage is adequate.

Here are some additional items to consider when you are selecting a term or permanent policy:

What happens if I fail to make the required payments?

If you miss a premium payment, you typically have a 30- or 31-day grace period during which you can pay the premium with no interest charged. In a term policy at the end of the grace period if you do not make a payment the policy will lapse. In a permanent policy, the company can, with your authorization, draw from a permanent policy’s cash surrender value to keep that policy in force as long as there is sufficient cash surrender value. In some flexible premium policies, premiums may be reduced or skipped as long as sufficient cash values remain in the policy. However, this will result in lower cash values.

What if I become disabled?

Provisions or riders that provide additional benefits can be added to a policy. One such rider is a “waiver of premium”** for disability. With this rider, if you become totally disabled for a specified period of time, you do not have to pay premiums for the duration of the disability.

Are other riders available?

• “Accidental death benefit”, provides for an additional benefit in case of death as a result of an accident. This rider, if available, would require additional premium. Availability and specifics varies by carrier and state.
• “Accelerated benefits”, also known as “living benefits.” This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care or confinement to a nursing home. This rider, if available, may require additional premium. Availability and specifics varies by carrier and state.
• “Child rider”, provides insurance for all your children, usually ranges from $1,000 to $20,000 of death benefit. This rider, if available, would require additional premium. Availability and specifics varies by carrier and state.

When will the policy be in effect?If you decide to purchase the policy, find out when the insurance becomes effective. This could be different from the date the company issues the policy.

*Guarantees are based on the claims paying ability of the issuing insurance company.

** Availability, specifics, and costs of these riders vary by carrier and state

Term Life Insurance Glossary

Accidental Death Benefit:
An extra death benefit amount that is paid out in addition to the face amount of the policy if the insured dies by accidental means. It cost extra to get this benefit, and usually cannot exceed $250,000 to $300,000, and cannot exceed more than the face amount of the policy.

Accelerated Death Benefit Option:
Also known as “living benefits.” This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care or confinement to a nursing home. Availability and specifics of these riders vary by carrier and state.

Age:
Most insurance companies calculate age by using the age you are nearest to. Example: Insured is 45 and it is January, and the insured’s birthday is in March. If the insurance company was calculating age nearest, the insured would be considered age 46 for the purpose of calculating rates.

Assignment:
The transfer of the ownership rights of a Life Insurance policy from one person to another.

Aviation Hazard:
The extra hazard of death or injury resulting from participation in aeronautics. It usually does not include fare-paying passengers in licensed commercial aircraft. This generally will require paying extra premium or the waiving of certain benefits of coverage.

Backdating:
A procedure for making the effective date of a policy earlier than the application or issue date. Backdating is often used to make the age at issue lower than it actually was in order to get lower premium. State laws often limit to six months the time to which policies can be backdated.

Beneficiary:
The person designated to receive the death benefit when the insured dies.

Business Insurance:
Policies written for business purposes, such as key employee, buy-sell, business loan protection, etc.

Buy-Sell Agreement:
An agreement among owners in a business which states the under certain conditions, i.e., disability or death, the person leaving the business or in case of death, his heirs are legally obligated to sell their interest to the remaining owners, and the remaining owners are legally obligated to buy at a price fixed in the Buy-Sell agreement. The funding vehicles are either disability or life insurance or both.

Children’s Term Insurance Rider:
Provides term insurance to the insured’s children. It is a flat premium for all his children and the benefit usually is not less than $1,000 or more than $10,000.

Collateral Assignment:
Assign all or part of a life insurance policy as security for a loan. If the insured dies the creditor would receive only the amount due on the loan.

Conditional Receipt:
This is the more exact terminology for what is often called a receipt. It provides that if premium accompanies an application, the coverage will be in force from the date of application, or medical examination, if any, whichever is later, provided the insurer would have issued the coverage at the rate applied on the basis of the facts revealed on the application, medical examination and other usual sources of underwriting information. This coverage usually has a limit until the policy is delivered and all delivery requirements are met. A life and health insurance policy without a conditional receipt is not effective or available until it is delivered to the insured and the premium is paid and all other conditions are met.

Contestable Clause:
A provision in an insurance policy setting forth the conditions under which or the period of time (usually 2-4 years) during which the insurer may contest or void the policy. After that time has lapsed, normally two years, the policy cannot be contested. Example: Material misrepresentation in the application. The suicide exclusion on life policies also may apply during the same period.

Contingent Beneficiary:
A person or persons named to receive policy benefits if the primary beneficiary is deceased at the time the benefits become payable.

Convertible (conversion):
A policy that may be changed to another form by contractual provision and without evidence of insurability. Most term policies are convertible into permanent insurance.

Credit Insurance:
Insurance on a debtor in favor of a creditor to pay off the balance due on a loan in the event of the death of the debtor.

Cross Purchase:
A form of business life insurance in which each party purchases life insurance on each other.

Decreasing Term:
A form of life insurance that provides a death benefit which declines throughout the term of the contract, reaching zero at the end of the term. Almost never sold any more because level term insurance is so much less expensive.

Delivery:
The actual placing of a life insurance policy in the hands of an insured.

Double Indemnity:
Payment of twice the basic benefit in the event of loss resulting from specified causes or under specified circumstances.

Entity Agreement:
A buy-sell agreement in which the company agrees to purchase the interest of a deceased or disabled partner.

Evidence of Insurability:
The medical and other information needed for the underwriting of an insurance policy.

Examination:
The medical examination of an applicant for Life Insurance.

Examiner:
A physician, nurse, or para-med appointed by the medical director of a life insurance company to examine applicants.

Expiry:
The termination of a term life insurance policy at the end of its period of coverage.

Face:
The first page of a life insurance policy.

Face Amount:
The amount of insurance provided by the terms of an insurance contract, usually found on the face of the policy. In a life insurance policy, the death benefit.

Fixed Benefit:
A benefit, the dollar amount of which does not vary.

Free Look:
A period of time(usually 10, 20, or 30 days, depending on the state) during which a policyholder may examine a newly issued individual life insurance policy, and return it in exchange for a full refund of premium if not satisfied for any reason.

Insurability:
Acceptability to the insurer of an application for insurance.

Insurable Interest:
You have an insurable interest in the life of the insured if upon the death of the insured you would suffer financial loss.

Insurance Policy:
The printed form which serves as the contract between an insurer and an insured.

Insured:
The party, who is being insured. In life insurance, it is the person because of his or her death the insurance company would pay out a death benefit to a designated beneficiary.

Insurer:
The company that pays out the death benefits if the insured dies.

Irrevocable Beneficiary:
A beneficiary that cannot be changed without his or her consent.

Key Person (Key Man) Insurance:
Insurance on the life of a key employee whose death would cause the employer financial loss. The policy is owned and payable to the employer.

Lapsed Policy:
An Insurance policy which has been allowed to expire because of nonpayment of premiums. In a cash value life insurance policy such as Whole Life or Universal Life the policy could expire because the cash surrender value reached were insufficient to cover cost of insurance payments are being made to replenish it.

Level Term Insurance:
A type of term policy where the face value remains the same from the effective date until the expiration date, it would also mean a period of time the premiums would remain level. For example, the 5, 10, 15, 20, 25 & 30. However, after the level premium period most policies turn into Annual Renewable Term where the premiums increase annually.

Life Expectancy:
The average number of years remaining for a person of a given age to live as shown on the mortality or annuity table used as a reference.

Life Insurance:
An agreement that promises the payment of a stated amount of monetary benefits upon the death of the insured.

Medical Information Bureau (MIB):
A data service that stores coded information on the health histories of persons who have applied for insurance from subscribing companies in the past. Most Life insurers subscribe to this bureau to get more complete underwriting information.

Mortality Charge:
The charge for the element of pure insurance protection in a life insurance policy.

Mortality Cost:
The first factor considered in life insurance premium rates. Insurers have an idea of the probability that any person will die at any particular age; this is the information shown on a mortality table.

Mortality Rate:
The number of deaths in a group of people, usually expressed as deaths per thousand.

Mortality Table:
A table showing the incidence of death at specified ages.

Mortgage Insurance:
A life policy covering a mortgagor from which the benefits are intended to pay off the balance due on a mortgage upon the death of the insured.

Nonmedical (Non-Med):
A contract of life insurance underwritten on the basis of an insured’s statement of his health with no medical examination required.

Not Taken:
Policies applied for and issued but rejected by the proposed owner and not paid for.

Occupational Hazard:
A condition in an occupation that increases the peril of accident, sickness, or death. It usually will mean higher premiums.

Ownership:
All rights, benefits and privileges under life insurance policies are controlled by their owners. Policy owners may or may not be the insured but need to have an insurable interest in the life of the insured at the time of application. Ownership may be assigned or transferred by written request of current owner.

Permanent Life Insurance:
A term loosely applied to Life Insurance policy forms other than Group and Term, usually Cash Value Life Insurance, such as Whole Life Insurance or Universal Life.

Policy Fee:
There are two calculations to determine the premium for term insurance. The Policy Fee which is a flat fee added to each policy and the rate per thousand times the number of thousands of death benefit.

Preauthorized Check Plan:
A premium-paying arrangement by which the policy owner authorizes the insurer to draft money from his or her bank account for the payments. This is usually done on a monthly basis.

Preferred Risk:
Any risk considered to be better than the standard risk on which the premium rate was calculated. Some companies are now offering degrees of preferred to reduce the premium rates even more. An extremely healthy person can now get extraordinary low rates.

Premium:
The price of insurance for a specified risk for a specified period of time.

Primary Beneficiary:
The beneficiary named as first in line to receive proceeds or benefits from a policy when they become due.

Provisions:
Statements contained in an insurance policy which explain the benefits, conditions and other features of the insurance contract.

Rated:
Coverage’s issued at a higher rate than standard because of some health condition, or impairment of the insured.

Renewable Term:
Term insurance that may be renewed for another term without evidence of insurability. Level term usually turns into renewable term with increasing premiums after the level premium period.

Replacement:
A new policy written to take the place of one currently in force.

Revocable Beneficiary:
The beneficiary in a life insurance policy in which the owner reserves the right to revoke or change the beneficiary. Most policies are written with a revocable beneficiary.

Rider:
An attachment to a policy that modifies its conditions by expanding or restricting benefits or excluding certain conditions from coverage.

Standard Risk:
A risk that is on a par with those on which the rate has been based in the areas of health, physical condition, and lifestyle. An average risk, not subject to additional charge / rate or restrictions because of health. At one time the best class of risk was the standard class. As the insurers improved their underwriting skills, they were able to define those in very good health and offer them better rates with the new preferred class. Now some insurers have even developed different levels of preferred.

Stock Purchase Agreement:
A formal buy-sell agreement whereby each stockholder is bound by the agreement to purchase the shares of a deceased stockholder and the heirs are obligated to sell. This agreement is usually funded with life insurance.

Stock Redemption Agreement:
A formal buy-sell agreement whereby the corporation is bound by the agreement to purchase the shares of a deceased stockholder and the heirs are obliged to sell. This agreement is usually funded with life insurance.

Term Insurance:
It is the type of life insurance that provides protection for a specified period of time. It usually has no real cash value build up.

Underwriter:
A technician trained in evaluating risks and determining rates and coverage. When an application is submitted to the insurer, it is the underwriter who gathers all the necessary information to determine whether a person is a preferred risk, a standard risk, or rated.

Underwriting:
It is what the underwriter does to determine the class of risk an applicant will be placed in.

Universal Life:
An interest sensitive life insurance policy that builds cash values. The premium payer has some flexibility as to amount and frequency of premium payments. It is a matter of considering 3 variables. The assumed interest rate, the cash surrender value and the premium payment plan. The policy is interest sensitive, and if interest rates change from the assumed interest, it will effect the other two variables. If you have a Universal Life Policy, you should have it evaluated to see if you need to increase premiums based on current interest rates. A fourth variable that has not been a factor but could be in the future, and the owner should be aware of, is the cost of insurance variable. Universal Life policies are usually structured assuming current cost of insurance rates. The insurance companies reserve the right to change those rates.

Waiver of Premium:
A provision of a life insurance policy which continues the coverage without further premium payments if the insured becomes totally disabled.

Whole Life Insurance:
Life insurance that is kept in force for a person’s whole life as long as the scheduled premiums are maintained. All Whole Life policies build up cash values. Most Whole Life policies are guaranteed as long as the scheduled premiums are maintained. The variable in a whole life policy is the dividend which could vary depending on how well the insurance company is doing. If the company is doing well and the policies are not experiencing a higher mortality than projected, premiums are paid back to the policyholder in the form of dividends. Policyholders can use the cash from dividends in many ways. The three main uses are: It may be used to lower premiums, it may be used to purchase more insurance or it may be used to pay for term insurance.