280QR_Lesson_06

1、280QR_Lesson_06Cash Value Life Insurance and Endowment InsuranceLOMA 280Principles of Insurance: Life, Health, and AnnuitiesLESSON 6Cash Value Life InsuranceA cash value life insurance policy grants the policyowner certain ownership rights.The policyowner generally has the right to surrenderor termi

2、natea cash value life insurance policy for its cash value during the insureds lifetime.?The amount of the cash value that a policyowner is entitled to receive upon policy surrender is referred to as the cashsurrender value or the surrender value.The policyowner has the right to use the policys accum

3、ulated cash value as security for a loan.?The policyowner can use the cash value of the policy ascollateral for a loan from another financial institution.?The policyowner can receive a loan, known as a policy loan, from the insurer. If the insured dies before a policy loan isrepaid, the unpaid amoun

4、t of the loanplus any interestoutstandingis subtracted from the policy benefit.Despite their common characteristics, cash value plans differ widely in their features and benefits.whole life insurance: a form of cash value life insurance that provides lifetime insurance coverage at a level premium ra

5、te that does not increase as the insured agesWhole life insurance policies include a table that illustrates how the policys cash value will grow over time.If the policy does not remain in force until the insureds death, the insurer agrees to refund thecash value to the policyownerless any surrender

6、charges and outstanding policy loans.Whole life policies can be classified on the basis of the length of the policys premium payment period. Most whole life policies are classified as either continuous-premium policies or limited-payment policies. continuous-premium whole life policy (sometimes call

7、ed a straight life insurance policy or an ordinary life insurance policy): a whole life policy under which premiums are payable until the death of the insured Because premiums are payable over the life of the policy, the amount of each premium payment required for a continuous-premium whole life pol

8、icy is lower than the premium amount required under any other premium payment schedule for a whole-life policy.limited-payment whole life policy:a whole life policy for which premiums are payable only until some stated period expires or until the insureds death, whichever occurs firstPremiums payabl

9、e for a specified number of yearsExample:premiums payable for 20 years (called a 20-payment whole life insurance policy)Premiums payable until the insured reaches a specified age Example:premiums payable until the insured reaches the policy anniversary closest to or immediately following the insured

10、s65th birthday, when premium payments cease but coveragecontinues (called a paid-up-at-age-65 policy)paid-up policy:a policy that requires no further premium payments but continues to provide coveragesingle-premium whole life policy:a type of limited payment whole life policy that requires only one

11、premium paymentModified Whole Life InsuranceAs we have seen, traditional whole life policies provide a constant face amount of coverage in exchange for a series of level premiums or a single premium.However, under some whole life policies eitherthe amount of the required premium payments changes at

12、some point in the life of the policy (modified premiums)orthe face amount of the coverage changes during the life of the policy (modified coverage)Joint Whole Life Insurancejoint whole life insurance:a type of insurance that has the same features and benefits as individual whole life insurance, exce

13、pt that it insures two lives under the same policyJoint whole life insurance is often referred to as first-to-dielife insurance because, upon the death of one of the insureds, the policy death benefit is paid to the surviving insured and the policy coverage ends.To allow the surviving insured to obt

14、ain coverage, joint whole life policies usually provide a specified periodsuch as 60 or 90 daysfollowing the first insureds death within which to purchase an individual whole life policy of thesame face amount without evidence of insurability.Some joint whole life policies provide the surviving insu

15、red with temporary term insurance during the specified period.Monthly Debit Ordinarymonthly debit ordinary (MDO) policy:a whole life insurance policy marketed under the home service distribution system and paid for by monthly premium paymentsThe home service distribution system is a method of sellin

16、g and servicing insurance policies through commissioned sales agents, known as home service agents, who sell a range of products and provide specified policyowner services, including the collection of renewal premiums, within a specifiedgeographic area.A home service agents assigned territory is ref

17、erred to as adebit, agency, or account.MDO policies have many of the same characteristics as traditional whole life insurance, but MDO policies tend to be sold in smaller face amounts than other whole life policies.universal life (UL) insurance: a form of cash value life insurance characterized by i

18、ts flexible premiums, its flexible face amount and death benefit amount, and its unbundling of the pricing factorsTerm life insurance and most forms of whole life insurance state the gross premium that the policyowner must pay to keep the policy in force. However, some policiesmost notably universal

19、 life insurance policieslist each of the three pricing factors (mortality, interest, and expenses) separately.Mortality charges.The insurer periodically deducts a mortality charge from the universal life policys cash value. This mortality charge is the amount needed to cover the mortality risk the i

20、nsurer has assumed by issuing the policy.The amount of the mortality charge is based on the insureds risk class; it typically increases each year as the insured ages.The policy guarantees that the mortality charge will not exceed a stated maximum amount.Usually, the policy provides that the mortalit

21、y charge will be less than the specified maximum if the insurance companys mortality experience is more favorable than expected.The policy expresses the mortality charge as a charge per thousand dollars of net amount at risk.The net amount at risk for most life policies is the policys face value min

22、us its reserve, but the net amount at risk for a universal life policy depends on whether the death benefit payable is level or varies with changes in the policys cash value.Interest.A universal life insurance policy guarantees that the insurer will pay at least a stated minimum interest rate on the

23、 cash value each year. It also provides that the insurer will pay a higher interest rate if conditions warrant. For example, the policy may state that the interest rate paid willReflect current interest rates in the economy orBe tied to the rate paid on a standard investment, such as a specified cat

24、egory of U.S. government Treasury Bills orBe at the guaranteed interest rate on cash values up to a stated amount, such as $1,000, and be at the higher current interest rate on cash values greater than the stated amountMost universal life policies provide that any portion of the cash value that is b

25、eing used as security for a policy loan will earn interest at a rate lower than the current rate, but this reduced rate will not fall below the guaranteed minimum interest rate.Expenses.Each universal life insurance policy lists the expense charges that the insurer will impose to cover the costs it

26、incurs to administer the policy. The following expense charges may apply:A flat charge during the first policy year to cover sales and policyissue costsA percentage of each annual premium (such as 5 percent) tocover expensesA monthly administration feeSpecific service charges for coverage changes an

27、d cash withdrawalsA chargecalled a surrender chargewhich reduces thepolicys cash value if the policyowner surrenders the policyIn policies with a surrender charge, state regulators may require insurers to use a term such as account value, reserve value, or accumulation value, to describe the accumul

28、ated cash value.Face Amount and Amount of Death Benefit.At the time of purchase, the policyowner specifies the policys face amount and decides whether the amount of the death benefit payable will be level or will vary with changes in the policys cash value.Under an Option A plan (alsoknown as an Opt

29、ion 1 plan ),the amount of the death benefitis level; the death benefitpayable is always equal to thepolicys face amount.Under an Option B plan (also known as an Option 2 plan ), the amount of the death benefit at any given time is equal to the policys face amount plus the amount of the policys cash

30、 value.The net amount at risk for an Option A plan decreases as theamount of the cash value increases. The net amount at risk for an Option B plan is always equal to the policys face amount.A universal life policy gives policyowners a great deal of flexibility to decide (1) the policys face amount a

31、nd the amount of the death benefit payable and (2) the amount of premiums they will pay.After a universal life policy has been in force for a specified minimum timeoften one yearthe policyowner can request an increase or decrease in the policys face amount.The owner of a universal life policy can de

32、termine, within certain limits, how much to pay for the initial premium and for each renewal premium. The policyowner also has great flexibility to decide when to pay renewal premiums.The insurer imposes maximum limits on premium amounts so the policy will maintain its status as an insurance product

33、.The insurer requires at least a stated minimum initial premium. As long as the policys cash value is large enough to pay the periodic mortality and expense charges, the policy remains in force even if the policyowner does not pay renewal premiums. If the policys cash value is insufficient to cover

34、the periodic charges, the policy lapses unless the policyowner pays anadequate renewal premium.How a Universal Life Policy OperatesWhen an insurer receives a premium payment, it first deducts the amount of any applicable expense charges and then credits the remainder of the premium to the policys ca

35、sh value.Each month,the insurer deducts the periodic mortality charges from the cash value and credits the remainder of the cash value with interest.The more a policyowner pays in premiums above the amount needed to pay the policys costs,the greater the cash value.If the cash value is not sufficient

36、 to pay periodic charges,the insurer gives the policyowner a stated amount of timeat least 60daysin which to pay a premium to cover those charges.If the policyowner does not make the premium payment,the policy lapses.U.S. federal tax laws treat life insurance more favorably than investments. These l

37、aws establish limits on the size of a life insurance policys cash value in relation to its face amount. If the cash value exceeds regulatory limits, then the policy is treated for tax purposes as an investment rather than an insurance product. In the U.S., the difference between a policys face amoun

38、t and the cash value required to qualify as a life policy is often called the Section 7702 corridor in reference to the section of the Internal Revenue Code that establishes the applicable limits. Insurers do not allow a policyowner to pay a premium amount that would result in the policys cash value

39、 exceeding thelegislatively defined percentage of the face amount.Most universal life policies provide that if the cash value exceeds the specified percentage, then the face amountautomatically is increased to an amount that meets thelegislative requirements.Death benefit payable Policys cash valueC

40、ash surrender value, ifdifferent from cash valueInterest earned on cashvalue Many aspects of a universal life policy change over the coursea year, so insurers send each policyowner an annual, semiannual, or quarterly report providing the policys current values and benefits. Generally, the report sho

41、ws the following amounts: Mortality charges deducted Expense charges deducted Premiums paid during reporting period Policy loans outstanding Any cash value withdrawalsvariable life (VL) insurance:a form of cash value life insurance in which premiums are fixed, but the face amount and other values ma

42、y vary, reflecting the performance of the investment subaccounts selected by the policyownersubaccount:one of several alternative pools of investments to which a variable life insurance policyowner allocates the premiums paid and the cash values that have accumulated under the policy separate accoun

43、t (also known as a segregated account): the subaccounts in which variable insurance premiums and cash values are invested; the insurer maintains this investment account separately from its general account to isolate and help manage the funds placed in its variable productsgeneral account: an undivid

44、ed investment account in which an insurer maintains funds that support its contractual obligations to pay benefits under its guaranteed insurance products, such as whole life insurance and other nonvariable products; the funds in the general account are placed in relatively secure investmentsMost va

45、riable life policies permit the policyowner to select from several subaccounts and to change selections at least annually.The insurer follows a different investment strategy for each subaccount. For example, some subaccounts concentrate oninvesting in high-growth stocks, while others invest in bonds

46、.The amount of the policys death benefit and cash value depend on how well the separate investments perform. Most variable life policies guarantee that the amount of the death benefit will not fall below the amount initially purchased. However, variable lifepolicies do not guarantee either investmen

47、t earnings or aminimum cash value.Because the policyowner, not the insurer, assumes the investment risk of a variable life policy, the U.S. Securities and Exchange Commission (SEC) has determined that variable life policies are securities and, thus, are subject to federal securities regulation.In ad

48、dition, variable life products must comply with applicable state insurance regulatory requirements.Life Insurancevariable universal life (VUL) insurance (also called universal life II and flexible-premium variable life insurance): a form of cash value life insurance that combines the premium and dea

49、th benefit flexibility of universal life insurance with the investment flexibility and risk of variable life insuranceUnder a variable universal life (VUL) insurance policy, the policyowner chooses from among several subaccounts and may change the chosen options at least annually.Most insurers allow

50、 the policyowner to choose whether the policys death benefit will remain level (an Option A account) or will vary along with changes in the investment earnings of the subaccounts (an Option B account).Life InsuranceLike a universal life policy, a variable universal life policy allows the policyowner

51、 to choose the premium amount and face amount.Like a variable life policy?The cash value of a variable universal life policy isplaced in the separate account.?A variable universal life policy does not guaranteeinvestment earnings or cash values.?A variable universal life product is considered asecur

52、ity in the U.S. and, thus, must comply withfederal securities laws.indeterminate premium life insurance policy (also known as nonguaranteed premium life insurance policy and variable-premium life insurance policy ): a type ofnonparticipaing whole life policy that specifies two premium rates a maximu

53、m guaranteed premium rate and a lower premium rateIndeterminate Premium Life InsuranceThe insurer charges the lower premium rate when the policy is issued and guarantees that rate for at least a stated period of time, such as 1, 2, 5, or 10 years.After that period, the insurer uses its actual mortality, interest, and expense experience to establish a new premium rate that may be higher or lower than the previous premium rate.In no case, however, will the new premium rate exceed the maximum rate guaranteed in the po