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LIFE INSURANCE GLOSSARY
THERE ARE SEVERAL MAIN FORMS OF LIFE INSURANCE
WITH MANY VARIATIONS. WHILE THEY
ALL PROVIDE
A DEATH BENEFIT, SOME HAVE A
CASH VALUE (LIVING
BENEFIT) AS WELL. THE MAIN TYPES
OF LIFE
INSURANCE BEING PURCHASED TODAY
ARE TERM, UNIVERSAL LIFE, WHOLE LIFE, AND VARIABLE UNIVERSAL LIFE.
TERM INSURANCE IS A POLICY FORM THAT PROVIDES ONLY A DEATH
BENEFIT. USUALLY THERE IS NO
CASH VALUE ASSOCIATED
WITH IT. IT CAN BE PURCHASED
TO COVER A SPECIFIC
TIME PERIOD, USUALLY 1, 5, 10,
15, 20, OR
30 YEARS.
USUALLY THE PREMIUM STAYS THE
SAME FOR THAT
PERIOD AND INCREASES ANNUALLY
& RAPIDLY
AFTER THAT.
THE ISSUES THAT NEED TO BE CONSIDERED
WHEN
PURCHASING TERM INSURANCE ARE
AS FOLLOWS:
1- WHAT IS THE PURPOSE OF THE
COVERAGE
2- HOW LONG WILL YOU NEED TO
HAVE THE COVERAGE
3- HOW IS THE FACE AMOUNT DETERMINED
4- WHAT HAPPENS TO THE RATES
AT THE END OF
THE RATE GUARANTEE PERIOD
5- CAN YOU KEEP THE COVERAGE
AFTER THE GUARANTEE
PERIOD AND IF SO FOR HOW LONG
6- DOES THE TERM POLICY OFFER
YOU THE OPTION
OF CONVERTING IT TO A PERMANENT
POLICY (IE.
UNIVERSAL LIFE, WHOLE LIFE, OR
VARIABLE LIFE).
REMEMBER THAT AS YOU AGE, AND THE GUARANTEE
PERIOD ENDS, IT IS INCREASINGLY
MORE EXPENSIVE
TO GO BACK INTO THE MARKETPLACE
AND PURCHASE
A NEW POLICY FOR A NEW TERM PERIOD.
THERE
ARE ALSO AGE RESTRICTIONS THAT
LIMIT PURCHASING
TERM INSURANCE AT OLDER AGES.
IT ALSO BECOMES
INCREASINGLY MORE EXPENSIVE TO
PURCHASE PERMANENT
COVERAGE AS ONE GETS OLDER.
UNIVERSAL LIFE INSURANCE IS A PERMANENT POLICY FORM THAT WILL ALLOW
ONE TO KEEP THE COVERAGE TO AGE
100- OR SOMETIMES
LONGER, IF PROPERLY FUNDED. THIS MEANS
PAYING A PREMIUM THAT IS SUFFICIENT
TO WITHSTAND
DECREASES IN INTEREST CREDITING
RATES AND
/ OR INCREASES IN MORTALITY EXPENSES.
THINK OF UNIVERSAL LIFE AS A
POLICY WHERE
AFTER CERTAIN EXPENSES ARE DEDUCTED
(OFTEN
A PORTION OF EACH PREMIUM), THE
REMAINING
CASH VALUE IS CREDITED WITH A
CURRENT INTEREST
RATE. THIS RATE IS SOMETIMES
TIED TO AN INDEX,
BUT MORE OFTEN THAN NOT IS A
RATE ARBITRARILLY
DETERMINED BY THE INSURER. NO
MATTER WHAT
THE INSURER MAY WANT TO DO WITH
THE RATES
THE DOWNSIDE IS LIMITED DUE TO
A STATED MINIMUM
INTEREST RATE. IN ADDITION TO
THE UP FRONT
EXPENSE CHARGES, THE INSURER
MAKES DEDUCTIONS
FROM THE CASH VALUE EVERY MONTH
TO COVER
THE RISK ASSOCIATED WITH THE
INSURED DYING,
KNOWN AS MORTALITY CHARGES. THESE
CHARGES
INCREASE AS ONE GETS OLDER AND
CAN CAUSE
A POLICY TO "SELF DESTRUCT"
EARLY
IF PREMIUM PAYMENTS ARE INSUFFICIENT
AND
IF INTEREST RATES ARE LOW ENOUGH
AS TO NOT
ALLOW THE CASH VALUE TO COVER
THESE DEDUCTIONS.
IF PROPERLY FUNDED, AND IF CHECKED
ON A REGULAR
BASIS, BY ORDERING AN IN-FORCE
LEDGER FROM
THE INSURANCE CARRIER, AND IF
ADJUSTMENTS
TO PREMIUMS ARE MADE TO COVER
THE DOWNSIDE
EXPOSURES, THE POLICY SHOULD
LAST UNTIL MATURITY-
USUALLY AGE 100.
UNIVERSAL LIFE WAS DESIGNED TO
BE THE MOST
FLEXIBLE POLICY FORM IN TERMS
OF AMOUNT AND
TIMING OF PREMIUM PAYMENTS AS
WELL AS THE
NUMBER OF WAYS THAT ONE CAN ACCESS
THE CASH
VALUE.
IN THAT REGARD, IT IS SOMETIMES
USED AS A VEHICLE
TO ACCUMULATE MONEY FOR A CHILD'S
EDUCATION,
TO HELP SUPPORT ONE'S RETIREMENT,
OR FOR
A NUMBER OF OTHER CASH ACCUMULATION
NEEDS.
IN ADDITION, THERE ARE NEW TYPES OF UNIVERSAL LIFE NOW AVAILABLE THAT HAVE "SECONDARY GUARANTEES". THE GENERIC TERM FOR THIS IS "GUARANTEED NO-LAPSE".
IF IT IS IMPORTANT THAT THE POLICY NOT BE SUBJECT TO THE USUAL POTENTIAL CHANGES ASSOCIATED WITH UNIVERSAL LIFE, SUCH AS DECREASES IN INTEREST RATES, WHICH CAN AFFECT A POLICY'S LONGEVITY, ONE CAN ASK FOR A GUARANTEED NO-LAPSE POLICY. AS LONG AS THE GUARANTEED NO-LAPSE PREMIUM IS PAID WHEN DUE, THE POLICY WILL TYPICALLY LAST TO AGE 100 AND BEYOND- SOME LASTING AS LONG AS TO AGE 125.
THESE POLICIES USUALLY HAVE ALL OF THE DESIGN FLEXIBILITY OF TRADITIONAL CASH ACCUMULATION UNIVERSAL LIFE.
VARIABLE UNIVERSAL LIFE DIFFERS FROM UNIVERSAL LIFE IN THAT THE
ACCUMULATED CASH VALUE CAN BE
SELF DIRECTED
INTO A NUMBER OF "SUB-ACCOUNTS"
THAT ARE OFFERED AS PART OF THE
POLICY. THESE
SUB-ACCOUNTS ARE OFFERED THROUGH
A NUMBER
OF INVESTMENT COMPANIES THAT
THE CARRIER
HAS MADE ARRANGEMENTS WITH, RESEMBLE
MUTUAL
FUNDS, AND OFFER A NUMBER OF
INVESTMENT OBJECTIVES
FROM CONSERVATIVE TO AGGRESSIVE.
IT CANNOT BE STATED TOO STRONGLY
THAT THIS
IS AN EXTREMELY RISKY POLICY
FORM IN THAT
THE CASH VALUE IS DIRECTLY RELATED
TO THE
PERFORMANCE OF THE UNDERLYING
SUB-ACCOUNTS.
THEREFORE, ONE MUST CAREFULLY
CONSIDER THE
CONSEQUENCES OF PARTIAL OR TOTAL
LOSS OF
CASH VALUE, AND PERHAPS THE POLICY
ITSELF,
INCLUDING THE DEATH BENEFIT,
IN THE EVENT
OF A DOWNWARD MARKET CORRECTION.
THE AGENT MUST HOLD A SECURITIES
LICENSE
IN ORDER TO SELL YOU A VARIABLE
LIFE POLICY.
WHOLE LIFE IS THE MOST CONSERVATIVE POLICY FORM AND
IS USUALLY THE MOST EXPENSIVE.
THE REASON
THE HIGHER COSTS IS BECAUSE THE
UNDERLYING
CASH VALUE IS GUARANTEED. YOU
WILL FIND A
CHART WITHIN THE POLICY THAT
INDICATES WHAT
THE GUARANTEED CASH VALUE WILL
BE IN ANY
GIVEN YEAR.
PARTICIPATING WHOLE LIFE POLICIES,
USUALLY
SOLD BY MUTUAL INSURANCE COMPANIES,
MAY PAY
A "DIVIDEND" IN ANY
GIVEN YEAR.
A DIVIDEND BY LAW IS A RETURN
OF AN OVERPAYMENT
OF PREMIUM. THE CARRIER MAY CHOOSE
TO PAY
A DIVIDEND IF IT HAS "DIVISIBLE
SURPLUS".
DIVISIBLE SURPLUS IS AVAILABLE
WHEN A CARRIER
PERFORMS WELL AS RESPECTS IT'S
OPERATING
EXPENSES AND OVERHEAD, IT'S CLAIMS
RATIOS,
IT'S GENERAL INVESTMENT RESULTS,
AND IT'S
PERSISTENCEY- THE ABILITY TO
KEEP THE BUSINESS
IT WRITES ON THE BOOKS. DIVIDENDS
ARE NOT
GUARANTEED, BUT IF THEY ARE,
THERE ARE A
NUMBER OF DIVIDEND OPTIONS THAT
ARE AVAILABLE.
THE MOST COMMON IS TO USE THE
DIVIDEND TO
PURCHASE SINGLE PREMIUM PURCHASES
OF "PAID
UP ADDITIONS" TO THE POLICY.
THIS INCREASES
THE DEATH BENEFIT AND THE UNDERLYING
CASH
VALUE.
THEY MAY ALSO, AFTER A TIME PERIOD,
BE USED
TO "ABBREVIATE" THE
PREMIUM PAYING
PERIOD, WHILE KEEPING THE COVERAGE
IN FORCE.
MANY CARRIERS OFFER DIFFERENT
RIDERS SUCH
AS ACCIDENTAL DEATH BENEFIT,
SPOUSE RIDER,
CHILD RIDER, FUTURE PURCHASE
OPTIONS, AND
WAIVER OF PREMIUMS ON SOME OR
ALL OF THEIR
POLICY FORMS.
THESE BENEFITS SHOULD BE CAREFULLY
CONSIDERED
BY THE CLIENT IN LIGHT OF THEIR
PRESENT AND
POTENTIAL FUTURE NEEDS.
THERE ARE A NUMBER OF "SETTLEMENT
OPTIONS"
(DISTRIBUTIONS) AVAILABLE TO
THE BENEFICIARIES
OF A LIFE INSURANCE POLICY. THESE
SHOULD
BE CAREFULLY CONSIDERED, BASED
UPON THE BENEFICIARIES
AND THEIR POTENTIAL FUTURE INCOME
NEEDS.
IN ADDITION, BENEFICIARY DESIGNATIONS
AND
OWNERSHIP SHOULD BE CAREFULLY
CONSIDERED
SO AS TO MINIMIZE ESTATE TAX
CONSEQUENCES,
AND IN SOME CASES TO PROTECT
THE BENEFICIARY
AGAINST THEMSELVES AND OTHERS.
TO ORDER PROPOSAL
GLOSSARY INDEX
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