Post No. 11. Non
Tradicional Life Policies.
Nontraditional Life Policies. In the 1980, insurance
companies introduced a number of new policy forms, most of which are more
flexible in design and provisions than their traditional counterparts. The most
notable of these are: interest-sensitive
whole life, adjustable life, universal life, variable life, and variable life.
Interest- Sensitive Whole Life
Also known as current-assumption whole life, this policy is
characterized by premiums that vary to reflect the insurer’s changing assumptions
with regard to its death, investment, and expense factors. In this respect, it
is similar to indeterminate premium whole life. However, interest-sensitive
products also provide that the cash values may be greater than the guaranteed levels,
if the company’s underlying death, investment, and expense assumptions are more
favorable than expected. In this way, policyowners have two options: lower
premiums or higher cash values.
Adjustable Life
Are distinguished by their flexibility that comes from
combining term and permanent insurance into a single plan. The policyowner
determines how much face amount protection is needed and how much premium the
policyowner wants to pay. The insurer then selects the appropriate plan to meet
those needs. Or the policyowner may specify a desired plan and face amount, and
the insurer will calculate the appropriate premium.
Consequently, depending on the desired changes, the policy
can be converted from term to whole life or from whole life to term, or from a
high premium contract to a lower premium or limited pay contract.
Typically, increases in the face amounts on these policies,
require evidence of insurability. Moreover, due to its design and flexibility,
adjustable life is usually more expensive than conventional term or whole life
policies.
Universal Life
Universal life is a variation of whole life insurance,
characterized by considerable flexibility. Unlike whole life, with its fixed
premiums, fixed face amounts, and fixed cash value accumulations, universal
life allows its policyowners to determine the amount and frequency of premium
payments and to adjust the policy face amount up or down to reflect changes in
needs. Consequently, no new policy need be issued when changes are desired.
Universal life provides this flexibility by “unblunding” or
separating the basic components of a life insurance policy-the insurance (protection)
element, the savings (accumulation) element, and the expense (loading) element.
As with any other life policy, the policyowner pays a premium. Each month, a
mortality charge is deducted from the policy’s cash value account for the cost
of the insurance protection. This mortality charge may also include an expense,
or loading, charge.
Like term insurance premiums, the universal life mortality
charge steadily increases with age. Actually, universal life is technically
defined as term insurance with a policy value fund. Even thought the
policyowner may pay a level premium, an increasing share of that premium goes
to pay the mortality charge as the insured ages.
As premiums are paid and cash values accumulate, interest is
credited to the policy’s cash value. This interest may be either the current
interest rater or the guaranteed minimum rate, specified in the contract. If the
cash value account is not large enough to support the monthly deductions, the
policy terminates.
A specific percentage of all premiums must be used to
purchase death benefits or the universal life policy will not receive favorable
tax treatment on its cash value.
Another factor that distinguishes universal life from whole
life is the fact that partial withdrawals can be made from the policy’s cash
value account (Whole life insurance allows a policyowner to tap cash values
only through a policy loan or a complete cash surrender of the policy’s cash
values, in which case the policy terminates.) Also, the policyowner may
surrender the universal life policy for its entire cash value at any time. However,
the company probably will assess a surrender charge unless the policy has been in
force for a certain number of years.
Universal life has other features in common with traditional
cash value insurance policies, including an accidental death benefits rider
that provides a multiple of the death proceeds (i.e., “double indemnity) if the
cause of death is a covered accident event., an accelerated benefit rider that
pays a portion of the death benefit if the insured person is diagnoses with a
terminal illness, a no-lapse guarantee rider that guarantees a death benefit
for life so the insured is covered even if premium payments lapse or fall
behind. An additional insured rider that provides a death benefit on the live
of family members, a children’s insurance rider that extends a death benefit to
the insured’ child up to age 25, and more.
Universal life insurance offers two death benefit options.
Under Option one, the policyowner may designate a specified amount of
insurance. The death benefit equals the cash values plus the remaining pure
insurance (decreasing term plus increasing cash values). This level death benefit is composed of the
increasing cash values and the remaining pure insurance (decreasing term). If
the growing cash value-to-total death benefit ratio exceeds a certain
percentage fixed by federal law, an additional amount of pure insurance, called
the “corridor”. Under Option Two, the death benefit equals the face amount (pure
insurance) plus the cash values (level term plus increasing cash values). To
comply with the Tax Code’s definition of life insurance, the cash values cannot
be disproportionately larger than the term insurance portion.
Equity Index Universal Life Insurance
Equity index universal life insurance (EIUL) is an indexed
universal life insurance policy offering an equity index feature that offers
the potential for cash value accumulation and basic interest guarantees. These
features help the policyowner plan for family security and offer a number of
interest crediting strategies that allow the potential to build up cash value
in the policy. These choices give the policyowner more flexibility as compared
to traditional universal life insurance policies. Policy cash value can be
transferred from a fixed account that offers traditional fixed interest rates
to an indexed account.
The policyowner should examine and select the index account
that meets the policyowner’s overall objectives.
Variable Insurance Products
Introduced in the 1970s, variable insurance products added a
new dimension to life insurance: the opportunity for policyowners to achieve
higher-than- usual investments returns on their policy cash values by accepting
the risk of the policy’s performance.
Under traditional whole life insurance policies, the insurer
guarantees a certain minimum rate of return will credited to the policies’ cash
values. This is accomplished because the insurer invests the policyowner’s premiums
in its general account- an investment account that is composed of investments
that are carefully selected to match the liabilities and guarantees of the
contracts they back. (These investments are usually quite conservative: US
government securities and investment-grade bonds are common.) Actually, the
premiums paid for life insurance are not, in and of themselves, sufficient to
cover the benefits promised in the contract.
In contrast, variable insurance products do not guarantee
contract cash values, and it is the policyowner who assumes the investment
risk. Variable life insurance contracts do not make any promises as to either
interest rates or minimum cash values. What these products do offer is the
potential to realize investment gains that exceed those available with
traditional life insurance policies. This is done by allowing policyowners to
direct the investment of the funds that back their variable contracts through separate
account options. By placing their policy values into separate accounts,
policyowners can participate directly in the account’s investment
performance,which will earn a variable ( as opposed t a fixed) return. Functioning
on much the same principle as mutual funds, the return enjoyed – or loss
suffered- by policyowners through their investment in a separate account is
directly related to the performance of the assets underlying the separate
account. Separate accounts are not insured by the insurer and the returns on
their investments are not guaranteed. For the insurer, this presents a means of
transferring the investment risk from itself to the policyowner. The insurer
can offer policyowners the possibility (through not the guarantee) or
competitively high returns without facing the investment risk posed by its
guaranteed fixed policies.
Because of the transfer of investment risk from the insurer
to the policyowner, variable insurance products are considered securities
contracts as well as insurance contracts. Therefore, they fall under the
regulatory arm of both state offices of insurance regulation and the Securities
and Exchange Commission (SEC). To sell variable insurance products, an
individual must hold a life insurance license and a Financial Industry
Regulatory Authority (FINRA) registered representative’s license. Some states
may also require a special variable insurance license or special addendum to
the regular life insurance license. In Florida
(Extracted from Life, Health and Variable Annuity. 
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