Life Insurance Basics 3
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Life Insurance Basics 3

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Policy Provisions

Policy Provisions

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Life Insurance Basics 3 Life Insurance Basics 3 Presentation Transcript

  •  
  • The Guardian Life Insurance Company of America 7 Hanover Square, New York, NY 10004 BASICS #3 LIFE INSURANCE
  • Policy Provisions Important
  • Assignment
    • A life insurance policy is personal property and freely transferable (assignable) by the owner.
    Policy Provisions
    • Collateral Assignment - Only certain rights are
    • transferable to another when the policy is to serve
    • as security for a loan or other debtor/creditor
    • situations.
    • Absolute Assignment -
    • All ownership rights are
    • transferable to another.
    • Two types of assignment
  • Grace Period
          • Policy remains in full force even though
          • premium is not paid.
    Policy Provisions
          • Period after policy premium is due .
          • Designed to protect policy holder against
          • inadvertent lapse.
    30-DAY GRACE
  • Incontestable
    • At end of "contestable" period (generally 2 years), insurer agrees not to deny a claim because of:
    Policy Provisions
    • Alleviates fear of lawsuits, especially at a time after the insured's death, when it would be difficult for the beneficiary to successfully combat an insurer's charge.
    • Misstatement (generally includes even fraud) on
    • the part of the insured
    • Concealment
    • Error
  • Delay Clause
    • Permits insurance company to postpone payment
    • of cash surrender (or loan) value for 6 months.
    Policy Provisions
    • Hint: Financial solvency of insurer should be considered .
    • Potentially could affect liquidity of cash or loan values.
    • Expected to be invoked only under most severe
    • circumstances.
    • Protects insurer against losses that might develop
    • from excess demands for cash in times of economic
    • crisis.
    • Provision must be included by law .
  • Suicide Provision
    • Generally during first 2 policy years .
    Policy Provisions
    • Insurer would only return premium paid , with or without interest, in event of suicide.
    • After period, suicide is covered risk and treated like any other cause of death.
  • Reinstatement Clause
    • Helps policyholder who fails to pay a premium within time allowed, including the grace period.
    Policy Provisions
    • Gives insured right to reinstate policy within a specified period (generally 3 years)*.
    • Must furnish evidence of insurability.
    • Must pay back premiums due
    • plus interest incurred.
    *Guardian’s reinstatement period is 5 years.
  • Policy Loan
    • Not available with term insurance.
    Policy Provisions
    • Policy acts as the collateral for the loan.
    • Loan may not exceed the cash (loan) value of policy as of next policy anniversary date.
    • Unpaid policy loans and accrued interest at death will be deducted from death proceeds or surrender value .
  • Policy Loan , continued…..
    • Rate of Interest is stated in contract
    Policy Provisions
    • May be a fixed rate or a variable rate according to contract.*
    • Beneficial for temporary financial needs
      • without surrendering the policy.
    *Guardian’s whole life policies have a fixed loan interest rate, due in advance on each policy anniversary.
  • Automatic Premium Loan
    • Not available with term insurance .
    Policy Provisions
    • Operates when policy would lapse for failure to pay premium, contingent on sufficient loan value to cover payment.
    • Not included automatically in all policies.
  • Beneficiary Designation
    • Can be " revocable " or " irrevocable ." Irrevocable beneficiary in effect becomes a joint owner of policy (assignments, loans, etc. must be approved by irrevocable beneficiary).
    Policy Provisions
    • Person(s) or entity to receive proceeds in event of insured's death.
    • Primary beneficiary is in first position, contingent or secondary beneficiary collects benefits in event primary beneficiary is deceased.
    • In event all listed beneficiaries are deceased, proceeds normally go to insured's estate .
    Beneficiary Designation Policy Provisions
    • Insurer is bound by law to pay proceeds to those designated. Life Insurance is a non-probate asset .
  • Cash Surrender Value:
      • State non-forfeiture laws
      • Generally require a cash value after premiums have been paid for three years . ( Many states require some cash value after one or two years.)
    Policy Provisions
      • Essentially, the same amount of cash may be obtained through the policy loan function.
          • Insurer has no further obligation.
          • Insurance protection ceases.
      • When cash value is surrendered:
      • When surrendering for cash, amount of
      • insurance lost is the " net amount at risk ."
    Cash Surrender Value: Policy Provisions
      • Consider the tax implications : the cash
      • values over and above total premiums
      • paid are considered a taxable gain . This
      • includes any loans taken prior to the
      • surrender.
      • (Difference between gross death benefit and cash
      • surrender value.)
      • ( This is a broad generalization.
      • Exact calculations as to the gain need to be done
      • by the insurer.)
      • Required by statute.
      • CASH VALUE &
      • NON-FORFEITURE OPTIONS
    Policy Provisions
      • Protects policyholder who has
      • accumulated cash values but wishes to
      • stop paying premiums or surrender the policy.
      • Non-forfeiture takes one of three forms:
          • Cash surrender value
          • Reduced paid-up life insurance
          • Extended term life insurance
      • Reduced Paid-Up Insurance: Policyholder can
      • use cash value to purchase paid-up insurance:
      • CASH VALUE &
      • NON-FORFEITURE OPTIONS
        • All Cash Values become Guaranteed Cash Values
        • of the new reduced paid-up policy .
    Policy Provisions
      • Same type of insurance as original policy,
      • but for reduced face amount .
    • Appropriate when a smaller amount of
    • permanent insurance is satisfactory, and
    • discontinuation of premiums is desired.
      • Extended Term Insurance:
      • CASH VALUE &
      • NON-FORFEITURE OPTIONS
    Policy Provisions
      • Cash value may be exchanged for paid-up term insurance for full face amount of original policy.
      • Duration of term coverage is a function of:
        • Net cash value applied as single premium.
        • Attained age.
      • Appropriate when:
    • Full amount of insurance is necessary and the insured cannot or does not want to continue premium payments.
  • Use of Life Settlement Options
    • Provides beneficiary or policyholder a secure life income that cannot be outlived .
    Policy Provisions
    • Once option is selected, policyowner can prevent the beneficiary from obtaining entire proceeds in lieu of income stream ( spendthrift clause ).
    • Settlement Choices(s ) should be considered carefully before any option is exercised.
    • Joint and survivor options "ensures" a second person a life income…(this may not be the best alternative. An individual life insurance policy may permit a life income option choice, thus providing a higher monthly income).
    • Rider
    Policy Riders
    • A way of modifying a basic life insurance policy.
    • Often used to add amounts and/or types of insurance benefits to a basic life insurance policy.
  • Waiver of Premium (WP or WPB)
      • Added to policy for an extra premium .
      • Caution: this does not hold true for all waiver provisions in some universal and variable universal life policies, which may only provide for waiver of cost of insurance.
    Popular Policy Riders
      • In event insured becomes totally disabled before a certain age (60 or 65 generally), premiums on policy will be waived (i.e. insured not required to pay).
      • Generally, must be continuing disability after 6 months.
      • Premiums normally waived retroactively for initial period.
      • Values continue in policy as premiums are paid.
  • Guaranteed Insurability Option (GIO or GPO)
    • Added to policy for extra premium .
    Popular Policy Riders
    • Permits purchase of additional amounts of insurance
    • without additional proof of insurability.
    • Options maybe exercised at stated ages , marriage,
    • and birth of children (i.e. 21, 24, 27, 30, 33, etc. to 40).
    • Option purchases can be up to face amount of original
    • policy (Guardian’s provision has a maximum of
    • $150,000 per option).
          • Added to policy for extra premium .
    Double Indemnity or Accidental Death Benefit (ADB) Popular Policy Riders
          • Provides an additional death benefit if
          • death is accidental .
          • Little justification from economic stand-
          • point in that the loss is just as severe to
          • dependents and beneficiaries if death is
          • caused by other means .
  • Participating Life Insurance Policies
    • Dividends as declared by insurer may be used in several ways:
      • Cash
      • Applied (reduce premium)
    • Accumulations
        • Accumulations participate if rate is higher (earnings on this option are taxable as current income).
        • Have a minimum guaranteed interest rate.
      • Provides paid-up insurance at net single premium rates
        • Evidence of insurability may be necessary to convert
        • accumulated dividends to paid-up additions.
    • Paid-up Additions
    • One-Year Term Insurance
      • So called "fifth dividend option.”
      • Amount that can be purchased generally limited to cash value of policy.
      • Purchases term insurance at net rates.
    Participating Life Insurance Policies
  • Service to Your Clients: Knowledge of policy provisions, non-forfeiture options, and dividend options is essential to communicate the extraordinary value and flexibility of permanent life insurance.
  • Read The Guardian’s policies and riders to become familiar with how the choices you can offer to your clients will help them meet their financial planning needs. Service to Your Clients:
  • Settlement Options
    • When proceeds become payable , the insured and/or
    • the beneficiary may elect to have proceeds paid in a variety of ways.
  • Settlement Options
    • Lump Sum - All proceeds paid at once. Death benefit proceeds are generally income-tax free.
    • Interest Option : Proceeds may be left with insurer for a guaranteed interest rate.
      • Excess interest may be earned.
      • May be a limited or unlimited right on withdrawal
      • by the beneficiary.
      • Right to change to another option may be given.
      • Principal can be retained intact.
    • Interest earned is taxable.
  • Settlement Options
    • Fixed Amount Option
      • Provides stated amount of income each month until proceeds are exhausted .
      • Proceeds are part interest and part principal. Interest portion is considered
      • taxable income .
      • Interest rate is established at time option is selected. Principal amount and interest
      • rate determine the number of payments.
  • Settlement Options
    • Fixed Period Option
      • Period of time which payments are made is fixed.
      • Level of monthly payment based on principal amount and interest rate.
    • Joint & Last Survivor Life Income Options
    Settlement Options
      • Proceeds paid during lifetimes of two or more recipients.
      • Income paid while both alive , then continues to survivor.
      • Survivor income options:
        • Continued at same amount
        • Reduced payments upon death of first payee (i.e. 67%, 50%). The lower the percentage to survivor, the higher the original life income while both alive will be.
    • Life Income Options
    Settlement Options
          • Proceeds buy a life annuity
          • Several types are available:
      • Pure Life Income
        • Proceeds paid out over lifetime of recipient.
        • Return of all proceeds not guaranteed .
        • Of all life options, provides highest monthly payment due to absence of refund feature.
        • Entire proceeds considered "used up" at recipient’s death.
      • Life Income With Period Certain
    Settlement Options
        • Payments guaranteed as long as recipient lives.
        • If recipient dies before end of specified period (usually 10 - 20 years), payments continue for remainder of period to second payee (payments cease at end of period).
        • Due to period guarantee, monthly income lower than Pure Life Income Option.
      • Refund Life Income Options
    Settlement Options
        • Provides monthly life income
        • Guarantees payment of entire proceeds
        • If recipient dies before full amount of proceeds paid out (original proceeds less amount paid to date), remainder will be paid to second payee.
        • Remainder is paid in lump sum or installments until entire premium amount is paid out.
  •