Chapter 4 Life Insurance Premiums, Proceeds and Beneficiaries

primary factors in premium calculations

A measure of the number of deaths in a given population. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

Insurance companies invest the premiums they receive in an effort to earn interest. The rate of earnings on investments is one of the ways an insurance company can reduce premium rates.

Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums. also known as the loading charge.

other factors that impact the premium amount include

Premium Payment Mode

premium payment options

the policyowner pays more in the early years for protection to help cover the cost in later years, which allows the premiums to remain level throughout the life of the policy. The shorter the premium-paying period , the higher the premiums, and vice versa.

Money that together with future premiums, interest, and survivorship benefits will fulfill an insurance
company’s obligations to pay future claims.

Cash value applies to the savings element of whole life insurance policies that are payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid.

Tax Treatment of Premiums

Tax Treatment of Cash Values

Death Benefits:

Death benefit is paid in a single payment

Insurance company holds death benefit for a period of time and pays only the
interest earned to beneficiaries.

Also called period certain. The fixed period option is when the insurer
pays proceeds (including interest and principal) in minimum guaranteed dollar
payments over a specified number of years.

he fixed amount installment option pays a fixed death benefit in
specified installment amounts until the proceeds are exhausted. The larger the installment payment the shorter the payout period.

The life income option provides the beneficiary with an income that they cannot
outlive. Installment payments are guaranteed for as long as the recipient lives, the amount of each installment is based on the recipient’s life expectancy and the amount of principal. This gives the potential for a greater return, or the potential for greater loss, based on how long the insured lives

Living benefit

Allows someone that a physician certifies as terminally ill to access the death benefit. The amount of benefit received will be tax free.

Allows someone with a terminal illness to sell their existing life insurance policy to a third party for a percentage of the death benefit. The new owner continues to make the premium payments and will eventually collect the entire death benefit.
Note: the original policyowner is called the Viator and the new third-party owner is called the Viatical, or sometimes referred to as the Viatee.

transfer for value rule, which applies when a life insurance policy is sold to another party before the insured’s death. Another tax cost typically associated with death is the Federal estate tax (although most relatively simple estates do not require the filing of an estate tax return).

By Order of Succession:

• Primary: First in line to receive death benefit proceeds

• Secondary (contingent): Second in line to receive death benefit proceeds if primary beneficiary dies first

• Tertiary: Third in line to receive death benefit proceeds. If no one named, death benefit
  will go to insured’s estate.
  Distribution by Descent

• Per Stirpes: (meaning by the bloodline) In the event that a beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary’s heirs.

• Per Capita: (meaning by the head) Evenly distributes benefits among all named living beneficiaries.

An irrevocable designation may not be changed without the written consent of the beneficiary. The irrevocable beneficiary has a vested interest in the policy, therefore the policyowner may not exercise certain rights (such as taking out a policy loan) without the consent of the beneficiary.

An irrevocable designation may not be changed without the written consent of the beneficiary. The irrevocable beneficiary has a vested interest in the policy, therefore the policyowner may not exercise certain rights (such as taking out a policy loan) without the consent of the beneficiary.

If the insured and the primary beneficiary die at approximately the same time for a common accident with no clear evidence as to who died first, the Uniform Simultaneous Death Act law will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries.

With a common disaster provision, a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary.

a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary.

a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary.

Prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time.

allows the insurance company to pay all or part of proceeds to someone not named in the policy that has a valid right. This is usually done on behalf of a minor or when the named beneficiary is deceased.

allows the insurance company to pay all or part of proceeds to someone not named in the policy that has a valid right. This is usually done on behalf of a minor or when the named beneficiary is deceased.

derwriting is the process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums. The underwriter will utilize several different types of information in determining the insurability of the individual.

application
credit report
warranty
representation
medical report
inspection report
Medical information Bureau (MIB)
special questionnaire
fair credit reporting act

Part I – General Information – Age, DOB, Sex, Address, Marital Status, Occupation Part II – Medical Information – Health History
Part III – Agent’s Report – Agent’s personal observations of the applicant. Includes the applicant’s financial condition, character, purpose of sale,
and how long agent has known the applicant.

An applicant’s credit history is sometimes used for underwriting and to determine the likelihood of making premium payments. The Fair Credit Reporting Act requires the applicant be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

Statements made by applicants that are substantially true to the best of their knowledge, but not warrantied as exact in every detail.

• Forwarding the application to the insurer in a timely manner

• Seeking additional information about the applicant's medical history if requested

• Notifying the insurer of any suspected misstatements in the application

• Forwarding the application to the insurer in a timely manner

• Seeking additional information about the applicant's medical history if requested

• Notifying the insurer of any suspected misstatements in the application

s the process of predating the application a certain number of months to achieve a lower premium. A lower age results in a lower premium. A backdated application results in a backdated policy effective date, if approved by the insurer. Applications usually can only be backdated up to 6 months. This process is also known as “saves age”.

verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application.

the policy is a good practice as it allows the producer to explain the coverage to the insured (such as the riders, provisions, and options). Personally delivering also builds trust and reinforces the need for the coverage. All of the following acts can be considered means of delivery: mailing policy to the agent; mailing the policy to applicant; and the agent personally delivering policy.