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Difference between Insured & Policy Owner
(also known as Policy Holder)
Costs, insurability, and underwriting
Insurance vs. assurance
of life insurance
Permanent life insurance
Universal life coverage
Equity-Indexed Universal Life
Related life insurance products
Senior and preneed products
Tax and life insurance in
the United States
Life insurance or life assurance is a contract between the insurance
firm and the policy owner, where the insurance firm agrees to pay an amount of
money upon the happening of the insured individual's or individuals' death or
other event, such as fatal illness or terminal illness. In exchange, the policy
owner agrees to pay up a specified amount known as a premium at fixed intervals
or in lump sums. In the U.S.A., the predominant form plainly defines a lump sum
to be paid up on the insured's death.
The conditions of a Life Insurance contract delineate the restrictions of the
insured events. Particular exceptions are oftentimes written into the contract
to bound the financial obligation of the insurance firm; for instance claims
relating to suicide, fraudulence, state of war, riot and civil commotion.
Life-based contracts lean to fall into 2 main categories:
* Protection policies - organized to allow for a benefit in the outcome of
designated event, generally a complete payment. A typical form of this design is
* Investment policies - wherever the main objective is to facilitate the
increase of capital by regular or lump sum premiums. Common United States forms
are whole life, universal life and variable life policies.
Difference between Insured & Policy Owner
(also known as Policy Holder) [Top]
Whenever somebody purchases an insurance policy on his own life he/she is
both the insured and the insurance policy holder. But if Roger buys a policy on
somebody else (e.g.: his wife) then Roger is the holder and his wife is the
The insurance policy owner is the guarantee and he or she will be the
individual who buys (and pays for) the policy. The insured is a participant in
the contract, but not needfully the owner of it.
The beneficiary receives remuneration upon the insured's death. The beneficiary
is not a party of the policy (is not required to pay for it) and it is
designated by the owner.
The owner can change the beneficiary unless the policy has a clause that forbids
it. In this case the beneficiary is said to be irrevocable. With an irrevocable beneficiary, the beneficiary must
agree to any beneficiary changes, policy assignments, or cash value borrowing.
In cases wherever the insurance policy owner is not the insured (also pertained
to as CQV the cestui qui vit ), insurance firms have attempted to limit policy
purchases to those with an "insurable interest" in the CQV. For illustration,
close family members and business partners. The "insurable interest" requirement
usually demonstrates that the customer will in reality bear some sort of loss if
the CQV passes away. Such a prerequisite keeps people from profiting from the
purchase of strictly speculative insurances on people they anticipate to die.
With no insurable interest requirement, the chance that
a customer would murder the CQV would be high. In at least 1 instance, an
insurance firm that sold a policy to a customer with no insurable interest (who
afterward murdered the CQV for the payoff), was found liable in courtroom for
being contributory to the unlawful death of the victim (Liberty National Life v.
Weldon, 267 Ala.171 (1957)).
Contract terms [Top]
Particular provisions may apply, such as suicide clauses wherein the insurance
policy becomes void if the insured commits suicide inside a specified time after
the purchase date (commonly two years); some jurisdictions provide a statutory
one-year suicide clause. Any deceptions by the insured on the application is
also cause for nullification.
Most U.S.A. states delineate that the contestability
time period can't be lengthier than 2 years; only if the insured passes away
inside this time period may the insurance company hold a legal right to contend
the claim on the bases of deception and call for supplemental information before
settling or denying the claim.
The declared sum of money on the policy is the initial amount that the policy
must pay at the demise of the insured or once the policy matures, even though
the actual death benefit can allow for for bigger or lesser than the face
amount. The policy matures once the insured passes or reaches a designated age
(for instance 100 years old).
Costs, insurability, and underwriting
The price of insurance is ascertained using mortality rate tables measured by
statisticians (actuaries). Actuaries are pros who utilize actuarial science,
which is founded in calculating chance and statistics. It is possible to deduce
life expectancy estimations from these mortality rate assumptions.
The 3 principal variables in a mortality table have been age, gender, and use of
tobacco, these, when used in conjunction with the health and family history of
the person applying for a policy will provide a baseline for the price of
The insurance underwriter will (in most cases) look into each nominated insured
individual. Group Insurance policies are an exception.
This investigating and ensuing evaluation of the risk is termed underwriting.
Health and life-style questions are asked. Certain answers or information
received may deserve additional investigating. Life insurance companies in the
U.S.A. support the Medical Information Bureau (MIB), which is a Boston
established clearinghouse of data on persons that have applied for life
insurance with participating firms in the last 7 years. As part of the
application, the insurer may obtain selective information from the proposed
Insurance underwriters will ascertain the purpose of insurance. The most common
is to safeguard the owner's family or financial concerns in the consequence of
the insurer's death. Additional uses include estate planning or, in the case of
cash-value contracts, investment for retirement planning. Bank loans or buy-sell
provisions of business agreements are added good purposes.
Life insurance companies are not compelled by law to underwrite or to provide
insurance coverage to anyone, with the exclusion of Civil Rights Act compliance
requirements. Insurance companies alone ascertain insurability, and some people,
for their own health or life-style causes are viewed as uninsurable. The
insurance policy can be turned down or rated. Rating increases the premiums to
allow for for additional risks.
Several companies use four generic health categories for those assessed for a
life insurance policy. These categories are Preferred Best, Preferred, Standard,
and Tobacco. Preferred Best is reserved only for the healthiest individuals.
This signifies that the proposed insured has no unfavorable medical history, is
not under medicament for any precondition, and his family line have no history
of early on cancer, diabetes, or additional conditions.
Preferred means that the proposed insured is presently
under medicament for a medical condition and has a family history of particular
illnesses. Most individuals are in the Standard category.
Profession, traveling, and life-style factor into whether the person to be
insured will be given a policy, and which category the insured falls. For
instance, somebody who would otherwise be classified as Preferred Best may be
denied a policy if he or she goes to a high risk country. Underwriting practices
can vary from insurer to insurer which provide for numerous competitive offers
in certain circumstances.
Upon the insured's demise, the insurer demands satisfactory proof of death prior
to paying up the claim. The normal minimum proof called for is a death
certificate and the insurer's claim form completed, signed (and usually
notarised). If the insured's death is suspicious, the insurance firm may choose
to enquire farther.
Insurance vs. assurance
Outside the U.S.A., the peculiar uses of the terms "insurance" and "assurance"
can occasionally be mixed-up. As a whole, in these jurisdictions "insurance"
relates to offering cover for an event that could happen (fire, theft, flood,
etc.), Whilst "assurance" is the supplying of cover for an event that is sure to
However, in the U.S.A. both forms of insurance
coverage are called "insurance", primarily owing to several companies offering
both cases of policy, and rather than refer to themselves utilising both
insurance and assurance titles, they rather use just one.
Types of life insurance
Life insurance may be separated into two basic classes temporary and permanent
or following subclasses - term, universal, whole life, variable, variable
universal and endowment fund life insurance.
Term life insurance or 'term assurance' allows for for life insurance coverage
for a defined term of years for a stipulated premium. The insurance policy does
not gather cash value. Term is by and large considered "pure" insurance, where
the insurance premium buys security in the outcome of death and nothing else.
The 3 key factors to be considered in term insurance are:
Face amount (protection or death benefit). The face amount can stay invariable
or decline, the term can be for one or numerous years. The face amount is
intended to be equivalent to the amount of the mortgage on the policy owners
residency so the mortgage will be paid if the insured passes away.
Premium to be paid (by the insured). The premium can stay level or increase.
Length of coverage (term). A typical type of term is called annual renewable
term. It is a 1 year policy but the insurance company ensures it will issue a
policy of equivalent or lesser amount without regard to the insurability of the
insured and with a premium set for the insured's age at that time. A different
typical type of term insurance is mortgage insurance, which is commonly a level
premium, declining face value policy.
Various U.S.A insurance companies sell term insurance with several different
combining of these 3 parameters.
A policy holder insures his life for a defined term. If he passes away before
that delineated term is up, his estate or appointed beneficiary receive a
payout. If he does not pass away before the term is up, he gets nothing. In the
past these policies would nearly always omit suicide. However, subsequently to a
number of court judgements against the industry, payouts do take place on death
by suicide (presumptively except for in the improbable case that it can be
demonstrated that the suicide was precisely to profit from the insurance
More often than not, if an insured individual commits suicide inside the first
two policy years, the insurance firm will give back the insurance premium paid.
However, a death benefit will normally be paid if the suicide takes place after
the two year time period.
Permanent life insurance
Permanent life insurance is life insurance that remains in force (in-line) till
the policy ages (pays out), except when the owner neglects to pay the premium
once overdue (the policy runs out or lapses).
The policy can't be invalidated by the insurer for any reason except
fraudulence in the application, and that nullification must come about inside a
time period delimitated by law (usually two years). Permanent insurance builds a
cash value that brings down the amount of money at risk to the insurance firm
and thus the insurance disbursement over time.
This signifies that a policy with a million dollars face value can be
comparatively unaffordable to a 70 year old. The owner can access the money in
the cash value by drawing off money, borrowing the cash value, or giving up the
policy and receiving the surrender value.
The three basic types of permanent insurance are whole life, universal life, and
Whole life coverage
Whole life insurance allows for for a level premium, and a cash value table
included in the policy bonded by the insurance company. The primary advantages
of whole life are assured death benefits, assured cash values, frozen and known
yearly insurance premiums, and mortality and expense charges will not bring down
the cash value indicated in the policy. The more common drawbacks of whole life
are premium rigidity, and the internal rate of comeback in the policy may not be
competitory with other savings options.
Riders are available that can allow one to increment the death benefit by paying
further premium. The death benefit can also be expanded through the use of
policy dividends. Dividends can't be guaranteed and may be greater or lower than
historical rates over time. Premiums are much steeper than term insurance in the
short-run, but accumulative premiums are approximately equivalent if policies
are kept in force until average life expectancy.
Cash value can be got at any time through policy "loans". Because these loans
reduce the death benefit if not paid back, payback is nonobligatory. Cash values
are not paid to the beneficiary upon the passing away of the insured; the
beneficiary receives the death benefit only.
If the dividend option: Paid up additions is elected, dividend cash values will
buy more death benefit which will step-up the death benefit of the policy to the
Universal life coverage
Universal life insurance (UL) is a comparatively new insurance product meant to
allow for unending insurance coverage with more flexibility in premium payment
and the potential for a greater internal rate of return. There are numerous
kinds of universal life insurance policies which include "interest sensitive"
(A.K.A. "traditional fixed universal life insurance"), variable universal life
insurance, and equity indexed universal life insurance.
A universal life insurance policy includes a cash account. Premiums increment
the cash account. Interest is paid within the policy (credited) on the account
at a rate determined by the insurance company. This rate may have a secured
minimum (for fixed ULs) or no minimum (for variable ULs). Mortality charges and
administrative costs are then charged against the cash account. The giving up
(surrender) note value of the policy is the amount of money left over in the
cash account less applicative surrender charges, if there are any.
On all life an insurance policies there are in essence two functions that make
it work. There's a mortality function and a cash function. The mortality
function comprises the classical notion of pooling risk where the premiums paid
by everyone else would cover the death benefit for the ones who will decease for
a given period of time. The cash function implicit in all life insurance tells
that if a person is to reach age 95 to 100 (the age changes depending on state
and company), then the policy matures and endows the face value of the policy.
Statistically, it is reasoned out that out of a grouping of 500 people, if even
5 of them live to age 95, then the mortality function by itself will not be
capable to cover the cash function. So in order to cover the cash function, a
minimal rate of investment return on the premiums will be necessitated in the
event that a policy matures.
Universal life insurance deals with the sensed limitation of whole life.
Premiums are elastic. Dependant on how interest is accredited, the internal rate
of return can be greater, for it moves with prevailing interest rates
(interest-sensitive) or the financial markets (Equity Indexed Universal Life and
Variable Universal Life); Mortality costs and administrative charges are known.
And cash value might be regarded easier to attain since the owner can give up
premiums if the cash value permits it. And universal life has a more
compromising death benefit as the owner can choose one of two death benefit
alternatives, Option A and Option B.
Option A pays the face amount at death as it is designed to have the cash value
equivalent to the death benefit at maturity (generally at age 95 or 100). On
each premium payment, the policy owner is cutting back the cost of insurance
until the cash value arrives at the face amount upon maturity.
Option B pays the face amount plus the cash value, as it is designed to step-up
the net death benefit as cash values cumulate.
Option B offers the benefit of a growing death benefit each year that the policy
stays active. The drawback to option B is that because the cash value is accrued
"on top of" the death benefit, the cost of insurance never diminishes while
premium payments are made. Therefore, as the insured becomes older, the insured
is faced with an ever growing cost of insurance (it costs more money to offer
the same initial face amount of insurance as the policy owner becomes older).
Both death benefit choices (A (level) and B (increasing) are dependent on the
same IRS rules and guidelines pertaining premium payments and tax-favored
handling of cash values. In order for the policy to maintain its tax favored
life insurance condition, it must stay inside a corridor delimitated by
Department of State and federal laws that preclude abuses such as attaching a
million dollars in cash value to a two dollar insurance policy.
The intriguing part about this corridor is that for those individuals who can
make it to age 95-100, this corridor requisite goes away and your cash value can
be equivalent to the face amount of insurance; If this corridor is ever
violated, then the universal life policy will be handled as, and in result turn
into, a Modified Endowment Contract (or more ordinarily referred to as a MEC).
But universal life has its own drawbacks which originate primarily from this
flexibleness. The policy misses the fundamental guarantee that the policy will
be in force except when sufficient premiums haven't been paid and cash values
are not guaranteed.
Early universal life policies are occasionally mistakenly referred to as
self-sustaining policies. In the 1980's, when interest rates were high, the cash
value accumulated at a faster rate, and universal life coverage was oftentimes
traded by brokers as a policy that could be selfpaying. Several policies did
sustain themselves for a drawn-out period, but the combining of lower interest
rates and an increasing price of insurance as the insured elds signified that
for many policies the cash option was decreased or used up.
Interest-Sensitive Universal Life Insurance
An interest sensitive UL policy was the first attempt at bringing about a
flexible premium life insurance policy and was created in the 1980s.
Interest-sensitive UL policies guarantee, (to some degree), the death payoff,
but not the cash function, hence the flexible insurance premium* and interest
Whenever interest rates are high, the investment returns assist in reducing the
called for premiums needful to maintain the policy in effect. Whenever interest
rates are low, the policy owner would have to pay supplemental premiums in order
to keep the policy good. If interest rates are higher than the lower limit
required or minimal guaranteed interest rate, then the policy owner has the
flexibleness to pay less as investment returns cover the balance to keep the
Equity-Indexed Universal Life Insurance
Equity-Indexed Universal Life Insurance or "EIUL" for short, is a fixed
universal life insurance policy which was made in the mid 1990's to address
worries about market unpredictability and allow for an alternative to the lower
interest rates being offered by interest-sensitive UL policies.
EIUL differs from interest-sensitive UL policies in that it credits interest to
the policy's own cash values based on the upwardly movement of a specific stock
market index, namely the S&P500. The insurance company may then accredit the
gains in the stock market accordant to one of many different accrediting
The most common is the "point to point" method.
Once the policy is issued, the insurer -pegs- the stock market's value. At the
anniversary of the policy, the insurer checks over the value of the underlying
stock index and credits the cash value with the difference equal to a cap that's
been before-handedly specified by the insurance company.
Variable Universal Life Insurance (VUL) is another type of universal life
insurance. There are generally no guaranties linked with this kind of life
insurance policy. The cash account within a VUL is held back in the insurer's
separate account - usually in mutual funds, handled by a fund manager -.
The policy owner then picks out the investments he/she wants to invest in. If
those investments do well, the insurance company then accredits the policy's
cash values accordingly. If the underlying investments do badly, the policy
owner will lose their cash value. If the investments do badly enough, it could
mean the policy could lapse due to not enough funds to cover the costs of
Another type of permanent insurance is Limited-pay life insurance, in which all
the insurance premiums are paid over a designated period after which no further
premiums are necessary to keep the policy effective.
Typical limited pay periods include 10-years, 20-years, and paid up at age 65.
Endowments are policies where the cash value built up inside the policy, equates
to the death benefit (face amount) at a certain age. The age this commences is
known as the endowment age. Endowments are considerably pricier (in terms of
annual premiums) than either whole life or universal life since the premium
paying period is abbreviated and the endowment date is earlier.
Endowment Insurance is paid up whether the insured lives or dies, after a
specific period (e.g. 15 years) or at a specific age (e.g. 65).
Accidental death is a limited life insurance which is organised to cover the
insured when they die due to an calamity/accident. Accidents include anything
through an accidental injury, but do not usually cover any deceases resultant
from health troubles or suicide. Since they only cover accidents, these policies
are much cheaper than other life insurances.
It is also very typically offered as "accidental death and dismemberment
insurance", also called an AD&D policy. In an AD&D policy, benefits are
available not just for accidental death, but also for loss of limbs or bodily
functions such as sight and hearing, etc.
Accidental death and AD&D policies seldom pay a benefit if either the cause of
death is not covered, or the insurance coverage is not kept up after the
accident until death happens. To be well aware of what coverage they have,
policy owners should always go over their policy for what it covers and what it
Often, it doesn't cover an insured who positions himself at risk in activities
such extreme sports or involvement in warfare. Likewise, a few insurers will
leave out death and injury induced by immediate causes imputable (but not
limited to) racing on wheels and mountain climbing.
Accidental death benefits can also be added to a standard life insurance policy
as a rider. If this rider is bought, the policy will normally pay twice the face
amount of money if the insured perishes due to an accident. This used to be
referred to as a double indemnity coverage. Some companies may even offer a
triple indemnity cover.
Related life insurance products
Riders are alterations to the insurance policy added at the same time the policy
is issued. These riders alter the basic policy to allow for some feature wanted
by the policy owner. A common rider is accidental death, which used to be
generally referred to as 'double indemnity', which pays up twice the sum of
money of the policy par value if death results from chance causes, as if both a
Comprehensive policy and an accidental death policy were in effect on the
insured. Another common rider is premium waiver, which waives subsequent
premiums if the insured becomes invalided.
Joint life insurance is either a term or permanent policy insuring 2 or more
lives with the proceeds payable on the 1st death.
Survivorship life or second-to-die life is a whole life policy insuring two
lives with the proceeds payable on the 2nd (later) death.
Single premium whole life is a policy with just 1 premium that is payable at the
time the policy is issued.
Modified whole life is a whole life policy that charges cheaper premiums for a
defined time period after which the premiums increase for the remainder of the
Group life insurance is term insurance covering a group of people, usually
employees of a firm or members of a union or association. Individual proof of
insurability is generally not a condition in the underwriting. Instead, the
underwriter looks at the size and turnover of the group, and the financial
strength of the group. Contract provisions will endeavor to exclude the chance
of unfavorable selection. Group life insurance often has a provision that a
member leaving the group has the right to buy separate insurance coverage.
Senior and preneed products
Insurance companies have recently developed products to offer to niche markets,
most notably aiming at the senior market to address needs of a population that's
growing older. Many insurers offer policies customised to the necessities of
senior applicants. These are often low to moderate face value whole life
insurance policies, to give a senior citizen buying insurance at an older age an
opportunity to buy affordable insurance. This may also be commercialised as
final expense insurance, and an agent or insurer may suggest (but not expect)
that the policy payoffs could be used for end of life expenditures.
Preneed (or prepaid) insurance policies are whole life policies that, even
though available at any age, are usually offered to aged applicants as well.
This kind of insurance is designed explicitly to cover funeral expenditures when
the insured person passes away. In some cases, the applicant signs a pre-funded
funeral arrangement with a funeral services provider at the time of applying for
the policy. The death proceeds are then warranted to be sent first to the
funeral home for payment of services provided. Most contracts order that any
excess proceeds will go either to the insured person's estate or a specified
These products are some of the times set apart into a trust at the time of
effect, or soon after. The policies are irrevocably assigned to the trust, and
the trust becomes the owner. Since a whole life policy has a cash value element,
and a loan provision, it may be regarded as an asset; assigning the policy to a
trust means that it can no more be regarded as an asset for that person. This
can affect a person's ability to qualify for Medicare or Medicaid.
An annuity is a contract with an insurance firm through which the purchaser pays
for an initial premium or premiums into a tax-deferred account, which pays out a
sum of money at pre determined time intervals. There are 2 periods: the
accumulation - when payments are paid into the account - and the annuitization -
when the insurance company pays out -.
For instance, a policy holder may pay $10,000, and in return receive $150 each
month until he dies; or $1,000 for each of 15 years or death benefits if he dies
before the full term of the annuity has elapsed. Tax penalties and insurance
company giving up charges may apply to early withdrawals.
Tax and life insurance
in the United States [Top]
Premiums paid by the policy owner are normally not deductible for federal or
state income tax purposes.
Proceeds paid by the insurance company upon death of the insured are not
included in gross income for federal and state income tax purposes;
nevertheless, if the proceeds are included in the "estate" of the deceased, it
is likely they will be subject to federal and state estate and inheritance tax.
Cash value growths within the policy are not subject to income taxes except when
certain events occur. Because of this, insurance policies may be a lawful tax
shelter wherein savings can increase without taxation till the owner cashes in
the money out of the policy. On flexible premium policies, big deposits of
premium could cause the contract to be seen as a 'Modified Endowment Contract'
by the Internal Revenue Service (IRS), which nullifies several of the tax
advantages connected with life insurance. The insurance firm should explain to
the policy owner about this risk before applying their premium.
Tax deferred profit from a life insurance policy may be counterbalanced by its
low return in some cases. This depends on the insuring insurance company, kind
of policy and other variables such as mortality, market return, etc etc.
Likewise, other income tax sparing means (i.e. Individual Retirement Account
(IRA), 401K and Roth IRA) might be more beneficial alternatives for value
accruement. This will depend upon case-by-case and their particular
The tax ramifications of life insurance are tangled. The policy owner should be
well advised to carefully review them. As ever, the U.S. Congress or the state
legislatures could change taxation laws at any time.
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