LOMA 280

Principles
of
Insurance

CHAPTER 6

Cash Value Life Insurance and

Endowment Insurance

CHAPTER SIX 1
Chapter 6

Outline

A cash value life insurance, sometimes referred to as

permanent life insurance, provides life insurance coverage
throughout the insured’s lifetime and provides a saving
element, known as cash value

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Whole Life Insurance

Despite their common characteristics, cash value plans
differ widely in their features and benefits.
Whole Life Insurance: a form of cash value life
insurance that provides lifetime insurance coverage at
a level premium rate that does not increase as the
insured ages
 Whole life insurance policies include a table that
illustrates how the policy’s cash value will grow over
time.
 If the policy does not remain in force until the
insured’s death, the insurer agrees to refund the
cash value to the policyowner—less any surrender
charges and outstanding policy loans.
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Whole Life Insurance

Whole life policies can be classified on the basis of the
length of the policy’s premium payment period. Most
whole life policies are classified as (1) either
continuous-premium policies or (2) limited-payment
policies.
Continuous-Premium Policies (sometimes called a
straight life insurance policy or an ordinary life insurance
policy): a whole life policy under which premiums are
payable until the death of the insured
Because premiums are payable over the life of the
policy, the amount of each premium payment required
for a continuous-premium whole life policy is lower than
the premium amount required under any other premium
payment schedule for a whole-life policy.
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Whole Life Insurance

Limited-Payment Policy: a whole life policy for which premiums
are payable only until some stated period expires or until the
insured’s death, whichever occurs first

 Premiums payable for a specified number of years

Example: premiums payable for 20 years (called a 20-payment
whole life insurance policy)
 Premiums payable until the insured reaches a specified age
Example: premiums payable until the insured reaches the policy
anniversary closest to or immediately following the insured’s
65th birthday, when premium payments cease but coverage
continues (called a paid-up-at-age-65 policy)
paid-up policy: a policy that requires no further premium payments
but continues to provide coverage
single-premium whole life policy: a type of limited payment whole
life policy that requires only one premium payment

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Modified Whole Life Insurance

As we have seen, traditional whole life policies provide
a constant face amount of coverage in exchange for a
series of level premiums or a single premium.
However, under some whole life policies either
 the amount of the required premium payments
changes at some point in the life of the policy
(modified premiums)
or
 the face amount of the coverage changes during
the life of the policy (modified coverage)

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Joint Whole Life Insurance

Joint whole life insurance: a type of insurance that has the
same features and benefits as individual whole life insurance,
except that it insures two lives under the same policy
Joint whole life insurance is often referred to as first-to-die
life insurance because, upon the death of one of the
insureds, the policy death benefit is paid to the surviving
insured and the policy coverage ends.
 To allow the surviving insured to obtain coverage, joint
whole life policies usually provide a specified period—such
as 60 or 90 days—following the first insured’s death within
which to purchase an individual whole life policy of the
same face amount without evidence of insurability.
 Some joint whole life policies provide the surviving insured
with temporary term insurance during the specified period.

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Universal Life Insurance

Universal life (UL) insurance: a form of cash value
life insurance characterized by its flexible premiums, its
flexible face amount and death benefit amount, and its
unbundling of the pricing factors.
Separation of Policy Elements
Both Term life insurance and whole life insurance -
state the gross premium that the policyowner must pay
to keep the policy in force. However, some policies-
most notably universal life insurance policies - list
policy elements separately (mortality charges, interest
rate, and expenses).

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Universal Life Insurance

Mortality charges. The insurer periodically deducts a mortality
charge from the universal life policy’s cash value. This mortality
charge is the amount needed to cover the mortality risk the insurer
has assumed by issuing the policy.

 The amount of the mortality charge is based on the insured’s risk

class; it typically increases each year as the insured ages.
 The policy guarantees that the mortality charge will not exceed a
stated maximum amount.
 Usually, the policy provides that the mortality charge will be less
than the specified maximum if the insurance company’s mortality
experience is more favorable than expected.
 The net amount at risk for most life policies is the policy’s face
value minus its reserve, but the net amount at risk for a universal
life policy depends on whether the death benefit payable is level
or varies with changes in the policy’s cash value.

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Universal Life Insurance

Interest. A universal life insurance policy guarantees that the
insurer will pay at least a stated minimum interest rate on the cash
value each year. It also provides that the insurer will pay a higher
interest rate if economic and competitive conditions warrant.

 Be tied to the rate paid on a standard investment, such as a

specified category of government Bonds.
 Interest rate for universal life policies bases on the return that its
own investments are earning.

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Universal Life Insurance

Expenses. Each universal life insurance policy lists the expense
charges that the insurer will impose to cover the costs it incurs to
administer the policy. The following expense charges may apply:
 A flat charge during the first policy year to cover sales and policy
issue costs
 A percentage of each annual premium (such as 7 percent) to
cover expenses
 A monthly administration (management) fee
 Surrender charges, which are specific charges imposed if the
owner surrenders the policy for its cash surrender value.
 Specific service charges for coverage changes and cash
withdrawals
In policies with a surrender charge, state regulators may require
insurers to use a term such as account value, reserve value, or
accumulation value, to describe the accumulated cash value.

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Universal Life Insurance

Operation of a Universal Life Insurance Policy
 When an insurer receives a premium payment, it first deducts
the amount of any applicable expense charges and then credits
the remainder of the premium to the policy's cash value.
 Each month, the insurer deducts the periodic mortality charges
from the cash value and credits the remainder of the cash value
with interest.
 The more a policyowner pays in premiums above the amount
needed to pay the policy's costs, the greater the cash value.
 If the cash value is not sufficient to pay periodic charges, the
insurer gives the policyowner a stated amount of time—at least
60 days—in which to pay a premium to cover those charges.
 If the policyowner does not make the premium payment, the
policy lapses.

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Universal Life Insurance

A universal life policy gives policyowners a great deal of flexibility to
decide (1) the amount of premiums they will pay and (2) the policy's
face amount and the amount of the death benefit payable

Flexibility Features. The owner of a universal life policy can

determine, within certain limits, how much to pay for the initial
premium and for each renewal premium. The policyowner also
has great flexibility to decide when to pay renewal premiums.

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Universal Life Insurance

After a universal life policy has been in force for a specified
minimum time, --often one year-- the policyowner can request an
increase or decrease in the policy’s face amount.

Face Amount and Amount of Death Benefit. At the time of

purchase, the policyowner specifies the policy’s face amount and
decides whether the amount of the death benefit payable will remain
equal or will vary with changes in the policy’s cash value.

Premiums
Flexible premium universal life insurance policy
Fixed premium universal life insurance policy

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Universal Life Insurance

Periodic Reports. Many aspects of a universal life policy change
over the course of a year, insurers send each policyowner an
annual, semiannual, or quarterly report giving the policy’s current
values and benefits. Generally, the report shows the following
amounts:

 Death benefit payable  Mortality charges deducted

 Policy’s cash value
 Cash surrender value, if
different from cash value
 Interest earned on cash
value
 Expense charges deducted
 Premiums paid during
reporting period
 Policy loans outstanding
 Any cash value withdrawals

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Variable Life Insurance

Variable Life (VL) Insurance: a form of cash value life insurance in
which premiums are fixed, but the face amount and other values
may vary, reflecting the performance of the investment subaccounts
selected by the policyowner
subaccount: one of several alternative pools of investments to
which a variable life insurance policyowner allocates the premiums
paid and the cash values that have accumulated under the policy
separate account (also known as a segregated account): the
subaccounts in which variable insurance premiums and cash values
are invested; the insurer maintains this investment account
separately from its general account to isolate and help manage the
funds placed in its variable products
general account: an undivided investment account in which an
insurer maintains funds that support its contractual obligations to pay
benefits under its guaranteed insurance products, such as whole life
insurance and other nonvariable products; the funds in the general
account are placed in relatively secure investments
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Variable Life Insurance

 Most variable life policies permit the policyowner to select from

several subaccounts and to change selections at least annually.
 The insurer follows a different investment strategy for each
subaccount. For example, some subaccounts concentrate on
investing in high-growth stocks, while others invest in bonds.
 The amount of the policy’s death benefit and cash value depend
on how well the separate investments perform. Most variable life
policies guarantee that the amount of the death benefit will not fall
below the amount initially purchased. However, variable life
policies do not guarantee either investment earnings or a
minimum cash value.

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Variable Universal
Life Insurance
variable universal life (VUL) insurance (flexible-premium
variable life insurance): a form of cash value life insurance
that combines the premium and death benefit flexibility of
universal life insurance with the investment flexibility and risk
of variable life insurance

Under a variable universal life (VUL) insurance policy, the

policyowner chooses from among several subaccounts and
may change the chosen options at least annually.
Most insurers allow the policyowner to choose whether the
policy’s death benefit will remain equal or will vary along with
changes in the investment earnings of the subaccounts.

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Variable Universal
Life Insurance
 Like a universal life policy, a variable universal life
policy allows the policyowner to choose the premium
amount and face amount.
 Like a variable life policy
 The cash value of a variable universal life policy is
placed in the separate account.
 A variable universal life policy does not guarantee
investment earnings or cash values.
 A variable universal life product is considered a
security in the U.S. and, thus, must comply with
federal securities laws.

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Endowment Insurance
Endowment insurance provides a specified benefit amount
whether the insured lives to the end of the term of coverage or
dies during that term.
Each endowment policy specifies a maturity date, which is the
date on which the insurer will pay the policy’s face amount to the
policyowner if the insured is still living. The maturity date is
reached either
(1) at the end of a stated term (e.g., 20 years) or
(2) when the insured reaches a specified age (e.g., age 65)
 Because of the maturity date, an endowment policy’s cash
value builds rapidly. Also, the cash value of an endowment
policy is large in relationship to the policy’s face amount.
 For these reasons, endowment policies in the U.S. do not
receive favorable federal income tax treatment, which has
resulted in dwindling sales of endowment policies in the U.S.

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End of Chapter 6

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