life insurance basics 3

The Guardian Life Insurance Company of America 7 Hanover Square, New York, NY 10004

AssignmentAssignment A life insurance policy is personal property and A life insurance policy is personal property and

freely transferable (assignable) by the owner. freely transferable (assignable) by the owner.

Collateral AssignmentCollateral Assignment - Only certain rights are - Only certain rights are transferable to another when the policy is to serve transferable to another when the policy is to serve as security for a loan or other debtor/creditor as security for a loan or other debtor/creditor situations.situations.

Absolute AssignmentAbsolute Assignment - - All ownership rights areAll ownership rights are transferable to another.transferable to another.

Two types of assignmentTwo types of assignment

Grace PeriodGrace Period

Policy Policy remains in full forceremains in full force even though even though premium is not paid.premium is not paid.

Period Period afterafter policy policy premium is duepremium is due..

Designed to Designed to protectprotect policy holder policy holder againstagainst inadvertent lapse.inadvertent lapse. 30-DAY GRACE

IncontestableIncontestableAt end of "contestable" period (generally 2 years), At end of "contestable" period (generally 2 years), insurer agrees not to denyinsurer agrees not to deny a claim because of: a claim because of:

Alleviates fear of lawsuits, especially at a time Alleviates fear of lawsuits, especially at a time after the insured's death, when it would be difficult after the insured's death, when it would be difficult for the beneficiary to successfully combat an for the beneficiary to successfully combat an insurer's charge.insurer's charge.

Misstatement (generally includes even fraud) on Misstatement (generally includes even fraud) on the part of the insuredthe part of the insured

ConcealmentConcealment ErrorError

Delay ClauseDelay Clause Permits insurance company to Permits insurance company to postpone paymentpostpone payment of cash surrender (or loan) value for 6 months.of cash surrender (or loan) value for 6 months.

Hint: Financial solvency of insurer should be consideredHint: Financial solvency of insurer should be considered..

Potentially could Potentially could affect liquidityaffect liquidity of cash or loan values. of cash or loan values.

Expected to be invoked only under most Expected to be invoked only under most severesevere circumstances.circumstances.

Protects insurerProtects insurer against losses that might develop against losses that might develop from excess demands for cash in times of economic from excess demands for cash in times of economic crisis.crisis.

Provision must be included by Provision must be included by lawlaw..

Suicide ProvisionSuicide Provision

Generally during first Generally during first 2 policy years2 policy years..

Insurer would only Insurer would only return premium paidreturn premium paid, with , with or without interest, in event of suicide.or without interest, in event of suicide.

After period, suicide is covered riskAfter period, suicide is covered risk and and treated like any other cause of death.treated like any other cause of death.

Reinstatement ClauseReinstatement Clause Helps policyholderHelps policyholder who fails to pay a who fails to pay a

premium within time allowed, including premium within time allowed, including the grace period.the grace period.

Gives insured Gives insured right to reinstateright to reinstate policy within policy within a specified period (generally 3 years)*.a specified period (generally 3 years)*.

Must furnish Must furnish evidence of insurability.evidence of insurability. Must Must pay back premiumspay back premiums due due plusplus interest incurred.

*Guardian’s reinstatement period is 5 years.

Policy LoanPolicy Loan

Not availableNot available with with term insurance.term insurance. Policy acts as the Policy acts as the collateralcollateral for the loan. for the loan. Loan Loan may not exceedmay not exceed the cash (loan) value of the cash (loan) value of

policy as of next policy anniversary date.policy as of next policy anniversary date.

Unpaid policy loans and accrued interest at death Unpaid policy loans and accrued interest at death will be will be deducted from death proceeds or surrender deducted from death proceeds or surrender valuevalue..

Policy LoanPolicy Loan, , continued…..continued…..

Rate of Interest is stated in contractRate of Interest is stated in contract

May be a fixed rate or a variable rate May be a fixed rate or a variable rate according to contract.*according to contract.*

Beneficial for Beneficial for temporary financial needstemporary financial needs without surrendering the policy. without surrendering the policy.

*Guardian’s whole life policies have a fixed loan interest rate, due in advance on each policy anniversary.

Automatic Premium Automatic Premium LoanLoan

Not available with term insuranceNot available with term insurance..

Operates when policy would lapse for Operates when policy would lapse for failure to pay premium, failure to pay premium, contingent on contingent on sufficient loan valuesufficient loan value to cover payment. to cover payment.

Not included automaticallyNot included automatically in all policies. in all policies.

Beneficiary Beneficiary DesignationDesignation

Can be "Can be "revocablerevocable" or "" or "irrevocableirrevocable." Irrevocable beneficiary ." Irrevocable beneficiary in effect becomes a joint owner of policy (assignments, loans, in effect becomes a joint owner of policy (assignments, loans, etc. must be approved by irrevocable beneficiary).etc. must be approved by irrevocable beneficiary).

Person(s) or entity to Person(s) or entity to receive proceedsreceive proceeds in in event of insured's death. event of insured's death.

PrimaryPrimary beneficiary is in first position, contingent beneficiary is in first position, contingent or or secondarysecondary beneficiary collects benefits in event beneficiary collects benefits in event primary beneficiary is deceased.primary beneficiary is deceased.

In event all listed beneficiaries are In event all listed beneficiaries are deceased, proceeds normally go to deceased, proceeds normally go to insured's estateinsured's estate..

Beneficiary DesignationBeneficiary Designation

Insurer is bound by law to pay proceeds to Insurer is bound by law to pay proceeds to those designated. Life Insurance is a those designated. Life Insurance is a non-non-probate assetprobate asset..

Cash Surrender Value:Cash Surrender Value:

State non-forfeiture lawsState non-forfeiture laws Generally Generally require a cash valuerequire a cash value after premiums after premiums

have been have been paid for three yearspaid for three years. . ((Many Many states require some cash value after one or two years.)states require some cash value after one or two years.)

Essentially, the same amount of cash may Essentially, the same amount of cash may be obtained through the policy loan be obtained through the policy loan

function.function.

Insurer has no further obligation.Insurer has no further obligation.

Insurance protection ceases.Insurance protection ceases.

When cash value is surrendered:When cash value is surrendered:

When surrendering for cash, amount of When surrendering for cash, amount of insurance lost is the "insurance lost is the "net amount at risknet amount at risk." ."

Cash Surrender Value:Cash Surrender Value:

Consider the tax implicationsConsider the tax implications: the cash : the cash values over and above total premiums values over and above total premiums paid are considered a paid are considered a taxabletaxable gaingain. This . This includes any loans taken prior to the includes any loans taken prior to the surrender. surrender.

(Difference between gross death benefit and cash (Difference between gross death benefit and cash surrender value.)surrender value.)

((This is a broad generalization.This is a broad generalization. Exact calculations as to the gain need to be doneExact calculations as to the gain need to be done by the insurer.)by the insurer.)

Required by statute.Required by statute.

CASH VALUE & CASH VALUE & NON-FORFEITURE OPTIONSNON-FORFEITURE OPTIONS

Protects policyholderProtects policyholder who has who has accumulated cash values but wishes toaccumulated cash values but wishes to

stop paying premiums or surrender the stop paying premiums or surrender the policy.policy.

Non-forfeiture takes one of three forms:Non-forfeiture takes one of three forms: Cash surrender valueCash surrender value Reduced paid-up life insuranceReduced paid-up life insurance Extended term life insuranceExtended term life insurance

Reduced Paid-Up Insurance: Reduced Paid-Up Insurance: Policyholder can Policyholder can use cash value to purchase paid-up insurance:use cash value to purchase paid-up insurance:


All Cash Values become Guaranteed Cash Values All Cash Values become Guaranteed Cash Values of the of the new reduced paid-up policynew reduced paid-up policy. .

Same type of insurance as original policy,Same type of insurance as original policy, but for but for reduced face amountreduced face amount..

Appropriate when a smaller amount of Appropriate when a smaller amount of permanent insurance is satisfactory, andpermanent insurance is satisfactory, and discontinuation of premiums is desired.discontinuation of premiums is desired.

Extended Term Insurance:Extended Term Insurance:


Cash value may be exchanged for paid-up Cash value may be exchanged for paid-up term insurance for full face amount of term insurance for full face amount of original policy.original policy.

Duration of term coverage is a function of:Duration of term coverage is a function of: Net cash value applied as single premium.Net cash value applied as single premium. Attained age.Attained age.

Appropriate when:Appropriate when: Full amount of insurance is necessary and Full amount of insurance is necessary and the insured cannot or does not want to the insured cannot or does not want to continue premium payments.continue premium payments.

Use of Use of Life Settlement OptionsLife Settlement Options

Provides beneficiary or policyholder a secure life Provides beneficiary or policyholder a secure life incomeincome that that cannot be outlivedcannot be outlived..

Once option is selected, policyowner can prevent the beneficiary Once option is selected, policyowner can prevent the beneficiary from obtaining entire proceeds in lieu of income stream (from obtaining entire proceeds in lieu of income stream (spendthrift spendthrift clauseclause).).

Settlement Choices(sSettlement Choices(s) should be considered ) should be considered carefully before any option is exercised.carefully before any option is exercised.

Joint and survivorJoint and survivor options "ensures" a second options "ensures" a second person a life income…(this may not be the best person a life income…(this may not be the best alternative. An individual life insurance policy may alternative. An individual life insurance policy may permit a life income option choice, thus providing a permit a life income option choice, thus providing a higher monthly income).higher monthly income).

RiderRider

Policy RidersPolicy Riders

A way of modifying a basic life A way of modifying a basic life insurance policy.insurance policy.

Often used Often used to addto add amounts and/or amounts and/or types of insurance types of insurance benefitsbenefits to a basic to a basic life insurance policy.life insurance policy.

Waiver of Premium (WP or Waiver of Premium (WP or WPB)WPB)

Added to policy for an Added to policy for an extra premiumextra 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 In event insured becomes totally disabledtotally disabled before a before a certain age (60 or 65 generally), certain age (60 or 65 generally), premiums on policy premiums on policy will be waivedwill be waived (i.e. insured not required to pay). (i.e. insured not required to pay).

Generally, must be continuing disability after 6 months.Generally, must be continuing disability after 6 months. Premiums normally Premiums normally waived retroactivelywaived retroactively for initial for initial

period.period.

Values continueValues continue in policy as premiums are paid. in policy as premiums are paid.

Guaranteed Insurability Option Guaranteed Insurability Option (GIO or GPO) (GIO or GPO)

Added to policy for Added to policy for extra premiumextra premium. .


Permits purchase of additional amounts of insurance Permits purchase of additional amounts of insurance without additional proofwithout additional proof of insurability. of insurability.

Options maybe exercised Options maybe exercised at stated agesat stated ages, marriage,, marriage, and birth of children (i.e. 21, 24, 27, 30, 33, etc. to 40).and birth of children (i.e. 21, 24, 27, 30, 33, etc. to 40).

Option purchases can be Option purchases can be up to face amountup to face amount of original of original

policy (Guardian’s provision has a maximum of policy (Guardian’s provision has a maximum of

$150,000 per option).$150,000 per option).

Added to policy for Added to policy for extra premiumextra premium..

Double Indemnity or Accidental Double Indemnity or Accidental Death Benefit (ADB)Death Benefit (ADB)


Provides an Provides an additional death benefitadditional death benefit if if

death is death is accidentalaccidental..

Little justification from economic stand- Little justification from economic stand- point in that the point in that the loss is just as severeloss is just as severe to to dependents and beneficiaries if death is dependents and beneficiaries if death is caused by other meanscaused by other means..

Participating Participating Life Insurance Policies Life Insurance Policies

DividendsDividends as declared by insurer may be used as declared by insurer may be used in several ways:in several ways: CashCash

Applied (reduce premium)Applied (reduce premium) AccumulationsAccumulations

Accumulations participate if rate is higher (earnings on Accumulations participate if rate is higher (earnings on this option are taxable as current income).this option are taxable as current income).

Have a minimum guaranteed interest rate.Have a minimum guaranteed interest rate.

Provides paid-up insurance at net single premium ratesProvides paid-up insurance at net single premium rates Evidence of insurability may be necessary to convert Evidence of insurability may be necessary to convert

accumulated dividends to paid-up additions.accumulated dividends to paid-up additions.

Paid-up AdditionsPaid-up Additions

One-Year Term InsuranceOne-Year Term Insurance

So So called "fifth dividend option.”called "fifth dividend option.”

Amount that can be purchased generally limited to Amount that can be purchased generally limited to cash value of policy.cash value of policy.

Purchases term insurance at net ratesPurchases term insurance at net rates..

Participating Participating Life Insurance Policies Life Insurance Policies

Service to Your Clients:Service to Your Clients:

Knowledge of policy provisions, Knowledge of policy provisions, non-forfeiture options, and dividend non-forfeiture options, and dividend options is essential to communicate options is essential to communicate

the extraordinary value and the extraordinary value and flexibility of permanent life flexibility of permanent life

insurance.insurance.

Read The Guardian’s policies Read The Guardian’s policies and riders to become familiar and riders to become familiar with how the choices you can with how the choices you can offer to your clients will help offer to your clients will help

them meet their financial them meet their financial planning needs.planning needs.

ServiceService to Your Clients: to Your Clients:

Settlement OptionsSettlement Options

When When proceedsproceeds become become payablepayable, the insured and/or , the insured and/or

the beneficiary may elect to the beneficiary may elect to have proceeds have proceeds paid in a paid in a variety of ways.variety of ways.


Lump SumLump Sum - All proceeds paid at once. - All proceeds paid at once. Death benefit proceeds are generally Death benefit proceeds are generally income-tax free.income-tax free.

Interest OptionInterest Option:: Proceeds may be left with Proceeds may be left with insurer for a guaranteed interest rate.insurer for a guaranteed interest rate.

Excess interest may be earned. Excess interest may be earned. May be a limited or unlimited right on withdrawalMay be a limited or unlimited right on withdrawal by the beneficiary.by the beneficiary. Right to change to another option may be given.Right to change to another option may be given. Principal can be retained intact.Principal can be retained intact. Interest earned is taxable.Interest earned is taxable.


Fixed Amount OptionFixed Amount Option Provides Provides stated amountstated amount of income each of income each

month month until proceeds are until proceeds are exhaustedexhausted.. Proceeds are part interest and part Proceeds are part interest and part principal. Interest portion is consideredprincipal. Interest portion is considered taxable incometaxable income. . Interest rate is established at time optionInterest rate is established at time option

is selected. is selected. Principal amount and interestPrincipal amount and interest rate determine the number of payments.rate determine the number of payments.


Fixed Period OptionFixed Period Option Period of time which payments are made Period of time which payments are made is fixed.is fixed.

Level of monthly payment based on Level of monthly payment based on principal amount and interest rate.principal amount and interest rate.

Joint & Last Survivor Life Income OptionsJoint & Last Survivor Life Income Options

SettlementSettlement OptionsOptions

Proceeds paid during lifetimes of twoProceeds paid during lifetimes of two or or more recipients.more recipients.

Income paid Income paid while both alivewhile both alive, then continues to survivor., then continues to survivor.

Survivor income options:Survivor income options: Continued at Continued at same amountsame amount Reduced paymentsReduced payments upon death of first payee (i.e. upon death of first payee (i.e.

67%, 50%). The lower the percentage to survivor, 67%, 50%). The lower the percentage to survivor, the higher the original life income while both the higher the original life income while both alive will be.alive will be.

LifeLife Income OptionsIncome Options


Proceeds buy a life annuityProceeds buy a life annuity Several types are available:Several types are available:

Pure Life IncomePure Life Income Proceeds Proceeds paid out over lifetimepaid out over lifetime of recipient. of recipient. Return of all Return of all proceeds not guaranteedproceeds not guaranteed.. Of all life options, provides Of all life options, provides highest monthlyhighest monthly

payment due to absence of refund feature.payment due to absence of refund feature. Entire proceeds considered "used up" at Entire proceeds considered "used up" at

recipient’s death.recipient’s death.

Life Income With Period CertainLife Income With Period Certain


Payments Payments guaranteed as long as recipient guaranteed as long as recipient lives.lives.

If recipient dies before end of specified If recipient dies before end of specified period (usually 10 - 20 years), payments period (usually 10 - 20 years), payments continuecontinue for remainder of period for remainder of period to secondto second payee (payments cease at end of period).payee (payments cease at end of period).

Due to period guarantee, monthly income Due to period guarantee, monthly income lower than Pure Lifelower than Pure Life Income Option. Income Option.

Refund Life Income OptionsRefund Life Income Options


Provides Provides monthlymonthly life income life income Guarantees paymentGuarantees payment of entire proceeds of entire proceeds If recipient dies before full amount of proceeds If recipient dies before full amount of proceeds

paid out (original proceeds less amount paid to paid out (original proceeds less amount paid to date), date), remainder will be paid to secondremainder will be paid to second payee. payee.

Remainder is Remainder is paid in lump sum or installmentspaid in lump sum or installments until entire premium amount is paid out. until entire premium amount is paid out.

life insurance basics 3

Documents

policy provisions policy

life insurance policy

original policy

policy provisionsimportant

contract policy provisions

policy provisions persons

policy loan function

cash surrender value