Term insurance is discussed first as it is the simplest form of insurance, actually the basic form of life insurance.  Term life insurance provides either level or decreasing death benefits, and in some cases, increasing death benefits (usually a “rider” to a policy).  The majority of life insurance sold in the U.S. – and probably worldwide also – is term insurance, which provides for a level death benefit over the period of the policy, with either level premiums or with premiums that increase with age (as discussed previously).




When a term policy has level death benefits and with increasing premiums, they are considered as renewable term policies.  The yearly renewable term policies (which are also known as annual renewable term) are the simplest forms of term policies.  There are also five-year, 10 year and 20 year (and other policy periods) renewable term policies available (all increasing premium policies). 


Some insurance companies have recently moved away from yearly renewable term (YRT) policies as these policies traditionally have high lapse ratios and low premiums, leading to unprofitable business.  Premiums are low as competition for YRT and similar policies that have no benefits other than death benefits, are purchased on a cost basis mostly, leading to recent “rate wars.”


In addition to lower premiums, companies differentiate in their pricing in other areas, such as different premiums for smokers and non-smokers.  This discount for non-smokers can be substantial, as much as 50% with some companies.  When the smoker/non-smoker premiums were developed for general use several years ago, actuaries took into consideration the difference in mortality between smokers and non-smokers, and decreased the premium for non-smokers to create a block of “preferred” risk insureds.  Logically, if those with better mortality were to be removed from the general “population,” then those remaining would be considered “sub-standard” and should pay higher premiums.  When companies even suggested raising premiums on smokers, there was howls of protest from the marketing departments, with the result that if a company raised the premiums on smokers, their agents would write non-smokers and (unless they were “captive” agents) would place the smokers with those companies that did not differentiate or did not have separate premiums for smokers and non-smokers.  This would mean that those that accepted the smoker risks would suffer worse mortality than expected particularly those who made no distinction.


Another method of pricing differently was the introduction of a reentry feature.  The insured may be allowed to “reenter” the lower priced group of policyowners (those that have reentered) periodically, typically once every 5 years.  The insured will have their premium lowered if they resubmit evidence of insurability at that time.  Technically, those who enter at the end of the reentry period will have their premium reduced to premiums that are based on first-year select mortality for their attained age.  A brief explanation of “select” mortality should be of interest here.


Select mortality is derived from a table showing the mortality of only those persons who have purchased insurance during the past year.  These tables clearly show that such people have a much lower mortality rate in the years immediately following their purchase of insurance, than those who have been insured for some time because they have recently passed medical (and other) tests, and, of course, because they are younger.  The mortality “curve” which shows the increase in mortality as individuals age, will show much lower mortality on a select basis, than on the general population (called an Aggregate Mortality table), and of those of the entire group exclusive of the initial period after purchasing life insurance (Ultimate Mortality table).



John, age 40, considers purchasing a $100,000 of term insurance with no reentry feature, with a premium of $185.  He also considers a policy with a 5-year reentry feature, with the initial premium of $138.  However, at the end of 5 years, the non-reentry premium would be $228.  However, with reentry (submission of evidence of insurability) the premium would still be $138, a 25% savings over the regular term.  He must also take into consideration whether he believes he will continue to be in good health at future reentry dates.



Term insurance may be written for a specified period of years – typically 10 and 20 years, or to age 65.  These policies have become quite popular in recent years as there has been so much interest in investing in the stock market that the difference in premium between permanent insurance and level premium term policies makes more funds available for investment.


There is a product available, called life-expectancy term that provides level premiums for the expected lifetime of the insured, according to the specified mortality tables.  This would lead to some cash value (non-forfeiture value laws apply), but the cash value increases to a point, and then decreased to zero by the end of the policy period. 


Term-to-age-65 (or a later age, such as 70) provides insurance for a shorter period of time than do the life-expectancy policies, and is used mostly for life insurance protection during the working years of the insured.  The cash values perform as with life-expectancy term.



Decreasing Termwhere the face amount decreases over time is sold in significant amounts in the U.S.  One of the primary uses of decreasing term is for mortgage protection.  With these policies, the face amount decreases each year in the same amount that the mortgage decreases, therefore in case of death before the mortgage is satisfied, there will be sufficient funds for the heirs to pay off the mortgage in full.  Term that decreases in the same amount each year of the policy period is used for a variety of purposes, and may be used for mortgage protection also.  The disadvantage of using decreasing term per se for mortgage protection is that the death benefit does not exactly match the decrease in the mortgage amount.  As anyone who has ever had a mortgage can attest, during the early years of a mortgage, the mortgage amount decreases very slowly because of interest on the unpaid amount.  Therefore if an insured would die in the early years of a mortgage, a decreasing term policy would be considerably short of providing all the funds to retire the mortgage.


Another type of decreasing term is the payor benefit rider on a policy, which insures the life of a juvenile.  The rider provides a death benefit in case of the death of the premium-payor, which would pay the exact premium to keep the juvenile policy in force until the juvenile insured reaches age 21.


The family incomepolicy (it can also be sold as a Rider) provides funds to be paid to a surviving spouse until a certain age or for a predetermined period of time (10, 15, 20 years, typically).  It is sold as protection during the time that children are being raised, and the policy then expires.


Increasing Term insuranceis seldom sold as a policy, but is usually sold as a rider to a permanent plan of insurance.  In the past, during inflationary times, it was popular as a Cost of Living Adjustment  rider, which would provide for automatic increases in the policy death benefit calculated by a designated index, such as the Consumer Price Index.  There is no evidence of insurability required as long as the insured continues to accept the added premium and increased death benefit each year.  A separate premium notice is mailed each year for this rider.  A decline in the cost of living is not reflected, but the amount of the previous year is automatically transferred to the present year.


A return-of-premiumrider is also available, which returns an additional amount of death benefit equal to the premiums paid for the insurance, if the insured dies within a stipulated period of time.  This is a misnomer, as there really is no “premium returned,” but the death benefit increases each year by the amount of the premium paid, with the increases “financed” by an increasing term rider.  This rider is primarily used in business situations. 


Increasing term insurance may also be purchased by dividends, thereby providing an important source of needed additional coverage and can be used advantageously in business situations.




Prior to 1984, endowment insurance was used by many as a savings vehicle.  In 1984, the tax laws pretty much limited endowment policies to qualified retirement plans, but even before that, endowment plans were having difficulty competing with whole life and term insurance, primarily because of the high first-year expenses related to endowments. 


There are many endowment policies still in force in the U.S., and a retirement income endowment was a well-known use of the endowments that paid either the death benefit or the cash value at death, whichever was greater – and is still used in some pension plans.  A semi-endowmentpolicy pays half of the death benefit if the insured survives the policy period.


In the 1970’s, deposit term was popular and some agents and agencies became wealthy promoting this plan.  Although it is a term policy, it provided for the payment of an endowment that was equal to a multiple of the difference between the high first year premiums and the renewal premiums.  By increasing the first year premium (deposit), premiums for the rest of the policy period would be lower because of the projected interest on the “deposit.”  Actually, this plan was so misrepresented and so confusing to policyowners, that it soon became unpopular with regulatory bodies.


Juvenile Endowment policies are not popular in the U.S. but are sold in large amounts in foreign countries.  They provide expenses for a child’s education, marriage or independence.  Education endowments are very popular in Japan and Korea.  Obviously Universal Life and other variable products can provide this type of coverage, and at a lower price.




As discussed earlier, whole life insurance pays a death benefit (face amount) upon the death of the insured, regardless of when that might be.  For study purposes in this text and following definitions used in many other texts, “whole life insurance” is defined as any type of life insurance that can be maintained in effect indefinitely.  Universal Life insurance can be considered as whole life if there are sufficient cash values.


Whole life insurance generally is priced on mortality statistics that assume that all insureds die by a certain age, as illustrated and discussed earlier.  Age 100 is commonly used, and those who live to age 100 can receive the full-face amount as if they had died.  It is often viewed, as term-to-age-100 as actuarial calculations are based on the assumption that everyone that may survive to age 99, will die that last year.



While the terms are used interchangeably at times, ordinary life insurance is always whole life insurance, but whole life insurance is not always ordinary life insurance (as discussed below).  Ordinary life insurance provides whole life insurance because the premiums are payable for life.  This form of insurance is also known as straight life, and continuous-premium whole life, usually depending upon which is being compared to ordinary life. 


Basically, ordinary life policies provides permanent protection at an affordable (usually) premium.  This is because the costs of mortality are spread throughout the entire policy.  As anyone experienced in life insurance knows, premiums vary widely for reasons other than age or face amount, such as by dividends (if any), larger or smaller cash values, and excess-interest credits for certain types of policies.  It is also a fact of life, whether one admits it or likes it, name recognition of the insurer can have an effect on the premiums.  A lower premium is the only way some not-well-known companies can compete with the more advertised and better known insurance companies. 


The traditional whole life policies have lost a lot of market share to newer-generation interest sensitive products, such as Universal Life and Variable Universal Life (surprised?).  These new products were introduced when interest rates were relatively high and agents were able to use projections showing larger interest growth than traditional life.  Many, too many, insurers believed that the high rates shown in the illustration would continue, so when the interest rates fell, the actual results did not meet the results expected by the insureds, leading to a lot of “undesirable consequences” and lawsuits.  The use and abuse of financial projections are discussed later in this text.


Companies issuing traditional participating whole life policies were not affected so severely because they could credit higher rates of interest through dividends.  These interest rates are predicated on the interest received on the entire portfolio of the company, and portfolio rates change much more slowly.  Therefore when interest rates fall, Universal Life products do not fare as well as traditional policies. 


To compete better, companies offering traditional whole life introduced flexible provisions such as allowing the policyowner to determine their own future premium payments (within company and tax maximums and minimums).  As an example, so that the insured can pay a lower than usual premium, low-load term riders with face amounts of (up to) 10 times the basic face amount was created.



James, who just turned 35, purchases an ordinary life  policy with a face amount of $100,000.  The premium would be $1,500.  However, using a combination of term rider and ordinary life, a rider can reduce the annual premium to $500.  The insurance company offered to reduce the premium to any amount between $1500 and $500.  (Cont.)

The policy is participating, and combining paid-up additions from the dividend and adding an increasing term rider, the company could provide a level death benefit with lower than usual premium.

James wanted his premium to be fixed so that he could budget for it and he was concerned that the projected dividends may not be realized, so he opted for the first plan.


If future dividends and surrenders of paid-up additions are sufficient, theoretically the policy is now self-sustaining, so after so many years, an insured can have the premium paid.  This is called vanishing premiums and which is, in fact, erroneous.  Note the first word of above sentence (IF), if the dividends are lower than those assumed initially, the policyowner will be called upon to resume premiums.  Unhappy policyowners!  (This is also discussed later in the section of interest-sensitive products).  This same system is used with non-participating policies with non-guaranteed benefits.


A policy deposit rider is used by some companies, whereby a policyowner deposits an amount to pay future premiums (providing sort of a “cleaned-up” deposit term).  Therefore the premiums will be paid by the rider at some time in the future.  (An immediately annuity is sometimes used to accomplish the same purpose).



With a limited payment whole life policy, the policy remains in full force for the “whole of life” but premiums are paid for a limited period of time only.  After that point, the policy becomes fully paid-up.  For definition purposes, a policy matures when the face amount is payable, usually at death.  A policy expires when the term of the policy expires and there are no benefits payable, such as in term insurance.


Premiums for these types of policy are typically 10, 15, 20 or 30 year, or to age 65 or similar age.  Because the premiums for these type of policies are (comparatively) high, there is not much demand in the individual life insurance market; however, limited payment policies can be used in business situations where it is important that the policy be paid-up within a certain time frame.


Single premium whole life policies are those whole life policies where, as the name implies, all of the premium for the life of the policy is paid from inception with a single payment.  As one can imagine, the cash value of the single premium policy is substantial from the date of the policy.  Because of the high premiums, these policies are not frequently sold but are used for special situations.



Bertha, age 55, had 4 small-face-amount policies which were taken out when she was a child, by her parents and doting grandparents, and when she was first married.  These policies were either endowment policies (3) or limited pay life (20-pay life).  Totally, there were cash values of $25,000 (which had been considered a lot of money when she first was insured).  The cash values were credited only with 3% interest. 

Bertha was a widow and wanted to make sure that her burial expenses were covered by insurance, and she wanted to leave a small amount of money to a nurse that had helped her in the past few years.  She is uninsurable now so she could not get a new policy.

Bertha, upon the advice of her agent, “cashed in” the policies, and received the $25,000, which she immediately used to purchase a single premium policy.  Since she met the requirements for a Section 1035 exchange (non-taxable), when she died there was sufficient (approximately $10,000) for her burial, the remainder going to her nurse.  She no longer had to worry about burial expenses.




A current assumption whole life(CAWL) provides a “bridge” between traditional insurance and interest sensitive “new generation” products.  In effect, a CAWL is called “interest sensitive whole life” by some, and also called “fixed-premium whole life” by others.  The CAWL provides nonpar whole life insurance under a more modern “transparent” format.  Generally the policy will use interest rates that reflect the new-money rates and will also use the current mortality charges in determining the cash value.  While more traditional whole life policies use dividends as a means of passing to the policyowner any changes in assumptions used in the pricing of the original policy, CAWL uses changes in the cash value and premiums to reflect the changes in the company expense and interest criteria from that that is guaranteed inside the contract. 


Because CAWL policies are “unbundled,” much like Universal Life, there is a stated allocation of premium payments and interest earnings to the mortality charges, expenses and cash values.  Contract this with the traditional whole life policy, where the policyowner has no idea as to how these funds are allocated.


To be specific, the premiums paid are charged for expense charges, and the remainder is a (net) addition to the policy fund.  This is added to the previous policy fund balance and any interest (at the current rate) that has accumulated on the fund.  From this fund total, a mortality charge is made, and the remaining amount is the year-end fund balance.  This balance less any stipulated surrender charges, would be the net surrender value if the policy were to be surrendered. 


The CAWL can be either a low-premium plan, or a high-premium plan.


CAWL Low-premium Plan

The initial indeterminate premium is lower than that of a traditional ordinary life policy and the policy has a provision that allows the company to “redetermine the premium using either the same or other (new) assumptions for future mortality and/or interest, within the guaranteed assumptions in the policy.”  When the premium is redetermined, so that it combined with the existing account value, will be sufficient to maintain a level death benefit for the life of the policy (if the new assumptions are proven correct).  If these new assumptions are higher or lower than those used at the time of issue, the premiums will be either higher or lower – if they are the same; the premium will remain the same.


If the new premiums are lower than the previous premium, there are three options available to the policyowner:

  • The policyowner may pay the new (lower) premium and keep the previous death benefit.  (The usual choice.
  • The policyowner may elect to continue to pay the previous premium, maintain the same death benefit, and pay the difference into the fund.
  • The policyowner may continue to pay the previous premium, but use the difference to purchase an increased death benefit.  If this option is used, the insured may be subject to evidence of insurability.


CAWL High-premium Plan

If the premium is higher than the previous premium:

  • The policyowner may pay the new (higher) premium and keep the previous death benefit. 
  • The policyowner may elect to continue to pay the previous premium, but accept a lower death benefit that can be paid-for by the new higher premium.
  • The policyowner may continue to pay the previous premium and keep the same death benefit, using some of the cash value to pay the additional premium.  This option is usually available only if the account is at a determined level for at least 5 years in the future.


The high premium plan is as the name implies, relatively high, however there is a guarantee that the premium will not exceed a stated amount.  Some of the policies offer a vanishing premium concept which states that the “vanish” will continue as long as it is greater than the minimum cash value.  Policyowners have been known to confuse the “may vanish” in this option, with a paid-up life policy where the policy has no more premiums to be paid. 


There are many variations of this policy, some of short-lived duration.  The principal difference between the CAWL and Universal Life is that the CAWL has a required premium, making it easier for companies to administer, and the company has a greater control over the cash value buildup.  One of the principal advantages in the mind of many people is that it “forces” the payment of an established premium amount.  One of the well-established advantages of life insurance as a savings or investment vehicle is that many people do not consider themselves (and probably rightfully so) as having the personal discipline to pay flexible premiums.




A Modified Lifeinsurance policy is a whole life policy with the early premium (from 1 to 5 years) considerably lower than the typical whole life policy and with higher premiums after the modified period.  Some policies charge 50% of the usual premium for a period of 3 or 5 years, and then charge the higher premiums.


There are two types of modified life policies that are highly advertised and considerable premium has been generated with these policies.  The principal type is used for “Senior” citizens and sold usually in units of $1,000 or $10,000 and are sold primarily to be used for final expenses.  These policies may have either no premium for the modified period – 1 to 3 years –or a very low premium.  The health questions are very simple and there is little, if any, underwriting, as the premium is loaded for the extra mortality.  But the big difference between these policies and similar modified plans, is that if there is a death during the modified period, then the beneficiary will receive only the return of premium.  Most states now require that those plans that offered this plan must contain an accidental death benefit of the face amount, or a multiple thereof during the modified period.  Otherwise these plans could not be considered as “life insurance.”  Makes sense.


The second type is not as prevalent now as it once was.  It is offered to substandard risks, and the original plan would accept any person with no evidence of insurability.  There was a premium during the modified period (some offered reduced premiums) and in most respects, the plan was identical to the Senior plan discussed in the previous paragraph.  If the insured lived past the modified period, any serious health problems would either have been resolved, or the insured would have died, and in which case the beneficiary received the premiums paid (the insurance company kept the interest on the premiums).  Eventually, there were a very few health questions asked, such as previous or present episodes of cancer, heart attack, or being hospitalized within the past 6 months (or similar period).  Interestingly, prior to these questions being asked, one company’s actuary insisted that the agents could actually accept anyone in a “cancer ward.”  While technically and actuarally this may have been correct, the company management could not bring themselves to market in this area.




The enhancedlife policy is a participating whole life policy that uses dividends to reduce the premiums of the policy.  There are several variations but perhaps the best known is a whole life policy whose premiums are reduced after 5 years (usually), but the face amount stays level because the dividends are used to purchase paid-up insurance so that the face amount remains level. 


If the dividends are not quite adequate to meet the premium requirements, then the dividends are used to purchase one-year term.  If they are more than adequate, the excess is used to purchase paid-up additions (so the face amount may be higher).




Graded Premium Whole Life policies are similar to Modified Life policies described above and are often sold for the same purpose.  The typical Modified Life policy charges premiums that are 50% of the usual premium for a whole life policy, and increase incrementally over the next time period (5 to 20 years), and then they remain level thereafter.  Cash values do not grow as rapidly as with whole life and may not appear for 5 years or so. 


There are variations, such as a YRT policy that has increasing premiums for a specified number of years, and level thereafter.  Actually this is a YRT policy that automatically converts into a permanent whole life after the term period.  This is useful for those who can afford to pay for protection in an increasing amount each year, but then wants a level premium later, such as retirement or after reaching some financial or lifestyle goal.




Dating back to England in the 17th century, debit insurance was the major type of life insurance sold in the U.S. until the beginning of the 20th century.  Also called Industrial insurance, it was sold in small amounts, usually no more than $2,000, and was sold door-to-door by “debit” agents who had their own territory – called a “debit” because the insurance agent would accept the payment (usually weekly, then later monthly) and then “debit” the insured’s record for the premium payment.  In today’s market, debit insurance usually applies to any type of insurance sold through home marketing. 


Debit insurance has lost its appeal as $2,000 does not go far today and the premiums are relatively high compared to other permanent insurance.  Debit insurers have received bad publicity because their premiums are so high, however the principle reason that premiums are high is that the persistency is not good, as the lapse rate is very high.  Many debit customers drop the insurance for a month or so if finances become tight, and then start again when they have a few dollars available.  Today most of the companies are called home service life insurance companies, which is an appropriate name, and most of their “debit” insurance is monthly debit ordinary which are ordinary life policies written for amounts of $5,000 to $25,000, usually with premiums collected monthly at the policyowners home, although some policyowners make monthly payments regularly at the local insurance office, or they mail the premiums monthly.


It is fully expected that debit insurance will continue to decrease as group insurance has replaced much of the debit insurance.  There has also been considerable legislation restricting the marketing and provisions of debit insurance, with the result that much of the profit of this business has disappeared.




A Family policy is a policy or a rider on a contract, that provides for whole life insurance for the father or mother, and with term insurance for the other family members.  The coverage on the spouse and children can be a specified amount of insurance, or it can vary by age.  The amount of life insurance is often measured by a “unit,” typically $1,000 of coverage per unit for spouse and children, and $5,000 per unit for the principal insured. 


The premium for a family policy typically will remain level, regardless if there are additional children, and is based upon an average number of children.  This could prove inexpensive coverage if there are several children or expensive if there is only 1 child.




Typically, Juvenile Insuranceis a whole life policy issued on the application of the parent or other responsible person, on the life of a juvenile.  Most juvenile policies are written on children who are at least one month old and the applicant controls the policy until the child reaches the age of 18 (usually) or upon the death of the applicant, whichever comes first.


The purposes of juvenile insurance are many, but principally it is used for guaranteeing a college fund to the child entering college, or at least there will be a cash value that can be used for college purposes.  It is also frequently used to guarantee that there will be some life insurance for the child even if the child becomes uninsurable later. 


Many agents and financial planners insist that it is better to use the funds that would go to pay the premiums on a child, for the purchase of additional coverage on the “breadwinner” under the theory that there is little “financial” loss that will occur in the death of the child, and only the death of the breadwinner will cause a financial hardship.




Burial insurance is also called “Pre-need Funeral Insurance” by some of those in the business, as it is felt that “burial” is a small part of the final expense of the insured, undoubtedly true.  This policy provides that a fund will be made available for final expenses, and in most cases, it is used to fund a prearranged funeral.  The funeral provider (usually a funeral home) agrees to furnish certain services and articles for the funeral, including casket and in many cases, even a burial plat, for the amount of the policy.


These policies are usually sold to persons between ages 65 and 70, and provides between $2,500 to $10,000 of coverage – frequently a single premium whole life policy. 


There were considerable concerns about these policies, as some consumer advocates believe that the funeral companies were taking advantage of older persons because they were easily confused and did not understand that they were dealing with a life insurance agent.  The NAIC has since changed its advertising and disclosure model regulations to include funeral insurance, with the result that complaints have diminished significantly.




First-to-Die insurance, Survivor Life insurance, Joint and Last Survivor and Second-to-Die insurance are all forms of providing life insurance on two lives but with the death benefit paid at the death of one of the parties.  The death benefit is paid at the death of the second survivor under survivor, joint and last survivor and second-to-die insurance policies, but under the first-to-die coverage, benefits are paid when the first person dies.  (Did the names of these policies give a clue?)  These policies are popular because they are less expensive than other whole life policies on two lives, however they really are not less expensive for the benefits they provide.


F In the first-to-die policy, the policy may be less expensive than individual insurance on two insureds.  However, the insurance company only pays on the death of one person, leaving the other person, who may actually be uninsurable at that time, without insurance.


Second-to-die policies also pay off at the death of one person, but in this case it is the death of the second person.  This delays the time and chance that the company will be called upon to pay a death benefit.  Therefore, “actuarially” speaking, the mortality costs for life insurance in the policy are much less than in policies that cover only a single life.  The second survivor does not receive any benefits when the first person dies, so the second survivor will have to pay premiums on a policy that is now a single life policy. 


These policies should not be considered as “bargains” but only as policies that can meet the needs of a particular situation quite efficiently. 




Any discussion of traditional life insurance cannot be complete without the problems of disintermediation being addressed.


F Disintermediation is the flow of funds out of one financial instrument, whose interest rates are low, into another financial instrument whose interest rates are higher.


In the early 1980’s, insurance companies experienced disintermediation as whole life policies were surrendered for their cash values and these sums were then transferred to higher-interest-paying noninsurance products.  Because of these situations, interest sensitive policies were developed by life insurance companies. 


Because of the disintermediation, insurers had to liquidate bonds and other securities, usually at significant discounts from par.  Because of this, dividends paid at that time on participating policies were not competitive with interest credits on current assumption policies.  Companies embarked on campaigns to alleviate the replacement problem by making older policies more competitive in an effort to hold on to their existing customers.


Previously, for many years, companies had a tendency to pay higher dividends than what was necessary, but when the interest rates fell during the 1980’s, companies had to reduce dividends and other interest credits, to a level below what was illustrated in the policies.  Some insurance companies (actually many companies) maintained higher interest rate credits than were justified in an effort to keep their customer base.  Some companies began to invest in riskier investments (the riskier the investment, the higher the income – usually) so as to stop the investment return decline. 


Finally, during the early years of the 1990’s, nothing seemed to work for some of the insurance companies, and there were some rather large – and several small – companies that became insolvent or under the protection of the insurance departments.


The saving grace for some companies has been policy exchanges.  During the late 1980’s, there were a few companies who encouraged 1035 policy exchanges (non-taxable exchange) and thousands of policies were exchanged for those giving a higher interest rate.  Some companies used an internal exchange in an effort to save their own business, while others would actually solicit policies from other companies.  Because of the interest rates at that time, there were many mutual participating policies exchanged for interest-sensitive products.  In many, if not most, cases, there was no requirement for evidence of insurability.  Other companies “streamlined” the evidence requirements.


Companies that “enhanced” their policies or encouraged exchanging policies for newer versions, lost some of the profitability that they enjoyed on their old block of business, but anticipated making up for it by increased profit on their new business because of higher interest rates and higher profile in the marketplace.




In 1993, the American Society of CLU and ChFC (Chartered Life Underwriters and Chartered Financial Consultants) created an Illustration Questionnaire to assist the client and the agent under different assumptions used in illustrations.  Illustrations are discussed later in this text, but suffice it to say at this point that a typical method of replacing policies has been by using illustrations and projections.  This questionnaire asks the insurance company to provide answers for the following questions.


  • Does what you are showing in this illustration differ from what is going on now in your company?
  • Do you treat new policyowners and existing policyowners consistently?
  • Is the number of deaths assumed in your illustration the same as your company is currently experiencing?
  • Does the illustration assume that the number of people dying in the future will increase, decrease or stay the same as your current experience?
  • Do the mortality costs generated by your assumptions about the number of people dying include some expenses or margin for profit?
  • Do these changes vary by product?
  • What is the basis for the interest rate used in the illustration?
  • Is that interest rate net or gross?
  • Does the interest rate illustrated exceed what you are currently earning?
  • Do the expense assumptions in the illustration reflect your actual expense experience?
  • If more people keep your policies than your illustrations assume, would that result in all the policyowners getting less? 
  • Do the illustrations include non-guaranteed bonuses after the policy has been held any specific number of years?


Please note that these are not all of the questions asked, and there can be several answers to any of the questions.


States also require that a replacement form be completed and signed by the applicant for insurance when an insurance policy is being replaced by another policy.  The purpose is to eliminate “twisting” as much as possible.




Group life insurance is an important part of the life insurance industry, accounting for about 40% of all life insurance in force by amount with an average certificate of $32,000.



While the minimum size of a group was typically 50 lives a few years ago, it is now usual for states to require a minimum of 10 lives required by state law and by insurance companies.  The larger the group, the less expense per person is incurred. 


Generally, only active, full-time employees are eligible for group coverage, usually specified by occupation classification of those that must be included in the group, such as “salaried employees” or “all hourly employees.”  The employee must be actively at work for a normal number of hours per week (usually 30 hours) at the employees regular job at the date the employee becomes eligible for coverage. 


Employees usually have a probationary period, usually one to six months, during which they are not eligible for coverage.  After this period, under a contributory plan (the employee pays part of the premium) the employee has an eligibility period in which they must apply for insurance without submitting evidence of insurability.  This period is usually for 30, 31 or 45 days.  If the plan is noncontributory, then there is no eligibility period as all employees automatically go on the plan when they have completed the probationary period.


The coverage period is usually the length of time that the employee remains with the employer (assuming the plan stays in force with the employer and the employee pays their share of the premium, if any).  The employer has the right to continue coverage for an employee temporarily off the job and upon termination, coverage is usually afforded for 31 days.


Typically, the employee does not specify the benefit amount and the amount is usually (1) a set amount for all employees, (2) a percentage of the employee’s income with the employer, (3) an amount that is designated for the position the employee holds (job title), or (4) a function of the employees length of service.  Insurers do not usually write insurance for less than $2,000 on an employee, most companies require $5,000 or $10,000, or more.  Most companies allow for additional insurance over the normal maximum with evidence of insurability.


Employees usually have the option to convert their group life policy into an individual cash value policy within 31 days after termination of employment or after the employee ceases to be a member of an eligible position.  The death benefit is paid under the group policy within 31 days after the insured has withdrawn from the eligible group.


A typical waiver of premium is used with group life insurance plans, and the premium will be waived as long as the insured can prove disability periodically. 


Group life insurance is basically yearly renewable terminsurance.  Group premiums are paid monthly, except with some small groups when premiums may be paid quarterly.  Premiums are usually guaranteed for one year only, but often for competitive purposes, the premiums are guaranteed for a longer period of time. 


For contributory plans employee contributions are usually at a set rate per $1,000 of coverage at all ages.  In most states, employers are required to pay at least a portion of the premium, and some states restrict the amounts that can be paid by any one employee, commonly 60 cents per month per $1,000 of coverage, or 75% of the total premium for that employee.


Supplemental life insurance may be provided to employees, normally contributory and the amounts of insurance available are banded.  Generally the maximum is a multiple of the employees salary.


A common form of group insurance is Credit Life insurance, which provides a benefit that is equal to the unpaid amount owed to the institution by the consumer.  The creditor, which is usually a bank or a finance company, is both the policyowner and beneficiary of the policy.  Premiums are usually paid by the debtor, but if there are dividends, they are paid to the creditor.  Needless to say, group credit life can be very profitable to the lender and there has been considerable abuse.  States have reacted and most states now have maximum rates that can be charged and most, if not all, states do not allow the purchase of credit life insurance to be a prerequisite for obtaining a loan.


Group life insurance often includes an accelerated death benefit, which pays a portion of the face amount of the policy in case of the terminal illness of the employee.


Under U.S. law, the value of the first $50,000 of employer-provided group term life insurance is non-taxable as income to the employee, but amounts over $50,000 may be taxable.  If the employee contributes towards the plan, then the amount of the contributions are allocated to the excess coverage.  The formula for determining the taxable amount to an employee is as follows:

  • The total amount of group term life insurance for the employee in each month of the taxable year.
  • The $50,000 is subtracted from each month’s coverage.
  • The IRS furnishes a Uniform Premium Table and the appropriate rate is applied to any balance for each month.
  • Then from the sum of the monthly cost, the total employee contributions for the year are subtracted.



Johnson age 45, is provided $150,000 of group term life insurance by his employer.  Johnson contributes $30 per month for this coverage, or 20 cents per $1,000 of coverage.

                   Amount of coverage                               $150,000

Less:            Exempt amount                                50,000

Equals:        Excess over the exempt amount     $100,000

Times:`        Uniform Premium Table rate                x0.15

                   Tentative monthly taxable income     $  15.00

Times:          Months of coverage                                     12

Equals:        Tentative yearly taxable income     $  180.00

Less:            Employee contributions for 12 mos. $  360.00

                   Taxable to employee                  (-)$ 180.00

Therefore, Johnson had no taxable income for this coverage.


When a group has less than 10 lives, IRS Regulation 1.70-1(c) requires that all full-time employees who provide adequate evidence of insurability, must be included unless they “opt” out.


Under the U.S. Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the $50,000 tax exemption is not available to key employees if the plans discriminates in their favor, either in eligibility or type and amount of the benefit; but are not discriminatory if all benefits to the key employees are also available to all group members.  Plans will not be discriminatory if they have a uniform relationship to the total compensation of the group members, or the basic rate of compensation of each employee.


For those retired employees, they may be provided group life insurance coverage if the plan continues a portion of the term life insurance, or cash-value life insurance is provided, or a retired lives reserve is established. 


Group cash-value life insurance is the simplest method of providing coverage for retirees, and is usually expressed as either a flat amount or a percentage of the previous group coverage.


Group paid-up insurance has been popular and is a combination of accumulating “units” of single-premium whole life and decreasing units of group term life.  Usually this is on a contributory plan and the employees contributions go toward units of single premium whole life insurance.  The employer’s contributions provides an amount of decreasing term insurance, when added with the amount the employee pays for, equals the total amount for which the employee is eligible.  Then at retirement, the term insurance portion is discontinued and the paid-up insurance remains in force on the employee for the remainder of his/her life. 


Group ordinary insurancecan be any traditional plan (except group paid-up) that provides the cash value life insurance to employees, where the cost of the term portion is paid by the employer, and the cash value portion is paid by the employee (which the employee may refuse to accept).


Group Universal Lifewhich has the typical guaranteed interest fate, a fixed death benefit and loan option, but they also have the flexibility and added returns of the newer life insurance products.  Group Universal Life (UL) is the same as individual UL, except that Group UL is generally issued (up to a certain amount) without evidence of insurability and is usually high enough to meet the needs of most employees.  Group UL products usually pay low, or no, commission, plus administrative charges are lower than individual plans.  Generally, these plans are 100% contributory, therefore the plans are totally portable.


Retired life reserves (RLR) is a group reserve accumulated before retirement in order to pay premiums on term insurance after retirement.  The employer can make tax-deductible contributions to this reserve on behalf of the employees, and these contributions are not taxed as income to the employees.  RLRs can be administered through a trust or by a life insurance company and as long as there are employees participating in the plan, the reserve cannot be recaptured by the employer.  If an employee dies (or resigns) prior to retirement, the individual’s reserve value is used to fund the RLR for others in the plan.  The plan must be nondiscriminatory and limits the amounts to $50,000.


Supplemental coverages are generally available, either through the insurer of the group, or by another insurer that offers supplemental benefits.  These benefits can be accidental death,or accidental death & dismemberment.


Some plans also offer Survivor Income Benefitswhere proceeds are payable in monthly income benefits only.  Beneficiaries are not named but are covered by specified beneficiaries in the policy, and benefits usually continue as long as there is a surviving beneficiary and sometimes are discontinued if the survivor remarries.


Dependent Life insurancemay be offered whereby the spouse and/or unmarried dependent children are insured for usually a small amount of life insurance. 



Chapter 4

1. Term Life Insurance

A. builds cash values each year.

B. is the simplest form of life insurance.

C. cannot be renewed.

2. Life insurance companies change

A. more for smokers.

B. more for “preferred” risks than “sub-standard risks”.

C. the same premium for smokers and non-smokers.

3. One of the primary uses of decreasing term life insurance is for

A. life insurance during the working years of the insured.

B. mortgage insurance.

C. family income.

4. A whole life insurance policy

A. pays a death benefit upon the death of the insured, regardless of when that might be.

B. must be paid in a lump sum upon the death of the insured.

C. can be voided by the insurance company if the insured become sick.

5. With a Limited Payment Whole Life policy

A. the premium payment is limited to a lump sum.

B. the insurance company is limited to paying the insured only if there is an accidental death.

C. the policy remains in full force for the “whole of life” but premiums are paid for a limited period of time only.


6. A Modified Life insurance policy

A. is a Term Life Insurance policy.

B. is a Whole Life policy with early premiums lower than typical Whole Life policies.

C. premiums remain level throughout the life of the insured.

7. Debit insurance

A. is usually written in amount of $100,000 and higher.

B. premiums are low.

C. is now sold by “home service life insurance companies”.

8. Juvenile Insurance is a Whole Life policy

A. principally used for guaranteeing a college fund.

B. sold to teenagers.

C. whereby the insured must prove insurability.

9. Group life insurance

A. is generally available to all employees.

B. usually has a probationary period before an employee is eligible for coverage.

C. is basically a Whole Life insurance policy.

10. Employer-provided group Term Life insurance

A. is non-taxable to the employee if the value is under $50,000.

B. requires the employee to prove insurability.

C. covers the employee even if they leave their employment.

11. An Enhanced Life policy

A. has low premiums at the beginning of the policy and then they increase.

B. is a team policy without cash values.

C. uses dividends to reduce the premiums.


12. Burial insurance

A. can only be used to cover the funeral director’s services.

B. is usually sold by the funeral director who is also an insurance agent.

C. is usually sold to college age individuals.


13. The “Replacement Questionnaire” was created to stop

A. “twisting”.

B. “redlining”.

C. an agent from replacing one life insurance policy with a better one.

14. With a Credit Life insurance policy

A. the insured is the beneficiary.

B. the bank or lending institution is both the policyowner and beneficiary of the policy.

C. the bank or lending institution pays the premiums.

15. Whole Life insurance pays a death benefit

A. regardless of when the insured dies.

B. only if the insured dies within a certain period of time, example: tens year.

C. if the insured losses their sight.


Answers to Chapter Four Study Questions

1B    2A    3B    4A    5C    6B    7C    8A    9B    10A    11C    12B    13A    14B    15A