copyright © 2008 pearson education canada 5-1 credit life insurance a variation of group term...
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Copyright © 2008 Pearson Education Canada 5-1
Credit Life Insurance A variation of group term insurance Purchased & arranged by lenders
Borrower ultimately pays premium Benefits must be used to pay debt
Insurer must reimburse creditor Unlike decreasing term life insurance
Where there is no obligation to pay mortgage company
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Whole Life Insurance Whole life insurance Limited payment life insurance
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Whole Life Insurance Also known as
Straight life Ordinary life
Premiums Constant for life May be prepaid
Lifelong duration Accumulation of policy reserves
Cash reserves/cash surrender value
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Cash Surrender Value Early payments > pure cost of
insurance Reserves are created
Cash value + any dividends Calculated from table of
guaranteed values
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Uses of Cash Surrender Value
1. Surrender of policy2. Policy loan3. Automatic premium loan4. Collateral for a loan5. Paid up policy
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2. Policy Loan Borrow from cash surrender value Usually lower rate If insured dies
Loan balance & interest deducted from face value
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3. Automatic Premium Loan If policyholder stops paying
premiums Cash surrender value used to pay
premiums Face value of policy diminished
By premiums paid
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4. Collateral for Loan Transfer right to cash surrender
value To creditor
If policyholder defaults on loan payments Creditor cashes policy Retains what is owed
If insured dies Insurance proceeds pay creditor
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5. Paid up Policy Use cash surrender value
To buy a smaller Face value, paid-up policy Policy with a single premium
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Limited Payment Life Insurance A variation of whole life Completely paid for during a
specified period Shorter time/higher premiums In force for life Appropriate for people with high
income For a short period of time
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Universal Life Insurance Flexible payments Withdrawal privileges Flexible coverage Regular statements
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The Insurance Policy
Contract between the insuring company and the policy holder
Not a contract in indemnity Unlike property insurance
Whereby insured is returned to financial position before loss
Life insurance policies pay a predictable sum of money
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Features of Life Insurance Policies Description of policy Grace period Dividends Incontestability Policy loans Ownership rights and assignment Beneficiary
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Grace Period One month after premium’s due
date Insurance remains in force Premium paid without penalty
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Dividends Refund on a participating policy Depends upon
Company’s efficiency ROI Amount paid in claims Policy cancellations
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Ownership Rights and Assignment Stipulates rights of policy owner
To name beneficiary To change name of beneficiary To use the cash surrender value To receive dividends To transfer (assign) ownership of
policy
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Beneficiary Identifies receiver of proceeds
upon death of insured person Proceeds not distributed through
will Go directly to beneficiary
Free from claims of estate’s creditors
Copyright © 2008 Pearson Education Canada 5-19