Copyright © 2008 Pearson Education Canada 5-1 Credit Life Insurance A variation of group term...

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

Whole Life Insurance Whole life insurance Limited payment life insurance

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

Cash Surrender Value Early payments > pure cost of

insurance Reserves are created

Cash value + any dividends Calculated from table of

guaranteed values

Uses of Cash Surrender Value

1. Surrender of policy2. Policy loan3. Automatic premium loan4. Collateral for a loan5. Paid up policy

2. Policy Loan Borrow from cash surrender value Usually lower rate If insured dies

Loan balance & interest deducted from face value

3. Automatic Premium Loan If policyholder stops paying

premiums Cash surrender value used to pay

premiums Face value of policy diminished

By premiums paid

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

5. Paid up Policy Use cash surrender value

To buy a smaller Face value, paid-up policy Policy with a single premium

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

Universal Life Insurance Flexible payments Withdrawal privileges Flexible coverage Regular statements

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

Features of Life Insurance Policies Description of policy Grace period Dividends Incontestability Policy loans Ownership rights and assignment Beneficiary

Grace Period One month after premium’s due

date Insurance remains in force Premium paid without penalty

Dividends Refund on a participating policy Depends upon

Company’s efficiency ROI Amount paid in claims Policy cancellations

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

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 5-1 Credit Life Insurance A variation of group term...

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