Credit Life Insurance Credit life insurance is used to repay a personal debt should the borrower die before completing the payments. It is based on the belief that "no man's debts should live after him." It was introduced in 1917 in the United States in connection with installment financing and purchasing. Originally, and for many years, this coverage was provided by policies that individuals purchased for themselves. Now, the vast majority of the coverage is group insurance provided under a master contract issued either to a bank or other type of lending agency or to a retail store selling goods on the installment plan. The average under group coverages is $1,010 per individual loan. Credit life insurance accounted for 7 per cent of all life insurance in the United States at the end of 1969. Participating and Policies There are several ways of classifying individual life insurance policies. One is whether it is participating or nonparticipating. For a participating policy, the premium rate is fixed at an amount somewhat greater than the company expects will be needed under normal conditions to pay for the cost of providing insurance. The policyholder receives a refund, in the form of a dividend, based on actual operating experience together with an estimate of future cost trends. Specifically, the dividend represents the portion of the participating premium not needed for the following purposes: to be set aside for present and future benefit payments to policyholders and beneficiaries (known as the reserve), to be set aside for possible contingencies (known as the surplus fund), and to meet the operating expenses of the company. Under a participating policy, the policyholder has the guarantee that he will never be called upon to pay more than the premium rate specified in the policy. But the net cost of a participating policy cannot be guaranteed in advance since it depends upon actual operating experience from year to year. In a nonparticipating policy, the premium rate is fixed at an amount which represents as closely as possible what the company expects will be needed to pay for the cost of providing the insurance, and no dividend is payable. This premium rate then becomes the cost to the policyholder. Thus the actual cost of a nonparticipating policy is guaranteed in advance for the life of the policy. What Are the Different There are two basic types of life insurance companies — stock companies and mutual companies. A stock company is owned by stockholders who finance its operations and who assume the risks and responsibilities of ownership and management. Most stock companies issue only nonparticipating policies; a few also issue participating policies; a very few issue participating policies only. A mutual company has no stockholders. Its management is directed by a board elected by the policyholders for whose benefit the company is operated. Nearly all mutual companies issue only participating policies; a few also issue policies on a non-participating basis, the owners of such policies having no voice in the manage ment. Individual Policies and Their Uses Basically there are only three types of individual policies: term, whole life and endowment. However, there are many variations of each type and, in addition, a number of special-purpose policies combine two or more of the three basic policies with perhaps an annuity element added. Here is a brief outline of the three basic policies and of a few special types of individual policies. 1. TERM POLICY A term life insurance policy provides temporary protection. The benefit is payable only if the policyholder dies within a specified period of time. Some companies offer term policies which run to age 60 or 65. 25-407 0-74 - pt. 1 - 9 A term policy may be convertible; that is, it may grant the privilege of exchanging it, without proving one's insurability, for permanent insurance on either the whole life or an endowment plan, which have higher premiums but which also contain cash values. A term policy may contain a renewal privilege, which gives the right to renew the policy, without proving one's insurability, at the end of the original policy term. The renewed term policy will usually be similar to the first one, except that it will call for a higher premium rate because the policyholder is older at the time of change. This renewal privilege is limited to a certain number of renewals, or the policy may not be renewed after age 55, 60 or 65. The insurance ends at the close of the final renewal period. A term policy is frequently used to provide additional temporary insurance protection on a father's life while his children are growing up. During such periods, people usually need maximum insurance protection at a minimum of premium outlay. Another typical use of a term policy is to guarantee the repayment of the mortgage on the policyholder's home if he should not live to do so himself. Example Richard Smith is 28 years old, has a wife and a two-yearold daughter. He has recently been made an assistant foreman in the machine shop where he works. Mr. Smith has owned $12,000 of life insurance for several years and has $10,000 of group life insurance. He knows that, provided he remains alive and healthy, he will be able to take good care of his family. Should anything happen to him, on the other hand, he realizes that his wife and small daughter will have to rely solely upon his life insurance and Social Security. His family needs additional life insurance protection — more than he can afford to buy on a permanent basis at this time. Because his prospects for future advancements are bright, Mr. Smith decides to buy a $15,000 ten-year convertible term insurance policy. He plans to change it to a whole life or endowment policy as soon as he can afford the larger premium required. 2. WHOLE LIFE POLICIES There are policies which provide lifetime insurance protection. At the death of the policyholder the face value (the amount written on the front of the policy) is paid to the beneficiary he has named. A person may select a policy which calls for the payment of premiums for as long as he lives; or for a definite number of years; or to a certain age; or even in a single sum. His choice should depend upon an estimate of his ability to pay premiums as well as the purpose for which he is buying the policy. Straight life or ordinary life, has the lowest premium rate of any lifetime policy on the "level premium" plan, which means the premium stays the same even though the policyholder grows older (see page 31). It is among the most widely used and is a flexible policy which can meet many different needs and family situations. While the policy calls for premium payments as long as the policyholder lives, many people plan to discontinue premium payments in later years and take a lump sum or an income for life. Example Tom Jones is 35 years old. He has a wife and three children, 2, 4, and 7 years old. He owns his own home in the suburbs and has a good law practice in the city. Most of Mr. Jones' insurance is on the straight life plan because this gives him a lifetime program with maximum protection per dollar of premium payments. It also gives him the right to borrow against the cash value of the policy, say in an emergency. If he someday wishes to discontinue premium payments, he can select any one or, if his policy is large enough, a combination of the following things: 1. Continue the protection at a reduced amount for the balance of his lifetime; 2. Continue the full amount of protection for a definite period of time; 3. 4. Cancel the policy entirely in return for a cash settlement of guaranteed amount; or Discontinue the policy and receive an income for a certain limited period of time, or for life. A limited payment life policy also provides lifetime protection, but premium payments end after a period such as 10, 20 or 30 years, or at a certain age, usually 60, 65 or 85, according to the buyer's choice. Because the premium-paying period is limited, the premium rate is necessarily higher than for the straight life policy. The higher premium, however, builds cash values faster than a straight life policy for the same amount. In all other respects, it is similar to the straight life policy. If a person wants lifetime protection, but wishes to limit premium payments to a definite period of time, such as his best earnings years, then a limited payment life plan may be the policy for him to purchase. Since the premium rate is higher than for the straight life policy, this factor by itself will tend to limit the amount of protection he can buy for his family. Example Jim Brown is 45 years old and has a wife aged 42, but no children. He is anxious to provide an income adequate to take care of his wife for the rest of her lifetime, in the event of his death. He already owns $20,000 of insurance on the straight life plan. On the advice of his agent, Mr. Brown buys a $10,000 twenty-payment life policy. In the event of his death, his widow will receive $2,000 to pay current obligations and the balance will be available to her as a monthly income for life, the amount depending upon her age at the time of his death. At her current age, Mrs. Brown would receive about $105 a month in all. If Mr. Brown dies when Mrs. Brown is 65, she would receive about $160 a month for life. The new policy is written on the twenty-payment life plan |