Jane Dotson
Life insurance is a complex topic with a lot of terminology. When closing a life insurance policy, there are a few key terms to be aware of. These include 'lapse rate', which refers to the rate at which policies terminate due to non-payment of premiums, and 'non-forfeiture', which is an option available to policy owners who discontinue premium payments on a policy with a cash value. It's also important to understand the concept of 'policy proceeds', which is the amount actually paid out on a life insurance policy, and the difference between 'non-participating' and 'participating' policies, which determines whether the company distributes any surplus to policyowners.
| Characteristics | Values |
|---|---|
| Insurable Interest | A substantial interest established through love and affection for persons related by blood, and a lawful and substantial economic interest in having the life of the insured continue for all other persons |
| Lapse Rate | The rate at which life insurance policies terminate because of failure to pay the premiums |
| Policy | The printed legal document stating the terms of the insurance contract that is issued to the policyowner by the company |
| Policy Proceeds | The amount actually paid on a life insurance policy at death or when the policyowner receives payment at surrender or maturity |
| Non-Forfeiture | One of the choices available if the policy owner discontinues premium payments on a policy with a cash value |
| Non-Participating | A life insurance policy in which the company does not distribute to policyowners any part of its surplus |
| Participating Policy | A life insurance policy under which the company agrees to distribute to policyowners the part of its surplus that its Board of Directors determines is not needed at the end of the business year |
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What You'll Learn
Insurable interest
In order to purchase life insurance on another person, an insurable interest is required. This means that there must be a substantial interest established through love and affection for persons related by blood. For all other persons, there must be a lawful and substantial economic interest in having the life of the insured continue.
When a policyowner discontinues premium payments on a policy with a cash value, they have the option to take the cash value in cash or to use it to purchase extended-term insurance or reduced paid-up insurance. A policyowner can also choose a non-participating policy, in which the company does not distribute any part of its surplus to policyowners. Alternatively, a participating policy means that the company agrees to distribute a part of its surplus to policyowners, provided that the Board of Directors determines that it is not needed at the end of the business year.
The printed legal document stating the terms of the insurance contract is known as the policy. This is issued to the policyowner by the company. The amount actually paid on a life insurance policy is known as the policy proceeds, and this is paid at death or when the policyowner receives payment at surrender or maturity.
The lapse rate is the rate at which life insurance policies terminate because of a failure to pay premiums. When policies are lapsed before enough premium payments are made to cover early policy expenses, the company must make up this loss from remaining policyholders. Therefore, the lapse rate will affect the cost of the policy.
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Lapse rate
The lapse rate is the rate at which life insurance policies are terminated because the policyholder has failed to pay their premiums. When policies lapse before enough premium payments have been made to cover early policy expenses, the insurance company must make up this loss from the remaining policyholders. This means that the lapse rate will affect the cost of the policy.
There are several reasons why policyholders may stop paying their premiums. One reason could be financial hardship, such as job loss or medical bills. Another reason could be that the policyholder no longer feels the need for the policy, perhaps because their financial situation has changed or they have found a better policy elsewhere.
Insurance companies can take several steps to reduce lapse rates. One option is to offer policyholders a grace period during which they can catch up on missed payments without penalty. Another option is to provide incentives for policyholders to keep their policies in force, such as discounts or loyalty programs.
If a policyholder discontinues premium payments on a policy with a cash value, they have several options available to them. They can take the cash value in cash, use it to purchase extended term insurance, or use it to buy reduced paid-up insurance.
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Policy
A life insurance policy is a printed legal document that states the terms of the insurance contract and is issued to the policyowner by the company. It is a contract between the insurance company and the policyowner, outlining the rights and responsibilities of both parties. The policy will detail the specific coverage provided, any exclusions or limitations, and the premium amount to be paid by the policyowner.
Life insurance policies can be purchased by individuals or groups, and the terms of the policy will vary depending on the type of policy chosen. There are several types of life insurance policies available, including term life insurance, whole life insurance, and universal life insurance. Each type of policy has its own unique features and benefits, and it is important for the policyowner to understand the differences before purchasing a policy.
One important term to understand in relation to life insurance policies is 'insurable interest'. This refers to the requirement that the policyowner has a substantial interest in the continued life of the insured person. For persons related by blood, this interest is established through love and affection, while for all other persons, it is a lawful and substantial economic interest. Insurable interest is required when purchasing life insurance on another person.
Another key term is 'lapse rate', which refers to the rate at which life insurance policies terminate due to failure to pay premiums. If a policy lapses before enough premium payments have been made to cover early policy expenses, the company must make up this loss from remaining policyholders. Therefore, the lapse rate can affect the cost of the policy.
In the event of the death of the insured person, the life insurance policy will pay out a specified amount to the policyowner or their beneficiaries. This is known as the 'policy proceeds' and is typically paid out in a lump sum. The policy proceeds can be used to cover funeral expenses, outstanding debts, or any other financial obligations of the insured person.
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Policy proceeds
When a life insurance policy is taken out, the policyowner will agree to pay a certain amount of money, known as the premium, at regular intervals. In return, the insurance company agrees to pay out a sum of money, known as the policy proceeds, upon the death of the insured person. The policy proceeds can also be paid out if the policyowner decides to surrender the policy before it matures. This means that the policyowner will no longer be covered by the insurance policy, but they will receive a payment based on the value of the policy at that time.
The policy proceeds can be paid out in a lump sum or in regular instalments, depending on the terms of the policy and the preferences of the policyowner or their beneficiaries. In some cases, the policy proceeds may be used to purchase an annuity, which will provide a steady stream of income for the policyowner or their beneficiaries.
If the policyowner discontinues premium payments on a policy with a cash value, they may have the option to take the cash value in cash or to use it to purchase extended term insurance or reduced paid-up insurance. This is known as non-forfeiture. Non-forfeiture options allow the policyowner to retain some of the benefits of the policy even though they have stopped making premium payments.
Participating policies are another type of life insurance policy in which the insurance company agrees to distribute a portion of its surplus to policyowners. The amount distributed is determined by the company's Board of Directors and is typically paid out at the end of the business year. Participating policies can provide additional value to policyowners, as they may receive a share of the company's profits in addition to the death benefit provided by the policy.
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Non-forfeiture
The policy is the printed legal document stating the terms of the insurance contract that is issued to the policy owner by the company. Policy proceeds refer to the amount actually paid on a life insurance policy at death or when the policy owner receives payment at surrender or maturity.
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Frequently asked questions
Closing life insurance is referred to as 'lapse rate'.
'Lapse rate' refers to the rate at which life insurance policies are terminated because of failure to pay the premiums.
If a policy owner discontinues premium payments, they have the option to take the cash value in cash or use it to purchase extended term insurance or reduced paid-up insurance.
A 'non-participating' policy is one in which the company does not distribute to policyowners any part of its surplus.
A 'participating' policy is one in which the company agrees to distribute to policyowners the part of its surplus that its Board of Directors determines is not needed at the end of the business year.
