subtypes

Posted: Thu Dec 10, 2009 05:47 pm Post Subject:

Hi mrsconfused, welcome to the forum.

Your question is a good one. I have a feeling, however, that any response you're going to receive will be minimal at best. The question that you posed would literally take up volumes in a typical library.

The insurance industry is huge, and there are dozens of "major" lines and hundreds of "sub-categories" out there.

Might I suggest a Google search? Something tells me that you will have a bit more success going that route. We can provide you some info, and let's see where this thread goes... I'll check back every few hours to see where it's going and to (hopefully) add to your knowledge base.

InsTeacher 8)

Posted: Fri Dec 11, 2009 03:10 pm Post Subject:

Let's try to keep it as basic at this point as possible.

"Ordinary" insurance means a policy issued to an individual (as opposed to a group life insurance policy). It can be term insurance or cash value insurance. Typically, it also means a face amount of at least $10,000.

"Industrial" insurance (now mostly known as "home service") is the predecessor to group life. By definition, low value ($1,000), and most states do not allow more than $10,000 on any one life. Very high cost at about $1/$1,000 per week, but usually "paid up" after 20 years. A cash value policy. Premiums are usually collected by an agent who goes door-to-door each week, with a receipt book and picks up cash for the premium due. Some policies are paid on a monthly basis rather than weekly. Agents usually get to keep 25%-50% of the collections, the balance transmitted to the insurer.

Better to separate the basic differences between individual policies into TERM and CASH VALUE.

Under TERM, the basic policies are level death benefit and decreasing death benefit. You'll read about "increasing term" but this is now mostly just the addition of term riders to existing (term or cash value) policies that raise the total death benefit over time. All term policies are written for a specific period of time (the "term") from 1 to 40 years, with 10-15-20 among the most common. Decreasing term is used mostly to cover a debt, such as a mortgage, where only the need to payoff any unpaid balance is a concern.

Term is pretty basic. All protection, no cash accumulation. Not really too much variation unless you start adding riders. Biggest pitfall: a policy might be sold as 20-year level term, but doesn't have a 20-year level premium. Level for 3-10 years, then Annually Renewable, where the cost will increase each year due to age. Term life contracts are usually short 10-12 pages, and fairly easy to understand. In order for a beneficiary to receive money following the insured's death, the death must occur during the term of the policy. Missing by just one day, is one day too long.

Under CASH VALUE, the major variations are whole life, universal ("interest sensitive") life, and variable life (including variable universal life). There are as many variations within each of those three categories as there are colors of crayons -- maybe even more. No need at this point to discuss them specifically.

WHOLE LIFE is not really anything more complex than a combination of decreasing term + cash accumulation. The major difference being the "term" of the policy -- used to be "from now to age 100", but the current mortality table ends at age 121, so newer policies go from "now to age 120 (or 121)." The "inside build up" of cash reduces the insurer's liability in the event of a death claim, as the cash accumulation + the insurer's money combine to pay only the face amount of insurance to the beneficiary. If the insured lives to the "endowment" or "maturity age" instead of dying sooner, the cash accumulation will equal the face amount of insurance and the policy terminates with the payment of the cash accumulation to the owner of the policy. Cash accumulation is guaranteed according to a schedule in the contract that assumes all premiums will be paid on time, and no borrowing from cash accumulation will occur.

Like term, a basic whole life contract is fairly short 15-18 pages, the extra pages devoted mostly to discussing the owner's options available with the cash accumulation.

Variations of whole life become more complex, increasing the number of potential disadvantages to the policyowner.

UNIVERSAL LIFE or interest sensitive policies are an evolution from whole life whose origins can be traced to the period of high inflation in the US in the 1970s. While whole life policies typically have an (undisclosed) internal rate of return in the 3-5% range, when inflation was running at 14-15% and higher in the mid-1970s and banks were offering 12%+ on CDs, people started borrowing their insurance cash value at 6-8% (then, tax-deductible) interest, parking it at 12%, and taxes aside, thought they were doing better.

Universal policies offered more "transparency" as the fees and interest were "unbundled" and disclosed. They also allow policyowners to adjust the death benefit and raise or lower the premium payments at will (to as low as $0).

To attract the money away from the banks, insurance companies were offering 12-15% or more in universal policies, with the understanding that the interest crediting rate could go up or down, but not below a minimum guarantee (typically 3%). When inflation came under control in the 1980s, none of these policies continued to pay double digit interest, and many collapsed due to lack of premium payment by owners who had been told, "This policy will pay for itself, so you won't have to pay any premiums."

Modern universal life policies are better constructed, and things like "no lapse guarantees" can preserve the death benefit even if the policy has no cash value and would otherwise collapse. But the basic design of the policy has not changed in 30+ years:

Premiums are paid, a "current" interest rate (at the sole discretion of the insurer) is credited, and monthly fees (cost of insurance, policy charges, cost of riders, other expenses) are deducted from the cash value. If all is working well, cash value should be increasing.

Death benefit decreases can be made at any time without proof of insurability and within the limitations described in the contract (minimum change amounts/increments, not less than the minimum death benefit required). Death benefit increases usually require proof of insurability in the absence of a "guaranteed purchase option" rider.

Premiums may be paid in almost any amount (from $0 to $$$) as long as they do not exceed a threshold which would cause the policy to become a "Modified Endowment Contract" or MEC (a new term invented by Congress in the 1980s -- a concept too complex for this discussion).

Universal life insurance also has the additional feature of "Death Benefit Options" (1 and 2/A and B, and sometimes 3/C). Option 1/A = "level death benefit", Option 2/B = "increasing death benefit", Option 3/C = "return of premium". This is a major difference between universal life and whole life. As discussed under whole life, the insurer never pays more than the face amount of insurance. In universal life, the beneficiary could receive more than the face amount.

An Option 1 policy would pay more than the face amount of insurance only if the cash value was greater than the face amount. Rarely happens. Like traditional whole life, it more closely resemble a decreasing term policy + cash accumulation

An Option 2 policy pays the face amount + the cash value. In this respect, the policy looks more like a level term policy + cash value. So if there is any cash value at all, the check to the beneficiary will be for more than just the face amount of insurance. Because of this, Option 2 policies are more expensive.

The "unbundled" cost of insurance in universal life is based on Annual Renewable Term rates. To mitigate against the increasing rate per $1,000 of insurance, the cash accumulation reduces the "Net Amount at Risk" (NAR). The cost of insurance is calculated monthly and if properly balanced, the premium payment will cover the cost of insurance and other fees, and add more cash to the accumulation account to continue to offset the increasing rate per $1,000 of death benefit. Option 2, with its "level" term design would always demand more premium since the cash accumulation is outside the death benefit, but complex calculations are used internally to allow cash accumulation to offset the Net Amount at Risk, in an effort to reduce the amount of increasing premium that must be paid. (When seen in the contract, these formulas usually include a series of 4-7 "+" signs, a few "-" signs, and multiplier(s) that have seven or eight digits to the right of the decimal point. Difficult at best to follow and calculate using a spreadsheet, let alone pencil and paper.)

Universal life has at least as many variations as does whole life, including "Equity Indexed Universal Life" policies that tie the interest crediting rate to an external factor beyond the control of the insurer, such as the S&P 500 stock (equity) index. This is made more complex through the addition of elements such as "minimum interest rate", "participation rate" and "rate cap". An equity-indexed policy's cash value is directly influenced by the uncontrolled market factors, and negative stock market performance will not decrease the cash accumulation by itself.

Even though premiums are being paid as "scheduled", all forms of universal life are subject to the erosion of cash accumulation due to the ever increasing cost of insurance. This is not true of whole life policies.

VARIABLE POLICIES are both life insurance and securities products (like stocks, bonds, and mutual funds). There are two primary categories: variable whole life and variable universal life. Both work in exactly the same manner as the basic types above, with the exception of the cash accumulation. In a variable policy, the cash accumulation is (primarily) directed into the insurers "separate account" and invested among a variety of "subaccounts" that resemble retail mutual funds. The policyowner is responsible for allocating the cash among the available options, and for managing the "portfolio" to maximize the returns. The insurer bears no risk in this. Their only responsibility is to provide the subaccount choices by prospectus, and follow the directions of the policyowner. Variable policies have the "potential" to earn significantly greater returns than the insurer would be willing to offer in any of its other cash value policies.

Without becoming too technical, the death benefit of a variable whole life policy can increase over time if investment returns are good, and decrease over time if investment returns are negative, poor, or simply insufficient. So the policies have a built in minimum death benefit guarantee to protect against losing everything as long as all premiums are paid without fail.

Variable universal policies work the same as traditional universal policies, with the addition of the stock market options that offer the potential of larger returns. Still have the death benefit options, newer policies offer the no lapse guarantees (as long as all premiums are paid on time and without fail).

Because of their complexity, variable policies are often difficult for policyowners to understand and manage properly. Due to the inherent complexity of both universal and variable life policies, these contracts range from 25-65 pages (or more) in length. Variable products are required to be accompanied by a prospectus that can easily be 200-300 pages in length, and new prospectuses are issued about once a year (every 12-16 months as required by securities laws).

You haven't asked about endowments (shorter term, higher cost cash value policies) or annuities, which are not life insurance, but are a life insurance product, so we won't get into those just yet.

Your remaining questions are about "debit", "credit", and "burial" insurance. Easy enough.

"Debit" policies refers to the industrial life segment. Agents are known as "debit agents" because their commission account is debited for the amount of commission payable against what they are supposed to collect in premiums each week. It is their responsibility to "zero" their debits by the end of the week, keeping whatever is left over.

"Credit" insurance is a form of group life or disability insurance that a lender/creditor obtains to protect itself against the risk of a borrower dying or becoming disabled and unable to pay off the balance of their account. Most states limit the amount of insurance to not more than $100,000 or the actual amount of the debt, whichever is less. Primarily paid for by the borrower as a single premium added to their loan amount and financed. Used in the purchase of autos, furniture/consumer goods & services, and credit cards. May be required as a condition of obtaining the loan, but cannot require the borrower to use only the lender's insurance company. This is strictly a form of term insurance.

"Burial" insurance is usually a cash value policy. Sold to folks with a desire to pay for their own funeral expenses but who have no other resources and don't want to leave others with the bill. Usually underwritten without a medical exam because the policy is for $25,000 or less, and premiums are usually high because these are written on older people who are planning to die sooner rather than later. Often paid up in just 10 years. Although anyone could be named as beneficiary, it is usually the mortuary who will be handling the funeral details. Agents who sell burial insurance usually work for the mortuary as independent contractors.

Hope this helps without being too confusing or overwhelming. There is just no way to condense all of this information into anything more compact without leaving something important out -- which is why InsTeacher said

. . . any response you're going to receive will be minimal at best. The question that you posed would literally take up volumes in a typical library.