MASTER LANGUES APPLIQUEES TERMINOLOGY
MARCH 2009
Applying componential analysis to life insurance
Whole Life Insurance
Whole life insurance offers the policyholder a cash value account and tax-deferred cash accumulation
and pays a death benefit directly to the named beneficiary. The policy is in effect during the lifetime of
the insured and provides permanent security for all your dependents while building a cash value
account.
On of the benefits of a whole life policy is that it provides a savings component (cash value), which is
tax-deferred. The policyholder can borrow from or cash in the policy during the policyholders lifetime.
The policy has a fixed premium, which does not increase during the policyholder's lifetime, as long as
the planned premium amount is paid. The premium is invested for the insured for a long-term basis.
A whole life insurance policy does not allow for any premium flexibility. The policyholder cannot
invest into separate accounts, such as money markets, stocks and bond funds.
The policy cannot terminate unless the policy holder dies and the beneficiaries are paid benefits, the
policy reaches the age of 100 or the policy cancels for nonpayment of premium and the cash value of
the policy is returned to the insured.
There are several different types of whole policies. They are as follows:
•
•
•
•
Single premium whole life policy is when the policyholder pays whole life premium in one
lump sum. The only benefit to this policy is tax advantages. The regular life policy grows in
response to the interest rate and the growth is then tax deferred. If a client wants to shelter
some money and would want death benefits, the single premium would be an excellent choice.
Continuous premium life (aka straight life) policy is the most common whole life policies.
This policy accumulates in cash value and provides lifetime protection with level premium
payments up to the age of 100. This policy offer the lowest regular premium cost among the
permanent policies.
Limited-Pay policies are paid over a limited period of time. Each type of plan is named after
the terms of the payment period (i.e., "20-Pay Life," or "Life Paid-up at 65"). The payment
amounts are determined according to length of the payment period. In addition, the insurer
must pay the full, insured amount to the beneficiary in the event that the policyholder dies,
even if the insured has only made one payment to the policy.
Current Assumption Whole Life (aka Interest Sensitive Whole Life) premium payments
fluctuate according to the current interest rates. The premiums are adjusted upon renewal of
the policy.
Comment
The four sorts of whole of life insurance (called whole life, the standard American term) share
all the features already noted for whole of life insurance in the original matrix analysis.
Artificial intelligence calls this inheritance, which simply means that the narrower concepts
all have the same features as the broader concepts, with some extra criteria. These can easily
be added to the matrix.
The distinguishing feature of the differing sorts of whole life insurance is the payment of the
premium. This is paid either in one lump sum at the beginning, or over the whole life in
annuities or over a shortened, specified period. The premium rate is constant for continuous
and limited whole life insurance (and not relevant for single premium), but variable with
current. These features can be broken up as shown in the table overleaf:
WHOLE OF LIFE INSURANCE
whole of life
premium paid premiums
insurance
once
paid over
whole of life
Single
+
+
Continuous
+
+
premium
limited pay
+
Current
+
assumption
premiums
paid over a
set period
+
premium
rate
constant
+
+
-
The components are generally represented as discrete entities, present or absent. It may be
more economical in presentation to indicate different values for each feature, as below:
Single
Continuous
Whole of life
insurance
+
+
Limited
+
Current
+
Premiums
paid
Once
over whole
period
over set
period
over whole
period ?
Premium
rate
Lump sum
Constant
Constant
Variable
Definitions
single premium whole life insurance : whole of life insurance for which the premium is
paid in one lump sum
continuous premium whole life insurance : whole of life insurance for which the premium
is paid over the whole period (or until the age of 100)
limited pay insurance : whole of life insurance for which the premiums are paid over a
period defined in the policy
current assumption insurance : whole of life insurance for which the rate of the premium is
indexed to interest rates
Term Life Insurance
Term life insurance is the most simplified of the life insurance types. The basic concept for term life is
that the policyholder pays a premium for a specified amount of coverage for a limited period of time
(aka "term"). If the insured should happen to die before the end of the term, the beneficiary would be
paid the face value of the policy. If the insured does not die before the policy period expires, no benefit
is paid out.
A term life insurance policy has no cash value and the coverage period is very specific. The premium
is intended to cover only the cost of the insurance itself and usually for fairly short period of time.
The premiums are based mainly on the age of the policyholder and with the increase of age there is the
more likelihood of death. The most common of the term policies is the one-year policy written with
level benefits. These policies renew annually until a certain age (average 65-70) and the premiums
fluctuate according to gender and by specific underwriting guidelines. Some medical testing (i.e.,
blood, urine, saliva, etc.) maybe required at a certain age or under certain medical conditions.
Premiums apt to be more expensive at older ages and most insurance companies offer policies with
increments of 5, 10, 15, 20, or 30-year guarantees, with premium levels based on the insured's age at
the time the policy was purchased, and on the length of the guaranteed premium level.
There are several different types of term policies. They are as follows:
•
•
•
•
•
Level Term is a death benefit contract, which remains level throughout the policy term. The
premium can increase at confirmed intervals over the years or it may remain the same, but the
death benefit will remain the same. This type of term insurance is sold in yearly terms of one,
five, ten, twenty, or until the age of 65.
Decreasing Term is a death benefit contract, in which levels decrease over time, but premium
remains the same throughout the policy period. The most common use for this type of policy
is to cover a mortgage. As the mortgage amount decreases of over time, so does the amount of
insurance needed. A term life policy is used cover the policyholders financial obligations.
Increasing Term is a death benefit contract, in which levels and premium increase over time.
This coverage is usually written as a rider to a policy and written for the purpose of providing
the policyholder with increasing death benefits until the policy terminates. One reason for
obtaining this type of coverage could be that the insured needs his/or hers benefits increased
while their children are attending college.
Renewable Term is a death benefit, which provides levels throughout the policy period. In
addition, this coverage provides for automatic renewal without having to provide proof of
insurability. The premium is adjusted according to the age of the policyholder upon renewal of
the policy. If the insured experiences ill health/terminal conditions, the insurance company
cannot non-renew or cancel the policy. The maximum number of times a policy can be
renewed is specified by the insurer.
Convertible Term is a death benefit, which provides levels throughout the policy period. In
addition, this coverage provides the option to change the policy to a permanent (whole life)
policy without having to prove evidence of insurability. An additional premium is required for
this special feature. If the insured experiences poor health/terminal conditions, the insurance
company cannot non-renew or cancel the policy.
The first difficulty in preparing the matrix for this analysis is clear identification of the
criteria, and the ambiguity of tertiary terminology is a major hindrance here. The most
ambiguous word is level: as an adjective it is used for fixed rates (i.e. neither rising nor
falling); as a noun, it can represent either level of premium or, more commonly, level of cover.
From the context provided, the latter meaning is the one relevant here.
The next point to be dealt with is the grouping of criteria under the concepts of premium and
death benefit. These should be linked, as we have indicated in the table below. Again, a table
could be made where the indications are supplied directly under the general heading.
TERM INSURANCE
Term
Death benefit = payout
Insur
Ance
Falling Rising
fixed
Level
+
+
Decreas
ing
Increas
ing
Renew
able
Convert
ible
Premium
fixed falling
rising
-
+
-
-
+
+
-
+
-
+
+
+
-
-
+
-
+
+
Re
New
el
-
Change to
whole of
life
+
Evidence
of insur
ability
+
-
Definitions
level term insurance : term insurance providing level death cover over time and requiring
payment of level or rising premiums
decreasing term insurance : term insurance providing decreasing death cover over time and
requiring the payment of level premiums
increasing term insurance : term insurance providing rising death cover over time and
requiring the payment of rising premiums
renewable term insurance : term insurance which can be renewed automatically without
proof of insurability
convertible term insurance : term insurance which can be changed into a whole of life
policy without proof of insurability