2.9 Classes of Life Insurance Policies
Group Insurance – A group insurance plan is typically owned by an employer, creditor, or association and provides coverage to eligible employees, debtors, or members under a single master policy. Coverage is issued for the benefit of the insured individual's designated beneficiary, often a spouse or family member. Any changes to coverage provisions must be made at the master policy level by the policyholder (the employer or sponsoring organization).
Group life insurance is generally written on a renewable term basis and does not accumulate cash value or offer living benefits like permanent individual policies. Coverage amounts are commonly structured as either a flat dollar amount (e.g., $50,000) or a multiple of the insured's earnings (such as two times annual salary).
Some group plans permit participants to purchase supplemental coverage, which may require partial or full underwriting depending on the amount requested. Upon retirement or termination of employment, insured individuals typically have the option to convert their group coverage to an individual permanent life insurance policy without providing evidence of insurability, provided conversion requirements are met.
Individual Insurance – The primary distinction between individual and group life insurance lies in ownership and control. Individual policies provide complete ownership rights to the policyowner, including the ability to select the type of coverage, designate beneficiaries, assign the policy, or make changes as permitted under the contract.
Unlike group coverage, which is typically limited to renewable term insurance, individual life policies may be structured as term, whole life, universal life, or other permanent forms of insurance. Many individual policies offer additional features, such as cash value accumulation, estate planning benefits, or living benefits for terminal illness.
In contrast to group insurance—which may terminate upon employment separation or if the employer discontinues the plan—an individually owned policy remains in force as long as the policyowner continues to meet the contractual requirements, such as paying premiums. The decision to maintain or discontinue coverage rests solely with the policyowner.
Ordinary Life Insurance – Any type of life insurance that is not group, industrial or government insurance. A large number of people are insured with an ordinary life policy making this the larger portion of the life insurance in force today.
Industrial (Home Service) Insurance – Also known as debit life insurance, industrial insurance represents a very small segment of today's life insurance market (approximately 0.03%). These policies typically provide modest face amounts, often ranging from $250 to $1,000. Historically, they were designed to cover funeral and burial expenses and were commonly marketed to individuals seeking limited final expense protection.
Permanent Life Insurance – A type of life insurance designed to remain in force until age 100 or beyond, provided required premiums are paid. When issued for the same face amount and underwriting classification, permanent policies generally have higher initial premiums than term policies. In addition to providing a death benefit, permanent insurance accumulates cash value, which may be accessed by the policyowner through loans, withdrawals, or surrender options. These policies also offer various ownership and policy features that provide flexibility over time.
Term Life Insurance – A form of life insurance that provides coverage for a specified period of time and generally offers the lowest initial premium compared to other types of life insurance. It is designed for individuals who have substantial coverage needs but limited current cash flow. Because it provides protection for a defined term, it is often described as temporary insurance.
Term policies do not accumulate cash value. The death benefit may be structured as level, increasing, or decreasing, depending on the policy design. Term insurance is commonly used to cover temporary financial obligations such as mortgages, business loans, income replacement during working years, or the needs of young families with dependent children.
Participating Policy – A type of life insurance policy typically issued by a mutual insurance company. The term participating indicates that the policyowner may receive dividends if declared by the insurer's board of directors. Dividends are not guaranteed and depend on the company's financial performance, including mortality experience, investment earnings, and operating expenses.
Although a mutual insurer may issue both participating and nonparticipating policies, only participating policies are eligible to receive dividends. For tax purposes, dividends are generally treated as a return of premium and are not taxable until the total dividends received exceed the total premiums paid. Once cumulative dividends surpass the aggregate premiums paid, any excess dividends may be subject to taxation.
Nonparticipating Policy – A type of life insurance policy commonly issued by a stock insurance company. A stock insurer is owned by shareholders, who may receive corporate dividends if declared from company profits. These shareholder dividends are distinct from policy dividends and are generally treated as taxable ordinary income.
Policyholders under a nonparticipating policy are not eligible to receive policy dividends. In addition, a policyholder is not required to be a shareholder of the company and typically has no ownership interest in the insurer.
Fixed – A fixed policy provides a guaranteed face amount, fixed premium, and defined benefits as stated in the contract. The insurer assumes the investment risk and guarantees the policy values. However, without optional riders such as cost-of-living adjustments, inflation may reduce the purchasing power of the policy's benefits over time.
Flexible – Flexible policies, such as Universal Life and Variable Universal Life, allow the policyowner to adjust certain features of the contract. These may include premium payments (within limits), death benefit options, and, in some cases, investment allocations. This flexibility enables the policy to adapt to changing financial needs and economic conditions, including inflationary environments.
Variable – Introduced in the 1970s, a variable life policy allocates cash value into separate accounts that function similarly to mutual funds. The policyowner assumes the investment risk, and the cash value and potentially the death benefit fluctuate based on investment performance. Positive market performance may increase policy values, while poor market performance may reduce them. Because these policies involve securities, producers must hold both a life insurance license and the appropriate securities registration to sell them.
Quiz
1. Which statement correctly describes group life insurance?
A. It accumulates cash value for each insured member.
B. It is typically written as permanent insurance with living benefits.
C. It is usually written as renewable term coverage under a master policy.
D. It cannot be converted to an individual policy.
Correct Answer: C
Rationale: Group life insurance is generally issued as renewable term coverage under a master policy owned by an employer, creditor, or association. It does not build cash value and typically offers no living benefits. Many group policies include a conversion privilege, allowing the insured to convert to an individual permanent policy without evidence of insurability.
2. What is the primary difference between individual and group life insurance?
A. Individual insurance is always term coverage.
B. Individual insurance provides full ownership and control to the policyowner.
C. Group insurance always requires medical underwriting.
D. Group insurance builds greater cash value.
Correct Answer: B
Rationale: The key distinction is ownership and control. Individual policies provide the policyowner with full rights, including beneficiary changes, policy assignments, and coverage selection. Group insurance is controlled by the master policyholder (employer or sponsor), and individual insureds have limited control.
3. Which type of life insurance accumulates cash value and is designed to remain in force to age 100 or beyond?
A. Term insurance
B. Industrial insurance
C. Permanent insurance
D. Group insurance
Correct Answer: C
Rationale: Permanent life insurance is designed for long-term coverage and includes a cash value component that may be accessed by the policyowner. Term insurance provides temporary protection only and does not accumulate cash value.
4. A participating life insurance policy differs from a nonparticipating policy because it:
A. Guarantees annual dividends to the policyowner.
B. Is issued only by stock insurers.
C. May pay policy dividends if declared by the insurer's board of directors.
D. Does not provide a death benefit.
Correct Answer: C
Rationale: Participating policies, typically issued by mutual insurers, may pay dividends if declared by the board of directors. Dividends are not guaranteed. Nonparticipating policies do not pay policy dividends, and stockholder dividends are separate from policy dividends.
5. In a variable life insurance policy, who assumes the investment risk?
A. The insurer
B. The policyowner
C. The beneficiary
D. The employer
Correct Answer: B
Rationale: In variable life insurance, cash values are invested in separate accounts similar to mutual funds. The policyowner assumes the investment risk, meaning policy values may increase or decrease based on market performance. Because variable policies involve securities, proper securities licensing is required to sell them.