Appendix I

Life Insurance Concepts

The following are some key concepts that are important to understand in order to assess life insurance as part of MA financial eligibility.

Accelerated life insurance payments

Accelerated life insurance payments allow some or all of the proceeds of the life insurance policy to be paid out to the policy owner prior to the death of the insured. Receipt of these types of payments may reduce the face value (FV) and cash surrender value (CSV). A policy owner can also take out a loan against the life insurance policy.

Accelerated life insurance policies can provide three basic types of payments:

Long term care model – policy owner can access the death benefit of the contract to pay for extended care in a facility or for home health care.
Dread disease or catastrophic illness model – policy owner can access the death benefit of the contract in order to care for the insured during any specified covered condition.
Terminal illness model – policy owner can access the death benefit of the contract when a terminal illness is diagnosed for the insured and death is expected to occur within a specified period.

Annuity

An annuity is a life insurance product that may be converted to an income stream for the owner while they are still living. The individual deposits money with an insurance company either all at once (lump sum) or over several years. The terms of the contract determine whether an owner may annuitize at any time, or is subject to an accumulation period. During an accumulation period the money earns interest at a tax deferred rate and the owner has limited access to the fund for that period. At the end of the accumulation period, the policy owner may have several distribution or annuitization options, ranging from a higher monthly income for a short specified period to a smaller income until their death.

Beneficiary

The insurance or annuity policy owner names the beneficiary(ies) who will receive the proceeds upon the death of the insured or annuitant.

Burial insurance

Burial insurance is a contract whose terms preclude the use of its proceeds for anything other than payment of the insured’s burial expenses.

NOTE: If a policy has a CSV to which the owner has access, the policy is not burial insurance for MA purposes.

Cash surrender value (CSV)

Cash surrender value (CSV)is the monetary or equity value that an endowment or whole life insurance policy acquires over time as the policy owner pays the premiums and dividend additions and interest are added to the policy. The policy owner can take out loans against this amount and can obtain the full CSV by cancelling the life insurance policy before the insured dies or the policy matures. A loan against a life insurance policy reduces its CSV.

NOTE: Dividend accumulations are considered a separate asset.

Demutualization

Demutualization occurs when a life insurance company converts from a policyholder owned mutual company to a stockholder owned company. As part of demutualization, the insurance company issues shares of stock or cash to its policy owners to compensate them for the loss of certain ownership rights.

Dividends

“Mutual” or “participating” life insurance companies may offer their policy owners payment from the company’s annual surplus earnings, which they call dividends. Insurance companies pay these dividends in one of three ways:

Issuing checks to the owners (usually annually),
Applying the funds to premiums due; or
Crediting the funds as an addition or accumulation to the existing policy.

Dividend accumulations are surplus company earnings, which accrue in an account that the insurance company controls for the policy owner. The policy owner can access these funds without penalty at any time without affecting the FV or CSV.

The insurance companies use surplus company earnings, called dividend additions, to buy more insurance protection for the life insurance policy owner. Dividend additions increase the FV and CSV.

NOTE: The tables of CSVs that come with a life insurance policy do not reflect the added CSV of any dividend additions.

Endowment

An endowment is a type of life insurance policy in which CSV is built up within the policy until the CSV equals the FV at a fixed maturity date. If the insured outlives the policy, the FV is paid to the insured. If the insured does not outlive the policy, the FV is paid to the beneficiary.

Face value (FV)

Face value (FV) is the amount that is contracted for at the time the life insurance policy is purchased – it is the amount to be paid out when the insured dies. The front page of the life insurance policy may show it as such, or as the “amount of insurance,” “the amount of this policy,” “the sum insured,” etc. A life insurance policy's FV does not include:

the FV of any dividend additions, which are added after the life insurance policy is issued;
additional sums payable in the event of accidental death or because of other special provisions; or
the amount(s) of term insurance, when a policy provides whole life coverage for one family member and term coverage for the other(s).

Insurable interest

Insurable interest means there would be a financial loss by the owner in the event of the death of the insured person.

Insured

The insured is the person on whose life the insurance company issues the policy.

Insurer

The insurer is the company or association which contracts with the owner of the insurance.

Life Insurance

Life Insurance is a contract under which the insurer agrees to pay a specified amount upon the death of the insured.

Limited pay

A limited pay policy is a type of whole life policy in which all premiums are paid for a certain period, after which no more premiums are due.

Loan

A loan is a cash advance made by the life insurance company to a policy owner on the security of the cash value of the life insurance policy. Loans reduce the CSV of the policy.

Modified whole life policy

A modified whole life policy charges smaller premiums for a specified length of time after which the premiums increase for the remainder of the policy.

Owner

The life insurance policy owner can be the insured, another individual, a company, or a trust with an insurable interest in the insured person. The life insurance policy can be an asset only to the owner of the policy. The owner, who might not be the person who is insured, is the person with ownership interest in the policy: this includes the right to surrender the policy or change the beneficiary.

Participating policy

A participating policy is life insurance that is eligible for payment of dividends by the insurer.

Permanent policy

A permanent policy is any form of life insurance except term policies. Generally, a permanent policy, such as whole life, universal life, etc builds up a cash value.

Premiums

Premiums are the amount the policy owner pays during the lifetime of the policy to keep it in force. In most cases, if the owner stops paying the premiums the policy will lapse and become inactive.

Pre-need senior or final expense

Pre-need senior or final expense policies are whole life policies designed specifically to cover funeral expenses. The life insurance policy owner signs an arrangement with the funeral home and, at the insured’s death, the proceeds are assigned to the funeral home for payment of services it promises to render. Most contracts dictate that any excess proceeds are paid either to the insured’s estate or to designated beneficiary(ies).

Proceeds

The proceeds of a life insurance policy are the total of the FV of the life insurance policy plus any additions payable at maturity or upon death. Proceeds do not include dividends or interest that are left to accumulate in the life insurance policy. Also, proceeds do not include a life insurance policy's CSV.

Riders

Riders are modifications the policy owner adds to the life insurance policy at the time of purchase. A common example is accidental death (which pays twice the FV if death is from accident). Riders do not alter the FV or CSV of the policy.

Single premium whole life

Single premium whole life is a life insurance policy with only one premium payable at the time the life insurance policy is purchased.

Supplementary contract

A supplementary contract is not a life insurance policy. It is an agreement whereby, when the life insurance policy matures or the insured dies, the proceeds are paid not in a lump sum, but in an alternative manner selected by the individual, usually as an annuity.

Survivorship life

Survivorship life, also known as joint life insurance, is a whole life insurance policy insuring two lives (generally spouses) with the proceeds payable to the beneficiary(ies) on the later death of the second person.

Term life

A term life policy is life insurance that provides coverage for a specified period at a guaranteed rate. Some common subtypes of term life insurance are mortgage insurance and group insurance. Policy owners may have the option of converting term life insurance policies into whole or universal life insurance policies (convertible). Alternately, policy owners can renew the policy at the end of its term for limited number of successive terms (renewable).

Universal life

Universal life policies provide insurance over a specified period, and build cash value for policy owners over time. They have greater flexibility in premium payment and potential for higher internal rates of return. There are several types of universal life policies, including variable universal and equity indexed universal life. All universal life policies include a cash account in addition to the standard death benefit.

Whole life

Whole life is a form of life insurance that applies part of the premium payments to build an investment or savings value for the policy owner. The investment or savings value is called the CSV of the policy.

A modified whole life policy charges smaller premiums for a specified length of time after which the premiums increase for the remainder of the policy.