Posts Tagged ‘Policies’

Automatic Premium Loan

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Automatic Premium Loan

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What Is an Automatic Premium Loan?

An automatic premium loan (APL) is an insurance policy provision that allows the insurer to deduct the amount of an outstanding premium from the value of the policy when the premium is due.

Automatic premium loan provisions are most commonly associated with cash value life insurance policies, such as whole life, and allow a policy to continue to be in force rather than lapsing due to nonpayment of the premium.

Key Takeaways

  • Automatic premium loans allow for the cash value of a permanent life insurance policy to be applied to overdue premium payments.
  • As the name implies, this would be done automatically once premium payments are a certain amount of time overdue.
  • The purpose is to avoid having a policy lapse, which would terminate coverage.
  • The payment is structured as a policy loan, and so will also require interest payments.
  • Automatic premium loans are only viable if the policy’s cash value is equal to or greater than the overdue premium amount.

Understanding Automatic Premium Loans

In order to take an automatic premium loan, you have to have a cash-value life insurance policy, in which every premium you pay adds to the cash value of the policy. Depending on the policy language, life insurance policyholders may be able to take out a loan against the cash value of their policy. This accrued cash value is a value over and above the face value of the policy and can be borrowed against by the policyholder at their discretion.

An automatic premium loan is essentially a loan taken out against the policy and does carry an interest rate. If the policyholder continues to use this method of paying the premium, it is possible that the cash value of the insurance policy will reach zero.

At this point, the policy will lapse because there is nothing left against which to take out a loan. If the policy is canceled with an outstanding loan, the amount of the loan plus any interest is deducted from the cash value of the policy before it is closed.

Note that the policy contract’s language may indicate that no loans may be taken out unless the premium has been paid in full.

Special Considerations

Since the accrued value is technically the property of the policyholder, borrowing against the cash value does not require a credit application, loan collateral, or other good faith requirements typically found in loans. The loan is taken out against the cash value of the policy, and the loan balance is deducted from the policy’s cash value if not repaid. The policyholder will owe interest on the loan, just as with a standard loan.

Automatic premium loan provisions help both the insurer and the policyholder: The insurer can continue to automatically collect periodic premiums rather than sending reminders to the policyholder, and the policyholder is able to maintain coverage even when they forget or are unable to send in a check to cover the policy premium.

The policyholder may still choose to pay the premium by the regularly scheduled due date, but if the premium is not paid within a certain number of days after the grace period, such as 60 days, the outstanding premium amount is deducted from the policy’s cash value. This prevents the policy from lapsing. If the automatic premium loan provision is used, the insurer will inform the policyholder of the transaction.

An automatic premium loan taken out against an insurance policy is still a loan and, as such, does carry an interest rate.

What Kinds of Life Insurance Policies Are Eligible to Include an Automatic Premium Loan Provision?

Automatic premium loans can only be made from permanent policies that have a cash-value component. These include whole life policies and some universal life (UL) policies. Because universal life policies deduct expenses from the cash value, they do not always allow ALP.

What Is the Automatic Premium Loan Provision Designed to Do?

Automatic premium loans are designed to keep life insurance coverage in-force even after the policy owner has not paid the required premiums on time. Perhaps the policy owner is unable to pay due to financial or other difficulties, or simply forgot. Either way, the APL provision allows the death benefit to remain even in such circumstances.

Does an Automatic Premium Loan Decrease the Death Benefit of a Policy?

Potentially. Any outstanding loans along with interest due will be deducted from the death benefit amount if the insured passes away before these are paid back.

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Aleatory Contract Definition, Use in Insurance Policies

Written by admin. Posted in A, Financial Terms Dictionary

Aleatory Contract Definition, Use in Insurance Policies

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What Is an Aleatory Contract?

An aleatory contract is an agreement whereby the parties involved do not have to perform a particular action until a specific, triggering event occurs. Events are those that cannot be controlled by either party, such as natural disasters and death. Aleatory contracts are commonly used in insurance policies. For example, the insurer does not have to pay the insured until an event, such as a fire that results in property loss. Aleatory contracts—also called aleatory insurance—are helpful because they typically help the purchaser reduce financial risk.

Key Takeaways

  • An aleatory contract is an agreement whereby the parties involved do not have to perform a particular action until a specific event occurs.
  • The trigger events aleatory contracts are those that cannot be controlled by either party, such as natural disasters or death.
  • Insurance policies use aleatory contracts whereby the insurer doesn’t have to pay the insured until an event, such as a fire resulting in property loss.

Understanding an Aleatory Contract

Aleatory contracts are historically related to gambling and appeared in Roman law as contracts related to chance events. In insurance, an aleatory contract refers to an insurance arrangement in which the payouts to the insured are unbalanced. Until the insurance policy results in a payout, the insured pays premiums without receiving anything in return besides coverage. When the payouts do occur, they can far outweigh the sum of premiums paid to the insurer. If the event does not occur, the promise outlined in the contract will not be performed.

How Aleatory Contracts Work

Risk assessment is an important factor to the party, taking a higher risk when considering entering into an aleatory contract. Life insurance policies are considered aleatory contracts, as they do not benefit the policyholder until the event itself (death) comes to pass. Only then will the policy allow the agreed amount of money or services stipulated in the aleatory contract. The death of someone is an uncertain event as no one can predict in advance with certainty that when the insured will die. However, the amount which the insured’s beneficiary will receive is certainly much more than what the insured has paid as a premium.

In certain cases, if the insured has not paid the regular premiums to keep the policy in force, the insurer is not obliged to pay the policy benefit, even though an insured has made some premium payments for the policy. In other types of insurance contracts, if the insured doesn’t die during the policy term, then nothing will be payable on maturity, such as with term life insurance.

Annuities and Aleatory Contracts

Another type of aleatory contract where each party takes on a defined level of risk exposure is an annuity. An annuity contract is an agreement between an individual investor and an insurance company whereby the investor pays a lump sum or a series of premiums to the annuity provider. In return, the contract legally binds the insurance company to pay periodic payments to the annuity holder—called the annuitant—once the annuitant reaches a certain milestone, such as retirement. However, the investor might risk losing the premiums paid into the annuity if they withdraw the money too early. On the other hand, the person might live a long life and receive payments that far exceed the original amount that was paid for the annuity.

Annuity contracts can be very helpful to investors, but they can also be extremely complex. There are various types of annuities each with its own rules that include how and when payouts are structured, fee schedules, and surrender charges—if money is withdrawn too soon.

Special Considerations

For investors who plan on leaving their retirement funds to a beneficiary, it’s important to note that the U.S. Congress passed the SECURE Act in 2019, which made rule changes to beneficiaries of retirement plans. As of 2020, non-spousal beneficiaries of retirement accounts must withdraw all of the funds in the inherited account within ten years of the owner’s death. In the past, beneficiaries could stretch out the distributions—or withdrawals—over their lifetime. The new ruling eliminates the stretch provision, which means all of the funds, including annuity contracts within the retirement account–must be withdrawn within the 10-year rule.

Also, the new law reduces the legal risks for insurance companies by limiting their liability if they fail to make annuity payments. In other words, the Act reduces the ability for the account holder to sue the annuity provider for breach of contract. It’s important that investors seek help from a financial professional to review the fine print of any aleatory contract as well as how the SECURE Act might impact their financial plan.

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Affirmative Action: What Is Affirmative Action? Definition, How It Works, and Example

Written by admin. Posted in A, Financial Terms Dictionary

What Is Affirmative Action? Definition, How It Works, and Example

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What Is Affirmative Action?

The term affirmative action refers to a policy aimed at increasing workplace and educational opportunities for people who are underrepresented in various areas of our society.

Affirmative action focuses on demographics with historically low representation in leadership, professional, and academic roles. It is often considered a means of countering discrimination against particular groups.

Affirmative action programs are commonly implemented by businesses and governments by taking individuals’ race, sex, religion, or national origin into account when hiring.

Key Takeaways

  • Affirmative action seeks to reverse historical trends of discrimination against individuals with certain identities.
  • It provides financial assistance to groups that historically have been and continue to be subjected to forms of discrimination.
  • Policies often implement hiring quotas, provide grants and scholarships, and may also deny government funding and contracts to institutions that fail to follow policy guidelines.
  • Affirmative action now includes assistance for gender representation, people with disabilities, and covered veterans.
  • Criticism of affirmative action emphasizes high program costs, the hiring of fewer qualified candidates, and a lack of historical progress in equal representation.

How Affirmative Action Works

The main purpose of affirmative action is to diversify various parts of society. It is a government-backed policy that was developed to provide inadequately represented groups of people with access to opportunities in academia, the private workforce, and government jobs.

These opportunities include admission to schools and jobs in professional positions, as well as access to housing and financing.

History and Implementation

The affirmative action policy rose to prominence in the United States in the 1960s as a way to promote equal opportunity for various segments of society. The policy was developed to enforce the Civil Rights Act of 1964, which sought to eliminate discrimination.

Early implementations of affirmative action largely focused on halting the continued social segregation of minorities and other disadvantaged individuals from institutions and opportunities.

Despite legislation that outlawed discrimination practices in the U.S., tangible change in the status quo was not immediate.

In more recent years, campaigns have expanded to make organizations and institutions even more inclusive by pushing for greater gender diversity. Newer policies are also aimed at providing more access to opportunities for covered veterans and people with disabilities.

Covered veterans are veterans who are disabled, who served on active duty in a war or other campaign and have a campaign badge or a service medal, or who are recently separated from the Armed Forces.

Elements of Affirmative Action

Efforts to stimulate change can take the form of financial assistance such as grants, scholarships, and other support earmarked to help with access to higher education opportunities.

In addition, hiring practices may be structured to require the inclusion of diverse candidates for consideration for job openings. Government agencies may mandate that companies and institutions populate their ranks with a minimum percentage of qualified professionals from varying ethnicities, genders, and cultures.

Failure to meet such requirements could disqualify institutions from receiving government funding or being able to compete for public contracts.

People confuse employment equity with affirmative action. There’s a distinct difference between the two. Employment equity attempts to ensure that all individuals are treated equally while affirmative action actually supports those people in particular who historically have been denied opportunities.

Examples of Affirmative Action

Affirmative action has been put to work since the 1960s, despite lack of progress at times and rulings by legal authorities such as the Supreme Court that have hindered it. Here are some examples of the policy in action.

  • In 1965, President Lyndon B. Johnson issued Executive Order 11246. It required that all government contractors and subcontractors expand job opportunities for minorities. It also established the Office of Federal Contract Compliance (OFCC) to enforce the order.
  • In 1970, the Labor Department ordered and authorized flexible goals and timetables to address the underutilization of minorities by federal contractors. In 1971, women were included in the order.
  • In 1973, President Richard M. Nixon signed the Rehabilitation Act of 1973. It required agencies to submit an affirmative action plan to the EEOC that detailed the hiring, placement, and advancement of individuals with disabilities.
  • In 1983, President Ronald Reagan issued Executive Order 12432. It required every federal agency with substantial procurement or grant-making authority to develop a Minority Business Enterprise development plan.
  • In 1990, President George H.W. Bush signed the Americans with Disabilities Act. A year later, he signed the Civil Rights Act of 1991.
  • In 1998, the U. S. House of Representatives and the U. S. Senate stopped attempts to eliminate specific affirmative action programs. Both houses of Congress prohibited the abolishment of the Disadvantaged Business Enterprise program. In addition, the House refused to allow the elimination of affirmative action in admissions in higher education programs funded through the Higher Education Act.
  • In 2022, the Wall Street Journal reported that dozens of major U.S. companies including Apple, Alphabet, American Airlines, and General Motors were urging the Supreme Court to uphold the continued use affirmative action policies in college admissions. They asserted that greater diversity on college campuses contributed to ongoing innovation in commerce and successful business endeavors.

Advantages and Disadvantages of Affirmative Action

The implementation and continued use of affirmative action policies have drawn strong support as well as staunch criticism.

Advantages

An obvious benefit of affirmative action is the opportunities they provide to people who otherwise might not have them. These opportunities include access to education for students who may be disadvantaged and career advancement for employees who may be blocked from rising up the corporate ladder.

Proponents of affirmative action say that the effort must continue because of the low percentages of diversity in positions of authority and in the media, as well as limited acknowledgment of the achievements of marginalized or unrepresented groups.

Disadvantages

Opponents of affirmative action frequently call these efforts a collective failure. They cite as evidence the tiny changes to the status quo after decades of effort. The cost of such programs, coupled with a belief that affirmative action forces the populace to make unwarranted accommodations, drives a significant part of the opposition.

Certain individuals believe that there is little to no bias in society. They argue that affirmative action results in reverse discrimination, which can often lead to qualified candidates being overlooked in academics and the workplace in favor of less qualified candidates who meet policy standards.

Affirmative Action Statistics

Affirmative action is a very controversial topic and often leads to heated debates between those who support it and people who feel it doesn’t benefit society. Is there a way to quantify how people feel and how it’s working?

According to a Gallup poll, more than half of Americans (61%) believe in affirmative action policies. This level of support has increased since the last poll, where only 47% to 50% of individuals thought affirmative action was necessary. This increase in support is especially important, given the active issues surrounding race and identity in the U.S. and elsewhere.

Many Americans feel positive about diversity. They are comfortable with the makeup of their communities, saying diversity positively impacts society as a whole.

There is some divide when it comes to identifying race and ethnicity for purposes of hiring. In fact, about 74% of individuals feel that a candidate’s racial or ethnic background shouldn’t be considered when hiring or promoting them. These activities should only be based on someone’s merit and qualifications.

What Is the Goal of Affirmative Action?

The goal of affirmative action is to increase opportunities for individuals and groups that historically have been underrepresented or, in some cases, barred, from certain areas of academia, the government, and the private sector workforce. Affirmative action policies provide funding in the form of grants and scholarships to these communities.

Policies were adopted to help those from different racial backgrounds and national origins. They have expanded to address gender, sexual orientation, and various disabilities.

What Has Been the Result of Affirmative Action Policies in Higher Education?

Affirmative action policies have helped diversify higher education. When first adopted, the student body at most higher education institutions was primarily white. That has changed, leading to more diverse and vibrant student populations across the country.

How Did Regents v. Bakke Change Affirmative Action Policies?

The Regents v. Bakke case changed affirmative action policies by striking down the use of racial quotas. The case was presented by Allan Bakke, who claimed he was denied admission to medical school at the University of California on two separate occasions because he was white. The Supreme Court ruled in Bakke’s favor, saying racial quotas were unconstitutional.

Which U.S. President First Defined and Used the Term Affirmative Action?

That was President John F. Kennedy. He did so in 1961, telling federal contractors to take “affirmative action to ensure that applicants are treated equally without regard to race, color, religion, sex, or national origin.”

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Adjustable Life Insurance: Definition, Pros & Cons, Vs. Universal

Written by admin. Posted in A, Financial Terms Dictionary

Adjustable Life Insurance: Definition, Pros & Cons, Vs. Universal

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What Is Adjustable Life Insurance?

Adjustable life insurance is a hybrid of term life and whole life insurance that allows policyholders the option to adjust policy features, including the period of protection, face amount, premiums, and length of the premium payment period.

Adjustable life policies also incorporate an interest-bearing savings component, known as a “cash value” account.

Key Takeaways

  • Adjustable life insurance allows policyholders to make changes to their cash value, premiums, and death benefits.
  • It gives policyholders the ability to reformulate their insurance plans based on shifting life events.
  • There is a savings component, known as a “cash value” account, with adjustable life insurance.
  • When the cash value in an adjustable life insurance policy grows, the policyholder may borrow from it or use it to pay their premiums.
  • The cash value earns interest often at a guaranteed rate, but the interest gains are usually modest.

Understanding Adjustable Life Insurance

Adjustable life insurance differs from other life insurance products in that there is no requirement to cancel or purchase additional policies as the insured’s circumstances change. It is attractive to those who want the protection and cash value benefits of permanent life insurance yet need or want some flexibility with policy features.

Using the ability to modify premium payments and face amounts, policyholders may customize their coverage as their lives change. For example, a policyholder may want to increase the face amount upon getting married and having children. An unemployed person may want to reduce premiums to accommodate a restricted budget.

As with other permanent life insurance, adjustable life insurance has a savings component that earns cash value interest, usually at a guaranteed rate. Policyholders are permitted to make changes to critical features of their policy within limits. They may increase or decrease the premium, increase or decrease the face amount, extend or shorten the guaranteed protection period, and extend or shorten the premium payment period.

Adjustments to the policy will alter the guaranteed period of the interest rate, and changes in the length of the guarantee will change the cash value schedule. Decreasing the face amount is done upon request or in writing. However, increasing the face amount may require additional underwriting, with substantial increases requiring full medical underwriting.

Increasing the amount of the death benefit could require additional underwriting, and substantial increases may call for full medical underwriting, which would mean an updated medical exam.

Factors That Can Be Adjusted

Three factors can be changed in an adjustable life insurance policy. These are the premium, cash value, and death benefit. All three elements can be adjusted because this policy is a permanent life insurance policy and does not expire, like a term life policy.

Premiums can be changed by frequency or amount of payments, as long as you pay above the minimum cost. The policy’s cash value can be increased by upping your premium payments. You can decrease your cash amount if you withdraw funds or use the cash in the policy to pay the premiums.

Finally, you can adjust your death benefit by decreasing or adding to the amount. If you decide to add a significant amount to the death benefit due to a life event like the birth of a child, your premiums may go up based on the new benefit amount. In some cases, your policy will have to undergo additional underwriting.

Advantages and Disadvantages of Adjustable Life Insurance

Adjustable life insurance gives policyholders more flexibility than term life insurance, but it is more expensive than a simple 20- or 30-year term policy. If you plan on using adjustable life insurance as an investment vehicle, you may be better off with a tool that earns more interest. Adjustable life insurance only provides modest amounts of interest growth.

Pros

  • Cash value grows over time

  • You can decrease or increase your death benefit

  • The most flexible of all types of life insurance

Cons

  • Is expensive to purchase

  • Interest earnings may be modest

  • If you largely increase your death benefit, your premiums may rise

Guidelines for Life Insurance Policies and Riders

Internal Revenue Code (IRC) Section 7702 defines the characteristics of and guidelines for life insurance policies. Subsection C of this section provides guidelines for premium payments. The policyholder may not adjust the premiums in a manner that violates these guidelines. Increasing premiums may also increase the face amount to the point that it requires evidence of insurability.

However, many life insurers set parameters to prevent violations. Adjustable life insurance policies typically have optional riders. Familiar ones include the waiver of premium and accidental death and dismemberment riders.

What Is the Difference Between Adjustable Life Insurance and Universal Life Insurance?

Adjustable life insurance is another name for universal life insurance. There is no difference between them, because they are the same type of policy.

What Does an Adjustable Life Policy Allow a Policy Owner to Do?

An adjustable life policy allows a policy owner to make changes to the death benefit amount, adjust their payment on their premiums, and add money or remove money from their cash value.

What Is Credit Life Insurance?

Credit life insurance may be offered when you take out a large loan, such as a mortgage. This type of life insurance is used to pay the loan off if the borrower dies before the loan is repaid. For example, if you co-sign a 30-year mortgage with your spouse, and your spouse dies 10 years into the mortgage, the mortgage would be paid in full by the credit life insurance policy. Credit life insurance can protect co-signers, whose partner or spouse might not be able to afford to keep up with payments on their own.

The Bottom Line

Adjustable life policies provide the flexibility that most traditional policies do not. However, the frequency of allowable adjustments is restricted within set time frames. Requests must be made within an allotted period and meet the guidelines set by the insurer.

The variability in adjustments can create a policy that mirrors either term life insurance or whole life insurance. Effectively, adjustable life insurance policies allow policyholders to customize their life insurance to meet current or anticipated needs.

As with any kind of permanent policy, it’s critical to research every firm that’s being considered to ensure that they’re among the best life insurance companies currently operating.

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