The book says whole life insurance lasts for the whole life, so I assume the member pays an annual premium until the day they die. (Section 4.1.2)
But whole life insurance obviously has an age of maturity or age of endowment? I assume for some people this happens after the age of death, and for some, this happens before the age of death (Section 4.1.4.3)
This is confusing? After they reach age of endowment, and assuming they havent died, do they keep on paying the premium? What if they died before the age of premium? What do they receive?
I read through 2015 version of Schweser which did not have that section (being new and all); It is on my to do lis to glance through the curriculum for that portion. However I am insurance license and have my CLU Designation and can tell you that whole life insurance can be structured to have premiums for life (till death), or other fixed number of years such as paid up 20 (paid in 20 years). I am not sure how much details CFAI goes into but would be wise to have a look at it given new topic may show up… I know my insurance so not too worried about it but will glance over…
A policy that “endows” (under the current US tax regime) will have a Cash Value (CV) that is equal to the Death benefit (DB). It will then either pay the policy owner the CV or hold it in trust for when the insured dies. There are no more premia required. The traditional policies were designed to do this at Age 100.
Paid-up policies will not have CV = DB, but the insurance company will allow the premium payor to stop paying premia due to contractual guarantees that the policy will continue to last for the rest of the insured’s life. It may or may not endow at Age 100 or Age 120, but will pay the full DB. Some paid-up policies are “reduced paid up”, where the initial DB is reduced to a smaller DB that is then guaranteed to last for the rest of the life. In either case, being “paid-up” is not the same as endowing. And in both cases, paid-up and endowed insurance no longer require premia.
Remember that insurance is a protection against mortality risk, so as long as the policy is in-force (usually, due to paying regular premia), the beneficiary receives the full DB no matter when the insured dies.
Endowment insurance to age xx: you pay premiums to the earliest of the date of death or surviving to age xx. If you die before age xx, the face amount plus any accumulated dividends are paid to the beneficiary; if you survive to age xx, the face amount plus any accumulated policy dividends are paid to the insured as a maturity benefit. The payout distinction is very important from a tax perspective.
Most whole life plans today have premiums payable for life. Some older plans had limited pay periods, but tax law changes over they years made limited pay unpopular
.The typical assumption for whole life insurance was to treat it as endowing at age 100, i.e. you make it to 100, the policy pays the face amount out. Back in the day, mortality tables topped out at the age of 99, so this basically assumed no one survived to age 100. Nowadays, some lifecos have bumped up their mortality tables to something like 104 or issue what’s called a maturity extension rider.
Decades ago, lifecos issued endowment policies to age 60, 65, 70. If you made it to the endowment age alive, you got the face amount of the policy plus any accumulated policy dividends as a maturity benefit. Naturally, all premium payments ceased on the maturity date: the whole contract ceases on the maturity date.