Special Use Policies (pretty cool)
Credit Life Insurance
MR. WATSON: I want to talk about credit life . Have you ever financed a car and the bank asks you, they say, "Do you want to pay off that loan should you die? Do you want insurance to pay off that loan?" Y'all ever heard of that?
ALL: Yes.
MR. WATSON: It's called credit life. The beneficiary is usually the lender. What kind of insurance do you think that they would use?
ALL: Decreasing term.
MR. WATSON: Credit life is sold by banks to cover loans. Now, tell me if this is true. If I buy a car, finance a car, and I add the credit life on from a bank, when I die, they'll pay off the loan but my wife will receive the balance of the insurance policy. Is that true or false?
ALL: False.
MR. WATSON: That's false. Why? There's no balance. It just pays off the loan. Does that make sense?
ALL: Yes.
Juvenile Insurance
MR. WATSON: We are going to talk about a juvenile policy now.
MR. WATSON: Minimum age to buy insurance is 15. But you can buy a policy on someone at any age. Under age 15 does not require a signature.
MR. WATSON: Here's my son, Lebanon, he's 10 years old. I love you, Lebanon.
Lebanon: Love you too, daddy!
MR. WATSON: He's ten years old. I'm going to try to give him a gift that will last a lifetime. Instead of a new Ferrari, I buy a life insurance policy on his life. A Juvenile policy, because he's too young to buy it himself. I'm the owner. I'm the premium payor of the life insurance policy. If he dies, I receive the money to bury him properly. My goal is, if he lives, maybe when he graduates college, I will transfer the policy to him, (assign the policy), and he will be the owner. He will still be paying for the rest of his life on a policy based upon premium rates of a child 10 years old. Does that make sense?
ALL: Yes.
MR. WATSON: Here's the question. What if I were to die? Who is going to pay the premiums on my son's policy?
WOMAN: It would have a waiver.
MR. WATSON: Kind of, maybe.
MAN: Young Lebanon would pay.
MR. WATSON: Lebanon? Look at him. He's 10. He was born with that beard!
MAN: What kind of policy is it?
MR. WATSON: Whole life policy.
MR. WATSON: Guys, just say nobody will pay the premiums, because there is nobody around to pay it.
WOMAN: Policy just cancels out?
MR. WATSON: Correct, the policy will lapse. Guys, if you don't pay your light bill, what's going to happen? It gets dark.
MAN: Seems like there would be a waiver.
MR. WATSON: Yep, if not, it's going to lapse. Y'all agree?
ALL: Yes.
MR. WATSON: We can add what's called a payor rider . P-a-y-o-r. A Payor rider. Here's how the payor rider reads. It reads: if the premium payor, Papa, should die or become disabled, the insurance company will pay the premiums on his policy until the earliest of these two things:
- either the premium is paid up or
- he reaches age 25, whichever happens first.
Once he turns 25, he will pick up the premiums and start paying them. Does that make sense?
ALL: Yes.
MAN: If you bought this rider, does it cost you more money?
MR. WATSON: Anytime you add a rider, 9 times out of 10, it will cost you more money because it is putting the insurance company at risk.
MR. WATSON: Let me ask you guys a question. You've learned by now that I'm always setting you up for something that you need to learn? So if you understood the review -
- premiums do not go up with whole life,
- death benefits do not go up with whole life,
- nothing changes with whole life except the cash value grows -
this question should makes sense... be careful, it's a trick.
ALL: Okay.
MR. WATSON: How old is my son?
ALL: 10.
MR. WATSON: My boy is 10. I bought a 10-pay life whole life policy on him. I died when he was 15. I had the payor provision on this policy. When is he going to take over the premium payments?
ALL: 25.
MR. WATSON: No, he won't take over the premium payments. Because the policy will be paid up when he is what age?
ALL: 20.
MR. WATSON: 20. If I died when he's 15, the insurance company will start paying the premiums until at the earliest the policy is paid up or 25, whichever occurs first. And in this case, the policy would have been paid up at what age? Age 20.
MR. WATSON: And would have required no more premium payments.
MAN: Who is the policy owner?
MR. WATSON: I am. The adult.
MAN: But you died.
MR. WATSON: Oh, you mean if I died, who would then be the owner? Then it would be transferred to the estate or whatever, like any other thing I owned. But in this example, the policy is paid up. Y'all agree?
MAN: Is there a legal age for him to become the policy owner?
MR. WATSON: We already said that. What's the age?
ALL: 15.
MAN: So at age 15 he becomes the owner of that insurance policy while the company pays for it?
MR. WATSON: Indeed! What's the minimum age you can own a policy?
ALL: 15.