Life Insurance & Annuities Information

 

Lost Life Policy Locator Service

Life Policy Locator Application

This Illinois Department of Insurance service can assist consumers in locating and identifying individual life insurance policies or annuity contracts of a deceased family member.

 

Consumer Resources


Annuities and Senior Citizens

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Note: This information was developed to provide consumers with general information and guidance about insurance coverages and laws. It is not intended to provide a formal, definitive description or interpretation of Department policy. For specific Department policy on any issue, regulated entities (insurance industry) and interested parties should contact the Department.

The Department receives numerous complaints regarding annuity policies, particularly policies sold to senior citizens. Annuity sales to senior citizens have significantly increased in recent years. However, as annuity sales have risen, so has the sense of confusion among consumers. It is extremely important, when considering whether or not to buy an annuity, to take the necessary precautions in order to make an informed decision that is best for you.

What is an Annuity?

An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are most often bought for future retirement income, and can pay an income that can be guaranteed to last as long as you live.

What are the Different Kinds of Annuities?
There are several types of annuities, all of which carry varying levels of risk and guarantees. To get the most out of an annuity, it is imperative that you know the different options available to you, as well as the benefits each type provides.

  • Single Premium Annuity: An annuity in which you pay the insurance company only one premium payment.
  • Multiple Premium Annuity: An annuity in which you pay the insurance company multiple premium payments.
  • Immediate Annuity: An annuity in which you begin to receive income payments no later than one year after you pay the premium.
  • Deferred Annuity: An annuity in which you begin to receive income payments many years later.
  • Fixed Annuity: An annuity in which your money, less any applicable charges, earns interest at rates set by the insurance company or in a way specified in the annuity contract.
  • Variable Annuity: An annuity in which the insurance company invests your money, less any applicable charges, into a separate account based upon the risk you want to take. The money can be invested in stocks, bonds or other investments. If the fund does not do well, you may lose some or all of your investment.
  • Equity-Indexed Annuity: A variation of a fixed annuity in which the interest rate is based on an outside index, such as a stock market index. The annuity pays a base return, but it may be higher if the index increases.

Is an Annuity Right for You?

To find out if an annuity is right for you, think about what your financial goals are for the future. Analyze the amount of money you are willing to invest in an annuity, as well as how much of a monetary risk you are willing to take. You shouldn't buy an annuity to reach short-term financial goals. When determining whether an annuity would benefit you, ask yourself the following questions:

  • How much retirement income will I need in addition to what I will get from Social Security and my pension plan?
  • Will I need supplementary income for others in addition to myself?
  • How long do I plan on leaving money in the annuity?
  • When do I plan on needing income payments?
  • Will the annuity allow me to gain access to the money when I need it?
  • Do I want a fixed annuity with a guaranteed interest rate and little or no risk of losing the principal?
  • Do I want a variable annuity with the potential for higher earnings that aren't guaranteed and the possibility that I may risk losing principal?
  • Or, am I somewhere in between and willing to take some risks with an equity-indexed annuity?

If you are already retired, an annuity is probably not a good option if you intend to use it to supplement your retirement income because it can take many years for the contract to become profitable. If you do not have any other investments or savings accounts, an annuity is probably not a good place to start. It is generally a good idea for investors to have at least some investments that can be quickly converted to cash in case of an emergency or sudden need. You may have to pay a substantial surrender charge – which can be as high as 25 percent – if you withdraw your money within a certain number of years of purchasing an annuity.

Questions You Should Ask your Agent or the Company

General Annuity Questions

  • What is the guaranteed minimum interest rate?
  • What charges, if any, are deducted from my premium & when?
  • What charges, if any, are deducted from my contract value & when?
  • What are the surrender charges or penalties if I want to end my contract early and take out all of my money?
  • How many years will surrender charges apply?
  • Can I get a partial withdrawal without paying charges or losing interest? Does my contract have vesting?
  • Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?
  • What annuity income payment options do I have and when?
  • What is the death benefit?
  • What are the risks that my annuity/earned interest could decline in value?
  • Is interest compounded during the term of the policy?
  • What is the agent's commission on this product?

Additional Questions to Ask for Equity-Indexed Annuities

  • What is the participation rate?
  • For how long is the participation rate guaranteed?
  • Is there a minimum participation rate?
  • Does my contract have a cap?
  • Is averaging used? How does it work?
  • Is there a margin, spread, or administrative fee? Is that in addition to or instead of a participation rate?
  • Which indexing method is used in my contract?
  • What is the minimum interest the contract can earn?
  • What is the maximum (cap) interest the contract can earn?

Understand the Product You are Buying

  • Always review the contract before you decide to buy an annuity. Terms and conditions of each annuity contract will vary.
  • You should understand the long-term nature of your purchase. Be sure you plan to keep an annuity long enough so the charges don't take too much of the money you invest.
  • Compare information for similar contracts from several companies. Comparing products may help you make a better decision.
  • Ask your agent and/or the company for an explanation of anything you don't understand. Do this before any free look period ends. The free look period gives you a set number of days to review the policy after you buy it. If you are not satisfied for any reason, you may return the contract and get your money back.
  • Verify that the company and agent are licensed. In order to sell insurance in your state, companies and agents must be licensed. To confirm the credibility of a company or agent, contact the Department of Insurance. We can also provide you with the company's AM Best rating.

Suitability

The Department routinely receives consumer complaints questioning the suitability of an annuity sale to a senior citizen. Many times these complaints are from the children of the senior citizen, but sometimes they originate directly from the senior citizen who purchased the policy.

Prior to January 1, 2008, Illinois did not have suitability laws or regulations. Effective January 1, 2008, suitability regulations were implemented for these products. Those regulations, 50 IAC 909 and 50 IAC 3120, require the insurance producer and insurance company to comply with the National Association of Securities Dealers Conduct Rules. Those rules require an insurance producer or insurance company, when selling an annuity insurance policy, to make reasonable efforts to obtain information concerning:

  • the customer's financial status;
  • the customer's tax status;
  • the customer's investment objectives; and
  • such other information used or considered to be reasonable by the insurance producer or insurance company in making recommendations to the customer.

 

The regulations do not set specific suitability criteria which must be met prior to selling a variable life policy or an annuity insurance policy to an individual. For example, the regulations do not prohibit the selling of a product to an individual who has attained a certain age or whose assets do not meet a certain threshold.

If You Have Questions or Wish to File a Complaint

Write or call us at

Complaints
Illinois Department of Insurance
320 West Washington Street
Springfield, Illinois 62767-0001
(866) 445-5364

Complaints must be submitted in writing.

Buying Life Insurance

Printable PDF version

Note: This information was developed to provide consumers with general information and guidance about insurance coverages and laws. It is not intended to provide a formal, definitive description or interpretation of Department policy. For specific Department policy on any issue, regulated entities (insurance industry) and interested parties should contact the Department.

The goal of life insurance is to provide a measure of financial security for your family after you die. A life insurance policy will help them meet the financial needs that your income would have normally covered. Life insurance can be purchased on an individual or group basis. Most group life insurance is purchased through an employer group and is usually term coverage that is renewed yearly. This Fact Sheet discusses the types of life insurance that are generally purchased by an individual.

Assessing Your Needs

Before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments, or college?

You should reevaluate your life insurance policies annually or whenever you experience a major life event such as marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business. Following are examples of factors you may want to consider at various stages of your life:

Single person with no dependents: Funeral expenses; medical bills; debts, such as credit cards or student loans; elderly parents who may be dependent upon you for support.

Note: Buying life insurance at a young age is cheaper. As you get older or possibly incur a serious health condition, it will be more expensive or difficult to buy a policy.

Single person with dependents: Funeral expenses; medical bills; outstanding debts; caretaker expenses for your surviving dependents; education costs for surviving children.

Couple with no children: Funeral expenses; medical bills; outstanding debts, especially mortgage or car payments.

Couple with children: Funeral expenses; medical bills; outstanding debts, especially mortgage payments; child-rearing expenses; education costs.

Note: Even if one partner does not work outside the home, you may want to consider life insurance to help pay for childcare or other services performed by that partner.

Older couple: Funeral expenses; medical bills; impact on spendable income; outstanding debts, such as a new home, second vacation home, or recreational vehicle; impact on assets you may want to leave for children or grandchildren.

Mandatory Provisions

All types of individual life insurance policies sold in Illinois must contain the following provisions:

  • Incontestability Clause—An insurance company cannot void an individual life insurance policy after it has been in force for two years, except for nonpayment of premium. If a claim is filed within two years of the effective date, the company will review the application for insurance to make sure it was completed accurately. If you omitted information that would have caused the company to not issue the policy, the company may void the contract, return the premium and deny the claim. For that reason, it is extremely important that you accurately complete the application.
  • Grace period—A life insurance company must give you a 30 day grace period for payment of premium.
  • Free Look Period—Once a life insurance policy is delivered to you, you have a minimum of ten days to review it and decide if you want to keep it. If not, you can return the policy for a full refund.
  • Allowable general exclusions—A life insurance company has the right to deny benefits if:
    • The insured commits suicide within the first two years of the policy.
    • The insured dies as a result of war or act of war while serving in the naval or military service or while serving in any civilian noncombatant unit serving with such forces.
    • The insured's death is related to aviation, except when riding as a fare-paying passenger of a commercial airline flying on regularly scheduled routes between definitely established airports.

Types of Life Insurance Policies

There are two basic types of life insurance policies: term life insurance and whole life insurance
(sometimes called permanent life insurance).

Term Life Insurance

Term life insurance is coverage you buy for a specific time period, such as 1, 5, 10, or 20 years, or up to age 60 - 65. Term life insurance has five key features:

  1. It pays benefits only if you die during the time period (term) covered by the policy.
  2. It is generally cheaper than whole life insurance.
  3. It may be more practical for people who need large amounts of coverage for a specific period.
  4. It ends if you stop paying premiums or at the end of the term. However, some policies have a "renewable" provision that allows you to continue coverage when the term expires.
  5. It may have a "convertible" provision which allows you to exchange the term policy for a whole life policy without providing evidence of good health.

Variations of Term Life Policies

The most common types of term life insurance are:

  • Level Term—The death benefit remains the same over the term of the policy. Premiums remain the same for the term of coverage.
  • Decreasing Term—The death benefit decreases each year while the premium remains level. This type of coverage is often purchased in conjunction with a debt, such as a mortgage, which decreases over time.
  • Increasing Term—The death benefit starts at one amount and increases at stated intervals by some specified amount or percentage. The premium also increases as coverage increases.

Whole Life Insurance

Whole life insurance is coverage that is meant to be in effect for life. Traditional whole life insurance has four key features:

  1. It provides lifetime coverage.
  2. It allows you to pay premiums at a fixed rate for as long as the policy is in force. (See the section on "Variations of Whole Life Policies" for exceptions to this rule.)
  3. It accumulates cash value over time.
  4. It may pay you dividends if your whole life policy is a "participating policy."

Cash Value

A small portion of the premiums you pay for a whole life insurance policy accumulates as cash value. The cash value is the amount of money that will be refunded to you if you cancel the coverage and surrender the policy to the insurance company. The rest of your premium payments go toward the cost of insurance and the administrative fees associated with maintaining the policy. When a death benefit is paid, the cash value is automatically included in the face amount of the policy and is not paid in addition to it.

Whole life insurance policies contain a table showing the policy's cash value after each policy year. You can use cash value in several ways:

  • You can let it accumulate within the policy.
  • You can borrow against it up to the net cash value of the policy. Note: if you die before the loan is repaid, the face amount of the policy will be reduced by the amount of the outstanding loan.
  • You can use it to pay premiums.
  • You can use it to buy a "paid-up" policy with a smaller death benefit in the event you wish to stop paying premiums for the whole life policy.
  • If your policy lapses for nonpayment of premium, you can use the cash value to continue coverage as extended term insurance until the cash value is depleted.
  • You can surrender (cancel) the policy and receive payment for the cash value.

Dividends

Dividends are profits the insurance company shares with its policyholders. Dividend payments are not guaranteed and they may change annually. Dividends are not included in the face amount of the policy. When a death benefit is paid, the dividends or additional paid up insurance purchased with dividends will be added to the face amount of the policy.

You can use dividends in several ways:

  • You can leave them with the company to accumulate interest.
  • You can use them to offset the premium due on the policy.
  • You can use them to buy additional insurance.
  • You can ask the company to send them to you.

Variations of Whole Life Policies

There are several variations of traditional whole life insurance. Among the more common types are:

  • Modified Premium Policy—The premium for this type of policy starts out lower and then increases at a specified time. This feature allows you to purchase a larger death benefit and pay a lower premium initially and then pay a higher premium at a certain time (usually 5, 10, 15, or 20 years later) when you may be better able to afford it. The face value of the policy remains the same throughout the life of the policy.
  • Modified Coverage Policy—The face value of this type of policy decreases by specified amounts either when you reach a certain age or at the end of a specified time period. For example, the policy may start out with a $500,000 benefit which decreases by $100,000 every five years until it becomes a $100,000 policy. This type of policy is designed for a person who needs more coverage early in life when debts are higher and children are younger, but whose need for coverage decreases over the years. The premium remains the same for the life of the policy.
  • Limited Payment Whole Life Policy—This type of policy is "paid-up" after a specified number of years or at a specified age such as 60 or 65. Once the policy is "paid-up," the coverage remains in force, but no further premiums are due.
  • Endowment Life Insurance Policy—This type of policy has a maturity date on which the benefit will be paid. If the insured is still living, the benefit or endowment is paid to the policyowner. If the insured dies before the maturity date, the benefit is paid to the beneficiary.
  • Joint Whole Life—This type of policy is bought by two or more people. The benefit is paid when the first insured dies.
  • Last Survivor Life—This type of policy is bought by two or more people. The benefit is paid after the last insured person dies.
  • Family Policy—This type of policy can be purchased for a spouse and children in addition to the whole life policy purchased for the insured.
  • Monthly Debit Ordinary—This type of policy is marketed by an agent at your home. The agent collects the monthly premium at your home.
  • Single Premium—This type of policy requires you to pay the total premium in one lump sum when you buy the insurance. The protection is provided for your lifetime.

Whole Life Policies with Investment Features

Since the 1970s and 1980s, newer variations of whole life policies have emerged. Among the types of whole life policies with investment features are:

  • Universal Life Insurance—This type of life insurance is characterized by flexible premiums, face amounts and death benefits. This product is similar to term life insurance except it has a cash accumulation feature. Money is subtracted monthly from the cash portion of the policy to pay the cost of the insurance which increases annually. Any premium payments that exceed the cost of insurance are placed in the cash portion of the policy to earn interest. Other key features of a universal life insurance policy are:
    1. Guarantees a minimum interest rate on the policy's accumulated value each year. A higher interest rate is paid when interest rates are high.
    2. Allows flexibility with regard to premium payments. You may elect to pay additional premium, pay a reduced premium or skip a premium completely if there is sufficient cash value in the policy to cover the insurance and administration costs. Note: Targeted premiums may increase if they are not adequate to keep the insurance in force as you get older.
    3. Allows for policy loans and cash withdrawals to the extent cash value is available.
    4. Allows flexibility with regard to the amount of the death benefit. This option may be useful if you want to change the face value to reflect your insurance needs.
    5. Requires your active monitoring and participation. The company provides you annual statements showing policy activity for this purpose. You are responsible for reviewing the statements and making required changes such as paying a premium if the cash value is decreasing.
  • Adjustable Life Insurance Policy—This type of policy allows you to increase or decrease the coverage by changing the amount of premium payments or the period of coverage.
  • Indeterminate Premium Life—This type of policy is also known as a nonguaranteed premium life insurance policy or avariable-premium life insurance policy. After an initial guaranteed period, the company can adjust premiums, if warranted, for the entire class of policies. The policy usually has a maximum guaranteed premium rate which the insurer cannot exceed. This feature allows you to purchase a policy at a lower price initially.
  • Interest-Sensitive Whole Life Insurance—This type of policy is also called current assumption whole life insurance. This product varies the premium rates like indeterminate premium life insurance, but also provides that cash value of the policy can be greater than that guaranteed. The additional cash value can be used to lower the premium or increase the cash value of the policy. If the policy has unfavorable experience, you can lower the face amount of the insurance or pay a higher premium to keep the death benefit level. Once again, there is a maximum guaranteed premium rate which the insurer cannot exceed.
  • Variable Life Insurance—This type of policy allows the death benefit and the cash value to fluctuate according to the investment performance of a special investment account, called a separate account. Since you assume the risk for the investment under a variable life insurance policy, it is considered a security by the U. S. Securities and Exchange Commission (SEC) and is subject to their regulation as well as that of the state Department of Insurance. The product must be registered with the SEC and sales agents must be licensed in accordance both with SEC laws and state insurance laws. Other features include:
    1. Allows you to control the investment of the policy's cash value.
    2. Benefits and cash value of the variable account fluctuate according to the experience of the investment account you choose. You assume the risk of good or poor investment performance. The variable account contains no guarantees of investment earnings or cash values. Be sure to request a prospectus that contains extensive disclosure information about the company's investments and investment policies.
    3. Requires your active monitoring and participation. It is useful for people who are comfortable making investment decisions and who want to choose among investment options available through their companies and policies.
    4. Premium can be either fixed or flexible, depending on the policy you choose. Scheduled Premium Variable Life has premium payments that are fixed for duration and amount. Flexible Premium Variable Life has premium payments that allow changes in the duration and amount paid.
  • Variable Universal Life Insurance—Combines the flexibility of universal life insurance with the investment flexibility and risk of variable life insurance. Allows you to choose the premium amount and face amount of the policy and a separate investment account for the cash value. Like a variable life insurance policy, there is no guarantee of investment earnings or cash values. These policies must also be registered and comply with SEC regulations.

For More Information

Call our Consumer Services Section at (312) 814-2420 or our Consumer Assistance Hotline toll free at (866) 445-5364 or visit us on our website at insurance.illinois.gov

Buyer's Guide To Equity-Indexed Annuities

Prepared by the National Association of Insurance Commissioners

The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers.

This guide does not endorse any company or policy.

Reprinted by the Illinois Department of Insurance

This Guide has been written to help you understand annuities in general and equity-indexed annuities in particular. There are different kinds of annuities. It is important for you to understand the differences among various annuities so you can choose the kind that best fits your needs. At the end of this Guide are questions you should ask your agent or the company. Make sure you are satisfied with the answers before you make a purchase.

What is an Annuity?

An annuity is a series of income payments made at regular intervals by an insurance company in return for a premium or premiums you have paid. The most frequent use of income payments from an annuity is for retirement.

An annuity is neither a life insurance nor a health insurance policy. It is not a savings account or a savings certificate. You should not buy an annuity for short-term purposes.

What Are the Different Kinds of Annuity Contracts?

Individual or Group

An individual contract covers only one or two persons. A group contract covers a specific group of people, for example, the employees of an employer.

Immediate or Deferred

An immediate annuity begins to make income payments soon after you pay the premium. The income payments from a deferred annuity start later, often many years later. Deferred annuities have an "accumulation" period, which is the time between when you start paying premiums and when income payments start. The time after income payments start is called the "payout" period.

Single Premium or Installment Premium

You pay the insurance company only one premium for a single premium annuity. You pay for an installment premium annuity through a series of payments. There are two kinds of installment premium annuities. One kind is a flexible premium contract. You can pay as much as you want, whenever you want, within set limits. The other kind is a scheduled premium contract, which specifies how much your premiums will be and how often you will pay them.

Fixed or Variable

During the accumulation period of a fixed deferred annuity, premiums (less any applicable charges) earn interest at rates set by the company or in a way spelled out in the annuity contract. The company guarantees that it will pay no less than a minimum rate of interest. During the payout phase, the amount of each income payment you receive is generally set when the payments start and does not change.

During the accumulation period of a variable annuity, premiums (less any applicable charges) are put into a separate account of the insurance company. You decide how those premiums will be invested, from stock or bond mutual fund choices. The value of the separate account, and therefore, the value of your variable annuity, varies with the investment experience of the funds you choose. There is no guarantee that you will receive all of your premiums back. There is also no guarantee that you will earn any return on your annuity. During the payout period of a variable annuity, the amount of each income payment you receive may be fixed (predetermined) or variable (changing with the value of the investments in the separate account).

What Are Equity-indexed Annuities?

An equity-indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity reference or an equity index. The value of the index might be tied to a stock or other equity index. One of the most commonly used indices is Standard & Poor's 500 Composite Stock Price Index (the S&P 500), which is an equity index. The value of any index varies from day to day and is not predictable.

When you buy an equity-indexed annuity you own an insurance contract. You are not buying shares of any stock of index.

While immediate equity-indexed annuities may be available, this Buyer's Guide will focus on deferred equity-indexed annuities.

How Are They Different from Other Fixed Annuities?

An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity's value. Some fixed annuities only credit interest calculated at a rate set in the contract. Other fixed annuities also credit interest at rates set from time to time by the insurance company. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.

Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum. For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The guaranteed value is the minimum amount available during a term for withdrawals, as well as for some annuitizations (see "Annuity Income Payments") and death benefits. The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.

What Are Some of the Contract Features?

Two features that have the greatest effect on the amount of additional interest that may be credited to an equity-indexed annuity are the indexing method and the participation rate. It is important to understand the features and how they work together. The following describes some other equity-indexed annuity features that affect the index-linked formula.

Since new equity indexed annuity products are being developed, the contract you are interested in may contain a feature that is not discussed in this Buyer's Guide. If this is the case, ask your agent for an explanation that you understand.

Indexing Method

The indexing method means the approach used to measure the amount of change, if any, in the index. Some of the most common indexing methods, which are explained more fully later on, include annual reset (ratcheting), high-water mark and point-to-point.

Term

The index term is the period over which index-linked interest is calculated. In most product designs, interest is credited to your annuity at the end of a term. Terms are generally from one to ten years, with six or seven years being most common. Some annuities offer single terms while others offer multiple, consecutive terms. If your annuity has multiple terms, there will usually be a window at the end of each term, typically 30 days, during which you may withdraw your money without penalty. For installment premium annuities, the payment of each premium may begin a new term for that premium.

Participation Rate

The participation rate decides how much of the increase in the index will be used to calculate index-linked interest. For example, if the calculated change in the index is 9% and the participation rate is 70%, the index-linked interest rate for your annuity will be 6.3% (9% x 70% = 6.3%). A company may set a different participation rate for newly issued annuities as often as each day. Therefore, the initial participation rate in your annuity will depend on when it is issued by the company. The company usually guarantees the participation rate for a specific period (from one year to the entire term). When that period is over, the company sets a new participation rate for the next period. Some annuities guarantee that the participation rate will never be set lower than a specified minimum or higher than a specified maximum.

Cap Rate or Cap

Some annuities may put an upper limit, or cap, on the index-linked interest rate. This is the maximum rate of interest the annuity will earn. In the example given above, if the contract has a 6% cap rate, 6%, and not 6.3%, would be credited. Not all annuities have a cap rate.

Floor on Equity Index-Linked Interest

The floor is the minimum index-linked interest rate you will earn. The most common floor is 0%. A 0% floor assures that even if the index decreases in value, the index-linked interest that you earn will be zero and not negative. As in the case of a cap, not all annuities have a stated floor on index-linked interest rates. But in all cases, your fixed annuity will have a minimum guaranteed value.

Averaging

In some annuities, the average of an index's value is used rather than the actual value of the index on a specified date. The index averaging may occur at the beginning, the end, or throughout the entire term of the annuity.

Interest Compounding

Some annuities pay simple interest during an index term. That means index-linked interest is added to your original premium amount but does not compound during the term. Others pay compound interest during a term, which means that index-linked interest that has already been credited also earns interest in the future. In either case, however, the interest earned in one term is usually compounded in the next.

Margin/Spread/Administrative Fee

In some annuities, the index-linked interest rate is computed by subtracting a specific percentage from any calculated change in the index. This percentage, sometimes referred to as the "margin," "spread," or "administrative fee," might be instead of, or in addition to, a participation rate. For example, if the calculated change in the index is 10%, your annuity might specify that 2.25% will be subtracted from the rate to determine the interest rate credited. In this example, the rate would be 7.75% (10% - 2.25% = 7.75%). In this example, the company subtracts the percentage only if the change in the index produces a positive interest rate.

Vesting

Some annuities credit none of the index-linked interest or only part of it, if you take out all your money before the end of the term. The percentage that is vested, or credited, generally increases as the term comes closer to its end and is always 100% at the end of the term.

How Do the Common Indexing Methods Differ?

Annual Reset

Index-linked interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to your annuity each year during the term.

High-Water Mark

The index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date you bought the annuity. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to your annuity at the end of the term.

Point-to-Point

The index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to your annuity at the end of the term.

What Are Some of the Features and Trade-offs of Different Indexing Methods?

Generally, annuities offer preset combinations of features. You may have to make trade-offs to get features you want in an annuity. This means the annuity you choose may also have features you don't want.

Features Trade-Offs

Annual Reset

Since the interest earned is "locked in" annually and the index value is "reset" at the end of each year, future decreases in the index will not affect the interest you have already earned. Therefore, your annuity using the annual reset method may credit more interest than annuities using other methods when the index fluctuates up and down often during the term. This design is more likely than others to give you access to index-linked interest before the term ends.

Your annuity's participation rate may change each year and generally will be lower than that of other indexing methods. Also an annual reset design may use a cap or averaging to limit the total amount of interest you might earn each year.

High-Water Mark

Since interest is calculated using the highest value of the index on a contract anniversary during the term, this design may credit higher interest than some other designs if the index reaches a high point early or in the middle of the term, then drops off at the end of the term.

Interest is not credited until the end of the term. In some annuities, if you surrender your annuity before the end of the term, you may not get index-linked interest for that term. In other annuities, you may receive index-linked interest, based on the highest anniversary value to date and the annuity's vesting schedule. Also, contracts with this design may have a lower participation rate than annuities using other designs or may use a cap to limit the total amount of interest you might earn.

Point-to-Point

Since interest cannot be calculated before the end of the term, use of this design may permit a higher participation rate than annuities using other designs.

Since interest is not credited until the end of the term, typically six or seven years, you may not be able to get the index-linked interest until the end of the term.



What Is The Impact Of Some Other Product Features?

Cap on Interest Earned

While a cap limits the amount of interest you might earn each year, annuities with this feature may have other product features you want, such as annual interest crediting or the ability to take partial withdrawals. Also, annuities that have a cap may have a higher participation rate.

Averaging

Averaging at the beginning of a term protects you from buying your annuity at a high point, which would reduce the amount of interest you might earn. Averaging at the end of the term protects you against severe declines in the index and losing index-linked interest as a result. On the other hand, averaging may reduce the amount of index-linked interest you earn when the index rises either near the start or at the end of the term.

Participation Rate

The participation rate may vary greatly from one annuity to another and from time to time within a particular annuity. Therefore, it is important for you to know how your annuity's participation rate works with the indexing method. A high participation rate may be offset by other features, such as simple interest, averaging, or a point-to-point indexing method. On the other hand, an insurance company may offset a lower participation rate by also offering a feature such as an annual reset indexing method.

Interest Compounding

It is important for you to know whether your annuity pays compound or simple interest during a term. While you may earn less from an annuity that pays simple interest, it may have other features you want, such as a higher participation rate.

If there is a product feature that you do not understand, ask your agent. If you still do not understand, send the company a letter telling them that you want a written response so you can study their reply. You will be doing yourself a service!

Can I Take My Money out During the Term?

In most cases, you can take all or part of the money out of a deferred annuity at any time during the term. There may be a cost if you do. Sometimes the cost is a stated dollar amount. In other cases, you give up index-linked interest on the amount withdrawn. Some annuities do not let you make a partial withdrawal until the end of a term.

What Will It Cost Me to Take My Money out Early?

If you withdraw all or part of the value in your annuity before the end of the term, a withdrawal or surrender charge may be applied. A withdrawal charge is usually a percentage of the amount being withdrawn. The percentage may be reduced or eliminated after the annuity has been in force for a certain number of years. Sometimes the charge is a reduction in the interest rate credited to the annuity.

Some annuities credit none of the index-linked interest or only part of it if you take out all your money before the end of the term. The percentage that is vested, or credited, generally increases as the term comes closer to its end and is always 100% at the end of the term.

Is There Always a Charge to Take My Money out Early?

Your annuity may have a limited "free withdrawal" provision. This lets you make one or more withdrawals without charge each year. The size of the free withdrawal is limited to a set percentage of your annuity's guaranteed or accumulated value. If you make a larger withdrawal, you may pay withdrawal charges. You may also lose index-linked interest on amounts you withdraw.

Most annuities waive withdrawal charges on withdrawals made within a set number of days at the end of each term. Some annuities waive withdrawal charges if you are confined to a nursing home or diagnosed with a terminal illness. You may, however, lose index-linked interest on withdrawals.

Are Dividends Included in the Index?

Depending on the index used, stock dividends may or may not be included in the index's value. For example, the S&P 500 is a stock price index and only considers the prices of stocks. It does not recognize any dividends paid on those stocks.

What Are Some Other Equity-indexed Annuity Contract Benefits?

Annuity Income Payments

One of the most important benefits of deferred annuities is the right to use the value built up during the accumulation period to provide income payments during the payout period. While income payments are usually made monthly, you can often choose more or less frequent payments. The size of income payments is based on both the accumulated value in your annuity and the annuity's "benefit rate" that is in effect when income payments begin.

The insurance company uses the benefits rate to compute the amount of income payment it will pay you for each $1,000 of accumulated value in your annuity. The benefit rate usually depends on your age and sex, and the form of annuity payment you have chosen. You can usually choose from many forms of annuity payments. You might choose payments that continue as long as you live, or as long as either you or your spouse live, or payments that continue for a set number of years.

Death Benefit

Annuities provide a variety of death benefits. The most common death benefit is either the guaranteed minimum value or the value determined by the index-linked formula.

Tax Deferral

Federal income tax on interest accumulated in an annuity is deferred until you take the interest out of the annuity. You may be required to pay taxes then on the tax-deferred accumulation. You may have to pay a tax penalty if you withdraw the accumulation before you are age 59½. The advantage of tax deferral is that you will probably be in a lower tax bracket in retirement than while you are employed. Also, during the accumulation period, you will be earning interest on money that you would otherwise have used to pay taxes. Tax-qualified annuities are subject to different rules. In any case, you should consult your own tax advisor.

How Do I Know if an Equity-indexed Annuity is Right for Me?

The questions listed below may help you decide which type of annuity, if any, meets your retirement planning and financial needs. You should consider what your goals are for the money you may put into the annuity. You need to think about how much risk you're willing to take with the money. Ask yourself:

  • How long can I leave my money in the annuity?
  • What do I expect to use the money for in the future?
  • Am I interested in a variable annuity with the potential for higher earnings that are not guaranteed and willing to risk losing the principal?
  • Is a guaranteed interest rate more important to me, with little or no risk of losing the principal?
  • Or, am I somewhere in between these two extremes and willing to take some risks?

How Do I Know Which Equity-indexed Annuity is Best for Me?

As with any other insurance product, you must carefully consider your own personal situation and how you feel about the choices available. No single annuity design may have all the features you want. It is important to understand the features and trade-offs available so you can choose the annuity that is right for you. Keep in mind that it may be misleading to compare one annuity to another unless you compare all the other features of each annuity. You must decide for yourself what combination of features makes the most sense for you. Also, remember that it is not possible to predict the future market behavior of an index.

Questions You Should Ask Your Agent or the Company

  • What is the guaranteed minimum interest rate?
  • What charges, if any, are deducted from my premium?
  • What charges, if any, are deducted from my contract value?
  • How long is the term?
  • What is the participation rate?
  • For how long is the participation rate guaranteed?
  • Is there a minimum participation rate?
  • Does my contract have a cap?
  • Is averaging used? How does it work?
  • Is interest compounded during a term?
  • Is there a margin, spread, or administrative fee? Is that in addition to or instead of a participation rate?
  • Which indexing method is used in my contract?
  • What are the surrender charges or penalties if I want to end my contract early and take out all of my money?
  • Can I get a partial withdrawal without paying charges or losing interest? Does my contract have vesting?
  • Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?
  • What annuity income payment options do I have?
  • What is the death benefit?

Final Points To Consider

It is very important that you choose an annuity that you understand well. The purpose of this Buyer's Guide is to help you to understand your annuity. Your agent or insurance company can guide you. Remember that the quality of service you can expect from the company and the agent should also be important to you when you buy an annuity.

When you receive your contract, read it carefully. It may offer a "free look" period for you to decide if you want to keep the contract. Ask your agent or insurance company for an explanation of anything you don't understand. If you have a specific complaint or can't get the answers you need from your agent or company, contact your state insurance department.


Frequently Asked Questions—Individual Life Insurance

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Note: This information was developed to provide consumers with general information and guidance about insurance coverages and laws. It is not intended to provide a formal, definitive description or interpretation of Department policy. For specific Department policy on any issue, regulated entities (insurance industry) and interested parties should contact the Department.

General Questions

1. How do I know which life insurance companies are reputable?

The Department of Insurance can provide you with the following information to assist you in making a decision about purchasing coverage: whether or not the company is licensed in Illinois; the number of complaints we have received about the company in recent years; and the company's financial rating from A.M. Best Company.

2. Is there a law against the insurance company or agent returning a portion of the premium when a new insurance policy is purchased?

The practice of the agent or company returning part of the commission or providing some other thing of value, such as a return in whole or part of the premium, is known as “rebating.” This practice is prohibited by law in Illinois. No refund, discount, gift or other inducement may be given to the insured to encourage the purchase of insurance.

3. Will my life insurance policy be protected if my company goes broke?

Insurance companies licensed to write life insurance policies in Illinois are members of the Illinois Life and Health Insurance Guaranty Association. If you are an Illinois resident who bought life insurance from an Illinois licensed company, Illinois law provides protection up to the following limits:

  • $300,000 in life insurance death benefits on any one life, regardless of the number of contracts issued
  • $100,000 in life insurance net cash surrender and net cash withdrawal values.

4. What about my annuities? Are they also protected if my company goes broke?

The Illinois Life and Health Insurance Guaranty Association covers up to $100,000 in present value, including net cash surrender or withdrawal values, per annuitant; and up to $5,000,000 in present value per unallocated group annuity.

5. My mom died recently. We think she had life insurance but we can't find any policies. Is there a central records bureau that keeps track of all life insurance policies sold in Illinois?

Unfortunately, there is no clearinghouse of information for life insurance policies. You should go through your mother's cancelled checks and credit card receipts for names of insurance companies to which she may have paid premiums. You should contact her employer or her former employer or union to find out if she was covered by a group policy. Also, if she belonged to an association, she may have had insurance through them. You might also check with her insurance agent to see if he has a record of a policy for your mom. There are several services available on the Internet that perform searches for lost life insurance policies. Many of these services charge a fee. To find a service, do a search for "lost life policies" on any Internet search engine such as Yahoo or Gomez. The Department of Insurance does not regulate or endorse these services.

If you know the name of the insurance company but cannot locate a policy, you may contact the company and ask them to do a search. Make sure to provide the company with all names your mother may have used, as well as her social security number.

If you find a policy but cannot locate the company named on the policy, the Department of Insurance can tell you if the company has moved, changed its name, or merged with another life insurance company, and provide you with a current address and phone number.

6. I purchased a life insurance policy from an insurance company over twenty years ago. This company is no longer in business. How can I find out where my policy is now held?

The Department of Insurance can tell you what happened to the original company. If, for example, it was purchased by another company, we can provide the name, address and phone number of the new company. If you are unable to determine if your policy has been assumed by the new company, contact our Department in writing or by e-mail. We will then contact the succeeding carrier to see if we can determine what happened to the policy.

Beneficiary Questions

7. Can I designate whomever I want to be a beneficiary on my life insurance policy?

Most insurance companies require that the beneficiary have an insurable interest in the life of the insured at the time of application. In other words, the named beneficiary would suffer a financial loss should death of the insured occur. An insurable interest is presumed for close family members such as spouse, children, parent, grandchild, sibling, etc. However, an insurable interest is not presumed when the designated beneficiary is a more distant relative or a person who is not related. An insurance company may decline to issue a life insurance policy to an applicant if the company questions the appropriateness of the beneficiary designation.

8. In that case, how can a bank be named a beneficiary of a life insurance policy I purchased when I borrowed money to buy my home?

The beneficiary must be able to satisfy the insurable interest requirement. If you borrow money from the bank to purchase your home, the bank would have a financial, and consequently insurable, interest in your life.

9. My husband passed away. The beneficiary on his life insurance policy is his ex-wife because he forgot to change it. What can I do to receive the benefit?

The beneficiary designation by your husband probably states, "(ex-wife's name), wife of insured." While she is no longer married to the insured, the courts have ruled that words such as "wife of the insured" are descriptive only. The name of the beneficiary itself is controlling. Therefore, the courts have held that the benefit is payable to the person named as beneficiary whether or not the descriptive term is correct.

Cash Value Questions

10. How can I find out the cash value of my whole life insurance policy?

All policies that produce cash values must state the method used to compute such values and they must list the cash value available at the end of each of the first 20 years that the policy is in force. You may also write to the company to request the exact cash value of your policy. Many companies also send an annual statement to the insured, which specifies the cash value of the policy.

11. Why is the cash value of my life insurance policy much less than the total premiums paid?

Cash value or cash surrender value of a whole life insurance policy is the amount of money the policyowner will receive as a refund if the policyowner cancels the insurance and surrenders the policy to the company before the policy matures. The amount of cash value depends on the face amount of the policy, the length of time the policy has been in force, and the length of the policy's premium payment period. The cash value will increase throughout the life of the policy and will eventually equal the face amount of the policy, but usually not until the insured reaches the age at the end of the mortality table used to calculate premiums for the policy, usually age 100.

12. I bought a life insurance policy one year ago. I thought that after one year I could surrender the policy and receive a refund of premium paid in excess of $1,000. The company says the cash value is zero. Why is there no value to my policy?

Most whole life insurance policies do not provide cash value until the end of the second or third year. However, insurance companies are permitted to provide cash values sooner as a means of competing in the sale of life insurance. Check your policy to determine when the cash value is provided.

13. I borrowed money from my life insurance policy. How does that affect the cash value?

The cash value of your policy will be reduced by the outstanding amount of the loan. If you write the insurance company for the cash value of your policy, their response should include adjustments for loans outstanding against the policy.

14. I purchased a life insurance policy for my child who is now an adult. I tried to cash the policy in for its cash value but was told by the insurance company that my child owns the policy now. How did this happen?

Most life insurance policies which cover the life of a minor child state that the child will automatically assume ownership of the policy when he or she becomes an adult. Check the section of the policy on ownership to determine if that is what has happened in your case.

15. I surrendered my life insurance policy over 30 days ago. How long does the company have to send me the cash value of my policy? How much interest am I entitled to collect?

Illinois law allows the insurance company to defer payment of the cash surrender value of a life insurance policy up to six months after the application for surrender is made. However, most insurance companies pay in a timely manner. Insurance companies are not required to pay interest for cash surrender. If you believe your company is taking too long to pay you, you should contact our Department for assistance.

16. I have a life insurance policy with a $1,000 benefit. I have paid over $1,200 in premiums on this policy. How can it only be worth $1,000?

Premiums paid for life insurance are not like deposits in a bank where the insured can always get back at least the amount which has been paid in. The primary purpose of life insurance is to provide protection in case of death. If you die, the company pays the death benefit regardless of the amount of premiums that have been paid. The company must stand ready to pay the death benefit guaranteed by the policy even though that benefit may be many times the amount of premium received. A basic insurance principle is that the losses of one individual are shared by many. The claims of those who die are met in part by the premiums paid by those who survive. Thus, part of the premiums you have paid went toward the payment of death claims for other policyholders.

17. I purchased a term life insurance policy which has expired. Shouldn't the company refund some of my money since no claims were ever filed?

Term life insurance products provide coverage for a specified, limited period of time that can be as short as one year or as long as thirty or forty years. Term life insurance provides for insurance protection only and provides no further benefits when the term expires.

Death Benefit Questions

18. Is double indemnity a standard provision of all life insurance policies?

Typically, an accidental death benefit is provided in an amount equal to the amount of insurance provided by the life policy. For example, if the death benefit were $10,000, the accidental death benefit would be $20,000. For this reason, the accidental death benefit is often referred to as "double indemnity." However, as a general rule, the accidental death benefit is available only on application and is added to the policy by rider for an additional premium.

19. My insurance company has returned my premium after a claim was filed for a death benefit for my wife. Can they do that?

The insurance application form is part of the life insurance contract. The applicant signs the application affirming that all information is true and correct to the best of his/her knowledge, and the insurance company issues a policy based on that information. Contracts may be rescinded (coverage voided and all premiums returned) within the first two years if the insurance company discovers a material misrepresentation. "Material" means that the information would have affected the issuance of the policy.

For example, if a person answers a question on the application about heart disease as "no" and the company learns that the applicant had been treated for a heart attack, this would be considered a material misrepresentation since the coverage may not have been issued if the correct information had been provided. When a claim is filed within the first two years after issuance of the policy, it is not unusual for the company to investigate the validity of the application. Even if a material representation was not intentional, the company may rescind the policy.

20. What if the reason for the rescission had nothing to do with the cause of death?

The company may rescind the coverage for any material misrepresentation, whether or not it was directly related to the cause of death. For example, if an applicant fails to disclose on the insurance application that he has heart disease but then dies from cancer, the company may rescind the coverage for failure to disclose the heart disease.

21. After my mother died, I filed a claim with the life insurance company and received a death benefit check from them. In the meantime, my cousin has filed a claim and states she was the named beneficiary. The company has now stopped payment on the benefit check and has turned the matter over to the courts. What has happened?

When an insurer is faced with conflicting claims for policy proceeds, and there is reasonable doubt as to which of the claimants is entitled to the proceeds, the matter is turned over to the courts using interpleader. This means that the insurance company pays the policy proceeds directly to the court, stating that they cannot determine the proper recipient. The court examines the evidence and determines the proper party to receive the money and awards the money. Unfortunately, you will have to defend your right to policy proceeds and may need the assistance of an attorney to do so.

22. I have been approached by someone who says they want to purchase my life insurance policy and can pay me a percentage of the death benefit now (the benefit amount payable on the death of the covered person). Can I sell my policy?

Such a practice is usually called either a viatical settlement or life settlement. While this practice is legal, we encourage you to review the Illinois Department of Insurance fact sheet entitled Stranger/Investor Originated Life Insurance (STOLI)prior to selling your policy. It is important that you fully understand your options, as well as the financial impact of your decision.

Replacing Life Insurance Policies or Annuities

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Note: This information was developed to provide consumers with general information and guidance about insurance coverages and laws. It is not intended to provide a formal, definitive description or interpretation of Department policy. For specific Department policy on any issue, regulated entities (insurance industry) and interested parties should contact the Department.

If you already own a life insurance policy or annuity, you should think twice if someone suggests that you replace it - especially if you have had the policy for a long time. That doesn't mean you should never replace a policy, but you should think carefully before making that choice. To help protect your interests, insurance companies and agents in Illinois must follow certain requirements when you replace a policy or annuity.

What is Considered a Replacement?

If you are buying a new policy, under Illinois law, you are "replacing" your current policy if you:

  • let it lapse, or forfeit, surrender or terminate it;
  • convert it to a reduced paid-up policy, continue as extended term insurance, or otherwise reduce in value by use of nonforfeiture benefits or other policy values;
  • amend it to reduce benefits or terms;
  • have your policy or annuity reissued with a reduction of cash value; or
  • pledge it as collateral or take a loan against the policy for more than 25% of the loan value.

Which Policies Apply?

All life insurance and annuity replacements must comply with Illinois replacement laws except:

  • credit life insurance policies;
  • group life insurance and annuity policies;
  • life insurance that is issued in connection with a pension;
  • contracts that are registered with the Securities and Exchange Commission (SEC), such as variable life insurance policies and variable annuities;
  • non-convertible term life insurance policies that will expire in five years or cannot be renewed;
  • life insurance or annuity policies where the replacing insurer is the same company or under common ownership; and,
  • if the total cash surrender value is less than $500 and the face amount of the policy is less than $5000.

Before You Consider Giving Up Your Current Policy

  • Make sure you are still insurable. Check any medical or other qualification requirements the new company may have. You don't want to give up your current policy only to find out you are not insurable with the new company.
  • Understand that there may be no advantage to replacing a life insurance policy or annuity with another life policy or annuity because it may be years before the cash value in the new policy reaches the level in your current policy.
  • Make sure the new policy has the same provisions as your old policy. Many times, older policies have good features that aren't offered in newer policies, such as low interest rates for loans.
  • Understand that you may have to satisfy limits in your new policy that have already been satisfied under your current policy. For example, a life insurance policy or annuity has a two-year "incontestable" clause. That means after the policy has been in force for two years, the insurance company must, by law, pay a death claim even if there were misrepresentations in obtaining coverage, unless fraud can be proven. With a new policy, the two-year incontestable clause begins all over again.
  • Remember that you are older now than you were when you bought your current policy. A new policy will likely cost you more because of your age.
  • Tell your current agent or insurance company that you are thinking of switching policies. They may be able to match or beat the offer with their own new or updated products.

When Talking to an Agent or Company about Replacement

  • Call the Department of Insurance to make sure the new insurance agent and company are licensed to do business in Illinois. Ask if any complaints have been filed against them.
  • Make sure the application contains truthful statements about your health conditions. Don't leave information off the application, even if the agent suggests it. Misrepresentations or omissions on the application could jeopardize your coverage. Your signature on the application means you have read and agree with the information on the application.
  • Make sure the application clearly states that you intend to replace your existing insurance policy. If the agent or company knows that you intend to replace your existing policy, they must give you a copy of a "Notice Regarding the Replacement of Life Insurance or Annuity." This notice gives you advice to think about before switching policies or annuities.
  • If you are buying the new policy from an agent, he or she must give you a copy of the notice at the time of the sale. If you are buying the new policy directly from a company, the new company must: 1) ask you for a list of the policies you intend to replace and the names of your current insurers; and 2) mail you a copy of the notice within three (3) days of receiving your application.
  • The new company must also send a "Notice of Proposed Replacement of Life Insurance or Annuity" to your existing insurer stating that you are replacing your existing policy. The notice must contain your name and address, your existing insurance company's name and address, your existing contract number and the agent's signature acknowledging that you intend to replace your current policy or annuity.

When You Receive Your New Replacement Policy

  • Read it carefully. The application will be attached to the policy. Make sure there are no changes in the information you gave on the application.
  • If you do not understand the policy, ask the agent or company for an explanation. No agent can change policy wording, so be suspicious of any agent who makes statements contrary to what is stated in your policy.
  • If you find mistakes or decide that you do not want the replacement policy, you have 20 days from the date it was delivered to you to return it to the company for a full refund of premiums. Keep the envelope so you have proof of the date the new policy was mailed to you.

For More Information

Call our Consumer Services Section at (312) 814-2420 or our Consumer Assistance Hotline Toll Free at (866) 445-5364 or visit us on our website at insurance.illinois.gov

Viatical Settlements, Accelerated Death Benefits, and Stranger-Originated Life Insurance

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Note: This information was developed to provide consumers with general information and guidance about insurance coverages and laws. It is not intended to provide a formal, definitive description or interpretation of Department policy. For specific Department policy on any issue, regulated entities (insurance industry) and interested parties should contact the Department.

If you are diagnosed with a terminal illness, such as AIDS or cancer, or a chronic illness that prevents you from performing daily functions, you face many hurdles. You are likely to have medical expenses that insurance won't pay, as well as other bills. Traditionally, life insurance helps surviving beneficiaries meet expenses. There are, however, two other options available that let an insured tap into their life insurance benefits while they are still living. These options are Viatical Settlements and Accelerated Death Benefits.

As of July 1, 2010, Illinois law places strict and specific guidelines on viatical settlements for persons who are not terminally or chronically ill. If someone offers you “free” or “no cost” or “zero premium” life insurance you may the subject of an illegal scam. Please see the section below on “Stranger-Originated Life Insurance” or call the Department toll-free at (866) 445-5364 for more information.

What is a Viatical Settlement?

A viatical settlement is a contractual agreement to provide a life insurance policyholder immediate cash in exchange for the sale and transfer of life insurance policy ownership rights. The person selling the life insurance policy, who is known as theviator, gives up ownership of the policy in return for a cash payment that is less than the full amount of the death benefit in the life insurance policy. If you are terminally or chronically ill, a viatical settlement lets you sell a life insurance policy you already have to a viatical settlement provider.

The term viatical comes from the Latin term viaticum, which means "provisions for a long journey."

Who are the parties involved in a Viatical Settlement?

viatical settlement provider is the person or company that buys the life insurance policy. The viatical settlement provider becomes the policy owner, must pay any premiums that are due, and eventually collects the full amount of the death benefit from the insurance company.

The person or company who represents the seller (viator) and who can "comparison shop" for viatical offers is a viatical settlement broker.

What is a terminal or chronic illness for purposes of a Viatical Settlement?

terminal illness is an illness or physical condition a physician has certified as reasonably expected to result in death in 24 months or less.

chronic illness requires certification within the preceding 12 months by a licensed health professional of: (1) an inability to perform, without substantial assistance and for at least 90 days due to a loss of functional capacity, at least 2 activities of daily living, including, but not limited to, eating, toileting, transferring, bathing, dressing, or continence; (2) requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment; or (3) having a level of disability similar to that described in paragraph (1) as determined by the Secretary of Health and Human Services.

What are Accelerated Death Benefits?

Accelerated Death Benefits are paid by an insurance company on an existing policy as a percentage of the policy's face value, minus any outstanding policy loans. While some older policies may not grant an accelerated death benefit in the terms of the life insurance contract, many insurance companies are making this option available to their policyholders. You should check with your insurance agent or company to find out if this option is available.

If you accept an accelerated death benefit payment, you may become ineligible for Medicaid or other governmental benefits and the benefits may be taxable. You should consult with your tax and/or legal advisor to determine whether or not this may be the case in your individual situation prior to entering into any financial agreement.

What Should I Consider in Evaluating a Viatical Settlement or Accelerated Death Benefits?

A viatical settlement or accelerated death benefit option may be a good source of funds, but you should fully understand how your choice will affect you and your survivors.

Before you decide to apply for a viatical settlement or accelerated death benefits, you should:

  • Find out the name of the viatical settlement provider if you negotiate through a viatical settlement broker. Call the Department to make sure both the provider and broker are licensed.
  • Realize that after your death the policy may not pay your beneficiaries any death benefit. Or it may pay a much lower benefit than you planned when you bought the policy.
  • Think about whether other options would be better for you. You might borrow the cash value of your life insurance policy or cancel the policy and take out the cash value.
  • If you owe money, ask your accountant if your creditors can try to collect what you owe them from your life insurance payouts. Recent federal legislation makes payouts from a viatical settlement or accelerated death benefits tax free, a great benefit to terminally ill individuals.
  • You should contact your personal tax advisor as there may be tax implications under certain circumstances on the sale of a life insurance policy; for example, if you are not terminally ill and you sell your life insurance policy to a viatical settlement provider.
  • Decide how payments from your life insurance will affect your eligibility for programs such as Medicaid and supplemental Social Security income.

NOTE: Effective July 1, 2010, it is a violation of Illinois law for any person to enter into a viatical settlement contract within 2 years after the insurance policy is issued unless one or more specific conditions has been met, including the viator being diagnosed as terminally or chronically ill. You should contact the Department before entering into a viatical settlement contract less than two years after your life insurance policy has been issued.

Is there anything that has to be disclosed to me before I sign a Viatical Settlement Contract?

Yes. Effective July 1, 2010, the Viatical Settlement Act of 2009 (P.A. 96-739) (the Act), provides new consumer protections for individuals seeking to enter into a viatical settlement. The Act requires that certain disclosures are made to the viator no later than the time the viatical settlement application is signed. Both the viator and the provider or broker must sign the disclosures.

The following information must be disclosed before you sign a viatical settlement contract:

  • The beneficiaries of your life insurance policy lose the policies benefits, equity, and protection and by entering into the contract you may not qualify for another life insurance policy or may be required to pay substantially higher premiums.
  • There are possible alternatives to viatical settlement contracts, including accelerated death benefits or policy loans.
  • The viatical settlement broker represents only you and not the insurer or viatical settlement provider and owes you a fiduciary duty, including the duty to act according to your instructions and in your best interests.
  • Some or all of the proceeds of the viatical settlement may be taxable and you should seek assistance from a professional tax advisor.
  • The proceeds of the viatical settlement may be subject to the claims of creditors.
  • Receipt of the proceeds of a viatical settlement may adversely affect your eligibility for Medicaid or other government benefits or entitlement.
  • You have the right to rescind the viatical settlement contract before the earlier of: (1) 30 calendar days after the date the contract is executed by all parties; or (2) 15 calendar days after the viatical settlement proceeds have been paid.
  • Funds must be sent to you within three business days after the viatical settlement provider has received written acknowledgement that ownership of your life insurance contract has been transferred.
  • A viatical settlement provider or broker may ask you for medical, financial, and personal information that may be disclosed as necessary to effect the settlement.
  • You may be contacted for the purpose of determining your health status once every three months if you have a life expectancy of more than one year, or once each month if you have a life expectancy of one year or less.
  • Entering into a viatical settlement contract will result in investors having a financial interest in your death.

You must also be provided with a document entitled “Important Consumer Notices” which contains similar disclosures as well as additional information about parties involved in the viatical settlement contract.

What are the Differences Between Viatical Settlements and Accelerated Death Benefits?

  Viatical Settlements Accelerated Death Benefits (ADB)
Who is a candidate? Generally, Viatical Settlement Providers (VSPs) only buy your policy if you have 24 months or less to live. But some may buy policies from people with longer life expectancies. You are usually eligible if you have 24 months or less to live and you added this option to your life insurance policy before you became terminally ill.
How do I find a provider? Check the list of licensed VSPs, or go through a viatical settlement broker who will shop for a viatical settlement provider for you. Check first with your life insurance agent. Most insurers offer this option.
What type of policy qualifies? A VSP can buy almost any type of life insurance policy, including term, whole and universal life. Life insurance companies usually limit this option to certain policies.
Who pays the benefit? The VSP pays you in return for the rights to your life insurance policy. Your life insurance company pays you.
How do I get the money? Contact a licensed VSP for an application and to find out what you must do to prove you are terminally or chronically ill. Contact the life insurance company that issued the ADB option. Find out what you must do to prove you are terminally ill or have a qualified covered condition.
How much can I get? VSPs pay a lump sum usually from 50% to 85% of the face value of your policy, depending on your life expectancy. ADB options usually pay 50% to 80% of the face value of your policy. You may be able to choose between a lump sum or monthly payments. Illinois law also lets life insurance companies pay up to 75% of the policy's face value for some specific medical conditions, such as heart attack, Alzheimer's Disease, or major organ transplant.
What happens to my life insurance? The VSP will pay the rest of the premiums. The insurance company will pay the policy's benefits to the VSP upon your death. Your beneficiary will not receive the death benefit. You must keep paying the insurance premiums if you want the company to pay the beneficiary the remaining death benefit.

What is Stranger-Originated Life Insurance?

Stranger-Originated Life Insurance (also known as Stranger-Owned Life Insurance or “STOLI”) arrangements, are NOTtraditional life insurance policies. Traditionally, the consumer (i.e., the insured) initiates the application for insurance and the insured’s loved ones are beneficiaries of the death benefits. In a STOLI arrangement, an investor group—strangers—initiate the insured’s application and will likely acquire an interest in the life (and possibly profit from the death) of a participant.

The main characteristic of STOLI arrangements is that insurance is purchased purely as an investment vehicle by a group of strangers, not to provide for the insured’s beneficiaries.

Descriptions of STOLI arrangements vary. Some call them "zero premium life insurance," "estate maximization plans," or "no cost to the insured plans," while others refer to "new issue life settlements," "high net worth settlements," or "non-recourse premium finance transactions."

  • STOLI arrangements are typically promoted to consumers between the ages of 65 and 85 and include:
  • allowing someone to purchase life insurance on your life in exchange for an immediate lump sum payment of some amount;
  • allowing someone to purchase insurance on your life in exchange for a partial payment of the policy’s face value to your beneficiaries upon your death;
  • entering into a contract for “free” or “no-cost” insurance on your life; or
  • purchasing a life insurance policy for the sole purpose of selling the policy to a third-party, whether immediately or in the future.

Are Stranger-Originated Life Insurance Arrangements Prohibited?

Yes. Effective July 1, 2010, the Act expressly prohibits any person from entering into a STOLI arrangement as defined by the Act.

What Else Should I Know?

Be sure that the viatical settlement provider you choose is licensed in Illinois. You can obtain this information from the Illinois Department of Insurance.

Viatical settlements have become an investment tool. If you are asked or you are considering investing in or buying a viatical settlement policy, you should contact the Illinois Department of Insurance to learn about the issues and risks associated with this investment.

If you are asked to buy a life insurance policy and then sell it immediately as a viatical settlement, you should contact the Illinois Department of Insurance. This activity may be considered fraudulent and the individuals involved may be prosecuted.

Related Topics

Additional brochures are available from the National Association of Insurance Commissioners web site at http://www.naic.org.

For More Information

Call the Department of Insurance Consumer Services Section at (866) 445-5364 or visit our website athttp://insurance.illinois.gov

To verify licensing of a Viatical Settlement Provider, please click on the following link and do a name search.

https://sbs.naic.org/solar-web/pages/public/lookup/lookupLanding.jsf (If you have problems accessing this application, please contact DOI.Licensing@illinois.gov.)