4.0 Life Policy Provisions, Riders, and Options Flash Flashcards
The entire contract is composed of what
policy + copy of application + any riders or amendments
The insuring clause
insuring agreement.
- Usually is located on the policy face page,
- lists parties of contract, the premium to be paid, how long coverage is in force, and the amount of the death benefit.
List the Standard Provisions
- Entire contract
- Payment of premiums
- Grace period
- Reinstatement
- Incontestability
- Misstatement of age
- Statements of the insured
- Legal action
- Payment of claims
consideration
both parties provide value in order for the contract to be valid
If the insured dies during a period of time for which the premium has been paid, what does the insurance company do?
The insurer must refund any unearned premium along with the policy proceeds
level premium
premium remains the same throughout the duration of the contract
Flexible premium policies
allow the policy owner to increase or decrease the premium during the policy period.
The grace period provision
the period of time after the premium due date that the policy owner has to pay the premium before the policy lapses
-(usually 30 or 31 days, or one month) -protect the policyholder against an unintentional lapse of the policy
reinstatement provision
The reinstatement provision allows a lapsed policy to be put back in force.
- The maximum time limit for reinstatement is usually 3 years after the policy has lapsed
- evidence of insurability -pay back all premiums, but gets the same attained age values
Can a policy that has been surrendered be reinstated?
No
incontestability provision
incontestability clause prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2 years (even if there has been a material misstatement of facts or concealment of a material fact)
Misstatement of Age and Gender provision
will result in an adjustment of premiums or benefits
Other Provisions
- ownership
- assignment
- freelook
- beneficiary
- exclusions
Owner’s Right provision
Absolute Assignment provision
- involves transferring all rights of ownership to another person or entity.
- permanent and total transfer of all the policy rights.
- new policy owner does not need to have an insurable interest in the insured.
Collateral Assignment provision
-involves a transfer of partial rights to another person. -It is usually done in order to secure a loan or some other transaction. -a partial and temporary assignment of some of the policy rights. -Once the debt or loan is repaid, the assigned rights are returned to the policy owner.
Know: Absolute assignment is the complete and permanent transfer of ownership rights; collateral assignment is the partial and temporary transfer of rights.
Okay
What and how long is the “RIght to Examine” (Freelook)
-This provision allows the policy owner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. -The free-look period starts when the policy owner receives the policy (policy delivery), not when the insurer issues the policy.
Exclusions provision
types of risks the policy will not cover -ex: hazardous occupations, aviation, military, war.
Most life insurance policies issue do not exclude military. However, which two different types of exclusions may limit the death benefit, if result of death in war or service?
status clause - excludes all causes of death while the insured is on active duty in the military.
The results clause - only excludes the death benefit if the insured is killed as a result of an act of war (declared or undeclared)
Suicide
Insurance policies usually stipulate a period of time during which the death benefit will not be paid if the insured commits suicide (2 years). After that, entire death benefit is paid
Common Life Policy Provision Review Know
What are the designation options
Individuals (minor as well)
Classes (“my children”)
Estates
Trust
Two class designations available when the insured chooses to “group” beneficiaries (by class).
Per Capita- by the head, evenly distributes benefits among the living named beneficiaries.
Per Stirpes- by the bloodline, distributes the benefits of a beneficiary who died before the insured to that beneficiary’s heirs
Ex of Per Capita
Bryan Purchased 90k policy. -3 sons: Quentin, Steve, Patrick (beneficiary, equal share) -Quentin: 2 children. Steve and Patrick: No children. -Quentin dies before Bryan. -Named beneficiaries so Steve and Patrick get $45k. Fuck the kids. They aren’t beneficiaries
Ex of Per Stirpes
Bryan Purchased 90k policy. -3 sons: Quentin, Steve, Patrick (beneficiary, equal share) -Quentin: 2 children. Steve and Patrick: No children. -Quentin dies before Bryan. -By the bloodline so Steve and Patrick get 30k, and Quentins children get 15k each
If NO beneficiary is named what happens?
policy proceeds go to the insured’s estate
primary beneficiary
has first claim to the policy proceeds following the death of the insured
contingent beneficiary
secondary or tertiary beneficiary) has the second claim in the event that the primary beneficiary dies before the insured
revocable vs irrevocable designation
revocable: policy owner change beneficiary without their consent
irrevocable: means you cannot with their agreement
If the insured and the primary beneficiary die at approximately the same time from a common accident with no clear evidence as to who died first: What is the procedure.
Uniform Simultaneous Death Law: the policy proceeds are to be distributed as if the primary beneficiary died first. (gives to secondary)
Common Disaster Clause
if the insured and the primary beneficiary died in a common disaster, it is presumed that the primary beneficiary died first, so the proceeds will be paid to either the contingent beneficiary (or to the insured’s estate if no secondary)
insurer must provide ______ to the policy owner that the policy is going to lapse.
30 day’s written notice
loan value
Loan value = Cash value – (unpaid loans + interest)
ex: Face Amount $150k, 3 threes ago took out a $50k loan ($3.5k interest) If dies, death benefit is $150k-$50k-$3.5k $96.5K
automatic premium loans
that prevents the unintentional lapse of a policy (due to nonpayment of premium)
While the insurer may defer requests for other loans for a period of up to ____, loan requests for payment of due premiums must be honored immediately.
6 months
Universal life policies allow the ____ of the policy cash value. However, there may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made.
partial withdrawal (partial surrender)
Waiver of premium
a rider that waives the premium for the policy if the insured becomes totally disabled (after waiting period) -6 month waiting period then refunded if still disabled -rider usually expires when insured reaches age 65
Disability Income rider
- in the event of disability the insurer will waive the policy premiums and pay a monthly income to the insured.
- The amount paid is normally based on a percentage of the face amount of the policy to which it is attached.
Payor Benefit rider
primarily used with juvenile policies (any life insurance written on the life of a minor)
- otherwise functions like waiver of premium rider.
- If payor (usually parent/guardian) becomes disabled for at least 6 months or dies: insurer waives premiums until minor reaches age (21).
- Rider used when Owner and Insured are two different individuals
other insured rider
provides coverage for one or more family members other than the insured
- usually level term insurance
- If the rider covers just the spouse of the insured, it can be specified as a spouse term rider
- usually expires when spouse reaches age 65)
children’s term rider
allows children of insured be added to coverage.
- term insurance and usually expires when children reach a certain age
- most provide minor with option to convert to whole, without proof of insurability.
Children’s term rider: one premium for ____
ALL children
family term rider
- incorporates the spouse term rider along with the children’s term rider in a single rider.
- Family Term = Spouse Term + Children’s Term
Accelerated death benefits allow the early payment of a portion of the death benefit if the insured has any of the following conditions:
-terminal illness -medical condition that requires extraordinary medical intervention (asan organ transplant) for survival -medical condition that without extensive treatment drastically limits the insured’s lifetime -Inability to perform activities of daily living (ADLs); -Permanent institutionalization or confinement to a long-term care facility -Any other conditions approved by the Department of Insurance
Living Needs Rider
-provides payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years -simply an advance payment of the death benefit, so most insurance companies don’t charge for this rider
Accelerated benefit
early payment of part of death benefit to the insured from the insurer for qualifying medical expenses.
Long-Term Care (LTC) coverage
-provide for the payment of part of the death benefit (called accelerated benefits) in order to take care of the insured’s health care expenses -often purchased as a separate policy -benefits reduce amount payable to the beneficiary upon insured’s death (like living needs rider)
Payable Death Benefit
Payable Death Benefit = Face Amount - Amount withdrawn - Earnings lost by insurer in interest
Payable Death Benefit
Policy Face Amount: $100k Terminal Illness: Insured withdraws $30k, 3 yrs before death Withdrawn so insurance company
-$300 in interest. Beneficiary received $67.7K $100k-$30k-$300=$69,700
accidental death rider
pays some multiple of the face amount if death is the result of an accident as defined in the policy -death usually must occur within 90 days -benefir normally pay 2x face amount (double indemnity) -some policies pay 3x iface amount (triple indemnity)
accidental death and dismemberment rider (AD&D)
pays the principal (faceamount) for accidental death, and pays a percentage of that amount, or a capital sum, for accidental dismemberment.
guaranteed insurability rider
- allows the insured to purchase additional coverage at specified future dates (usually every 3 years) or events (such as marriage or birth of child)
- no need of evidence of insurability
- additional premium.
example of guaranteed insurability
Life policy: Guaranteed AND waiver of premium riders 3 yrs after policy issued, becomes totally disabled Life insurance waived but can ALSO purchase additional amount of insurance on those increases (also waived)
return of premium rider
is implemented by using increasing term insurance
-provides that at death prior to a given age, original face amount payable AND amount equal to all premiums paid is also payable to the beneficiary -usually expires at specified age (like 60)
cost of living rider
addresses the inflation factor by automatically increasing the amount of insurance without evidence of insurability from the insured
Term riders
allow for an additional amount of temporary insurance to be provided on the insured, without the need to issue another policy
-usually whole life
Nonforfeiture options are triggered by
policy surrender or lapse (certain guarantees are built into the policy that cannot be forfeited by the policyowner)
Upon receipt of the cash surrender value, if the cash value exceeds premiums paid, what happens to the excess
the excess is taxable as ordinary income
Under the extended-term option:
insurer uses cash value to convert term insurance for the same face amount of former whole life. -If policy owner neglected to select one of the non forfeiture options, insurer will automatically implement this option in the event of termination of original policy
KNOW: Extended term is the automatic nonforfeiture option same face amount, shorter term of coverage.
Okay
Reduced Paid-up Insurance option
policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a reduced face amount from that of the former policy -(use Table of Guaranteed Values)
Reduction of Premium option and ex
The insurer uses the dividend to reduce the next year’s premium. ex: Policy owner pays 1k annual premium. Insurance company declares dividend. 900 Annual Premium
Paid Up additions options
increase the death benefit when dividend
Dividends are a return of excess premiums; therefore, are ___ when paid to the policyowner
non taxable
one-year term insurance option
insurance company uses dividend to purchase this additional insurance. increases overall death benefit. Policy owner choices: 1.use dividend as single premium 2. purchase term insurance = policy cash value for as long as it will last
Settlement options
methods used to pay the death benefits to a beneficiary upon the insured’s death, or to pay the endowment benefit if the insured lives to the endowment date. -settlement options are triggered by the death or 100
cash payment options
-lump sum life income option(s) interest only fixed period fixed amount
