6 Life Insurance Policy Provisions, Options and Riders

Question 1

Terms

Answer 1

TERMS TO KNOW
Actives
of daily living (ADLs) - a persons essential activities that include bathing.
dressing eating. transferring, toileting. continence
Assignment - transfer of rights of policy
nership
Contingent beneficiary - a beneficiary who has second claim
to the policy proceeds after the death of the insured (usually after the death of the primary
beneficiary
NAIC- National Association of Insurance Commissioners
, an organization composed of insurance commissioners from all 50 states, the District of Columbia anc
thesU.s. territories,
formed to resolve insurance regulatory issues
Primary beneficiary - a beneficiary who has the first claim to the policy proceeds after the death of the insured
Principal amount - the face value of the policy; the original amount invested before the earnings
Trust - an arrangement in which funds or property are held by a person or corporation for the benefits of another person (trust beneficiary)
A. Required Provisions
While there is no “standard” policy form in life insurance, the standard policy provisions adopted by the National Association

Question 2

Ownership

Answer 2

The parties to the insurance contract are the insurer, the policyowner, the insured, and the beneficiary. The policyowner and the
insured mav be the same person or amerenpersons. egardless. only the Dolicvowner has the ownership rights under the policy and
not the insured or the beneficiary. Among the ownership rights are naming and changing the beneficiary, receiving the policy’s living
beners, selecn metotons, and assigning the polIcy.
The policyowner has the responsibility of paying the policy premiums, and is also the person who
must have an insurable interest in
the insured at the time of application for the insurance. When the owner and the insured are not the same person. the insurance
arrangement is referred to as the third-partv ownership.

Question 3

Assignment

Answer 3

2. Assignment
   The policyowner of a life insurance policy has the right to transfer partial or complete ownership of the policy to another person
   without the consent of the insurer. However, the owner must notify the insurer in writing of the assignment. Without a written notice
   the insurer may not recognize the assignment and would not assume responsibility for its validitv. The companv’s maior concern is
   paying the claim twice. Transfer of the life insurance policy does not change the insured or amount of coverage; it only changes who
   has the policy ownership rights.
   The assignment provision specifies the policyowner’s right to assign (transfer rights of ownership) the policy. The policyowner must
   advise the insurer in writing of the assignment. There are 2 types or policy assignment:

Question 4

Absolute Assignment

Answer 4

Absolute Assignment - involves transferring all rights of ownership to another person or entity. This is a permanent and total
transfer of all the policy rights. The new policyowner does not need to have an insurable interest in the insured.

Question 5

Collateral Assignment

Answer 5

Collateral Assignment - involves a transfer of partial rights to another person. It is usually done in order to secure a loan or some
other transaction. A collateral assignment is 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 policyowner.

Question 6

Entire contract

Answer 6

Entire Contract
The entire contract provision
stipulates that the policy and a copy of the application. along with any riders or amendments, constitute
the entire contract. No statements made before the contract was written can be used to alter the contract. Neither the insurer nor
the insured may change policy provisions once the policy is in effect without both parties agreeing to it and the change being affixed
to the contrall.
Know This! Entire contract = policy + copy ot application
+ any riders or amendments

Question 7

Right to Examine (Free Look)

Answer 7

Right to Examine (Free Look)
This provision allows the policyowner a specifiec
number of 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 policyowner receives the policy, not when the insurer
issues the policy. Certain types of policies may require a longer free-look period, or the period may be set by state statute
In New York, the minimum free-look period is 10 days. If the policy was sold by mail order, however, it must contain a 30-day free-look
orovision.

Question 8

5. Payment of Premiums

Answer 8

5. Payment of Premiums
   The policy stipulates when the premiums are due, how often they are to be paid (monthly, quarterly, semiannually, annually, etc.) and to
   whom. If the insured dies during a period of time for which the premium has been paid, the insurer must refund any unearned
   premium along with the policy proceeds. The payment of premium provision also stipulates that premiums must be paid in advance.

Question 9

6. Grace Period

Answer 9

6. Grace Period
   The grace period is the period of time after the premium due date that the policyowner has to pay the premium before the policy
   lapses (usually 30 or 31 days, or one month). The purpose of the grace period is to protect the policyholder against an unintentional
   lapse of the policy. If the insured dies during this period, the death benefit is payable; however, any unpaid premium will be deducted
   from the death benefit.

Question 10

Reinstatement

Answer 10

Reinstatement
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. If the policyowner elects to reinstate the policy, he/she will have to provide evidence of insurability.
The policyowner is required to pay all back premiums plus interest, and may be required to repay any outstanding loans and interest.
The advantage to reinstating a lapsed policy as opposed to purchasing a new one is that the policy will be restored to its original
status, and retain all the values that were established at the insured’s issue age.
Note that a policy that has been surrendered cannot be reinstated.

Question 11

8. Incontestability

Answer 11

8. Incontestability
   The 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. During the first 2 years of
   the policy, an insurer may contest a claim if the insurer feels that inaccurate or misleading information was provided in the application.
   The incontestability period does not apply in the event of nonpayment of premiums; it also does not usually apply to statements
   relating to age, sex or Identity.

Question 12

9. Misstatement of Age

Answer 12

9. Misstatement of Age
   Because the age of an insured affects the premium that will be charged for a life insurance policy, if the applicant has misstated his or
   her age on the application, in the event of a claim, the insurer has the right to adjust the benefit to an amount that the premium would
   have purchased at the correct age of the insured.
   Know This! Misstatement of age on the application will result in adjustment of premiums or benefits

Question 13

10. Statements of the Applicant

Answer 13

As you already know, all statements made by the applicant/insured are considered representations and not warranties, except in the
case of fraud.
A representation is a written response to questions or statements made on an application for insurance which the applicant indicat
are correct to the best of his or her knowledge, and upon which the underwriter relies to issue a policy. A warrantv is a
I statement have purchased at the correct age of the insured.
Know This! Misstatement of age on the application will result in adjustment of premiums or benetts

Question 14

10. Statements of the Applicant

Answer 14

10. Statements of the Applicant
    As you already know, all statements made by the applicant/insured are considered representations and not warranties, except in the
    case of fraud.
    A representation is a written response to questions or statements made on an application for insurance which the applicant indicates
    are correct to the best of his or her knowledge, and upon which the underwriter relies to issue a policv. A warranty is a statement that
    is guaranteed to be true.
    The distinction between a warranty and a representation is that if a warranty is untrue, the insurer has the right to void the contract. If
    a representation is untrue, the insurer has the right to cancel the contract only if the representation was material to the creation or
    the contract.

Question 15

Proof of Death

Answer 15

Proof of Death
Upon the death of the insured, an insurer will generally require proof of death before it will pay a claim. In many cases, this will consist
of a copy of a death certificate and a form provided by the insurer to be completed by the claimant.
Upon receipt of a written proof of loss, the insurer must pay death claims immediately. (Most states interpret this to be within 30
days.) If there is no beneficiary named in the policy, the death proceeds are paid to the estate of the insured. (An insurer cannot delay
the payment of a death claim until the settlement of the estate of the insured has been completed.)

Question 16

12. Exclusions

Answer 16

12. Exclusions
    Exclusions are the types of risks the policy will not cover. Certain exclusions are standard for all policies, while others are attached to
    the policy as an exclusion rider. The most common exclusions found in life insurance policies are aviation, hazardous occupation, and
    war and military service.
    Aviation - Most life insurance will cover an insured as a fare-paying passenger or a pilot on a regularly scheduled airline, but will
    exclude coverage for noncommercial pilots, or require an additional premium for the coverage.
    Hazardous Occupations or Hobbies - If the insured is engaged in a hazardous occupation or participates in hazardous hobbies (such
    as skydiving or auto racing), death that results from the hazardous occupation or hobby may be excluded from coverage. The
    underwriter also has the option of charging a higher premium for insuring these risks.
    War or Military Service - Most life insurance policies issued today do not exclude military service. However, there are actually two
    different types of exclusions that may be used to limit the death benefit if the insured dies as a result of war, or while serving in the
    nilitary. The status
    clause excludes all causes of death while the insured is on active duty in the military. The results clause only The results clause only
    excludes the death benefit if the insured is killed as a result of an act of war (declared or undeclared).
    The suicide provision in life insurance policies protects the insurers from individuals who purchase life insurance with the intention of
    committing suicide. Insurance policies usually stipulate a period of time during which the death benefit will not be paid if the insured
    commits suicide. If the insured commits suicide within 2 ears following the policv effective date (issue date), the insurer’s liability is
    limited to a refund of premium. If the insured commits suicide after the 2-vear period. the policy will pay the death proceeds to the
    designated beneficiary the same as if the insured had died of natural causes

Question 17

1. Designation Options

Answer 17

1. Designation Options
   The beneficiary is the person or interest to which the policy proceeds will be paid upon the death of the insured. The beneficiary may
   be a person, class of persons (sometimes used with children of the insured), the insured’s estate, or an institution or other entity such
   as a foundation, charity, corporation or trustee of a trust. Trusts are commonly used in conjunction with beneficiary designations to
   manage life insurance proceeds for a minor or for estate tax purposes (although naming a trust as beneficiary does not avoid estate
   taxes).
   The beneficiary does not have to have an insurable interest in the insured. In addition, the policyowner does not have to name a
   beneficiary in order for the policy to be valid.

Question 18

Individuals

Answer 18

Individuals
The owner of a life insurance policy may name any individual as a beneficiary for the policy proceeds. The owner may name more than
one individual, in which case the individual beneficiaries will split the benefit by the percentage specified in the policy.
Benefits designated to a minor will either be paid to the minor’s guardian, or paid to the trustee of the minor if the trust is the named
beneficiary, or paid as directed by a court. The guardian and trustee can be the same person. It is generally accepted not to be a good
practice to have life insurance benefits payable to a minor.

Question 19

Classes

Answer 19

Classes
A class of beneficiary is using a designation such as “my children.” This term can be vague if the insured has been married more than
once, has adopted children, or has children out of wedlock. An example of a class that is less vague is children of the union of Jane
Smith and James Smith.” Man insurers encourage the insured to name
each child specifically and to state the percentage of benefit
they are to receive.
When naming beneficiaries, it is most prudent to be specific by
naming each individual and by designating the exact amount to be
given for that individual. Two class designations are available for use when an insured chooses to “group” the beneficiaries: per capita
and per stirpes. Per capita, meaning by the head, evenly distributes benefits among the living named beneficiaries. Per stirpes,
meaning by the bloodline, distributes the benefits of a beneficiary who died before the insured to that beneficiary’s heirs.
For example, Bryan purchased a $90,000 life insurance policy. He named his three sons, Quentin, Steve, and Patrick, as beneficiaries
for equal shares. Quentin has two children of his own. Bob and Lou. Steve and Patrick are both married but have no children
Unfortunately, Quentin predeceases Bryan.
If Bryan selected the per capita designation, which means “by the head,” with Quentin gone, only 2 named beneficiaries remain. Steve
& Patrick each will receive $45,000 ($90,000 divided by 2). Quentin’s children would not receive any benefits, since they were not
named as beneficiaries.
If Bryan selected the per stirpes designation, which means “by the bloodline,” Steve and Patrick would receive $30,000 each and
Quentin’s sons would share his allotment equally at $15,000 each.

Question 20

Estates

Answer 20

Estates
If none of the beneficiaries is alive at the time of the insured’s death, or if no beneficiary has been named, the insured’s estate will
automatically receive the proceeds of a life insurance policy. The death benefit of the policy may be included in the insured’s taxable
estate it this occurs
Know This! If NO beneficiarv is named. policy proceeds go to the insured’s estate.

Question 21

Trust

Answer 21

Trusts
Trusts are commonly established for minors, or to create a scholarship fund. Trusts can be used for estate planning purposes, and
when used properlv. can keep life insurance death proceeds out of the insured’s taxable estate. The are. however, expensive to
administer.

Question 22

Succession

Answer 22

Succession
The beneficiary designation provides for levels of priority or choice. In the event that the primary beneficiary predeceases the
insured, the contingent (secondary or tertiary) level in the succession of beneficiaries will be entitled to the death proceeds. Each level
in the succession of beneficiaries is only eligible for the death benefit if the beneficiarvs) in the levels) above them has died before
the insured.
The primary beneficiary has first claim to the policy proceeds following the death of the insured. The policyowner may name more
than one primary beneficiary, as well as how the proceeds are to be divided.
The contingent beneficiary (also referred to as secondary or tertiary beneficiary) has second claim in the event that the primary
beneficiary dies before the insured. Contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time
of the insureds death.

Question 23

Revocable vs. Irrevocable

Answer 23

Revocable vs. Irrevocable
Beneficiary designations may be either revocable or irrevocable. The policyowner, without the consent or knowledge of the
beneficiary, may change a revocable designation at any time. An irrevocable designation may not be changed without the written
consent of the beneficiary. Irrevocable beneficiaries have a vested interest in the policy; therefore, the policyowner may not exercise
certain rights without the consent of the beneficiary. In addition to being unable to change the beneficiary designation, the
policyowner cannot borrow against the policy’s cash value (as this would decrease the policy face value until repaid or assign the
policy to another person without the beneficiarys agreement.

Question 24

4. Common Disaster Clause

Answer 24

4. Common Disaster Clause
   If the insured and the primarv beneficiarv di
   at approximatelv the same time from a common accident with no clear evidence as to
   who died first, a problem may arise in identifying which party is eligible for the death benefit. The Uniform Simultaneous Death Law
   has been adopted by most states to address this problem, and to
   protect the policyowners original intent, as well as to protect the
   contingent beneficiary. This law stipulates that if the insured and the primary beneficiary died in the same accident and there is no
   sufficient evidence to show who died first, the policy proceeds are to be distributed as if the primary beneficiary died first.
   The Common Disaster Clause, when added to a policy, provides that if the insured and the primary beneficiary died in a common
   disaster (even if the beneficiary outlived the insured by a specified number of days), 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 contingent beneficiary is
   designated. Most insurers specify a certain period of time, usually 14 to 30 days, in which the primary beneficiary’s death must occur
   in order for the Common Disaster Clause to apply. As long as the beneficiary dies within this specified period of time following the
   death of the insured, it will still be interpreted that the beneficiary died first. The intent is to fulfill the wishes of the policyowner in
   regard to payment of proceeds to beneficiaries
   Example:
   James had a life insurance policy that included a Common Disaster Clause. James was the insured; his wife Maggie was named the
   primary beneficiary, and his son Ben was named the contingent beneficiary. James and Maggie got in a terrible car accident, and
   James died immediately, but Maggie died 4 days later from her injuries from the same accident. Because the policy included the
   Common Disaster Clause, the death benefit would be paid to Ben, the contingent beneficiary, as if Maggie, the primary beneficiary,
   had died before James, the insured.

Question 25

Policy Loan and Withdrawals

Answer 25

Policy Loan and Withdrawals
The policy loan option is found only in policies that contain cash value. The policyowner is entitled to borrow an amount equal to the
available cash value. Any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured’s death.
The policy will not lapse with an outstanding policy loan unless the amount of the loan and accrued interest exceeds the available
cash value. However, the insurer must provide 30 days written notice to the policyowner that the policy is going to lapse. Insurance
companies may defer a policy loan request for up to 6 months, unless the reason for the loan is to pay the policy premium. Policy loans
are not subject to income taxation.
Know This! Policy loans are ONLY available in policies that have cash value (whole life).

Question 26

Cash loans

Answer 26

1. Cash Loans
   Whenever a policv has cash value. it has loan value. The amount available to the policyowner for a loan equals the cash value minus
   any outstanding and unpaid policy loans including interest.
   Loan value = Cash value - (unpaid loans + interest)
   If there are outstanding loans at the time of the insured’s death, the loan amount will be considered a debt to the policy and the death
   benefit will be reduced ov the amount of indebtedness
   Example:
   Vera has a whole life policy with a $150.000 face amount. Three years ago she took out a $50.000 policy loan: which has accrued
   $3,500 in interest. If Vera dies, the policy’s death benefit will be $150,000 - $50,000 - $3,500 or $96,500.

Question 27

2. Automatic Premium Loans

Answer 27

The automatic premium loan provision is not required, but is commonly added to contracts with a cash value at no additional charge.
This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium. For example, a loan
against the policy cash value for the amount of premium due is automatically generated by the insurer when the policyowner has not
paid the premium by the end of the premium-paying grace period. It is a loan for which the insurer will charge interest. If the loan and
interest are not repaid and the insured dies, then it will be subtracted from the death benefit. While the insurer may defer requests for
other loans for a period of up to 6 months, loan requests for payment of due premiums must be honored immediately.
Usually, the policyowner must specifically elect this provision in writing to make it effective.

Question 28

3. Withdrawals or Partial Surrenders

Answer 28

Universal life policies allow the partial withdrawal (partial surrender) 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. During the withdrawal, the interest
earned on the withdrawn cash value may be subject to taxation, depending upon the plan. The death benefit will be reduced by the
amount of any partial surrender. Note, however, that a partial surrender from a universal life policy is not the same as a policy loan.

Question 29

D. Disability Riders

Answer 29

D. Disability Riders
Riders are written modifications attached to a policy that provide benefits not found in the original policy. Riders sometimes require
an additional premium, but they also help tailor a policy to the specific needs of the insured, and can be classified according to their
orimary duroose
Some riders provide benefits in the event of the insured’s disability, while other riders provide for partial payment of the death benefit
prior to the insured’s death, called accelerated or living benefits riders

Question 30

1. Waiver of Premium

Answer 30

The waiver of premium rider waives the premium for the policy if the insured becomes totally disabled. Coverage remains in force
until the insured is able to return to work. If the insured is never able to return to work, the premiums will continue to be waived by the

Practice Question
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Know This! Waiver of premium rider waives the premium for a total disability atter a waiting period

insurance company. Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived. If the
insured is still disabled after this waiting period, the insurer will refund the premium paid by the insured from the start of the disability.
This rider usually expires when the insured reaches age bs.

Question 31

2. Waiver of Cost of Insurance

Answer 31

2. Waiver of Cost of Insurance
   The waiver of cost of insurance (or waiver of monthly deductions) rider is found in Universal Life Insurance. In the event of disability of
   the insured, this rider waives the cost of the insurance and other expenses, but does not waive the cost of premiums necessary to
   accumulate cash values

Question 32

3. Disability Income

Answer 32

3. Disability Income
   With the disability income rider, in the event of disability the insurer will waive the policv premiums and pav 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.

Question 33

4. Payor Benefit (Juvenile Insurance)

Answer 33

4. Payor Benefit (Juvenile Insurance)
   The payor benefit rider is primarily used with juvenile policies (any life insurance written on the life of a minor); otherwise, it functions
   like the waiver of premium rider. If the payor (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer
   will waive the premiums until the minor reaches a certain age, such as 21. This rider is also used when the owner and the insured are
   two different individuals.

Question 34

E. Accelerated (Living) Benefit

Answer 34

E. Accelerated (Living) Benefit
Accelerated death benefits allow the early payment of a portion of the death benefit if the insured has any of the following conditions:
• A terminal illness;
A medical condition that requires an extraordinary medical intervention (such as an organ transplant) for the insured to survive;
• A 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; or
• Any other conditions approved by the Department of Insurance.
The maximum benefit is typically a percentage of the face amount of insurance, usually 50%, but it is legal for the insurer to pay up to
100% of the death benefits before the insured dies. There may also be a dollar limit, such as $100,000. The face amount of insurance
is reduced after the payments. The accelerated death benefit payout will not necessarily result in a reduction of the premium;
nowever, premium mav be waived.

The Living Needs Rider provides for the 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. The purpose of this rider is to provide the insured with the necessary funds to take care of
necessary medical and nursing home expenses that incur as a result of the terminal illness. Many insurance companies do not charge
for this rider since it is simply an advance payment of the death benefit. The remainder of the policy proceeds are payable to the
beneficiary at the time of the insured’s death.
Know This! Accelerated benefit = early payment of part of death benefit to the insured from the insurer for qualifving medical
expenses.

Question 35

Long-Term Care (LIC)

Answer 35

Long-Term Care (LIC) coverage, which is often purchased as a separate policy, can also be marketed as a rider to a life insurance
policy. These riders 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, which are incurred in a nursing or convalescent home. As with the living needs rider, payment of LTC
benefits will reduce the amount payable to the beneticiary upon the insured’s death
The application for a life insurance policy or policy rider which provides for accelerated payment of death benefits or a special
surrender value must contain a notice, prominently displayed, to read as follows: Receipt of accelerated death benefits may attect
eligibility for public assistance programs and mav be taxable
It should also include the amount of any additional premium associated with the accelerated payment or, if there is no separately
identifiable premium, whether a discount is associated with acceleration.
The application to accelerate benefits must be dated by the insurer upon transmittal and be completed and signed by the
policyowner not more than 30 days thereafter; and contain 2 notices, prominently displayed, to read as follows:
“Receipt of accelerated death benefits may affect eligibility for public assistance programs such as medical assistance (Medicaid),
family assistance and supplemental security income. Receipt of accelerated death benefits in periodic payments may be treated
differently than receipt in a lump sum. Prior to applying for accelerated death benefits, policyowners should consult with
appropriate social services agency concerning how receipt will affect the eligibility of the recipient and/or the recipient’s spouse or
dependents.
“Receipt of accelerated death benefits may be taxable. Receipt of accelerated death benefits in periodic payments may be treated
differently than receipt in a lump sum. Prior to applying for such benefits, policyowners should seek assistance from a qualified tax
adviser.
The application to accelerate benefits must also contain a statement by the policyowner that the application is voluntary and without
coercion on the part of any third party. The application will also contain a statement about the remaining death benefit available to the
beneficiary.
Insurers are prohibited from paying accelerated death benefits or special surrender values to the policyowner or certificate holder for
a period of 14 davs from the date on which the information listed below is transmitted in writing to the policyowner or certificate
?
ASAY

Question 36

1. Conditions for Payment

Answer 36

1. Conditions for Payment
   One trigger for activating the accelerated payment of the death benefit in policies issued in the state of New York is the diagnosis of a
   medical condition which will require extraordinary care. While the law technically allows an insurance company to advance the entire
   death benefit, most carriers impose their own cap, such as 50% of the death benefit.

Question 37

2. Effect on Death Benefit

Answer 37

2. Effect on Death Benefit
   If an insured withdraws a portion of the face amount by the use of the accelerated benefits rider, the benefit payable at death will be
   reduced by that amount. plus the amount of earnings lost by the insurance companv in interest income
   Payable Death Benefit = Face Amount - Amount withdrawn - Earnings lost by insurer in interest
   Example:
   The policy’s face amount is $100,000; however, due to a terminal illness, the insured had to withdraw $30,000 from the policy 3
   years before his death. Since this amount was withdrawn, the insurance company lost $300 worth of interest. Upon the insured’s
   death, the beneficiary received $69,700 in death benefit:
   $100,000 (face amount) - $30,000 (accelerated benefit) - $300 (lost interest) = $69,700

Question 38

F. Riders Covering Additional Insureds

Answer 38

F. Riders Covering Additional Insureds
There are riders that allow the policyowner to add additional insureds under the original policy, such as children’s term or family term.
There is also a nonfamily term rider that allows the policyowner to change the insured under the policy.

Question 39

1. Spouse and Other Insured Term Rider

Answer 39

1. Spouse and Other Insured Term Rider
   The other insured rider provides coverage for one or more family members other than the insured. The rider is usually level term
   insurance, attached to the base policy covering the insured. This is also known as a family rider. If the rider covers just the spouse of
   the insured, it can be specified as a spouse term rider, and allows the spouse to be added to coverage for a limited period of time and
   for a specified amount (it usually expires when the spouse reaches age 65).

Question 40

Children’s Term

Answer 40

Children’s Term
The children’s term rider allows children of the insured (natural, adopted or stepchildren) to be added to coverage for a limited period
of time for a specified amount. This coverage is also term insurance and usually expires when the minor reaches a certain age (18 or
21. Most riders provide the minor with the option of converting to a permanent policy without evidence of insurability.
Children’s term riders provide temporary life insurance coverage on all children of the family for one premium. The premium does not
change on the inclusion of additional children: it is based
On
an average number of children.
Know This. Childrens term rider: one pre
mum for ALL chidren
3. Family Term
The familv term rider incorporates the spouse term rider along with the children’s term rider in a single rider. When added to a whole
life policy, the family term rider provides level term life insurance benefits covering the spouse and all of the children in the family.
Familv Term = Spouse Term + Children’s Term

Question 41

G. Riders Affecting the Death Benefit Amount

Answer 41

G. Riders Affecting the Death Benefit Amount
Some riders affect the amount of the death benefit paid out to the beneficiary, and either increase it through multiple indemnity or
refunds of premiums, or decrease it if a portion of the death benefit was paid out to the insured while still living.

Question 42

1. Accidental Death

Answer 42

1. Accidental Death
   The accidental death rider pays some multiple of the face amount if death is the result of an accident as defined in the policy. Death
   must usually occur within 90 days of such an accident. The benefit is normally two times (double indemnity) the face amount. Some
   policies pay triple the face amount (triple indemnity) for accidental death.
   Each policy specifies what will be considered accidental death. Accidental death does not include death that results from any health
   problem or disability. In addition, deaths that result from self-inflicted injuries, war, or hazardous hobbies or avocations are usually not
   covered. They would be covered under the base policy unless specifically excluded.
   This rider often expires at the insured’s age 65. No additional cash value is accumulated as a result of this rider. The accidental death
   benefits apply only to the policy’s base face amount, and not to any additional benefits that may be purchased from policy dividends.

Question 43

2. Guaranteed Insurability

Answer 43

2. Guaranteed Insurability
   The 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 a child), without evidence of insurability, for an additional premium. When this option is
   exercised, the insured purchases the additional coverage at his or her attained age. This rider usually expires at the insured’s age 41
   The guaranteed insurability rider is not modified or defeated by the existence of other riders

Example:
Alan’s life insurance policy contains both guaranteed insurability and waiver of premium rider. Three ears after the policy was issued,
Alan was totallv and permanentlv disabled. Not only are Alan’s life insurance premiums waived. but at the specified times or events
stated in the policy. Alan may purchase additional amount of insurance with the premiums on those increases also waived.

Question 44

3. Cost of Living

Answer 44

3. Cost of Living
   The cost of living rider addresses the inflation factor by automatically increasing the amount of insurance without evidence of
   insurability from the insured. The face value of the policy may be increased by a cost of living factor tied to an inflation index such as
   the Consumer Price Index (CPI).

Question 45

4. Return of Premium

Answer 45

4. Return of Premium
   The return of premium rider is implemented by using increasing term insurance. When added to a whole life policy, it provides that at
   death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previouslv paid is also
   pavable to the beneficiary. The return of premium rider usually expires at a specified age such as age 60.

Question 46

Term Rider

Answer 46

Term Rider
Term riders allow for an additional amount of temporary insurance to be provided on the insured, without the need to issue another
policv. The are usually attached to a whole life policy to provide greater protection at a reduced cost.
Here’s a breakdown of the various riders policyowners have to choose from when it comes to their policies

Question 47

Nonforfeiture Options

Answer 47

H. Nonforfeiture Options
Policvowners have decisions to make about how the cash value in the policy should be protected, how the return of excess premium
(dividends) should be invested, and how benefit payments will be made. The different choices available to them are categorized as
Nonforfeiture Options. Dividend Options, and Settlement Options.
Because permanent life insurance policies have cash values, certain guarantees are built into the policy that cannot be forfeited by
the policyowner. These guarantees (known as nonforfeiture values) are required by state law to be included in the policy. A table
showing the nonforfeiture values for a minimum period of 20 years must be included in the policy. The policyowner chooses one of
the following nonforfeiture options: cash surrender value, reduced paid-up insurance, or extended term

Question 48

Reduced Paid=up Insurance

Answer 48

Reduced Paid=up Insurance
Under this option, the policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent polic)
that has a reduced face amount from that of the former policy. The new reduced policv builds its own cash value and will remain in
force until death or maturity

Question 49

2. Extended Term

Answer 49

2. Extended Term
   Under the extended-term option, the insurer uses the policy cash value to convert to term insurance for the same face amount as the
   former permanent policy. The duration of the new term coverage lasts for as long a period as the amount of cash value will purchase
   If the policyowner has neglected to select one of these nonforfeiture options, the insurer will automaticallv implement the extended-
   term option in the event or termination of the original policy
   Know This! Extended term is the automatic nonforfeiture option: same face amount. shorter term of coverage

Question 50

3. Cash Surrender Value (Net Cash Value)

Answer 50

3. Cash Surrender Value (Net Cash Value)
   The policyowner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable.
   Upon receipt of the cash surrender value, if the cash value exceeds premiums paid, the excess is taxable as ordinary income. Once
   this option is selected, the insured is no longer covered. A policy that has been surrendered for its cash value cannot be reinstated. A
   surrender charge is a fee charged to the insured when a life policy or annuity is surrendered for its cash value.

Example: (review a sample Table of Guaranteed Values below):
If the insured chooses to exercise the reduced paid-up option at the end of 15 years, the cash value of $8.100 can be used as a single
premium to purchase paid-up insurance of the same type as the original policy. The insured doesn’t have to pay any more premiums,
while still retaining some amount of life insurance (in this example. $21.750)
The extended-term option indicates the option to use the policy’s cash value to purchase in a single premium a term insurance policy
in an amount equal to the original policy’s face value (in this case, term insurance with $50.000 face amount). The insurance company
determines that for this particular insured. $8.100 of cash value is worth 18 ears and 8 davs of $50.000 of protection
Table of Guaranteed Values
$50,000 Whole Life Nonforfeiture Table (20 years)

Question 51

Dividend Options

Answer 51

Dividend Options
Dividends are paid only on participating policies. When the policyowner purchases a policy from a participating insurer, he or she
actually pays a “grossed-up premium. The higher premium is charged as a safety margin in the event the insurer’s losses are higher
than anticipated. If this extra amount is not needed by the insurer to pay death claims and expenses, or if actual mortality experience
improves or interest earned by the company exceeds the assumptions. a dividend will be returned to the policvowner. In other words
dividends are a return of excess premiums, and for that reason thev
are not taxable to the policyowner. Insurance companies cannot
guarantee dividends
The first dividend could be paid as early as the first policy anniversary, but must occur no later than the end of the third policy year.
From then on dividends are usually paid on an annual basis. Policyowners have the option of taking their dividends in one of several
different ways.
Know lihis. Dividends are a return of excess premiums: therefore. not taxable when paid to the policvowner.

Question 52

1. Cash Payment

Answer 52

1. Cash Payment

The insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually.

Question 53

2. Reduction of Premium

Answer 53

2. Reduction of Premium
   The insurer uses the dividend to reduce the next year’s premium. For example, if the policyowner usually pays an annual premium of
   $1.000 and the insurer declares a $100 dividend. the policyowner would only pay a $900 premium that vear.

Question 54

3. Accumulation at Interest

Answer 54

3. Accumulation at Interest
   The insurance company keeps the dividend in an account where it accumulates interest. The policyowner is allowed to withdraw the
   dividends at any time. The amount of interest is specified in the policy and compounds annually. Although the dividends themselves
   are not taxable, the interest on the dividends is taxable to the policyowner when credited to the policy, whether or not the
   dolicvowner receives the interest.

Question 55

4. Paid-up Additions

Answer 55

Paid-up Additions
The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. No new separate
policies are issued: however, each of these small single premium payments will increase the death benefit of the original policy by
whatever amount the dividend will buy. In addition, each of these paid-up policies will accumulate cash value and pay dividends. The
amount of additional coverage that can be purchased with the dividend is based on the insured’s attained age at the time the dividend
is declared.
If the policvowner did not chose the dividend option. the insurer will automaticallv use paid-up additions to increase the death benetit
of the original policv bv the amount the dividend will buv

Question 56

Paid-up Insurance

Answer 56

Paid-up Insurance
Usuallv. the insurer first accumulates the dividends at interest and then uses the accumulated dividends. plus interest, and the policy
cash value to pav the policv up earlv. In other words, if the insured had a continuous premium whole life policy in which premiums are
paid to age 100), using the paid-up option the policyowner is able to pay up the policy early.

Question 57

One-year Term

Answer 57

One-year Term
The insurance company uses the dividend to purchase additional insurance in the form of one-vear term insurance that increases the
overall policy death benefit. The policyowner’s choice is to either use the dividend as a single premium on as much one-year term
insurance as it will buy, or to purchase term insurance equal to the policy’s cash value for as long as it will last. If the insured dies
during the one-year term, the beneticiary receives both the death benefit of the original policy and the death benefit of the one-year
term insurance.

Question 58

J. Settlement Options

Answer 58

J. Settlement Options
Settlement options are the methods used to pay the death benefits to a beneficiary upon the insureds death,
or to pav the
endowment benefit if the insured lives to the endowment date. The policyowner may select a settlement option at the time of policy
application, and may also change that option at any time during the life of the insured. Once selected by the policyowner, the
settlement option cannot be changed by the beneficiary. If the policyowner does not select a settlement option, the beneficiary will
be allowed to choose one at the time of the
insured’s death
Know This! Settlement options are triggered by the insured’s death or age 100

Question 59

1. Cash Payment

Answer 59

1. Cash Payment
   Upon the death of the insured, or at the point of endowment, the contract is designed to pay the proceeds in cash, called a lump sum,
   unless the recipient chooses a different mode of settlement. If no selection is made, the proceeds are automaticallv paid to the
   beneficiary in a single cash payment. As a rule, payments of the principal face amount after the insured’s death are not taxable as
   income.

Question 60

2. Life Income

Answer 60

2. Life Income
   The life-income option, also known as straight life, provides the recipient with an income that he or she cannot outlive. Installment
   payments are guaranteed for as long as the recipient lives, irrespective of the date of death. The amount of each installment paid is
   based on the recipient’s life expectancy and the amount of principal. If the beneficiary lives for a very long time, payments may
   exceed the total principal. However, if the beneficiary dies shortly after he or she begins receiving installments, the balance of the
   principal is forfeited to the insurer. Because there is a chance that the beneficiary may not live long enough to receive all the life
   insurance proceeds, insurers make options available which provide at least a partial guarantee that some or all of the proceeds will he
   paid out. With each of the guarantees, the size of the installment is decreased.

Question 61

Single Life

Answer 61

Single Life
The single life option can provide a single beneficiary income for the rest of his/her life. Upon the death of the beneficiary, the
payments stop.

Question 62

Joint and Survivor

Answer 62

Joint and Survivor
The life income joint and survivor option guarantees an income for two or more recipients for as long as the live. Most contracts
provide that the surviving recipient will receive a reduced payment after the first recipient dies
Most commonly, the reduced option is written as “joint and ½ survivor” or “joint and 2/3 survivor,” in which the surviving beneficiary
receives ½ or 2/3 of what was received when both beneficiaries were alive. This option is commonlv selected by the policyowner who
wants to protect two beneficiaries, such as elderly parents. Unless a period certain option is also chosen, as with the life income
option, there is no guarantee that all the life insurance proceeds will be paid out if all beneficiaries die shortlv after the installments
begin. This option guarantees, however, an income for the lives of all beneficiaries

Question 63

Life Refund

Answer 63

Life Refund
The life refund income option comes in either a cash refuna form or an installment refuna form. Both options guarantee that the total
annuity fund will be paid out to the annuitant or to the beneficiary. The difference between the two options is that under the cash
refund option, if the annuitant dies before the annuity fund is depleted. a lump-sum settlement of the remainder would be made to
the beneficiary, while under the installment refund option, the beneficiary would receive the remaining funds in the form of continued
annuity payments.

Question 64

Life with Period Certain

Answer 64

Life with Period Certain
Under life income with period certain option, the recipient is provided with the “best of both worlds” in terms of a lifetime income and
a guaranteed installment period. Not only are the payments guaranteed for the lifetime of the recipient, but there is also a specified
period that is guaranteed. For example, a life income with 10 years certain option would provide the recipient with an income for as
long as he or she lives. If the recipient dies shortly after starting to receive the payments, the payments will be continued to a
beneficiary for the remainder of the 10-year period. As already stated, the installments for the life income with period certain option
will be smaller than the life income only option.

Question 65

3. Interest Only

Answer 65

With the interest-onlv option, the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient
(beneficiary) at regular intervals (monthly, quarterly, semiannually, or annually). The insurer usually guarantees a certain rate of interest
and will often pay interest in excess of the guaranteed rate. The interest option is considered to be a temporary option since the
proceeds are retained by the insurer until some later point when the proceeds are paid out in a lump sum or paid under one of the
other settlement options. When the beneficiary is allowed to select a settlement option, the interest option is sometimes used as a
temporary option if the beneficiary needs some time to decide which settlement option to select. For example, the policyowner may
specify that interest only will be paid annually to the surviving spouse, with the principal to be paid to their children when they reach a
certain age or at the death of the surviving spouse

Question 66

4. Fixed-period Installments

Answer 66

4. Fixed-period Installments
   Under the fixed-period installments option (also called period certain, a specified period of years is selected, and equal installments
   are paid to the recipient. The payments will continue for the specified period even if the recipient dies before the end of that period. In
   the event of the recipients death, the payments would continue to a beneficiary. The size of each installment is determined by the
   amount of principal. guaranteed interest, and the length of period selected. The longer the period selected, the
   •smaller each
   installment will be. his option does not guarantee income for the life of the beneficiary; however, it does guarantee that the entire
   principal will be distributed.

Question 67

Fixed-amount Installments

Answer 67

Fixed-amount Installments
The fixed-amount installments option pays a fixed, specified amount in installments until the proceeds (principal and interest) are
exhausted. The recipient selects a specified fixed dollar amount to be paid until the proceeds are gone. If the beneficiary dies before
the proceeds are exhausted, installments will continue to be paid to a contingent beneficiary until all proceeds have been paid out.
With this option, the size of each installment will determine how long benefits will be received. The larger the installment, the shorter
the income period will be. As with the fixed-period option, this option does not guarantee payments for the life of the beneficiary, but
does guarantee that all proceeds will be paid out.

Question 68

Spendthrift Clause

Answer 68

Spendthrift Clause
The spendthrift clause, when included in a life insurance policy, protects beneficiaries from the claims of their creditors, as well as
prevents the beneficiary’s reckless spending of benefits by requiring that the benefits be paid in a fixed period or fixed-amount
installments. The beneficiary does not have the right to select a different settlement option and is not allowed to assign or borrow any
of the proceeds. The spendthrift clause is designed to protect life insurance policy proceeds that have not yet been paid to a named
beneficiary from the claims of the creditors of the beneficiary or policyowner.