Ch 5 Life Insurance Policy Provisions, Options and Riders

Question 1

Absolute Assignment

Answer 1

Absolute assignment is a policy assignment under which the assignee (person to whom the policy is assigned) receives full control over the policy and full rights to its benefits. Generally, when a policy is assigned to secure a debt, the owner retains all rights in the policy in excess of the debt, even though the assignment is absolute in form.

Question 2

Accidental Death Benefit (Multiple Indemnity) Rider

Answer 2

The accidental death benefit rider pays an additional sum to the beneficiary if the insured dies due to a covered accident. The amount paid is a multiple of the policy face amount, such as double or triple the original benefit. Accident death life insurance provides the cheapest way to add a lot of coverage for a limited period.

Question 3

Accelerated Benefits Rider

Answer 3

The Accelerated Benefit Rider allows the insured to receive a portion of the death benefit before death if the insured has a terminal illness and is expected to die within 1-2 years. Whatever amount is withdrawn in an accelerated death benefit will decrease the death benefit when death occurs.

Question 4

Accumulate Interest Option

Answer 4

The “accumulate interest” dividend option allows the policy owner to
leave dividends with the insurer to accumulate interest. In turn, the policy owner will be required to pay taxes on any interest (profit) generated by the dividend.

Question 5

Assignment clause

Answer 5

The assignment clause allows the right to transfer policy rights to another person or entity.

Question 6

Automatic Premium Loan Provision (or rider)

Answer 6

The automatic policy loan provision allows the insurance company to deduct the overdue premium from an insured’s cash value by the end of the grace period if a payment is missed on a life policy. The insurance company can AUTOMATICALLY take out a LOAN for you against your CASH VALUE to cover your PREMIUM if they don’t receive payment when due. This automatic premium loan can continue until the policy owner resumes making payments, or the policy runs out of cash value. Your policy will lapse if you don’t resume payments before you run out of cash value.

Question 7

Cash Option

Answer 7

The “cash” dividend option allows the policy owner to cash out the dividends they receive.

Question 8

Cash Surrender Option

Answer 8

The “cash surrender” nonforfeiture option allows the policy owner to receive the policy’s cash value. The policy owner no longer has coverage at this point. Usually, the maximum length of time a life insurance company may legally defer paying the cash value of a surrendered policy is six months (Delayed Payment provision).

Question 9

Collateral Assignment

Answer 9

Collateral assignment is an assignment of a policy to a creditor as security for a debt. The creditor is entitled to be reimbursed out of policy proceeds for the amount owed. Any proceeds above the amount due at the insured’s time of death will be paid to a beneficiary designated by the policy owner.

Question 10

Consideration Clause

Answer 10

The consideration clause states a policy owner must pay a premium in exchange for the insurer’s promise to pay benefits. A policy owner’s consideration consists of completing the application and paying the initial premium. The amount and frequency of premium
payments are contained in the consideration clause. “Please CONSIDER me for insurance. Here is my COMPLETED APPLICATION, INITIAL PREMIUM, and how much, how often I agree to pay. Please consider me.”

Question 11

Dependent Riders (Other Insureds Rider)

Answer 11

Dependents may be added to as additional (other) insureds through the use of a dependent rider. Other insured riders are typically used for spouses and children.

Question 12

Dividend Options

Answer 12

Dividend options are the options a policy owner has when receiving dividend payments from an insurance policy.

Question 13

Entire Contract Provision

Answer 13

The entire contract provisions (or clause) states the insurance policy itself, any riders and endorsements/amendments, and the application comprises the entire contract between all parties.

Question 14

Exclusions

Answer 14

Exclusions are features of an insurance policy stating that the policy will not cover certain
risks.

Question 15

Extended Term Option

Answer 15

The “extended-term” nonforfeiture option permits the policy owner to use the policy’s cash value to buy level, extended term insurance for a specified period. No further premium payments are made. The coverage provided with the extended-term nonforfeiture option is equal to the net death benefit of the lapsed policy.

Question 16

Free Look Period

Answer 16

The free look period states the policy owner is permitted a certain number of days once the policy is delivered to look over the policy and return it for a refund of all premiums paid.

Question 17

Grace Period

Answer 17

The grace period is a period after the due date of a premium during which the policy remains in force without penalty. If an insured dies during the Grace Period of a life insurance policy before paying the required annual premium, the beneficiary will receive the face amount of the policy minus any required premiums. For life insurance, the grace period is typically one month.

Question 18

Guaranteed Insurability Rider (Future Increase Option)

Answer 18

The Guaranteed insurability rider permits the policy owner to buy additional permanent life insurance coverage at predetermined intervals without submitting proof of insurability. It also includes specific events like marriage and births, without requiring proof of insurability. Usually, the benefit is allowed every three years, up to the original face amount of the policy.

Question 19

Incontestable Provision (Period)

Answer 19

The incontestable provision states that the insurance company may
not challenge the validity of the policy once the policy has been in force for a period of time, typically two years. Over the years, case law has established precedence that the Incontestable Clause applies
to cases of fraud.

Question 20

Insuring Clause (or Insuring Agreement)

Answer 20

The insuring agreement is the insurer’s basic promise to pay specified benefits to a designated person in the event of a covered loss. States the scope and limits of coverage, “We ensure to INSURE you for…”

Question 21

Misstatement of Age or Sex Provision

Answer 21

The Misstatement of Age or Sex Provision allows the insurer to adjust the policy benefits if the insured’s age or sex is misstated on the policy application. The misstatement of age provision allows the insurer to adjust the benefits payable if the age of the insured was misstated when the application for the policy was made. If the insured were older at the time of application than is shown in the policy, benefits would be reduced accordingly. The reverse would be true if the insured were younger than listed in the application.

Question 22

Nonforfeiture Options

Answer 22

Nonforfeiture options are the options you have for your cash value if you terminate a policy that has a cash value. You are closing your account (surrendering your policy); what do you want us to do with your cash (so you don’t forfeit it)? When a policy owner decides he does not want his insurance policy anymore, he has the option to surrender his policy.

Question 23

One-Year Term Option

Answer 23

The “one year term” dividend option allows the policy owner to exchange the dividend for additional coverage in the form of a one-year term policy.

Question 24

Paid-Up Additions Option

Answer 24

The “paid-up addition” dividend option allows the policy owner to
exchange the dividend for an additional single payment whole life policy.

Question 25

Payor Provision (Rider or Clause)

Answer 25

The payor provision waives future premiums for a juvenile life
insurance policy if the person responsible for paying the premiums dies or becomes disabled.

Question 26

Policy Loan (Cash Withdrawal) Provisions

Answer 26

The policy loan provisions apply to policies that have cash value also have policy loan and withdrawal provisions. These policies must begin to build cash value after a certain number of years. In most states, this is three years. These loans, with interest, cannot exceed the guaranteed cash value, or the policy is no longer in force. The policy owner has the right to the policy’s cash value. Policy loans are not taxable. Any loans with interest due at the time of death
will be deducted from the insured’s policy proceeds.

Question 27

Reduced Paid-Up Option

Answer 27

The “reduced paid-up” nonforfeiture option allows the policy owner to reduce the policy’s benefit amount and, in turn, cease making premium payments.

Question 28

Reduced Premiums Option

Answer 28

The “reduced premium” dividend option allows the policy owner to
return the dividend payment to the insurer in exchange for a reduction in the following year’s premium payments.

Question 29

Reinstatement Provision

Answer 29

Reinstatement is putting a lapsed policy back in force by producing
satisfactory evidence of insurability and paying any past-due premiums required. It Permits the policy owner to reinstate a policy that has lapsed as long as the policy owner can provide proof of insurability and pays all back premiums, outstanding loans, and interest.

Question 30

Return of Premium Rider

Answer 30

The return of premium rider pays the total amount of premiums paid into the policy in addition to the face value, as long as the insured dies within a specific period specified in the policy. It may also return premiums to the insured at the end of a specified period.

Question 31

Suicide Clause

Answer 31

The suicide clause states that the policy will be voided, and no benefit will be paid if the insured commits suicide within two years from policy issuance. The primary purpose of a suicide provision is to protect the insurer from applicants contemplating suicide.