Chapter 12 - Life Insurance Contractual Provisions Flashcards
Name the important Life Insurance Contractual Provisions. 14
Ownership Clause Entire Contract Clause Incontestable Clause Suicide Clause Grace Period Reinstatement Clause Misstatement of Age or Sex Clause Beneficiary Designation Change-of-Plan Provision Exclusions and Restrictions Payment of Premiums Assignment Clause Policy Loan Provision Automatic Premium Loan
What rights are included under the ownership clause? 5
- Naming and changing the beneficiary
- Surrendering the policy for its cash value
- Borrowing the cash value
- Receiving Dividends
- Electing settlement options
What are the two basic purposes of the Entire-Contract Clause?
- Prevents the insurer from amending the policy without the knowledge or consent of the owner by changing its charter or bylaws
- It protects the beneficiary. A statement made in connection with the application cannot be used by the insurer to deny a claim unless the statement is a material misrepresentation and is part of the application.
What is the purpose of the Incontestable Clause?
To protect the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued.
Under what circumstances of fraud so outrageous that it overrides the Incontestable Clause? 3
- The beneficiary takes out a policy with the intent of murdering the insured.
- The applicant had someone else take the medical examination.
- An insurable interest does not exist at the inception of the policy.
Who has the burden of proof to prove suicide?
The insurer.
Which types of policies have grace periods longer than 31 days?
Universal life and other flexible-premium policies.
What is the purpose of the grace period?
To prevent the policy from lapsing by giving the policyholder additional time to pay an overdue premium.
What are the requirements that must be fulfilled to reinstate a lapsed policy?
- Evidence of insurability is required
- All overdue premiums plus interest must be paid from their respective due dates.
- Any policy loan must be repaid or reinstated, with the interest from the due date of the overdue premium.
- The policy must not have been surrendered for its cash value
- The policy must be reinstated within a certain time period, typically three to five years from the date of lapse.
What are the advantages of reinstating a lapsed policy?
- Avoid the cost of paying acquisition expenses incurred if you had instead bought a new policy.
- The incontestable period and suicide period may have expired and will not renew when reinstating a policy.
What are the disadvantages of reinstating a lapsed policy?
- A substantial cash outlay is required if the policy lapses several years earlier.
- Insurers may have reduced premiums on policies and developed new products and as a result it may be less costly to purchase a new policy despite the insured being older when the new purchase is made.
- A new policy may provide for greater flexibility in the payment of premiums.
What are the principal types of beneficiary designations?
- Primary and contingent beneficiary
- Revocable and irrevocable beneficiary
- Specific and class beneficiary
What is the issue with naming minors as beneficiaries?
If policy owner dies before the beneficiary reaches the age of majority, they do not possess the legal capacity to receive the policy proceeds directly. Companies will require a guardian to receive the proceeds on the minor’s behalf.
Why should an estate not be names as a beneficiary?
To avoid:
- Attorney’s fees and other probate expenses
- Federal estate taxes
- State inheritance taxes
- Claims to creditors.
What is the purpose of the change of policy provision?
To provide flexibility to the policyholders, such as if the original policy may not longer be appropriate if family needs and financial objectives change.
What is the purpose of the war clause?
To reduce adverse selection against the insurer when large numbers of new insured may be exposed to death during wartime.
What are three notable exclusions and restrictions found in policies?
- War Clause
- Aviation Clause
- Suicide Clause
When can you pay your life insurance premiums? 4
Annually
Semiannually
Quarterly
Monthly
Why does the policyholder need to pay interest on the policy loan?
To offset the loss of interest to the insurer.
What are the three main sources of dividends?
- The difference between the expected mortality and actual mortality
- Excess interest earnings
- The difference between expected and actual operating expenses.
What are the five most common ways policy dividends can be taken?
- Cash
- Reduction of premiums
- Dividend Accumulations
- Paid-up additions
- Term insurance
What are the three nonforfeiture options (or cash-surrender options)?
- Cash Value
- Reduced Paid-Up Insurance
- Extended term insurance
What are the five most common settlement options?
- Cash
- Interest option
- Fixed-period option
- Fixed-amount option
- Life income options
Define Absolute Assignment
When all ownership rights in the policy are transferred to a new owner.
Define Accelerated Death Benefits
A rider or benefit in a life insurance policy that allows insureds who are terminally ill or who suffer from certain catastrophic diseases to receive part or all of their life insurance benefits before they died, primarily to pay for the care they require.
Define Accidental Death Benefit Rider (Double Indemnity)
Doubles the face amount of life insurance if death occurs as a result of an accident.
Define Automatic Premium Loan
Cash borrowed from a life insurance policy’s cash value to pay an overdue premium after the grace period for paying the premium has expired.
Define Aviation Exclusion
Can exclude aviation deaths other than as a fare-paying passenger on a regularly scheduled airline.
Define Change-of-Plan Provision
Allows life insurance policy holders to exchange their present policies for different contracts; provides flexibility.
Define Class Beneficiary
When a specific person is not named but is a member of a group designated as beneficiary, such as “children of the insured.”
Define Collateral Assignment
When the policyholder temporarily assigns a life insurance policy to a creditors as collateral for a loan. Only certain rights are transferred to the creditor to protect its interest, and the policyholder retains the remaining rights.
Define Contingent Beneficiary
Beneficiary of a life insurance policy who is entitled to receive the policy proceeds on the insured’s death if the primary beneficiary dies before the insured; or if the primary beneficiary dies before receiving the guaranteed number of payments.
Define Cost-of-Living Rider
Benefit that can be added to a life insurance policy under which the policyholder can purchase one-year term insurance equal to the cumulative percentage change in the consumer price index with no evidence of insurability.
Define Dividend Accumulations Options
Where dividends are held in the policy and earn additional interest on them over time.
Define Entire-Contract Clause
States that the life insurance policy and attached application constitute the entire contract between the parties.
Define Extended Term Insurance Option
The net cash-surrender value is used as a net single premium to extend the full face amount of the policy (less any indebtedness) into the future as term insurance for a certain number of years and days.
Define Fixed-Amount (income of elected amount) Option
A fixed amount is periodically paid to the beneficiary.
Define Fixed-Period (Income for elected period) Option
Policy premiums are paid to a beneficiary over some fixed period of time.
Define Grace Period
A period during which the policyholder has 31 day to pay an overdue premium.
Define Guaranteed Purchase Option
Gives the policyholders the right to purchase additional amounts of life insurance at specified times in the future without evidence of insurability.
Define Incontestable Clause
States that the insurer cannot contest the policy after it has been in force two years during the insured’s lifetime.
Define Interest Option
When policy proceeds are retained by the insurer, and interest is periodically paid to the beneficiary.
Define Irrevocable Beneficiary
One that cannot be changed without the beneficiary’s consent.
Define Life Income Options
The options available to a beneficiary to be paid the death benefits as an income stream as opposed to a lump sum.
Define Life Settlement
Financial transaction by which a policyholder who no longer needs or wants to keep a life insurance policy sells the policy to a third party for more than its cash value.
Define Misstatement of Age or Sex Clause
States that if the insured’s age or sex is misstated, the amount payable us the amount that the premiums paid would have purchased at the correct age and sex.
Define Nonforfeiture Laws
Require insurers to provide at least a minimum nonforfeiture valye to policyholders who surrender their policies.
Define Nonforfeiture Options
Options provided that allow a policyholder to surrender their policies.
Define Nonparticipating Policy
When a policy does not pay dividends.
Define Ownership Clause
States the policyholder possesses all contractual rights in the policy while the insured is living.
Define Paid-Up Additions
When a policy dividend is used to purchase a small amount of paid-up whole life insurance.
Define Participating Policy
When the policy pays dividends.
Define Policy Loan Provisions
Allows the policyholder to borrow the cash value. The interest rate is stated in the policy.
Define Primary Beneficiary
The beneficiary who is first entitled to receive the policy proceeds on the insured’s death.
Define Reduced Paid-Up Insurance
The cash surrender value is applied as a net single premium to purchase a reduced paid-up policy.
Define Reinstatement Provision
Permits the owner to reinstate a lapsed policy
Define Revocable Beneficiary
The policyholder reserves the right to change the beneficiary designation without the beneficiary’s consent.
Define Settlement Options
The various ways that the policy proceeds can be paid.
Define Specific Beneficiary
Means the beneficiary is specifically named and identified.
Define Suicide Clause
States that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid.
Define Viatical Settlement
The sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups who hope to profit by the insured’s early death.
Define Waiver-of-Premium Provision
Provision where, if the insured becomes totally disabled from bodily injury or disease before some stated age, all premiums coming due during the period of disability are waived.
Define War Clause
Excludes payment if the insured dies as a direct result of war.
