chapter 3 policy provision, options and riders Flashcards
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.
Absolute Assignment
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.
accidental Death Benefit (Multiple Indemnity) 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 Whatever amount is withdrawn in an accelerated death benefit will decrease the death benefit when death occurs.
accelerated benefits rider
Insuring Clause (or Insuring Agreement
The insurer’s basic promise to pay specified benefits to a designated person in the event of a covered loss.
A policyowner must pay a premium in exchange for the insurer’s promise to pay benefits. A policyowner’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.
Consideration Clause
Entire Contract:
The insurance policy itself, any riders and endorsements/amendments, and the application comprise the entire contract between all parties. Insurance producers cannot make changes to a policy. The entire contract provision is found at the beginning of every life insurance policy issued. Only an authorized officer of the insurer is permitted to make changes to the contract.
grace period
he period of time policyowners are allowed to pay an overdue premium during which the policy remains in force, usually 30 days. 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 less any required premiums.
Permits the policyowner to reinstate a policy that has lapsed- as long as the policyowner can provide proof of insurability and pays all back premiums, outstanding loans, and interest. Most states allow reinstatement up to 3 years after a policy has lapsed. However, some states are 5-7 years.
reinstatement
The clause in a life insurance contract that prohibits the insurer from questioning the validity of the contract after a certain period of time has elapsed.
incontestable clause
Allows the insurer to adjust the policy benefits if the insured’s age or sex is misstated on the policy application.
misstatement of age or sex
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 3 years. These loans, with interest, cannot exceed the guaranteed cash value or the policy is no longer in force. The policyowner 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.
Policy Loan Provisions
Allows the insurer to automatically use the policy cash value to pay an overdue premium. There is no cost for this provision.
automatic premium loans
The right to transfer policy rights to another person or entity.
assignment clause
When the assignee receives full control of the policy and rights to the policy benefits from the current policyowner.
absolute assignment
The partial and temporary transfer of rights to another person or entity. Collateral assignments are usually intended for securing a loan with a creditor.
collateral assignment
The policyowner 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.
free look
The policy will be voided and no death benefit will be paid if the insured commits suicide within 1 year from policy issuance. The primary purpose of a suicide provision is to protect the insurer against the purchase of a policy in contemplation of suicide.
suicide clause
Aviation: The insurer will not pay the claim if the insured dies due to involvement with aviation, such as a military pilot flying a jet aircraft.
War or Military Service: The insurer will not pay the claim if the insured dies while in active military service or due to an act of war.
Hazardous Occupation or Hobby: If the insured dies as a result of a hazardous occupation or hobby, the insurer will not pay the claim.
Policy exclusions
When a policyowner decides he does not want his life insurance policy anymore, he has the option to surrender his policy. If there is cash value remaining he must use one of the following nonforfeiture options:
nonfrofeiture options
non forfeiture options – cash surrender
allows the policyowner to receive the policy’s cash value. Policyowner no longer
has coverage at this point. Normally, the maximum length of time a life insurance company may legally defer paying the cash value of a surrendered policy is 6 months (Delayed Payment provision).
non forfeiture options- extended term options
permits the policy owner to use the policys cash value to buy level, extended insurance for a specified period. no premium payments are made. the coverage provided witht he extended term nonforfeiture option is equal to the net death benefit of the lapsed policy
nonforfeiture options-reduced paid up option
the policyowner pays no more premiums but the face amount is
decreased.
types of divedend options
Cash Option: Take the cash
* Reduced Premiums Option: Reduces premium payments
* Accumulate Interest Option: Allows dividends to accumulate interest
* Paid-Up Additions Option: Purchase single payment whole life coverage
* One-Year Term Option: Purchase one-year term protection
dividend options
Participating policies pay dividends to policyowners if the company’s operations result in a divisible surplus. Recall that dividends are a return of overcharged premiums, and are therefore not taxable. Insurers typically pay dividends on an annual basis.
Allows the policyowner to waive premium payments during a disability and keeps the policy in force. It does not provide cash payments to the policyowner. The disability must be total and permanent and have sustained through the waiting period (90 days or 6 months). After a certain age (usually 60 or 65), the waiver of premium rider is void.
waiver of premium rider
If the individual paying the premiums on a juvenile life policy becomes disabled or dies, the Payor Rider ensures that premiums will be waived.
payor rider or payor clause
Allows the insured to receive a portion of the death benefit prior to 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.
accelerated benefit rider
Pays an additional sum to the beneficiary if the insured dies due to an accident. The amount paid is a multiple of the policy face amount such as double or triple the original benefit.
accidental death benefit rider (multiple indemnity)
May be added to a life insurance policy. Pays benefits for dismemberment and accidental death. Pays a principal sum for loss of both hands, both arms, both legs, or loss of vision in both eyes.
accidental death and dismemberment
Permits the policyowner to buy additional permanent life insurance coverage at specific points of time in the future without submitting proof of insurability. It also includes specific events like marriage and births, without requiring the proof of insurability. Usually the benefit is allowed every 3 years, up to the original face amount of the policy.
guaranteed insurability Rider
Allows the policy face amount to be adjusted to account for inflation based on the consumer price index.
cost of living 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 certain time period specified in the policy. It also returns premiums to the living insured at the end of a specified period of time, as long as the premiums have been paid.
Return of premium rider
Allows the insurance company to deduct overdue premium from an insured’s cash value by the end of the grace period if a payment is missed on a life policy.
automatic premium loan rider
