Chapter 4

Question 1

Contractual provisions

Answer 1

Explain what the contract consists of, what duties and responsibilities the parties to the contract have, how the policy works, and basically spells out the agreement between the policy owner and insurance company

Provisions and clause unlike riders, are included in the contract for no additional charge

Question 2

Entire contract Clause

Answer 2

Provision describes the parts of the life insurance contract. Entire contract consist of the policy, riders, amendments, and a copy of the application.

Question 3

Incontestable Clause

Answer 3

Within the first 2 years, the insurer may contest and void the contract upon proof of a material misstatement or fraud.

Question 4

Insuring Clause (proof of death)

Answer 4

Found on front page of policy and is considered the most important clause in the policy. It identifies the parties to the contract and the perils or conditions in which it will pay.

Insurance company promise to pay the policy’s death benefit to the named beneficiary after receiving proof of death

Question 5

Consideration Clause

Answer 5

Specifies the amount and frequency of premium paid by the owner as something of value provided in exchange for the company promise to pay

Question 6

Suicide Clause

Answer 6

If the insurer commits suicide, within 2 years of issue date, insurer liability is limited to a refund of premium

Question 7

Owner rights

Answer 7

Policyowner retains all rights in the policy. unless the insurer is also th policyowner, the insurer doesn’t have rights. The policyowner has the right to name or change revocable beneficiaries, borrow against the cash value or access living values, receive dividends, and select among the dividend options.

Question 8

Assignment

Answer 8

Transfer of ownership. Two types of assignments:

Absolute

Collateral

Question 9

Absolute Assignment

Answer 9

Original owner, will name a new owner of the policy. This is considered a permanent assignment. The full amount of the policy is assigned, and this is referred to as a transfer of ownership

Question 10

Collateral Assignment

Answer 10

Does not cause a permanent change in ownership. Is typically used when policy is used as collateral for a loan. TEMPORARY assignment until debt is paid in full.

Question 11

Misstatement of Age or Gender

Answer 11

Have be misstated in a policy, all benefits under the policy will be provided based upon insureds correct age or gender according to the premium scale in effect at time of policy issued. Insurer can refund any overpaid premiums if the amount paid was greater than should have been paid

No time limit for discovery, never cancels or voids policy

Question 12

Free Look (Right to Examine Period)

Answer 12

Allows policy owner a specific number of days following receipt of the policy to look it over. Owner has the right to return it for full refund of premiums paid.

Usually 10 days, starts in date policy is delivered

Question 13

Exclusions

Answer 13

Conditions stipulated in the contract for which the insurer will not provide coverage. Cannot add or alter any exclusion after policy has been issued

Aviation- student pilots 
Status Clause- military status
Result Clause- death at war
Hazardous Occupation
Hazardous Hobbies
Suicide

Question 14

Accelerated Death Benefits

Answer 14

Provide early payment of a portion of the face amount prior to death. Qualifying as terminal I’ll or chronically ill. Do not have to be repaid if health improves, but amount received reduces remaining death benefit

Terminal I’ll-Death within 24 months

Chronically ill- last 12 months can’t perform 2 daily activities

Question 15

Mode of premium

Answer 15

Provision addresses frequency of premium payments (monthly, quarterly, semiannually, annually) and to whom the premiums are payable

More frequent the payment the greater the cost

Question 16

Grace period

Answer 16

Time provided after premium due date before policy lapses. If insurer dies during this period, death benefit is payable minus premiums due

Typically is a month

Question 17

Automatic premium Loan (APL)

Answer 17

Provision must be elected by policyowner and can be cancelled at any time. Enables insurer to automatically borrow against cash value to cover a premium payment to prevent contract lapsing

Question 18

Policy Loan Provisions

Answer 18

Loan against cash value does not immediately reduce cash value in policy. Rather is used as collateral against loan.

Question 19

Policy Loan Rate Provisions

Answer 19

Loans with fixed rates have max fixed interest rate of 8%

Variable interest rates the maximum max rate is based in Moodys corporate bond yield average and is stated in the policy

Question 20

Revocable

Answer 20

Policyowner may change a revocable beneficiary at any time. This beneficiary does not have a vested interest in the policy

Question 21

Irrevocable

Answer 21

Policyowner my not change an irrevocable beneficiary unless the beneficiary dies or provides written consent for the change

Question 22

Primary Beneficiary

Answer 22

First in line to receive the death benefit upon death of insured

Question 23

Contingent/ Secondary Beneficiary

Answer 23

Received death benefit only if there is no primary beneficiary alive following the death of insured

Question 24

Tertiary Beneficiary

Answer 24

Received policy proceeds of both primary and contingent beneficiary are predecessors the insured

Question 25

Interest Only

Answer 25

Taxed as ordinary income when paid to the beneficiary. Known as capital conservation, initial benefit is left untouched with the insurer.

Question 26

Fixed amount

Answer 26

Specific amount paid monthly with interest until benefits are exhausted

Question 27

Nonforfeiture Options

Answer 27

Options required in policies that accumulate cash values and protect the policyowner against total loss of benefits if the policy should lapse due to nonpayment of premium or is intentionally cancelled.

Question 28

Reduced paid-up

Answer 28

Present cash value is used to buy a single premium, permanent paid-up policy of a reduced face amount. Provided the longest period of coverage.

Question 29

Extended Term

Answer 29

Used to buy single premium term policy of of the same face amount for as long as a period as it will buy, expressed as a combination of years and days. Provides largest death benefit also referred to as Automatic option

Question 30

Cash Surrender

Answer 30

Surrendering policy back to insurer, policy owner will receive the cash surrender value stated in the policy less any outstanding loans and accrued interest