Chapter 4 - Life Insurance Policy Provisions, Options and Riders Flashcards
What are the two types of assignments?
- Absolute
2. Collateral
What do you find in the insuring clause of a life insurance policy? (4)
- Parties to the contract
- Length of coverage
- Premiums to be paid
- Amount of death benefit
What two items make up the entire contract?
- A copy of the application
2. The policy
How long is the free-look period on life insurance?
10 days starting on the day the policy is physical delivery of the policy (or mailed it)
What is the grace period? (3)
- The period in which you are late making a premium payment but you are still covered.
- Individual policies, it is 30 days, group policies, the grace period is 31 days.
- If the insured dies during the grace period, the death benefit is payable, minus any unpaid premium.
What is the incontestability clause?
- Is in effect for the first 2 years after the policy was issued.
- During this period the insurer can deny a claim due to material misrepresentations on the application.
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. 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. But the incontestability period does not apply during the first two years after the policy was issued for what reasons?
For reasons of nonpayment of premiums or misstatements of age, gender, or identity.
What happens when an insurance company pays out a death benefit but finds there had been misstatements of age, gender, or identity?
They will go back to the applicable rate chart and pay out the smaller death benefit based on the premiums you did pay.
What is the purpose of reinstatement?
To restore a lapsed policy
What is the advantage of reinstatement?
To retain all the values established at the original age the policy was issued.
What do you have to do to get a policy reinstated?
- Apply within the maximum time limit
- Provide proof of insurability
- Pay all back premiums plus interest
- Repay outstanding loans plus interest
What happens with an understatement of age if the error was discovered while the policy is still in force? overstatement?
-If the age has been understated - The policyowner is given the option of paying the difference in premiums with interest or having the policy reissued for the reduced amount.
If the age has been overstated - A refund is usually made by paying the difference in reserves
What are the standard policy provisions? (11)
- Entire Contract
- Insuring Clause
- Free Look
- Consideration
- Owner’s rights
- Assignment
- Reinstatement
- Incontestability
- Misstatement of Age and Gender
- Payment of premiums
- Grace Period
What are the three major exclusions in life insurance?
- Aviation (noncommercial)
- Hazardous occupation of hobbies (avocation)
- War and military service
What happens if an insured dies of suicide within the first two years of policy issue?
The premiums will be refunded and no death benefit will be paid.
What are ways you can name beneficiaries?
- Individuals
- Classes (All my children)
- Minors
- Estates
- Trusts
An insured receives an annual life insurance dividend check. What term best describes this arrangement?
Cash Option
What is true of a children’s rider added to an insured’s permanent life insurance policy?
It is term insurance covering all of the children in the family, including newly born children, and is convertible to permanent insurance upon a child reaching the maximum age without evidence of insurability.
An insured will be allowed to reactivate her lapsed insurance policy if action is taken within a certain period of time, and proof of insurability is provided. Which policy provision allows this?
The reinstatement provision.
What is the waiting period on a Waiver of Premium rider in life insurance policies?
Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived
What will happen if an insured stops making payments on a loan taken from their cash value policy?
Failure to pay back a loan will result in termination of the policy if the total amount of the loan and accrued interest equals the cash value.
The automatic premium loan provision is activated at the end of what?
The Grace Period
What is the interest-only option for life insurance payouts?
The insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals. The death benefit can be paid out later (like when kids reach a certain age)
Children’s riders attached to whole life policies are usually issued as what type of insurance?
Term
What nonforfeiture option provides coverage for the longest period of time?
Reduced Paid-Up
Define Settlement Options
The term used to describe methods of payment of the death benefit to the beneficiary upon the insured’s death.
What happens to a policy’s cash value under an extended-term nonforfeiture option?
The cash value is converted to the same face amount as in the whole life policy.
What type of assignment is used to secure the payment of a debt with an existing life insurance policy?
Collateral Assignment
If a settlement option is not chosen by the policyowner or the beneficiary, what option will be used by the insurer?
Lump-sum payment
What are the three nonforfeiture options in life insurance policies?
- Cash Surrender
- Reduced Paid-up
- Extended Term
An insurer has discovered a representation on a life insurance policy application regarding the insured’s age. The insured is 10 years older than he stated on the application. What will the insurer do regarding the death benefit?
Pay a reduced death benefit
What nonforfeiture option is automatically selected by the company if not chosen by the policyowner?
Extended Term
Which of the two types of policy assignments requires the transfer of all ownership rights in the policy to a third party?
Absolute Assignment
What dividend option is automatically selected by the company if not chosen by the policyowner?
Paid-up additions
What type of beneficiary can be changed at any point by the policyholder?
Revocable
What is the advantage of reinstating a life insurance policy as opposed to applying for a new one?
Policy premium in a reinstated policy will be set according to the insured’s original age.
What are the dividend options in life insurance policies? (7)
- Cash
- Reduced Premium
- Accumulation at Interest
- Paid-Up Additions
- Paid-Up Option
- One-Year Term
- Acceleration of Endowment
When can an insurance company use suicide as a defense against paying a death claim?
When a suicide is committed within a specified period of time after the policy is purchased (usually two years)
What life policy rider allows the company to forgo collecting the premium if the insured becomes disabled?
Waiver of Premium
What settlement options are available in life insurance policies? (5)
- Lump-Sum/Cash
- Fixed Period
- Fixed Amount
- Life Income
- Interest Only
With the interest-only settlement option, what happens to the policy’s death benefit?
Policy proceeds are retained by the insurance company, only the interest is paid to the beneficiary
What does the term double indemnity mean?
The insurer will pay a benefit of twice the face amount.
What is the name of the life insurance policy rider that provides coverage on the insured’s family members?
Other-Insured Rider
Who controls changes in premium payments, face values, and loans in a life insurance policy?
Policyowner
What is the purpose of the Automatic Premium Loan provision?
To prevent the unintentional lapse of a policy because of nonpayment of the premium.
What required provision protects against unintentional policy lapse?
Grace Period
Who does the common disaster clause protect?
The Contingent Beneficiary
Policy loans are only available in policies that have what?
Cash value (whole life)
What is the formula for determining loan value?
Loan Value = Cash Value - (Unpaid loans + Interest)
Define Face Amount
The amount of benefit stated in the life insurance policy
What is the Payor Benefit Rider?
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. The rider is also used when the owner and the insured are two different individuals.
Accelerated death benefits allow the early payment of a portion of the death benefit if the insured has any of what conditions? (6)
- A terminal illness
- A medical condition that requires 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
- Permanent institutionalization or confinement to a long-term care facility, or
- Any other condition approved by the Department of Insurance
What is the benefit amount of an Accelerated (Living) Benefit?
The maximum 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 $100k. The face amount is reduced after the payments.
What is the Living Needs Rider?
Provides for the payment 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.
What is 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 of 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.
- Designed to protect life insurance policy proceeds that have not yet been paid to a named beneficiary from the claims of a creditors of the beneficiary or policyowner.
