Chapter 5

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

Can be attached for additional premium. 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. For example, a $100,000 policy that provides for a 75% accelerated benefit will pay up to $75,000 to the terminally ill insured. The remaining $25,000 is payable as a death benefit to the beneficiary when the insured dies.

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 Whatever amount is withdrawn in an accelerated death benefit will decrease the death benefit when death occurs.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

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. Allows coverage to remain even with lapsed premiums

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. Policyowner assigns one or some of the ownership rights to another party, but doesn’t assign all of the policy ownership rights. Most conditional assignments involve the use by the assignor of a whole life policy’s cash value as collateral to secure a loan from a financial institution. When the cash value or a portion of it is “assigned” to a bank or “assignee,” the assignee becomes the primary beneficiary with regard to its interest (the amount of money owed).

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

Cost of Living Rider:

Answer 11

Policy increases as CPI (inflation) increases. If CPI decreases the policy will not

Question 12

Dependent Riders

Answer 12

(Other Insureds Rider): 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 13

Dividend Options:

Answer 13

How policyowners receive their dividends CRAPO
Cash, Reduced Premiums, Accumulate at interest, Purchase Additions, 1 yr. Term

Question 14

Dividend Options:

Answer 14

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

Question 15

Entire Contract Provision:

Answer 15

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. Found at the beginning of the policy and states that the entire contract consists of all included policy documents, the attached photocopy of the original application, and any attached riders or endorsements

Question 16

Exclusions:

Answer 16

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

Question 17

Excess Interest Provision:

Answer 17

Means that the cash value will increase faster than the guaranteed rate if the insurer earns a return that’s greater than the guaranteed rate. Therefore, the excess interest provision allows interest that’s more than the policy’s guaranteed rate of interest to be credited to the cash value account.

Index-linked Method: The index-linked method credits the excess interest from earnings tied to an economic indicator (e.g., the Consumer Price Index).

Portfolio Method: The portfolio method credits the excess interest in direct relation to the insurance company’s earnings on its investments

Question 18

Extended Term Option:

Answer 18

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 19

Free Look Period (Right to examine)

Answer 19

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 20

Grace Period

Answer 20

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 21

Guaranteed Insurability Rider (Future Increase Option)

Answer 21

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 22

Incontestable Provision (Period):

Answer 22

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 23

Insuring Clause (or Insuring Agreement):

Answer 23

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 X amount”. May state our promise to pay is subject to exclusions and conditions

Question 24

Irrevocable Beneficiary Provision:

Answer 24

Beneficiary cant be changed, unless given consent from beneficiary

Question 25

Level Term Rider

Answer 25

For example, an individual has been issued a $50,000 whole life insurance policy with a $100,000 10-year term rider. If she dies in five years (or at any point in the next 10 years), her beneficiary will receive $150,000 ($50,000 for the whole life + $100,000 for the term rider). If the individual dies in 15 years (or at any point after the 10-year term), her beneficiary will only receive the $50,000 face value of the whole life insurance.

Question 26

Decreasing Term Rider:

Answer 26

For example, Mary wants to add a 20-year decreasing term policy to her whole life insurance to cover the $100,000 balance of her mortgage. The insurance company may design the rider to start with a face value of $100,000 and decrease by $5,000 per year for a fixed additional premium of $20/month, which is in addition to the premium for the permanent whole life policy. However, to discourage Mary from canceling the rider as the coverage decreases, the insurer may design the premiums so that they’re complete after 15 of the 20 years. Or, the insurer may design the policy so that the face value stops decreasing after 15 years and remains at a fixed $25,000 for the final five years.

Question 27

Increasing Term Rider

Answer 27

An increasing term rider will allow for an increasing amount of coverage each year. Increasing term riders provide an additional term insurance face amount at death that’s equal to either all premiums paid or the amount of cash value. Increasing term riders may also be referred to as increasing benefit riders and they always increase the cost of the insurance policy.

Question 28

Misstatement of Age or Sex Provision:

Answer 28

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 29

Modification Provision:

Answer 29

States that any changes to the contract must be in writing and attached to the policy

Question 30

Mode of Premium:

Answer 30

Annually, monthly, quarterly, semiannual premium payments. Annual is cheaper because of lower admin and maintenance costs.

Question 31

Nonforfeiture Options:

Answer 31

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. EVen if you stop paying premiums you still have the right to the equity (cash value).

Question 32

3 types of nonforfetuire options

Answer 32

Cash Surrender Option: Policyowners request payment of their cash values (equity)

Reduced Paid-Up Option: Policyowner uses cash value as a single-premium whole life, and lowers coverage

Extended Term option: Exchange cash value for a paid-up level term policy

Question 33

One-Year Term Option

Answer 33

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 34

Owners Provision:

Answer 34

The right to assign and change the policy’s beneficiaries

The right to determine how proceeds will be paid (i.e., settlement options)

The right to surrender (terminate) the policy and select a non-forfeiture option (and potentially be responsible for applicable surrender charges)

The right to determine and change the premium payment schedule (not necessarily the amount of the premium, but whether the premium is paid monthly, quarterly, annually, etc.)

The right to assign ownership of the policy to another person
The right to decide what happens with dividends that are paid out from a participating policy

The right to convert or renew a term policy if such option exists within the contract

The right to exercise any other applicable policy options (i.e., guaranteed insurability option, policy loans, etc.)

Question 35

Paid-Up Additions Option

Answer 35

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

Question 36

Payor Provision (Rider or Clause):

Answer 36

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 37

Policy Loan (Cash Withdrawal) Provisions

Answer 37

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. Keep in mind, while a policyowner may be borrowing “his money,” the insurance company planned on using that money as an investment to return an estimated amount of interest. This estimated interest is a crucial component for an insurance company to fulfill its obligations. Policy loans reduce the amount of funds that an insurer has to invest and, accordingly, reduce the interest that the insurance company can accumulate. Policyowners are required to pay interest on these loans to offset the interest that the insurance company is missing by not having the funds invested.

Question 38

Reduced Paid-Up Option:

Answer 38

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 39

Reduced Premiums Option

Answer 39

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 40

Reinstatement Provision

Answer 40

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 41

Return of Premium Rider

Answer 41

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 42

Term Insurance Riders:

Answer 42

Policyowners can add term ins.if they die during a specific time to a whole life plan

Question 43

Suicide Clause:

Answer 43

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. But after two years if they commit suicide, the coerage will be paid to the beneficiary. The primary purpose of a suicide provision is to protect the insurer from applicants contemplating suicide.

Question 44

Waiver of Premium Rider

Answer 44

When added to an insurance policy, the waiver of premium rider prevents the policy from lapsing if the insured becomes totally disabled. The waiver of premium rider is not a loan and does not provide cash payments to the policy owner. The insurance company is “waiving” the premiums.” It’s just as if the insured made the premiums every month