Chapter 5

Question 1

What is the Execution Clauses

Answer 1

The execution clause states that the insurance contract will be executed when both parties (the insurer and the policy owner) have satisfied the conditions of the contract. In other words, when both parties have fulfilled their responsibilities, the contract will be executed.

Question 2

What is Entire Contract Provision?

Answer 2

The entire contract clause or provision is found at the beginning of the policy. It states that the entire contract consists of all included policy documents, the attached photocopy of the original application, and any attached riders or endorsements. Nothing may be incorporated by reference, meaning that the policy cannot refer to any outside documents as being part of the contract. Therefore, the insurer cannot deny a claim in the future by stating that it did not provide the policy owner with the entire contract.

Question 3

What is Modification Provision?

Answer 3

Sometimes listed separately from the entire contract provisions, this provision states that any changes made to the contract must be in writing and endorsed or attached to the policy. It also states that only an officer of the insurer or authorized home office personnel possess the authority to make any changes or modifications or waive a policy provision. A producer or agent does not need to countersign any such modification.

Question 4

What is the Privilege of Change Clause (Policy Change Provisions)

Answer 4

The privilege of change clause, or policy change provision, outlines the conditions under which the company will allow the policy owner to change the policy’s coverage. If the premium is increasing, but the face value remains the same, the insured would not have to prove insurability.
However, the insured is required to prove insurability if the premiums are decreasing or the face value is increasing, as it could result in adverse selection.

Question 5

What is the Insuring Clause Provision?

Answer 5

The insuring clause or agreement sets forth the company’s fundamental promise to pay benefits upon the insured’s death. This provision appears on the first page of the policy, referred to as the policy face or cover page. This provision identifies the insurer’s promise, the scope and limits of coverage provided by the policy. In other words, it specifies the death benefit or face amount. Additionally, the insuring clause identifies the amount annual premium, the frequency with which the premium is paid, and the name of the beneficiary.

Question 6

What is the Consideration Clause?

Answer 6

The consideration clause or provision in an insurance policy also specifies the amount and frequency of premium payments that the policy owner must make to keep the insurance in force. The policy owner provides truthful statements and a premium “in consideration” of the insurer’s promise to pay the death benefit if the insured dies while the policy is in force.

Question 7

What is an Incontestable Clause?

Answer 7

The incontestable clause or provision specifies that after a certain period of time has elapsed (usually two years from the issue date), the insurer no longer has the right to contest the validity of the insurance policy so long as the contract continues in force.
Therefore, after the policy has been in force for the specified term, the company cannot contest a death claim or refuse payment of the proceeds even on the basis of fraud, a material misstatement, or concealment.

Question 8

What is the Physical Exam and Autopsy?

Answer 8

The physical exam and autopsy provision entitles a company, at its own expense, to make physical examinations of the insured at reasonable intervals during the period of a claim, unless it’s forbidden by state law. A physical exam would typically be done when determining the insured’s level of disability, while an autopsy would help the insurer determine the cause of death.

Question 9

What are the three clauses that gives the insurer the right to contest and possibly void the policy at any time?

Answer 9

1. Impersonation or Identity. For example, if the insurer finds out that one person completed the insurance application, and a different person signed the application or completed the medical exam, the insurer can contest the policy and its claim.
2. Lack of insurable interest at the time of application.
3. Intent to murder- If it is proven that the applicant applied for the policy with the intent of murdering the insured for the proceeds, the insurance company can contest the policy and its claim.

Question 10

What is the Misstatement of Age or Sex Provision?

Answer 10

The misstatement of age or sex provision is essential because the age and sex of the applicant are critical factors in establishing the premium rate for a life insurance policy. The purpose of this provision is to safeguard the insurer against a misunderstanding of the applicant’s age. As such, the company reserves the right to adjust the policy if the age of the insured is misstated. Likewise, an adjustment is made if an applicant’s sex is incorrectly indicated in the policy or application because, age for age, life insurance premium rates for females generally are lower than for males.

Question 11

Wht is the Suicide Clause?

Answer 11

For many years insurers did not cover death as a result of suicide. Today, an insurer continues to protect itself against this contingency of a person taking their own life. Therefore, a suicide provision is inserted in most life insurance contracts. The provision or clause stipulates that death caused by suicide is excluded during an initial period of time after the policy becomes effective.

Question 12

What is Owner’s provision (Rights of policy ownership)

Answer 12

This provision states that the policy owner possesses all rights contained in the policy. In any insurance policy or contract, the policy owner may name or change the beneficiary, borrow against the cash value (if applicable), and select the frequency with which premiums are paid (i.e., the premium mode such as annual, monthly, etc.). The owner may also choose to transfer one, some, or all of these rights to another party.

For example, in the case of a juvenile policy, the parent or guardian is the owner, the payor, and the applicant, whereas the child is the insured. The child does not have any ownership rights until ownership is transferred to them.

An additional example would be a divorce situation where, as part of an alimony judgment, a spouse is required to be the insured and payor of an insurance policy with the other (ex)spouse listed as the policy owner.

Question 13

What is the Assignment Provision?

Answer 13

People who purchase life insurance policies are called policy owners rather than policyholders because they own their insurance policies and may do with them as they wish. The assignment provision reiterates one of the policy owner’s rights, as stated in the contract. It enables the policy owner to transfer any or all of their policy rights to someone else. This transfer of rights or ownership is known as policy assignment. The previous owner is called the assignor, and the new owner is called the assignee.

Question 14

Absolute vs Conditional or Collateral Assignment

Answer 14

An absolute or complete assignment happens when the policy owner transfers all of their policy (ownership) rights. In this case, the entire contract has been transferred to another party. An absolute assignment involves a complete transfer of the policy to another. The assignor (original policy owner) is usually not able to recover an absolute assignment. An absolute assignment may also be referred to as a voluntary or complete assignment.

Collateral or conditional assignment occurs when the policy owner assigns one or some of the ownership rights to another party but does not assign all policy ownership rights. As such, a collateral (or conditional) assignment is a partial and temporary transfer of policy rights to another.

Question 15

What is Free-Look Provision?

Answer 15

When a policy is delivered, the new owner possesses the ability to review the contract for a specified period of days. If the new policy owner decides not to keep the policy, they may return it to the insurer as long as this is accomplished within a specified number of days from the delivery date.
This provision allows the policy owner to return the policy for a full premium refund without giving a reason to the insurer.

Question 16

Policy Assignment and beneficiaries?

Answer 16

If a policy owner names an irrevocable beneficiary (meaning the beneficiary cannot be changed), the policy owner must get the irrevocable beneficiary’s agreement prior to any assignment. Furthermore, an assignee typically does not have the ability to change an irrevocable beneficiary designation. However, the assignee could change a revocable beneficiary.

Question 17

Grace period provision?

Answer 17

Grace periods are standard in a lot of other financial products such as consumer loans, mortgages, credit card payments, etc. The grace period in a life insurance policy is meant to protect the policy owner against the unintentional lapse of the policy. Grace period describes the period of time following the premium due date, where even though the premium has not been paid, coverage does not lapse. In most life insurance policies, the grace period is one month (30 or 31 days). While no longer a common practice, industrial policies have been known to define their grace period as four weeks. Additionally, some states may have specific laws for grace periods when the policy owner is a senior.

Question 18

Reinstatement Provision?

Answer 18

If a policy lapses because premiums are not paid, many life contracts allow reinstatement as long as it is requested within a specific amount of time after the policy lapse. Most states require reinstatement periods of at least three years following a policy lapse and, in some cases, may require as long as seven years.

In addition to the request, usually in the form of a reinstatement application, the insurer will require proof of insurability or good health. All back premiums (plus interest) owed must be paid to the insurer before reinstatement is granted. Once the owed premiums are paid and the reinstatement application (along with proof of insurability) is provided to the insurer, the insurer has 45 days to accept or reject the reinstatement request. If the insurer does not accept or reject the reinstatement within 45 days, coverage will be automatically reinstated as if it had never lapsed.

The most crucial advantage to the reinstatement of an insurance policy is that the premium of the policy will continue to be based on the insured’s age at the time of the initial application (i.e., the applicant’s original age).

Question 19

Cash value provision?

Answer 19

The cash value provision is associated with the whole life policy.

Question 20

What is the Excess Interest Provision?

Answer 20

The excess interest provision in life insurance means that the cash value will increase faster than the guaranteed rate if the insurer earns a greater return than the guaranteed rate.

There are two methods used for the excess interest provision.
1. Index-linked Method: The index-linked method credits the excess interest from earnings tied to an economic indicator (i.e., the consumer price index).
1. Portfolio Method: The portfolio method credits the excess interest in direct relation to the insurance company’s earnings on its investments.

Question 21

What is Nonforfeiture Cash Values?

Answer 21

At one point in time in the life insurance industry, if you did not pay your premiums and failed to pay it by the end of the grace period, the policy would lapse, and you would forfeit any equity held in the policy. In response to this problem, many states adopted the standard nonforfeiture law. This law requires that the policy owner must have access to any cash value accumulation should they stop paying the policy.

There are three nonforfeiture options available to a policy owner who decides to surrender a whole life policy. If this scenario arises, the policy owner can stop paying premiums, and he will not “forfeit” the cash value or equity that has been built up in the policy.

Question 22

Cash Surrender Option?

Answer 22

Policy owners may request an immediate cash payment of their cash values when their policies are surrendered. Any outstanding policy loans or debts reduce the amount of cash value the policy owner receives.
The cost recovery rule states that when a life policy is surrendered for its cash value, the cost basis (total premiums paid) is exempt from taxation. If the amount received in a cash surrender is greater than the total of premiums paid minus dividends paid, the excess is taxable as ordinary income. A partial surrender can allow the policy owner to withdraw the policy’s cash value interest-free.

Question 23

What is the Reduced Paid-Up Option?

Answer 23

A second nonforfeiture option is to take a paid-up policy for a reduced face amount of insurance. By doing this, the policy owner uses the policy’s cash value as the premium for a single-premium whole life policy at a lesser face amount than the original policy. When this option is exercised, the paid-up policy is the same kind as the original, but for a lesser amount of coverage. Meaning, if the original policy was a participating policy, the new policy will also be a participating policy. Once the paid-up policy has been issued, the new face value remains the same for the life of the policy. Additionally, like all whole life policies, the new policy will also build cash value.

Question 24

What is an extended-term option?

Answer 24

Extended-term insurance is a nonforfeiture option that lets you keep your life insurance coverage for some amount of time, even though your permanent policy ends. It replaces your permanent policy with a term policy, typically of the same face amount, paid for by your accumulated cash value.

Question 25

What is the Policy Loan Provision?

Answer 25

A buildup of cash value characterizes permanent or whole life insurance. The policy loan provision, which is required in all whole life policies, outlines that the policy owner has the right to access this equity at his or her discretion. This provision, which is supported by the previously reviewed owner’s rights provision, permits the owner to receive an advance against the cash value build-up of the whole life policy.

Question 26

Structure of the policy loan?

Answer 26

This advance against the cash value should be considered more of an advance of policy proceeds as opposed to an actual bank loan. A policy “loan” may not be “called” by the insurance company and can be repaid at any time by the policy owner. Additionally, policy loans do not require credit checks, proof of income, or other things commonly associated with taking out a loan. Remember, you’re essentially getting the policy proceeds advanced and using the cash value as collateral.
The maximum loan value of a whole life policy is generally its cash value less any projected interest.

Question 27

What is the Policy Loan Interest?

Answer 27

Remember that while you may be borrowing “your money,” the insurance company planned on using that money as an investment to return an estimated amount of interest. This estimated interest is crucial for an insurance company to fulfill its obligations. Policy loans reduce the amount of funds an insurer has to invest and accordingly reduce the interest the insurance company can accumulate. Policy owners must pay interest on these loans to offset the interest the insurance company misses by not having the funds invested.

Question 28

What is the use of a policy loan?

Answer 28

The primary advantage of a policy loan is that it provides ready cash for the policy owner without having to apply or qualify for the loan. Whether it is to pay debts, pay for emergencies, pay for education expenses, or used for a business purpose, a policy owner may use the cash value for any reason when they need cash. The cash value may also be used as collateral in order to secure another type of loan with a lending institution.

Question 29

Taxation on the policy loan?

Answer 29

Generally speaking, policy loans may be taken out of an individual whole life policy without any tax implications as long as the policy remains active. However, this changes if the policy lapses or is surrendered and there is an outstanding loan greater than the total premiums paid. Any gains, the amount received via policy loan that exceeds the premiums paid, when a policy with an outstanding loan is lapsed or surrendered (before the insured’s death) will be immediately taxed as ordinary income.

Question 30

What is an Automatic Premium (or Policy) Loan Provision?

Answer 30

The automatic premium loan provision offers another way for the policy owner to avoid or guard against the unintentional lapse of their policy, as long as there is sufficient cash value present in the policy. The provision allows the insurance company to automatically take a loan against the policy’s cash value to pay the premium due if the required premium is not paid by the end of the grace period.

The automatic premium loan provision is not automatically included in a policy and must be elected by the policy owner, typically at the time of application.

Question 31

What is the Settlement Options Provision?

Answer 31

The settlement options provision outlines the various ways the policy’s death benefit may be paid to the beneficiary as well as who has the authority to decide how to distribute the funds.

Question 32

What is the Accelerated Benefits Provision?

Answer 32

The accelerated benefits provision allows an insured to “accelerate” the death benefit of a life insurance policy while still living if a physician diagnoses and verifies that the insured is suffering from a terminal illness and is likely to die within twelve to twenty-four months or less.
For example, a $100,000 policy that provides for a 75% accelerated benefit would 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 33

Long-Term Care Rider?

Answer 33

Some accelerated benefits are available by adding a long-term care rider to a life insurance policy. If an insured is permanently confined to a nursing home and requires long term care, the policy rider will pay a benefit.

A long-term care rider can help safeguard against the financial burden of long-term care. These riders may be added to individual or group policies. For the insured to qualify for an accelerated benefit under a long-term care rider, the (long-term) confinement must be covered by the rider, or additional requirements must be satisfied.

Question 34

Policy Dividends

Answer 34

As noted previously, mutual insurers issue participating or par insurance policies and, as such, allow their policy owners the opportunity to receive dividends. While stock companies typically only issue non-participating or non-par policies, in rare cases, they may also issue participating policies, which include the potential for policy owner dividends.

Question 35

What is policy riders?

Answer 35

Policy options and riders are a similar concept as customizing a new vehicle, adding leather seats, a sunroof, or even an extended warranty. All of which will cost you additional money.

Question 36

what is the wavier of premium?

Answer 36

When added to an insurance policy, the waiver of premium rider prevents the policy from lapsing when the insured becomes totally disabled. If an insured becomes totally disabled for six consecutive months, the insurer promises to waive any future premium payments until they return to work.

Very few companies include this rider standard. It most often is an additional rider and thus must be requested by the applicant.

Question 37

Disability Income Benefit Rider?

Answer 37

The disability income benefit rider provides an income benefit if the insured is totally and permanently disabled as defined by the policy. Most riders provide a benefit of one percent of the face amount of the policy, which is payable if the insured is totally disabled.

For example, if Jim owned a $20,000 life insurance policy with this rider included and became totally disabled, he would be paid $200 per month (1% of $20,000).

Question 38

Accidental Death Benefit Rider ADB (Double Indemnity)

Answer 38

This type of rider may also be attached to a life insurance policy for an additional premium. This benefit provides a multiple indemnity and provides an additional death benefit if the cause of death listed on a death certificate is “accidental”. Policies that pay a multiple of two times the policy face amount are called double indemnity, and those that pay three times the death benefit for death due to accidents are called triple indemnity and so forth.

Question 39

Guaranteed Insurability Option

Answer 39

This rider allows a policy owner to purchase additional life insurance coverage at specified dates without providing evidence of insurability. This rider provides specific dates on which additional life insurance policies can be bought. The policy owner can only transact purchases using this option on these days, or within a short window (90 days).

Question 40

Cost of Living (Adjustment) Rider

Answer 40

This rider automatically increases the face amount of the policy at specified intervals based upon increases in the Consumer Price Index (CPI). The CPI measures the inflation rate each year. If there were a 2% rise in this index, the policy owner’s face amount would increase by 2% for the next year.

Question 41

Payor Rider

Answer 41

This rider may also be referred to as the payor benefit provision or payor clause and is only added to a policy an adult purchased to cover the life of a child. It provides that premiums will be waived until the child reaches age 21 (some policies use age 18 or 25) if the premium payor (i.e., parent or guardian) dies or becomes totally disabled. The rider solely covers the premium payments for the policy. It does not provide any income or death benefit to the child.

Question 42

What is an Exchange Privilege Rider (Substitute Insured Rider)?

Answer 42

The exchange privilege rider, also known as the substitute insured rider, outlines the conditions and processes for changing the insured of an insurance policy. This rider is typically limited to a business policy covering a key employee or executive. The goal is to simplify updating the insurance policy when such an insured is no longer employed with the business. The exchange privilege rider allows for the policy to continue with the same face amount. However, the premiums are recalculated based on the new insureds age, sex, insurability, etc.

Question 43

Exchange Privilege Rider (Substitute Insured Rider)

Answer 43

The exchange privilege rider, also known as the substitute insured rider, outlines the conditions and processes for changing the insured of an insurance policy. This rider is typically limited to a business policy covering a key employee or executive. The goal is to simplify updating the insurance policy when such an insured is no longer employed with the business. The exchange privilege rider allows for the policy to continue with the same face amount. However, the premiums are recalculated based on the new insureds age, sex, insurability, etc.

Question 44

What is the term Insurance Riders?

Answer 44

Many people like the peace of mind that comes with permanent insurance policies and the large, inexpensive face values typically associated with term insurance. Term insurance riders were created to give insureds an inexpensive option to add additional temporary coverage to a permanent policy. These riders allow for an additional death benefit (above the permanent face value) if the insured dies during a specified term. While there is an additional expense for the extra protection, it is nominal compared to the cost for the permanent protection and less than if the insured were to take out a separate term policy

Question 45

What is a Level Term Rider?

Answer 45

A level term rider adds an additional fixed, level death benefit for a predetermined amount of time at a predetermined cost to the existing face value a permanent policy.

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

Question 46

Decreasing Term Rider

Answer 46

A decreasing term rider adds an additional decreasing death benefit for a predetermined amount of time at a predetermined cost to the existing face value of a permanent policy.

For example, Mary would like 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 a year for a fixed additional premium of $20/month in addition to the premium for the permanent whole-life policy.

Question 47

Increasing Term Rider

Answer 47

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

Question 48

Return of Premium Rider

Answer 48

The return of premium rider is a type of increasing term insurance added to a whole life policy. When the insured dies, the beneficiary receives the face amount plus an additional (term insurance) death benefit equal to the cumulative total of all premiums paid during the life of the policy.

Question 49

Return of Cash Value Rider

Answer 49

The return of cash value rider is another type of increasing term rider that provides an increasing amount of term insurance that equals the cash value as it accumulates in a whole-life policy. This rider allows the cash value to be paid in addition to the face amount.

Question 50

Life Insurance Policy Exclusions

Answer 50

Insurance policies may contain an exclusion provision allowing the insurer to deny a death claim if any of the listed exclusions causes death.

Question 51

What is a variable whole life insurance?

Answer 51

Variable whole life insurance (VWL) is a permanent policy with a cash value component and death benefit that can vary. The policy is similar to a mutual fund, as the policyholder pays premiums into a separate investment account in which the insurance company invests. The policyholder chooses the investment options, such as stocks, bonds, or mutual funds, and the cash value and death benefit fluctuate based on the performance of those accounts.

Question 52

What are surrender charges on life insurance with rear-end loaded provision?

Answer 52

With a rear-end loaded life insurance policy, surrender charges are typically high in the early years after initiating the policy and decrease over time. They are imposed when a policyholder attempts to withdraw funds or cancel the policy prematurely, usually as a percentage of the cash value or the premiums paid.