Key Points Flashcards
Incontestability Clause, 3 challenge situations
The insurance company may only challenge (contest) a claim during the policy’s contestable period. Therefore, claims outside of the contestable period are generally incontestable. It should be noted that there are three situations to which the incontestable clause does not apply. A policy issued under any of these circumstances would not be considered a valid contract, which gives the insurer the right to contest and possibly void the policy at any time:
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.
Lack of insurable interest at the time of application. If no insurable interest existed between the applicant and the insured at the inception of the policy, the contract is not valid. As such, the insurer can contest the policy at any time.
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. Since the policy did not have a legal purpose from the start, the insurance company may simply deny coverage. The policy owner is powerless to enforce such a claim as no court of law will force an insurer to provide coverage under these circumstances.
A company can always void or cancel a policy for nonpayment of premiums. Additionally, statements related to age and sex or gender can be contested at any time.
4 ways to calculate actual policy cost to insured:
Interest Adjusted Net Cost Method
Interest adjusted cost indexes are designed to provide information on these four items: (1) premiums; (2) death benefits; (3) cash value; and (4) dividends. These are the variables that must be considered in evaluating cost, and they are the basis for the life insurance policy cost comparison methods.
The index numbers are designed to give the consumer a means ofcomparing the cost of policies of the same generic type. The indexes also factor the insured’s age and the amount of coverage desired. Each insurer and its producers must use the same computation formulas to arrive at the index numbers, or the purpose would be defeated. Due to the increasing complexity of life insurance policy structures, premium payment methods, benefits, and dividend configurations, the average consumer would not make cost comparisons without these index figures.
The NAIC Model Life Insurance Solicitation Regulation requires two interest-adjusted cost indexes for policy illustrations: a surrender cost index and a net payment cost index. These indexes show average annual costs and payments per $1,000 of insurance while also recognizing that $1 payable today is worth more than $1 payable in the future (i.e., the time value of money).
Life Insurance Surrender Cost Index
The surrender cost index uses a calculation formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of that period.The surrender cost index is important to the consumer who places a high priority upon the growth of cash value in the policy.It aids in cost comparisons if the policyowner plans to surrender the policy for its cash value in ten or twenty years.
Net Payment Cost Index
The net payment cost index uses a similar formula, but it does not assume the policy is surrendered at the end of the period. As such, the cash value element is omitted. The net payment cost index provides the policy owner an estimate of their average annual premium outlay, adjusted for the time value of money.
The net payment cost index is useful if one’s primary concern is the amount of death benefits provided in the policy, and is not as concerned with the build-up of cash value.It helps compare future costs, such as in 10 to 20 years, if one continues to pay premiums and does not take the policy’s cash value.
Comparative Interest Rate Method
The comparative interest rate method determines the rate of return required on an investment account to yield the same return of a life insurance policy that has cash value. This method is sometimes referred to as the “buy term and invest the rest” strategy.
The amount spent on the term insurance plus the hypothetical investment account must be the same as the required premiums for permanent insurance. The face value of the temporary and permanent insurance products being compared must also be the same.
For example, let’s say Greg is 30 years of age and wants $150,000 in permanent insurance coverage. One insurance agent shows Greg a $150,000 whole life insurance policy that requires annual premiums of $2,000 a year, for thirty years. A second insurance agent shows Greg a $150,000 decreasing term life insurance policy that costs $500 a year. The second agent further explains that Greg could place the $1,500 difference in premium in an investment account to grow. This second account can be used to offset the decreasing term policy or replace it entirely when it expires, essentially allowing him to have permanent coverage.
The comparative interest rate is the rate of return required on the investment account, so the value of the investment is equal to the surrender value of the higher premium policy at a specific point (i.e., 30 years, death). The higher the comparative interest rate (CIR), the less expensive the higher-premium permanent policy is compared to the alternative plan.
