Life Insurance Policy Provisions & Conditions

Question 1

True or False

Any person could own a life insurance policy as long as they have an insurable interest when it’s issued. After it’s issued there are limited restrictions on ownership.

Answer 1

False; There are NO restrictions on ownership after the policy is issued

Question 2

True or False

If one wants to transfer ownership of a life insurance policy. They must prove they are in good health.

Answer 2

False

Question 3

Primary Beneficiary vs Contingent Beneficiary

Answer 3

Primary Beneficiary is the first person and/or entity who is entitled to receive death benefits upon insured’s death

Contingent Beneficiary is next in line basically (if PB is ineligible cuz they’re dead or something)

Question 4

Revocable vs Irrevocable Beneficiary

Answer 4

Revocable - Policyowner can change beneficiary designations without consent of beneficiary

Irrevocable - Policyowner NEEDS consent to change beneficiary designations. TOTALLY NECESSARY.

Question 5

What is a Free Look provision?

Answer 5

It gives the policyowner a period of time, usually 10 days after receipt of the policy, to return policy without cost or penalty

Question 6

What is an Incontestable Clause?

Answer 6

Provides a time limit of two years (in most cases) on the insurer’s right to dispute the validity of facts stated by the insured in the application

Question 7

What is the required “Grace Period” Policy Provision all about?

Answer 7

An amount of time (1-2 months) after a policy’s premium is due that the policy will continue to be in force if the premium payment has not been received.

Question 8

What is a Reinstatement Clause and its requirements?

Answer 8

This clause allows individuals to reinstate a lapsed policy if they meet these requirements:

1. Evidence of insurability
2. Policy was not redeemed for cash value
3. No outstanding policy loan/unpaid interest
4. All overdue premiums, plus interest, must be paid
5. Must be within a specified time period

Question 9

Formula to determine amount of benefits for beneficiaries if insured lied about age

Answer 9

(Premium paid ÷ Premium due for correct age) x Face value of policy = Death benefit

e.g. (2,000 ÷ 2,500) x 100,000 = 80,000

Question 10

What is a Policy Loan Provision?

Answer 10

It allows policy owner to take out a loan against cash value of the policy

(cash value will not decrease because of loan if insured repays on time and stuff)

Question 11

What is an Automatic Premium Loan (APL)?

Answer 11

(In MOST Whole Life Policies)

In the event of a defaulted premium, insured can have premium paid via cash value of policy until it runs out or insured gets back on track

Question 12

What are Non-forfeiture Provisions?

Answer 12

Long term policies that accrue cash values (including Level Term + Whole Life) have this provision that provides policy-owners with various options if the policy is surrendered or lapses from non-payment of premiums

Question 13

4 Non-forfeiture provision options for surrendered Life insurance policies

Answer 13

1. Cash Surrender
2. Reduced Paid-up Insurance - can apply net cash value to buy a paid up policy (smaller death benefit)
3. Extended Team - buys a level term policy for original face amount of the existing policy
4. Annuity Purchase

Question 14

What does “Settlement options” refer to?

Answer 14

The policy owner can choose death benefits to be installed payments or lump sum.

THIS IS REQUIRED IN ALL LIFE INSURANCE

Question 15

Explain what “Entire Contract Clause” means

Answer 15

Actual life insurance policy and application is the entire contract

(i.e. insurance company can’t amend contract without knowledge and consent of the policy holder)

Question 16

4 types of settlement options for life insurance

Answer 16

1. Interest only (MONEY MARKET VIBES)
2. Fixed period installment payments (LENGTH OF TIME)
3. Fixed amount installment payments (AMOUNT)
4. Lifetime Income/Annuities (PEOPLE WHO ARE BAD AT MONEY)

Question 17

5 common and optional life insurance policy provisions

Answer 17

1. Assignment clause (owners can transfer rights of policy to 3rd party)
2. Suicide Clause
3. Military Service/War Clause (get premiums back)
4. Change of Plan Provision
5. Policy Dividends (do you want policy to pay out dividends or not?)

Question 18

What does it mean that a Whole Life policy is “Participating?” “Non-Participating?”

Answer 18

“Participating” - pay out annual dividends

“Non-Participating” - do not pay out annual dividends

Question 19

Collateral Assignment vs Absolute Assignment

(Policy provision)

Answer 19

Collateral Assignment - temporarily assigns limited rights to a 3rd party as collateral for a loan

Absolute Assignment - transfers ALL rights to another party (often charities)

Question 20

What is a Waiver of Premium in life insurance?

Answer 20

If you get a disability that lasts for 6 months before age 60, insurer pays the premium

Question 21

What is an Accidental Death Benefit?

Answer 21

Additional benefit (death benefit x2) if insured’s death is due to accident. (Exclusions apply).

Question 22

What is a Guaranteed Purchase Option in Life insurance?

Answer 22

Allows insured to purchase insurance in the future at standard rates regardless of health status, avocational activities, or vocation.

Question 23

What does it mean when an insurance agent provides a “conditional receipt?”

Answer 23

A conditional receipt makes the coverage effective as of the date of application when 2 conditions are met:

1. Applicant must have completed and signed application, provided medical history, had qualified medical exam, and paid 1st premium.
2. Approval of application

Question 24

Explain the unfair/deceptive practice of REBATING

Answer 24

When an agent directly or indirectly offers or gives any portion of the premium back to the purchaser as an incentive to purchase insurance.

Question 25

Explain the unfair/deceptive practice of TWISTING

Answer 25

When an agent convinces a person with existing insurance to replace that insurance without an adequate or non-prejudicial evaluation of the consequences of the change

Question 26

What is an Accelerated Death Benefit?

Answer 26

Provides policy owners with cash in the event of terminal illness or qualified illness as defined in the policy

Question 27

What is a Viatical Settlement?

Answer 27

If insured is terminal, policy owner can sell the life insurance policy to a private firm or investor for 40%-80% of their value