Life Policy Provisions

Question 1

Incontestability Clause

Answer 1

Gives the maximum amount of time an insurer has to contest the validity of the policy. During this time, insurer can verify the information given by the insured/policy holder. Insurer can contest for up to two years after policy date.

Question 2

Automatic Premium Loan Provision

Answer 2

Characteristic of cash value LI policies where the insurer is authorized to use cash value built up to pay premium if the premium still has not been paid after the grace period (31 days). Allows policy not to lapse when policy holder cannot make premium payment. Loan must be paid back, and if not, the death benefit will be reduced by that amount plus interest.

Question 3

Nonforfeiture

Answer 3

Apply when a policy holder stops paying premiums on a cash value LI policy and the policy is not paid up. Three options: 1. cash surrender 2. extended term 3. reduced paid up

Any riders on policies that are continued due to nonforfeiture are cancelled.

Question 4

Spendthrift Clause

Answer 4

Applies when beneficiaries receive death benefit in installments. Means that money that is still with the insurance company cannot be used by the beneficiary and cannot be seized by creditors. Protects beneficiaries who cannot handle large sums of money.

Question 5

Cost of Living Rider

Answer 5

Allows increase in death benefit based on inflation without further evidence of insurability

Question 6

Waiver of Premium/Waiver of Cost of Insurance Rider

Answer 6

Insurer will waive life insurance premium on a policy if insured becomes disabled. Usually in force until age 60 or 65, after which premium will not be waived if insured becomes disabled.

Waiver of cost of insurance rider will be applied if insured becomes TOTALLY DISABLED on a universal life policy. The rider costs additional premium and is not automatically on the contract.

Question 7

Reinstatement

Answer 7

Premium must be paid back plus interest not to exceed 8% (along with any policy loans) –> policy will go back in force. Evidence of insurability usually required.

Question 8

Mandatory Provisions

Answer 8

Incontestability, Entire Contract, and Misstatement of Age

Question 9

Accelerated Death Benefit Provision

Answer 9

LI policy pays a portion of the death benefit is the insured becomes terminally ill.

Question 10

Policy lapse

Answer 10

Occurs when premium payments are not made on time or during the grace period, or stopped altogether. Can be reinstated if premiums are paid up with interest. Most of the time, states require reinstatement provisions.

Insurers must send notification 30 days before termination if a policy is to lapse.

Question 11

Common Disaster Clause and Uniform Simultaneous Death Act

Answer 11

Common Disaster:Comes into play when the primary beneficiary does not outlives the insured for a certain number of days and benefits are paid to a class 2 or secondary beneficiary. Disaster periods vary from 30 to 90 days.

Uniform Simultaneous Death Act: insured and beneficiary die at the same time and contingent beneficiaries receive death benefit.

Question 12

Joint and Survivorship Settlement

Answer 12

Payments are made to both parties for their whole lives.

Question 13

Disability Income Benefit

Answer 13

Though usually on a separate disability policy, this benefit rider on a LI would pay for loss of income if an insured becomes disabled. Usually starts paying benefits after 6 months of being fully disabled.

Question 14

Withdrawals or partial surrenders

Answer 14

Insurance company can delay payment on these for up to 6 months

Question 15

Return of Premium Rider

Answer 15

Pays the total amount of premiums paid on the policy. Uses increasing term insurance (death benefit goes up as time goes on).

Question 16

Family/Children’s Term Rider

Answer 16

Adding TERM insurance for spouse and/or kids onto a LI policy that is not term. The fee for the rider stays the same regardless of how many children are covered. Policy remains in force for all children until teh youngest child turns 25.

So dad can have a whole life policy with children and wife under term insurance due to the rider.

Question 17

Testamentary

Answer 17

Trust on a LI policy

Question 18

Guaranteed Insurability Rider

Answer 18

Allows insured to buy additional insurance at future dates without having to prove insurability. These are at certain specified ages laid out in the policy.

Question 19

Payor Rider

Answer 19

Covers premium when the person actually paying the premiums becomes disabled. ex. a parent who purchase a juvenile LI policy on their child becomes disabled. Premium is waived for the payor benefit on a juvenile policy is the payor dies or becomes disabled before the child reached a certain age.

Question 20

Grace period

Answer 20

1 month to pay premium

Question 21

Individual exclusion riders

Answer 21

Riders that remove coverage for certain activities (ex. skydiving)

Question 22

Accidental death and dismemberment rider

Answer 22

Also often covered under individual policies, but can be riders on health insurance. Pays for loss of limbs as well as death. It will also pay for the amount if death occurs from the specific accident. So if all three occur, three payments of the face amount are paid. Death benefit = principal sum. Dismemberment = capital sum.

Question 23

Free look period

Answer 23

10 day s after policy delivery

Question 24

Per stirpes

Answer 24

Per stirpes designations pay benefit to the children of the deceased beneficiary when a beneficiary dies before the insured. Benefits paid evenly among family lines.

Question 25

Accidental death benefit

Answer 25

Rider that will pay an extra amount on top of the face value if the death was via accident.