Policy Riders, Provisions, Options, and Exclusions

Question 1

Policy Riders

Answer 1

A rider is a form attached to a policy that modifies the conditions of the policy by expanding or decreasing its benefits or excluding certain conditions from coverage. Riders are normally selected by the applicant at the time of application and provide temporary (term) benefits. Riders may cost extra…

Question 2

Waiver of Premium

Answer 2

The company will waive the premium if the insured is gainfully employed and becomes totally disabled (unable to perform the functions of ANY job). The insured must have a physician certification that the disability will last at least 6 months. The company will then waive the premium and continue coverage to a stated date or to a specific age (ex. 65).

Premiums paid in a six-month period of disability, prior to reporting, will be refunded.

Waiver of Premium with disability income includes a small monthly disability income payment to thee insured.

Question 3

Payor Benefit

Answer 3

States that, if the person paying the premium for a minor child dies or is permanently disabled, the company will pay the premium until the child reaches the stated age in the policy. The child will then pay the same premium as if there had been no interruption in the policy plan.

Question 4

Guaranteed Insurability

Answer 4

The company guarantees that, on specified dates in the future, the insured may purchase additional insurance without providing evidence of insurability.

The rate is based on the insured’s attained age.

The guarantee lasts until a maximum age, e.g., age 50

Question 5

Accidental Death

Answer 5

May be an independent policy or a temporary rider which pays a specified amount to the beneficiary if the insured dies due to an accident.. The F.V. can be any amount.

The insurer must allow at least 365 days from the date of the accident for death to occur.

Question 6

Other Insureds

Answer 6

Adding term life insurance to the base policy on a person other than the primary insured; e.g., spouse, children. Some companies allow coverage on non-family members, such as business partners. The rate is based on the other insured’s age, gender, amount of coverage and answers to application questions. All insureds proposed for insurance must provide proof of insurability.

Question 7

Long Term Care Rider (attached to a life insurance policy)

Answer 7

a.k.a. “Combo policy”

This rider provides the insured with a “Custodial Care” benefit (usually monthly), which is a derivative of the face value and cash value, of the base policy.

This rider is normally attached to a type of permanent life insurance, typically Universal Life.

Question 8

Entire Contract and Representations

Answer 8

The Policy and attached application (must be included) along with any endorsement and riders, shall constitute the entire contract. Neither party may refer to any other documents to contest the validity thereof. The statements on the attached application, in absence of fraud, are deemed to be represented and not warranties.

Question 9

Insuring Clause a.k.a. Insuring Agreement

Answer 9

This is the most important clause in the policy. Without this clause, there is no insuring.

This states that the company, for consideration, will pay a stipulated amount to the beneficiary upon the death of the insured.

It gives the liabilities and obligations of the insurance company.

This also gives parties to the contract (insured and insurer) and makes reference to the beneficiary.

The insuring clause is subject to the terms and conditions of the contract and defines the F.V.

Question 10

Free Look

Answer 10

The applicant is given a time from the date of delivery in which to review the policy. The minimum period is 10 days (typically 10 to 30 days). If dissatisfied with the content, the applicant may return the policy within the free-look period and receive a full refund of the entire initial premium paid at the application. If returned, it will be as if the policy was never issued.

Question 11

Consideration

Answer 11

The exchange of something of value for a promise of performance. In the case of the insurance contract, the consideration is the premium and application from the insured for the promise of the insurance company to pay if a covered loss occurs.

Question 12

Owners Rights

Answer 12

This provision states who the policy owner is and explains the policy owner’s rights. Owner’s rights include assignment of the policy, choosing policy riders, and requesting policy loans.
Third-party owner: This situation occurs when the owner is not the insured; e.g., the boss buys a policy to cover an employee, or a mother buys a policy to cover her child. Third-party owners must have “Insurable Interest” in the insured. Once the policy has been purchased and is in force, the benefit must be paid to the third-party owner, even if the insurable interest no longer exists.
Insurable Interest: When purchasing a life insurance policy, risk of financial or emotional loss in the insured must be present. An individual has an unlimited insurable interest in his/her own life. Insurable interest need only exist at the time of application and issuance of the policy.

Question 13

Grace Period

Answer 13

This allows the insured additional time to pay the premium, past the due date, and avoid lapse. Policies may have a one-month grace period of 30 to 31 days (no less than 30 days), during which the insured can pay a late premium before the policy lapses. If the insured dies during the grace period, the company will pay the full F.V., minus the premium and interest owed.

The insurer may collect interest of up to 6% on overdue premiums.

Question 14

Reinstatement

Answer 14

The policy may be reinstated at any time within three years after the default date.

Evidence of insurability, payment of all back premiums plus interest, and any other indebtedness to the insurer may be required.

Question 15

Policy Loans

Answer 15

After three years the insured may borrow against the CV at an interest rate stated in the policy. The company may require the interest in advance (called “pre-paid interest”). This is to assure that there is a balance in the C.V., in case no payment is made toward the loan or interest. Should the insured die during an outstanding loan, the full amount, including interest, is subtracted from the face value. To reinstate a policy to its original F.V., the loan plus interest must be repaid.

Question 16

Withdrawals

Answer 16

The cash value (CV) of certain policies may be withdrawn by the owner of the policy. Withdrawing the entire CV may constitute a surrender of the policy and termination of insurance. Any amount over what has been paid in premiums (“cost basis”) is taxable.

Question 17

Incontestability

Answer 17

After two years in force from the date of issue, the policy is deemed incontestable. The company may not cancel the policy except at the option of the insured, or for nonpayment of premium, even if a material and intentional lie is discovered.

Question 18

Misstatement of Age of Gender

Answer 18

A Standard Provision in Washington.
This is considered an error.
If the age or gender of the insured has been misstated, the amount payable under the policy will be the amount the paid premium would have purchased at the correct age and gender. This is not subject to the two-year time limit (incontestability period).

Question 19

Suicide

Answer 19

This is the most common exclusion in a life insurance policy.
If the insured commits suicide during the first two years of the policy, the company will refund the premium to the beneficiary. The F.V. is forfeited.
After two years, the company will pay the full F.V. in the event of a suicide.

Question 20

Assignments

Answer 20

Assignment: A transfer of rights in a policy to someone other than the policy owner.
Assignee: The person to whom policy rights are assigned in whole or in part by the policy owner.
Temporary assignment (most common): The C.V. or F.V. is temporarily assigned. Used to obtain a bank loan, or for mortgages, etc. Also known as “collateral assignment”.
Absolute assignment: Permanent transfer of some or all policy rights
The policy owner must give written notice to the insurer regarding an assignment. Insurer does NOT guarantee the validity of the assignment.

Question 21

Beneficiaries

Answer 21

A beneficiary is a person, persons, or legal entity to which insurance proceeds are paid in the event of the insured’s death.
The beneficiary may be an individual, class (e.g., all children of this marriage), institution, charitable organization, trust, or any legal entity.
Changes to the beneficiary can only be made by the owner of the policy

Question 22

Types of Beneficiaries - Primary

Answer 22

First choice (e.g., spouse) - collects the death benefit upon the death of the insured.

Question 23

Types of Beneficiaries - Contingent

Answer 23

The second choice - collects if the primary beneficiary does not survive the insured (e.g., child, or a guardian of the children.)

Question 24

Types of Beneficiaries - Tertiary

Answer 24

Third choice - collects if the primary and contingent have not survived the insured (e.g., insured’s estate (this is the default)).

Question 25

Types of Beneficiaries - Revocable

Answer 25

Type of beneficiary that may be changed by the policy owner at any time with written notice to the company.

Question 26

Types of Beneficiaries - Irrevocable

Answer 26

An Irrevocable Beneficiary may be changed only with the permission of the beneficiary. An irrevocable beneficiary has a vested interest (legal rights) in the policy. If the policy owner stops paying the premiums, the irrevocable beneficiary may pay the premiums to continue the policy.

Question 27

Changes of Beneficiary

Answer 27

Change of beneficiaries may be made by the owner at any time unless an irrevocable beneficiary is named. This restricts the owner’s rights. All changes to the policy must first be approved by the irrevocable beneficiary.
The insurer must be notified in writing of all beneficiary changes and/or assignments.

Question 28

Minor Beneficiary

Answer 28

The insurer will not pay benefits to children under a specified age (determined by state law). If a guardian or custodian has not been named, the insurer will hold the benefits in trust until the court names a custodian.

Question 29

Trust

Answer 29

(life insurance or living trust) is a useful tool for distributing a person’s assets (estate); especially funds left by a parent to care for minor children. A trust can be named the beneficiary of the life insurance policy. The trust specifies how the proceeds of the policy are to be used.

Question 30

Non-Forfeiture Options (NFO) - Cash Surrender Value

Answer 30

(Loan surrender): Insurer pays to a policy owner the accumulated CV at the time of policy lapse. The Policy is surrendered and no coverage exists. A policy that has been cash surrendered cannot be reinstated.

Question 31

Non-Forfeiture Options (NFO)

Answer 31

These protect the policy owners CV upon lapse or termination of the policy. Policies that are required to have an NFO will have a table of values in the policy.

Question 32

Non-Forfeiture Options (NFO) - Reduced Paid-Up Insurance

Answer 32

The CV is used to buy another policy of the same kind but with a reduced FV. The new policy is paid up CV will continue to build but at a slower rate. This policy may be reinstated.

Question 33

Non-Forfeiture Options (NFO) - Extended Term (Automatic NFO)

Answer 33

CV is used to buy a term policy with the same FV as the old policy and will last as long as the CV will pay the premium. The policy may be reinstated.

Question 34

Settlement Options (SO)

Answer 34

Settlement options distribute the F.V. to the beneficiary in a way other than a lump sum.
A notice of claim and proof of loss must be given to the insurance company before payments begin.
The policy owner chooses the settlement option for the beneficiary. The beneficiary may only choose a settlement option if the owner does not.
The insurance company must pay a reasonable interest rate on the F.V. as long as it holds the funds.

Question 35

Settlement Options (SO) - Fixed Settlement Options - Fixed Amount or Fixed Period Installments

Answer 35

Pays to the beneficiary a specificedd amount of money monthly, quarterly, semiannually, or annually, or over a specific period of time (fixed period) until the FV and interest have expired.

Question 36

Settlement Options (SO) - Fixed Settlement Options - Interest Only

Answer 36

Insurer pays interst to the beneficiary (at least annually) until a specified date or event and then pays the full FV. Interest only payments are fully taxable as ordinary income.

Question 37

Settlement Options (SO) - Life Payout Options

Answer 37

Uses the FV to purchase income for the life of the beneficiary. Payments may exceed the FV and interest. These payout options are similar to annuity payout options. The difference is that payout is to the beneficiary, not the annuitant.

Question 38

Settlement Options (SO) - Life Payout Options - Life Income Only (straight life income)

Answer 38

Pays the beneficiary income for life in monthly, quarterly, semiannually, or annual installments. Payments cease upon death of beneficiary.

Question 39

Settlement Options (SO) - Life Payout Options - Life Income Period Certain

Answer 39

Pays the beneficiary income for life in equal installments, but also guarantees a minimum period certain. If the beneficiary dies during the period certain, benefits would be paid to a beneficiary named by the beneficiary or to the beneficiary’s estate to the end of the selected period. The added guarantee results in a lower periodic payment.

Question 40

Settlement Options (SO) - Life Payout Options - Life Income Cash Refund

Answer 40

Pays the beneficiary income for life, but if the beneficiary dies before the full FV has been paid, the remainder of the FV is paid in a lump sum to a beneficiary named by the beneficiary, or to the beneficiary’s estate. The added guarantee results in a lower periodic payment.

Question 41

Settlement Options (SO) - Life Payout Options - Joint & Survivor

Answer 41

Joint & Survivor - Income for life is paid to two or more beneficiaries. Payments would be lower than straight life income because of the added guarantee.
Joint - Equal payments for more than one beneficiary. After the death of one beneficiary, payments continue to the surviving beneficiary.
Survivor - Pays first to the principal beneficiary. If the principal dies the surviving beneficiary receives 2/3 of the benefit.

Question 42

Accelerated Death Benefit (Living Benefits)

Answer 42

Provides pre-death benefits to insured who can demonstrate a terminal illness. This provision is used to dissuade “viaticals” and “life settlement contracts”. A percentage of the face amount is paid to the insured upon certification of a terminal illness (expected to die in 6-12 months). The funds can be used by the insured for living expenses, medical expenses, hospice expenses or last requests. Early distribution is considered payment of FV and is NOT taxable. Upon death of insured, payment of the remaining policy proceeds are paid to the beneficiary, less any interest lost by the insurer due to the early distribution.

Question 43

Disclosure Documents

Answer 43

Explain the impact of an early distribution on government benefits, such as Medicaid, must be provided to and signed by the insured.

Question 44

Dividends and Dividend Options - Mutual

Answer 44

Mutual insurers MUST issue participating (par) policies only. The company board of directors may “declare” dividends by paid to policy holders when there is a surplus in the general investment account. The dividends will be paid on the anniversary date of the insureds policy. The insured chooses how he would like to receive dividends.

Question 45

Dividends and Dividend Options - Stock

Answer 45

Stock insurers usually issue non-participating (non-par) policies but they can issue par policies as well. The insurers are for-profit and distribute profits to their stockholders rather than their policyholders. Dividends are never guaranteed.

Question 46

Dividend Options (DO) - Cash

Answer 46

Paid annually on the anniversary date of the policy

Question 47

Dividend Options (DO) - Application to reduce premium

Answer 47

Dividends reduce the premium in the next policy year

Question 48

Dividend Options (DO) - Accumulated at Interest

Answer 48

Dividends accumulate with interest at a rate specified in the policy. Accumulations may be withdrawn at any time. interest earned is taxable as ordinary income.

Question 49

Dividend Options (DO) - Paid Up Additions

Answer 49

Dividends are used to buy a small paid-up policy of the same type as the current policy. The FV of the paid up addition is paid along with the FV of the original policy upon death. No producer commissions are paid; purchases are on a net premium basis. The amount that may be purchased depends on the following: Attained age of the insured, type of policy, amount of the dividend.

Question 50

Dividend Options (DO) - One Year Term Option

Answer 50

Dividends are used to buy a one year term policy. This is not offered by all insurers.

Question 51

Policy Exclusions - War

Answer 51

Excludes paying the FV to the beneficiary, should the insured die in wartime activity. Applied to any type of military conflict, whether declared or undeclared. The insurer may either pay the policy CV, or all premiums paid plus interest, to the beneficiary (but not the FV)

Question 52

Policy Exclusions - Aviation (very rare)

Answer 52

Excludes coverage if insured dies in a PRIVATE plane crash, whether pilot or passenger. No exclusion for fare-paying passengers on regularly scheduled commercial airlines. This provision may, or may not be in a policy.

Question 53

Policy Exlusions - Dangerous Activity

Answer 53

Excludes life coverage while insured is engaged in a hazardous occupational or vocational activity, ex. bomb dismantler, race car driver, etc.

Question 54

Policy Exclusions - Suicide

Answer 54

Death benefit is not paid to the beneficiary if insured commits suicide in the first two years of issue. premiums paid to date od death will be refunded to beneficiary. After two years, the full death benefit will be paid out even if insured’s death is by suicide.