Study seven Flashcards
What are the policy provisions?
1) the right of recission
- 10 day period consumer has to review newly issued policy and decide whether or not to keep it or return it for a full refund
2) grace period
- law provides that a policy owner is granted a 30 day grace period in the event that he/she does not pay periodic premiums when they’re due
3) reinstatement provision
- describes conditions under which a policyholder may reinstate a policy that has lapsed, coverage has been reduced due to non-payment
- minimum legal reinstatement is 2 years from the date of the lapse
- policy owner must provide the insurer with new evidence of insurability in order to re-underwrite life insured
- policy owner must pay insurer all unpaid premiums with interest
- both 2 year suicide clause and contestability periods start anew
- would usually preserve the original attained age premium rates lapsed on
4) suicide provision
- releases the insurer from the obligation of paying death benefits if the life insured commits suicide during thr first 2 years after policy is issued/ within 2 years of policy reinstatement
5) incontestability provision
- bars the insurer from voiding policy after 2 years from date policy takes effect/ is reinstated, unless the insurer can prove fraud on the part of applicant/life insured on the original, signed application
6) misstatement of age/sex provision
- any adjustments the insurer may make to the policy benefit/premium payable, if discoveries of misstatements of age/sex made by the insured on the application at the time of application
The insurer will either:
i) adjust coverage to reflect how much coverage would have been available for the premium paid had the life insured’s correct age been used
ii) adjust premium payable to correct premium that should have been paid had life insured’s correct age been disclosed.
- requires immediate payment of difference in premiums since policy inception, with interest, in a lump sum
7) smoking status
- affirms that smoking status is material info which would qualify to void a policy for material misrepresentation during contestability period or for fraud
What are the settlement options and how are they applied?
- alternative options to a lump sum
- policy owner pre-selects an option when purchasing policy or at any point during the policy term prior to death
- if policy owner does not choose, the beneficiary may select one when the policy proceeds become payable
1) interest option
- the insurer retains policy proceeds in trust for primary beneficiary and makes periodic interest payments at a guaranteed minimum limit
- used when the policy owner wishes to ensure a life income for a primary beneficiary and a capital benefit to the secondary beneficiary
2) installment option
- insurer agrees to pay the policy proceeds, plus interest, to primary beneficiary in installments of equal amounts over an agreed period of time
- provides regular income for a finite period of time
- guarantees a minimum interest rate
- if there is undistributed capital left at the death of the primary beneficiary, it is paid to the secondary beneficiary
3) life income option
- insurer agrees to use the policy proceeds as a single premium to purchase a life annuity for the beneficiary
- provides ongoing income where no other source of income, like RRSP or pension will be available
Define life annuity.
- provides periodic payments for at least the lifetime of the annuitant
Describe how a joint life policy works.
1) joint first-to-die policy
- the lives of 2 or more are insured, but the policy pays out only one death benefit at the time of the first death
- offer conversion option which permits the survivor to purchase a new policu for the same face amount without medical underwriting
- premium cost is somewhat less than insuring lives individually, but greater than the cost of insuring only one life
2) joint last-to-die policy
- the lives of 2 or more are insured, but the policy pays out only one death benefit when the last person of the group dies
- premium cost less than insuring lives individually
- used to fund liabilities that relate to more than one person
- can be used to fund taxes due on RRSP proceeds
- or to realize a legacy under a couple’s will
THESE ARE TYPICALLY SEEN IN PERMANANT LIFE INSURANCE PLANS ONLY.
List and describe the different types of policy riders and additional benefits.
1) Guaranteed Insurability Benefit (GIB)
- guarantees the policy owner the right to purchase additional coverage on the life insured at a standard premium, at specified dates in the future, regardless of life insured’s state of health
2) Paid-up Additions Rider (PUA)
- affords the policy owner the option of making additional premium deposits, over and above scheduled premiums, to a whole life policy
- can enhance the overall death benefit and cash value of policy
- one dollar of additional premium deposit will always purchase considerably more than one dollar of death benefit
3) Accelerated death benefits
- to alleviate financial burdens associated with an insured who is suffering from certain specified conditions
- provides money for extraordinary medical care, wheelchair, supplement living expenses
- falls into 3 categories : terminal illness benefit, critical illness benefit, long-term care benefit
- capped at max of 25-50% of face amount of policy
- when death benefit becomes payable it is reduced by amount of accelerated benefits paid out
4) Waiver of Premium benefit
- aka “any occupation” disability definition
- “pays” the policy premiums on behalf of a disabled policy owner
- requires that the policy owner is ill or injured and unable to engage in any suitable occupation
- policy risks lapse before waiver rider takes over unless funds are set aside to cover premiums will unable to work
- necessary waiting period is 3-6 months
5) Accidental Death and Dismemberment (AD+D)
- the principal sum is payable in the event of the death of the life insured
- an amount equal to the principal sum will also be paid in the event the life insured dies as the result of an accident
- usually within 12 months of the accident
- referred to as “double indemnity”
- in addition to death benefits, a % of the principal sum is paid if the life insured should suffer specified physical injury as a result of an accident
6) Monthly disability benefit
- no longer a common practice
- in addition to death benefit
- monthly income disability benefit is payable should the policy owner be injured or ill and as a result be unable to work for a period of at least 3-6 months
What are the limitations set out in the use of GIB’s?
1) maximum amount that may be purchased per option exercised
2) max amount that may be purchased over the lifetime of the benefit
3) max number of options that may be exercised
4) timing of options exercised
5) max age of life insured at which the option may be exercised
Describe the categories that accelerated benefits falls into.
1) terminal illness benefit
- paid when an illness has been contracted by the life insured that is certified by a doctor to a likely result in the persons death in the following 12 months
2) critical illness benefit
- paid when a life-threatening disease/condition is contracted by life insured and he/she survives for a period of at least 30 days
- cancer, coronary bypass surgery, permanent stroke or heart attack
3) long-term care benefit
- paid when the life insured requires institionalized medical care or long term home care as a result of a medical condition
Define principal sum.
- the face amount of a policy.
List and describe the common policy terms.
1) term insurance policies
- issued for terms of 1,5,10,20 years, or until life insured reaches age 65
- normally the policy term expires and coverage terminates, on the anniversary of the policy issue date
- both death benefit and premium payable under a term ins. policy will normally remain level for the life of the term
2) term-to-100
- are a hybrid falling somewhere between term insurance and perm insurance
- a longer lasting version of term-to-65
- provides level premium
- usually have no cash value or non-forfeiture value
- although some do have non-forfeiture value that can be used to extend policy coverage in the event the policy owner stopped paying premiums
- some term-to-100 products even provide a cash value that would be paid in the event that policy were surrendered while the life insured was still alive
3) guaranteed renewable term
- used with term insurance
- include enhanced provisions whereby a policy owner may renew the coverage without having to provide medical evidence of continued insurability
- gives the option to extend the life of term policy at expiry date of current term with a new term policy with the same face amount of coverage/same duration
- increase in premium paid for next policy term
- good for individuals with deteriorated health
- comes with an age restriction beyond the age of 65
- higher rates to reflect additional risk that insurer is undertaking
- renews at a premium rate that is based on life insureds attained age at the time of renewal
4) re-entry term life policies
- because term policies don’t carry any cash value, there are no values to forfeit upon terminating or surrendering a policy
- no disincentive for a healthy life insured to seek lower premiums instead of renewing current policy
- to prevent this from happening re-entry term life policies were introduced
- renew policy at guaranteed premium rate, without having to provide medical evidence of insurability
- or you can prove evidence of insurability and receive a lower rate
5) convertible term
- gives policy owner the guaranteed option to convert a term life policy into a permanent one with the same insurer, for the same or less coverage
- without having to provide medical evidence of insurability
- can be based on attained age of the life insured at the time of the conversion (attained age conversion)
- or can be based on original age conversion, type of plan selected and life insureds original attained age at the time the term policy was issued
- in order to receive cash value, life insured must pay the permanent plan premiums from issue date to the present, with any interest, in a lump sum
6) term policy death benefit levels
i) level term polices
- constant level of coverage
- face value neither increases/decreases
ii) increasing term policies
- premiums and coverages increase, usually at the end of each policy term
- face amount increases based upon predetermined %, or be related to CPI
iii) decreasing term policies
- least popular form
- used to insure diminishing financial obligations such as a loan or mortgage
- amount of insurance protection decreases
- level premium usually
7) creditor term insurance
- where death benefit becomes payable to the lender, to discharge the balance of the loan in the event the the borrower dies
- premiums remain constant during term of policy
- face value of policy decreases in concert with outstanding balance
Describe term insurance riders.
- provides additional benefit such as a waiver of premium, or additional term insurance coverage
- can be added to term or perm policies
- the use of a rider opposed to taking out a seperate term policy is to reduce policy admin costs (aka policy fee)
- may provide coverage for life insured or life of a thir party such as a spouse
What is a family rider?
- provide fixed units of insurance coverage on spouse/children of the life insured
- typically provide a set sum
- underwriting is based on the health of spouse and kids at the time rider is taken out
- coverage on kids can be converted to perm policy once they reach 21 or 25, otherwise coverage terminates
- premiums based on # of units of coverage purchased, not the # of kids insured
What are the advantages of term insurance?
- tend to be relatively low, particularly while insured is young
- the initial low premiums allow for incoem to be allocated to other financial obligations such as RRSP, RESP, savings and investments
- are renewable or convertible, therefore offering future coverage flexibility
- may be used to guarantee repayment of a loan should the borrower die
What are the disadvantages of term insurance?
- coverage becomes unaffordable when life insured reaches 60-70
- is not renewable past a certain age, usually 65-70
- no savings or investment component, therefore cannot be self-supporting if owner can’t pay premium
What are the uses for term insurance?
1) temporary needs, time period is an important consideration
2) budgetary constraints, yearly renewable coverage may be purchased for a low initial premium, but cost increases each year upon renewal
3) term life insurance and divorce, paying support payments to ex-spouse as stated in divorce agreement
- can name child as beneficiary and set up a trust
- most common 5-10 year policies, best price
Describe permanent insurance.
- coverage is provided for duration of insured’s life, provded that premiums are paid as required
- pricing is typically based on level premium method
- a savings element is included in which cash values earn compound investment income and grow over time
- cover beyond the age of 65
