Unit 7: Life Insurance Policy Provisions

Question 1

Free look

Answer 1

•right to examine
•gives the policyowner a period of time to return a policy for any reason within 10 days of delivery & receive all premiums paid

Question 2

Insuring clause

Answer 2

•insuring agreement
•usually found on the first page of the policy
•insurers promise to pay upon death
•includes the face amount
•includes what the company will pay, the death benefit amount, & to whom it will be paid
•usually signed by an officer of the company

Question 3

Ownership rights

Answer 3

The owner of a policy may exercise all policy rights & privileges without the consent of any beneficiary including the right to:

•name or change the beneficiary
•select settlement options
•borrow or withdraw policy cash values
•receive policy dividends (participating policies)
•surrender or cancel the policy
•assign or transfer ownership
•select/change the premium payment mode
•select a non-forfeiture option

Question 4

Assignment (of life insurance)

Answer 4

•a transfer of the owner’s rights, in whole or part, to another individual or entity
•2 types:

1. Collateral (temporary/conditional/partial)-does NOT change ownership of the policy
   -most common type of partial assignment is to pledge all or part of the death benefit as collateral for a loan
2. Absolute/permanent-permanent change
   -transfers all rights of ownership to another person or entity
   Ex. A parent may transfer policyownership to a daughter when she reaches age 18

Question 5

Entire contract

Answer 5

•the life insurance policy & a copy of the original application = the entire contact
•any riders or amendments (if any)
•the insurer may NOT refer to documents other than these when denying or paying a claim

Question 6

Endorsements (modifications)

Answer 6

•any change made to the contract must be made in writing & agreed to by both the insurer & the policyowner
•this amendment must be signed by an executive officer of the company & cannot be authorized by an agent/producer

Question 7

Consideration

Answer 7

•think MONEY
•legal term that means something of value
•exchange of value is necessary to form a valid contract
•the insured’s consideration = the premium paid & the representations made in the application
•the insurer’s consideration = the promise the pay the face amount of the contract to the named beneficiary upon the death of the insured

Question 8

Payment of premium

Answer 8

•premiums are due in advance—>on or before the date on which the next period of coverage begins
•the mode of the premium payment is the frequency of the payment

Question 9

Grace period

Answer 9

•if the insured does not pay the premium on the due date, the policy will stay in force for a limited time before the coverage actually lapses=the policy’s grace period
—>lasts for a period of up to 31 days
•if the insured dies during the grace period, the policy will pay the death benefit minus the amount of the past due premium as of the date of death

Question 10

Reinstatement

Answer 10

•policy lapsed for nonpayment of premiums
•have up to 3 years to reinstate
•as long as the policy was not surrendered for cash
•must pay missed premiums + interest
•prove insurability (medical exam)
•saves original policy + issue age

Question 11

What is the contestability period?

Answer 11

•the first 2 years of a policy
•the insured might be required to substantiate statements in application during this period

Question 12

Incontestability

Answer 12

•usually after 2 years
•policy can’t be taken away, even if material misrepresentation or fraud (concealment)

•provided to protect the insured
•states that after a life insurance policy has been in effect for 2 years the company cannot claim that a statement made in the application for insurance was meant to defraud the insurer
•the first 2 years of a policy are known as the contestable period; the insured might be required to substantiate statements in application during this period
•if a policy has been reinstated after lapse, a new contestability period begins but it only applies to information given on the reinstatement application, not the information given when the policy was originally purchased

Question 13

Suicide clause

Answer 13

•if insured commits suicide prior to having a policy for 2 years, only the premium will be paid back
•after 2 years, the full face amount will be paid

Question 14

Misstatement of age or sex

Answer 14

•if a deceased insured misrepresented their age, the face amount of the policy will be adjusted to an amount the premium would have been purchased at the insured’s correct age, at the time of purchase of the policy
•if a misstatement of age is discovered while the insured is alive, this mistake will be fixed usually at the insured’s option
•when a misstatement of sex occurs, the face amount of a policy will be adjusted in a similar way
•premiums are higher the older you are
•premiums are higher for males

Question 15

Payment of claims

Answer 15

•says the insurer will pay the death benefit promptly
•generally required to pay a death claim within 60 days after receiving notification of the claim
•if the claim payment is made more than 60 days after notification of the claim, interest must be paid

Question 16

What are the 13 different life insurance policy provisions?

Answer 16

•free look
•insuring clause
•ownership rights
•assignment
•entire contract
•modifications
•consideration
•payment of premium
•grace period
•reinstatement
•incontestability provision
•misstatement of age or sex
•payment of claims

Question 17

What is a trust?

Answer 17

A legal entity which can hold title to property while it is managed for the benefit of others

Question 18

What are the 3 parties to a trust?

Answer 18

1. Grantor
2. Trustee
3. Beneficiary

Question 19

Who is the grantor of a trust?

Answer 19

The individual who sets up the trust, transfers property into it, & writes the instructions as to how true trust will operate

Question 20

Who is the trustee of a trust?

Answer 20

•the party that manages the property according to the grantor’s instructions
•may be an individual or another legal entity such as a bank

Question 21

Who is the beneficiary of the trust?

Answer 21

The person who receives the benefits of the trust

Question 22

Per capita

Answer 22

•means “by the head”
•divides the policy’s death benefit equally among the surviving members of the class
Ex. An insured has 2 adult children designated as primary beneficiaries
—>if both are living when the insured dies, each receives 50% of the policy’s death benefit
—>if one dies before the insured, the surviving child will receive the entire death benefit
•does NOT transfer death proceeds below a generational level
—>if the deceased child had children they would NOT receive proceeds upon the death of their grandparent

Question 23

Per stirpes

Answer 23

•means “by the branch”
•signifies that the children of a deceased class beneficiary are entitled to that beneficiary’s shares of the proceeds
Ex. An insured has 2 adult children designated as primary beneficiaries
—>both children are living when the insured dies, each gets 50% of the policy’s death benefit
—>one child dies before the insured, the surviving child gets 50% of the death benefit & the 2 children of the deceased child-the insurer’s grandchildren-receive 25% each of the proceeds

Question 24

What are revocable beneficiaries?

Answer 24

•beneficiary designations can be changed, or revoked, without notice & without their knowledge or consent

Question 25

What are irrevocable beneficiaries?

Answer 25

•policyowners give up their right to change a beneficiary designation
•if an irrevocable beneficiary dies before the insured, the policyowner usually has the right to name a new beneficiary

Question 26

What is the facility of payment provision?

Answer 26

Allows the insurer to pay all or part of the policy’s death benefit to someone other than a designated beneficiary if:
•the beneficiary is a minor, deceased, or cannot be found
OR
•someone other than the beneficiary incurred the insured’s final medical or funeral expenses

Question 27

What is the Uniform Simultaneous Death Act?

Answer 27

•insured & primary beneficiary die in the same accident
•assumes primary beneficiary dies first
•proceeds paid to contingent beneficiary or to the insured’s estate if no contingent beneficiary is listed

Question 28

What is the common disaster provision?

Answer 28

•insured & primary beneficiary in common accident
•both die within 30-90 days after accident
•proceeds paid as if the primary beneficiary
•proceeds paid to contingent beneficiary
•if the primary beneficiary lives beyond the period of time stated in the policy, the proceeds would be paid to the primary beneficiary or the primary beneficiary’s estate, if deceased

Question 29

What is the spendthrift provision?

Answer 29

•may be included in a life insurance policy
•death benefit cannot be paid in a lump sum
—>cannot be claimed by creditors before payment to beneficiary
—>cannot he pledged by the beneficiary to a creditor
—>cannot be used by the beneficiary as collateral for a loan
•this way, the insured is assured that the beneficiary will not spend money foolishly as a “spendthrift” upon the insured’s death

Question 30

What is the aviation exclusion?

Answer 30

•eliminates coverage for certain types of aviation activities
•applies to individuals such as private pilots, test pilots, military pilots, & crew
•does NOT apply to commercial flight

Question 31

What are the 2 types of the war or military service exclusion?

Answer 31

1. Status-type: eliminates coverage for the entire period during which the insured is in the military, regardless of how the insured dies
2. Results-type: coverage is eliminated only if the cause of death was related to military service

Question 32

What is the hazardous occupation or hobby exclusion?

Answer 32

•may be included if the insured engages in activities such as mountain climbing, auto racing, sky diving, scuba diving, etc., either for pay or recreating
•as an alternative to excluding coverage entirely for death resulting from these activities, the insurer might charge an additional premium or limit the amount of coverage it would issue