#13 XCEL: Chapter 3 Life Insurance Policy Provisions, Options, and Riders

Cash option

The "cash" dividend option allows the policy owner to cash out the dividends they receive.

Absolute Assignment

a policy assignment under which the assignee (person to whom the policy is assigned) receives full control over the policy and full rights to its benefits. Generally, when a policy is assigned to secure a debt, the owner retains all rights in the policy in excess of the debt, even though the assignment is absolute in form.

Reduced Paid-Up Option

allows the policy owner to reduce the policy's benefit amount and, in turn, cease making premium payments.

Entire Contract Provision

The entire contract provisions (or clause) states the insurance policy itself, any riders and endorsements/amendments, and the application comprises the entire contract between all parties.

Grace Period

a period after the due date of a premium during which the policy remains in force without penalty. If an insured dies during the Grace Period of a life insurance policy before paying the required annual premium, the beneficiary will receive the face amount of the policy minus any required premiums. For life insurance, the grace period is typically one month.

Misstatement of Age or Sex Provision

allows the insurer to adjust the policy benefits if the insured's age or sex is misstated on the policy application. The misstatement of age provision allows the insurer to adjust the benefits payable if the age of the insured was misstated when the application for the policy was made. If the insured were older at the time of application than is shown in the policy, benefits would be reduced accordingly. The reverse would be true if the insured were younger than listed in the application.

Paid-Up Additions Option

dividend option allows the policy owner to exchange the dividend for an additional single payment whole life policy.

Reduced Premiums Option

dividend option allows the policy owner to return the dividend payment to the insurer in exchange for a reduction in the following year's premium payments.

Exclusions

features of an insurance policy stating that the policy will not cover certain risks.

Reinstatement Provision

is putting a lapsed policy back in force by producing satisfactory evidence of insurability and paying any past-due premiums required. It Permits the policy owner to reinstate a policy that has lapsed as long as the policy owner can provide proof of insurability and pays all back premiums, outstanding loans, and interest.

Insuring Clause (or Insuring Agreement)

is the insurer's basic promise to pay specified benefits to a designated person in the event of a covered loss. States the scope and limits of coverage, "We ensure to INSURE you for..."

Accidental Death Benefit (Multiple Indemnity) Rider

pays an additional sum to the beneficiary if the insured dies due to a covered accident. The amount paid is a multiple of the policy face amount, such as double or triple the original benefit. Accident death life insurance provides the cheapest way to add a lot of coverage for a limited period.

Suicide Clause

states that the policy will be voided, and no benefit will be paid if the insured commits suicide within two years from policy issuance. The primary purpose of a suicide provision is to protect the insurer from applicants contemplating suicide.

Free Look Period

states the policy owner is permitted a certain number of days once the policy is delivered to look over the policy and return it for a refund of all premiums paid.

Extended Term Option

the "extended-term" nonforfeiture option permits the policy owner to use the policy's cash value to buy level, extended term insurance for a specified period. No further premium payments are made. The coverage provided with the extended-term nonforfeiture option is equal to the net death benefit of the lapsed policy.

Dividend Options

the options a policy owner has when receiving dividend payments from an insurance policy.

Payor Provision (Rider of Clause)

waives future premiums for a juvenile life insurance policy if the person responsible for paying the premiums dies or becomes disabled.

Dependent Riders

(Other Insureds Rider): Dependents may be added to as additional (other) insureds through the use of a dependent rider. Other insured riders are typically used for spouses and children.

Accumulate Interest Option

The "accumulate interest" dividend option allows the policy owner to leave dividends with the insurer to accumulate interest. In turn, the policy owner will be required to pay taxes on any interest (profit) generated by the dividend.

Cash Surrender Option

The "cash surrender" nonforfeiture option allows the policy owner to receive the policy's cash value. The policy owner no longer has coverage at this point. Usually, the maximum length of time a life insurance company may legally defer paying the cash value of a surrendered policy is six months (Delayed Payment provision).

Automatic Premium Loan Provision (or rider)

The automatic policy loan provision allows the insurance company to deduct the overdue premium from an insured's cash value by the end of the grace period if a payment is missed on a life policy. The insurance company can AUTOMATICALLY take out a LOAN for you against your CASH VALUE to cover your PREMIUM if they don't receive payment when due. This automatic premium loan can continue until the policy owner resumes making payments, or the policy runs out of cash value. Your policy will lapse if you don't resume payments before you run out of cash value.

Return of Premium Rider

pays the total amount of premiums paid into the policy in addition to the face value, as long as the insured dies within a specific period specified in the policy. It may also return premiums to the insured at the end of a specified period.

Incontestable Provision (Period)

states that the insurance company may not challenge the validity of the policy once the policy has been in force for a period of time, typically two years. Over the years, case law has established precedence that the Incontestable Clause applies to cases of fraud.

Accelerated Benefits Rider

allows the insured to receive a portion of the death benefit before death if the insured has a terminal illness and is expected to die within 1-2 years. Whatever amount is withdrawn in an accelerated death benefit will decrease the death benefit when death occurs.

Waiver of Premium Rider

allows the policy owner to waive premium payments during a disability and keeps the policy in force. The waiver of premium rider is not a loan and does not provide cash payments to the policy owner. The insurance company is "waiving" the premiums." It's just as if the insured made the premiums every month.

Assignment clause

allows the right to transfer policy rights to another person or entity.

Collateral Assignment

an assignment of a policy to a creditor as security for a debt. The creditor is entitled to be reimbursed out of policy proceeds for the amount owed. Any proceeds above the amount due at the insured's time of death will be paid to a beneficiary designated by the policy owner.

Policy Loan (Cash Withdrawal) Provisions

apply to policies that have cash value also have policy loan and withdrawal provisions. These policies must begin to build cash value after a certain number of years. In most states, this is three years. These loans, with interest, cannot exceed the guaranteed cash value, or the policy is no longer in force. The policy owner has the right to the policy's cash value. Policy loans are not taxable. Any loans with interest due at the time of death will be deducted from the insured's policy proceeds.

One-Year Term Option

dividend option allows the policy owner to exchange the dividend for additional coverage in the form of a one-year term policy.

Guaranteed Insurability Rider (Future Increase Option)

permits the policy owner to buy additional permanent life insurance coverage at predetermined intervals without submitting proof of insurability. It also includes specific events like marriage and births, without requiring proof of insurability. Usually, the benefit is allowed every three years, up to the original face amount of the policy.

Consideration Clause

states a policy owner must pay a premium in exchange for the insurer's promise to pay benefits. A policy owner's consideration consists of completing the application and paying the initial premium. The amount and frequency of premium payments are contained in the consideration clause. "Please CONSIDER me for insurance. Here is my COMPLETED APPLICATION, INITIAL PREMIUM, and how much, how often I agree to pay. Please consider me."

Nonforfeiture Options

the options you have for your cash value if you terminate a policy that has a cash value. You are closing your account (surrendering your policy); what do you want us to do with your cash (so you don't forfeit it)? When a policy owner decides he does not want his insurance policy anymore, he has the option to surrender his policy.