CH. 3

nonforfeiture options

3 options policy owners can select: - cash surrender option - for ordinary whole life insurance; surrender charges, sometimes referred to as a "rear-end load" - reduced paid-up option - extended term option - level term

joint life survivor

A variation of the joint life policy is the last survivor policy, also known as a "second to die" policy. This plan also covers two lives, but the benefit is paid upon the death of the last surviving insured.

whole life insurance

Also known as permanent insurance. Whole life insurance is called this because it provides permanent protection for the one's entire life-from the date of issue to the date of the insured's death. The benefit payable is the face amount of the policy, which remains constant throughout the policy's life. Premiums are set at the time of policy issue, and they too remain level for the policy's life. Certain features that distinguish whole life from term are cash values and maturity at age 100. These two features combine to produce living benefits to the policy owner.

reinstatement provision

a policy is restored to its original status and its values are brought up to date. Most insurers require the following to reinstate a lapsed policy: - all back premiums must be paid - interest on past-due premiums may be required to be paid - any outstanding loans on the lapsed policy may be required to be paid - the policy owner typically will be asked to prove insurability

waiver of premium rider

available on both permanent and term insurance policies. a insured generally must be seriously disabled for a certain length of time, called the "waiting period" (usually 90 days to six months). for the waiver to become operative, the insured must meet the policy's definition of "totally disabled"

endowment policy

characterized by cash values that grow at a rapid pace so that the policy matures or endows at a specified date (that is, before age 100). Provides benefits in one of two ways: 1. as a death benefit to a beneficiary if the insured dies within the specified policy period (known as the endowment period). 2. as a living benefit to the policy owner if the insured is alive at the end of the endowment period, at which time the policy has fully matured Because an endowment policy pays a death benefit if the insured dies during a certain period, it can be compared to level term insurance. Endowment policies can be compared to whole life policies with accelerated maturity dates; age 65 is a common maturity age. At the maturity age, the cash value has grown to match the face amount, just like what occurs at age 100 with whole life policy. Because they are designed to build cash values quickly, endowment policies are typically purchased to provide a living benefit for a specified future time for retirement, for example, or to fund a child's college education.

grace period provision

common in a lot of other financial products such as consumer loans, mortgages, credit card payments, etc... grace period provision is meant to protect the insured. in policies that the premium are paid monthly, the grace period is one month, but no less than 30 days. If an insured dies during the grace period and the premium has not been paid, the policy benefit is payable. However, the premium amount due is deducted from the death benefits paid to the beneficiary.

family income policies

consists of both whole life and decreasing term insurance. This policy will provide monthly income to a beneficiary if death occurs during a specified period beginning after date of purchase. The family income portion of this type of coverage is specified by a decreasing term policy. Income payments to the beneficiary begin when the insured dies, and continue for the period specified in the policy, which is usually 10, 15, or 20 years from the date of policy issue, and not from the date of the insured's death. If the insured dies after the specified period, only the face value (whole life) is paid to the beneficiary since the decreasing term insurance expired.

joint life policy

covers 2 or more people. Using some type of permanent insurance (as opposed to term), it pays the death benefit at the first insured's death. The survivors then have the option of purchasing a single individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies. The ages of the insureds are "averaged" and a single premium is charged for each life.

owner's rights provision

defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy.

credit line insurance

designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. The beneficiary of such a policy is usually the lender. The type of insurance used is decreasing term, with the term matched to the length of the loan period (though usually limited to 10 years or less) and the decreasing insurance amount matched to the outstanding loan balance. The cost of group credit life insurance usually is paid entirely by the borrower.

adjustable life

distinguished by their flexibility that comes from combining term and permanent insurance into a single plan. The policy owner determines how much face amount protection is needed and how much premium the policy owner wants to pay. The insurer then selects the appropriate plan to meet those needs. Another option would be the policy owner may specify a desired plan and face amount. The insurer would then calculate the premium. As financial needs and objectives change, the policy owner can make adjustments to the coverage, such as: - increasing or decreasing the premium, paying period, or both - increasing or decreasing the face amount, the period or protection, or both (increasing the face amount normally requires providing proof of insurability)

entire contract

found at the beginning of the policy, states that the policy document, the application (which is attached to the policy), and any attached riders constitute the entire contract. Nothing may be "incorporated by reference", meaning that the policy cannot refer to any outside documents as being part of the contract. The entire clause has another important function - it prohibits the insurer from making any changes to the policy, either through policy revisions or changes in the company's bylaws, after the policy has been issued. This clause does not prevent a mutually agreeable change from being made to the policy if the policy specifically provides a means for modifying the contract after it has been issued (for example, changing the face amount of an adjustable life policy).

suicide provision

found in most life policies, protects the insurer against the purchase of a policy in contemplation of suicide. suicide during the first or second year after the policy issue will not be repaid. after two years suicide is considered natural causes.

option to convert

gives the insured the right to convert or exchange the term policy for a whole life (or permanent) plan without evidence of insurability. This exchange involves the issuance of a whole life policy at a premium rate reflecting the insured's age at either the time of conversion (the attained age method) or at the time when the original term policy was taken out (the original age method). The option to convert generally specifies a time limit for converting, such as 10 years in force or at age 55, whichever is later. The cost of insurance is most important when an insured owner is trying to decide whether to convert term insurance at the insured's original age or the insured's attained age. The option to convert and the option to renew can be (and typically are) combined into a single term policy.

option to renew

guaranteed renewable policy allows the policy owner to renew the term policy before its expiration date, without having to provide evidence of insurability (that is, without having to prove good health). The premiums for the renewal period will be higher than the initial period, reflecting the insurer's increased risk. The advantage is that it allows the insured to continue insurance protection, even if the insured has become uninsurable.

ordinary life insurance

individual life insurance that includes many types of temporary and permanent insurance protection plans written on individuals. Premiums are normally paid monthly, quarterly, semiannually, or annually. Ordinary life insurance is the principal type of life insurance purchased in the United States and includes such types of insurance as whole, term, universal, and variable life coverage as well as endowment policies.

cash surrender options

insurers are required to make cash surrender values available for ordinary whole life insurance after the first three policy years. some policies require a penalty to be paid if a policy is surrendered in its early years. these surrender charges, sometimes referred to as a "rear-end load", are deducted from the cash value when the policy is discontinued. a partial surrender can allow the policy owner to withdraw the policy's cash value interest free

group life insurance

is written for employer, employee groups, associations, unions, and creditors to provide coverage for a number of individuals under one contract. Underwriting is based on the group, not the individuals who are insured.

juvenile insurance

life insurance policy that insures the life of a minor. Application for insurance and ownership of the policy rests with an adult (which does not require the minor's consent), such as a parent or guardian. The adult applicant is usually the premium payor as well until the child comes of age and is able to take over the payments. A payor provision is typically attached to juvenile policies. It provides that in the event of death or disability of the adult premium payor, the premiums will be waived until the insured child reaches a specified age (such as 25) or until the maturity date of the contract, whichever comes first.

policy dividends

major difference between participating and nonparticipating is the presence of policy dividends. if fewer insureds have died than was estimated, a divisible surplus results and the company can return to the policy owners a part of the premiums paid for participating policies. Policy dividends are really a return of part of the premiums paid. As such, policy dividends are generally not taxable income, unlike corporate dividends, which are reportable for income tax purposes. However, policy dividends can be taxed when they exceed the cost of the policy. A whole life policy that provides a choice of dividend options must include a statement that dividends are not guaranteed.

automatic premium loan provision

now commonly added to most cash value policies is the automatic premium loan provision. this provision authorizes the insurer to withdraw from the policy's cash value the amount of overdue premium if the premium has not been paid by the end of the grace period. Most importantly, the policy does not lapse and coverage continues.

cash value

often regarded as a savings element because it represents the amount of money the policy owner will receive if the policy is ever surrendered. Often called the cash surrender value. This value is a result of the way premiums are calculated and interest is paid, as well as the policy reserves that build under this system. The amount of a policy's cash value depends on a variety of factors, including: - the face amount of the policy - the duration and amount of the premium payments - how long the policy has been in force the larger the face amount of policy, the larger the cash value. The shorter the premium-payment period, the quicker the cash values grow.

policy loan provision

policy owners may borrow money from the cash values of their policies if they wish to do so. if not repaid by the time the insured dies, the loan balance and any interest accrued are deducted from the policy proceeds at the time of claim. - when a life insurance policy owner obtains a policy loan, the collateral for the loan is the cash value of the policy - interest rates on policy loans vary, but most states stipulate a maximum allowable rate. Some newer policies are issued with a variable interest rate tied to the Moody's corporate bond index. - if the policy owner does not make a scheduled interest payment on a policy loan, the amount of interest due will be added to the loan balance. - in the event a policy loan plus interest exceeds a life insurance policy's cash value, the policy is no longer in force

variable insurance

premium payments are fixed. part of the premiums placed into a separate account, which is invested in stock, bond, or money market fund. the death benefit is guaranteed, but the cash value of the benefit can vary considerably according to the ups and downs of the stock market. your death benefit can also increase if the earnings of that separate fund increase. variable insurance products do not guarantee contract cash values, and it is the policy owner who assumes the investment risk. by placing their policy values into separate accounts, policy owners can participate directly in the account's investment performance, which will earn a variable (as opposed to a fixed) return. because of the transfer of investment risk from the insurer to the policy owner, variable insurance products are considered securities contracts as well as insurance contracts. Therefore, they fall under the regulatory arm of both state offices of insurance regulation and the securities and exchange commission (SEC). to sell variable insurance products, an individual must hold a life insurance license and a financial industry regulatory authority (FINRA) registered representatives license (FINRA was formerly known as the national association of securities dealers, or NASD).

term life insurance

provides low-cost insurance protection for a specified period (or term) and pays a benefit only if the insured dies during that period. Term policies do not build cash values. One advantage is the initial premium is lower than for an equivalent amount of whole life insurance. Provides the greatest amount of death benefit per dollar of initial cash outlay. Term life is also called temporary life insurance since it provides protection for a temporary period of time. Term policies issued for a specified number of years provide coverage from their issue date until the end of the years so specified. Term policies issued until a certain age provide coverage from their date of issue until the insured reaches the specified age.

return of premium

provides that in the event of the death of the insured within a specified period of time, the policy will pay, in addition to the face amount, an amount equal to the sum of all premiums paid to date.

payor provision or rider

providing for waiver of premiums if the adult premium-payor should die or, with some policies, become totally disabled.

free-look provision

required by most states, given policy owners the right to return the policy for a full premium refund within a limited period of time after the delivery of the policy.

insuring clause

sets forth the company's basic promise to pay benefits upon the insured's death. Generally, this clause is not actually titled as such, but appears on the cover of the policy. An insuring clause might state that the promise to pay is subject to a policy's provisions, exclusions, and conditions.

accidental death benefit

sometimes called a "double indemnity" provision. provides an additional amount of insurance usually equal to the face amount of the base policy if the cause of death was an accident.

incontestable clause

specifies that after a certain period of time has elapsed (usually two years from the issue date), the insurer no longer has the right to contest the validity of the life insurance policy so long as the contract continues in force. - the incontestable clause allows an insurer to contest a claim during the contestable period

universal life

term policy with cash value, characterized by flexible premiums and an adjustable death benefit. allows its policy owners to determine the amount and frequency of premium payments and adjust the death benefit up or down to reflect changes in needs. Consequently, changes may be made with relative ease by the policy owner and no new policies will need to be issued when changes are desired. This mortality charge may also include a company expense, or loading charge. The policy specifies the percentage of each premium that goes toward the insurance protection and that which is used to build cash value.

extended term option

the 3rd nonforfeiture option is to use the policy's cash value to purchase a level term insurance policy in an amount equal to the original policy's face value, for as long a period as the cash value will purchase. When the level term insurance expires, there is no more protection. Moreover, all supplemental benefits included with the original policy, such as a term rider or accidental death or disability benefits, are dropped.

misstatement of age

the company reserves the right to make an adjustment if the age of the insured is misstated.

collateral assignment

the policy is assigned to a creditor as security, or collateral, for a debt. If the insured dies, the creditor is entitled to be reimbursed out of the benefit proceeds for the amount owed.

absolute assignment

the transfer is complete and irrevocable, and the assignee receives full control over the policy and full rights to its benefits

accelerated benefits provision

they provide for the early payment of some portion of the policy face amount should the insured suffer from a terminal illness or injury. the death benefit, less the accelerated payment, is still payable.

guaranteed insurability option

this rider allows a policy owner to purchase additional life insurance coverage at specified dates without providing evidence of insurability. costs for new coverages purchased under this rider are calculated on the basis of the insured's attained age. this rider also will allow the policy owner to purchase additional coverage at marriage or the birth of a child

consideration clause

value given in exchange for a contractual promise. In a life insurance policy, the consideration clause states that the policy owner's consideration consists of completing the application and paying the initial premium. The consideration clause or provision in a life insurance policy specifies the amount and frequency of premium payments that the policy owners must make to keep the insurance in force.