Ch. 4- Life Insurance Policy Provisions, Options, and Riders

What type of assignment is used to secure the payment of a debt with an existing life insurance policy?

Collateral assignment

What dividend option can increase the death benefit of the existing life policy?

Paid-up additions

An applicant for life insurance misstated her age on the policy application. How will this affect the death benefit?

The death benefit will be adjusted to the amount that the insured could contain for her correct age

What is the purpose of settlement options in life insurance policies?

To determine how the death benefit will be paid to the beneficiary

What are the three nonforfeiture options in life insurance policies?

Cash surrender, reduced paid-up, and extended term

What is the purpose of a free-look period?

To allow the insured to return the policy with a full refund

Under what nonforfeiture option does the company pay the policy's surrender value and have no further obligation to the policyowner?

Cash surrender

What is consideration on the part of the insurer?

A promise to pay policy benefits

Which of the two types of policy assignments requires transfer of all ownership rights in the policy to a third party?

Absolute assignment

What type of beneficiary is next in line after the primary beneficiary?

Contingent beneficiary

What is the disadvantage of selecting the life income settlement option?

If the beneficiary dies shortly after the payments begin, the balance of the principle will be forfeited

What is the advantage of restraining a life insurance policy as opposed to applying for a new one?

Policy premium in a reinstated policy will be set according to the insured's original age

What are policy dividends?

Return of unused premiums

What type of beneficiary can be changed at any point by the policyowner?

Revocable

Who does the common disaster clause protect?

The contingent beneficiary

What does the term 'double indemnity' mean?

The insurer will pay a benefit of twice the face amount

In the fixed-period settlement option, how will the number of installments for the death benefit proceeds determine the amount of the installments?

The longer the period selected, the smaller each installment will be

To meet the requirement of the entire contract policy provision, an insurance policy must contain what?

A copy of the original insurance application

What are the dividend options in life insurance policies?

Cash, reduced premium, accumulation at interest, paid-up additions, paid-up option, one-year term, and acceleration of endowment

What life insurance policy provision states that both the policy and a copy of the application form the contract between the policyowner and the insurer?

Entire contract

What nonforfeiture option is automatically selected by the company if not chosen by the policyowner?

Extended term

What provision in a life insurance policy extends coverage beyond the premium due date?

Grace period

What required provision protects against unintentional policy lapse?

Grace period

What life insurance policy provision prevents an insurer from disputing or denying a claim due to misstatements on the application after a certain period of time?

Incontestability

The sole beneficiary of a life insurance policy dies before the insured. If the policyowner does not amend the beneficiary designation, what will happen to the policy's death benefit?

It will be paid to the insured's estate

If a settlement option is not chosen by the policyowner or the beneficiary, what option will be used by the insurer?

Lump-sum payment

What dividend option is automatically selected by the company if not chosen by the policyowner?

Paid-up additions

An insured has discovered a (mis)representation on a life insurance policy application regarding the insured's age. The insured is 10 years older than he stated on the application. What will the insurer do regarding the death benefit?

Pay a reduced death benefit

With the interest only settlement option, what happens to the policy's death benefit?

Policy proceeds are retained by the insurance company; only the interest is paid to the beneficiary

Who controls changes in premium payments, face values, and loans in a life insurance policy?

Policyowner

Who has the right to the cash value of a life insurance policy?

Policyowner

What beneficiary designation has first claim to the death proceeds of a life insurance policy?

Primary beneficiary

What nonforfeiture option provides coverage for the longest period of time?

Reduced paid-up

What provision allows the policyowner to reactivate a lapsed life insurance policy within a specified period of time with proof of insurability?

Reinstatement

Statements on the application made by an applicant for a life insurance policy are known as what?

Representations

What term is used to describe methods of payment of the death benefit to the beneficiary upon the insured's death?

Settlement options

What is the purpose of the Automatic Premium Loan provisions?

To prevent the unintentional lapse of a policy because of nonpayment of the premium

What life policy rider allows the company to forgo collecting the premium if the insured becomes disabled?

Waiver of premium

What are the most common exclusions in life insurance policies?

War and military service, hazardous occupation, and aviation

When can an insurance company use suicide as a defense against paying a death claim?

When a suicide is committed within a specified period of time after the policy is purchased (usually 2 years)

When would a misrepresentation be considered material?

When it may alter the underwriting decision

When will a contingent beneficiary receive death benefit from a life insurance policy?

When the primary beneficiary dies before the insured

An insured purchased a life policy, and then committed suicide 5 years later. Will the company pay the death benefit to the beneficiary?

Yes, since the suicide was committed long after the restricting period

What settlement options are available in life insurance policies?

Lump-sum/cash, fixed period, fixed amount, life income, interest only

Is the beneficiary required to have insurable interest in the insured?

No, beneficiaries do not have insurable interest in the insured

What is the name for a life insurance policy rider that provides coverage on the insured's family members?

Other-insured rider

What are representations on life insurance applications?

Statements made by the applicant that are true to the best of the applicant's knowledge

What happens to a policy's cash value under an extended term nonforfeiture option?

The cash value is converted to the same face amount as in the whole life policy

With the reduction of premium dividend option, how is the dividend used?

The dividend is applied to the next year's premium (it reduces the next year's premium)

What happens to the proceeds of a life insurance policy if there is no named beneficiary?

The proceeds are paid to the insured's estate