chapter 3 life policy provisions, riders, and options

Uniform Simultaneous Death Act

- When there is a situation were the policy owner and primary beneficiary die at same time. The proceeds go to secondary beneficiary - Proceeds will be given out as if the primary beneficiary die first

Grace Period Provision

-period of time after the premium payment is due (usually 30 days) -purpose is to protect the policyholder against an unintentional lapse of the policy. -If insured dies during this period the benefit is payable, however any past due premiums will be deducted from the death benefit.

Revocable Beneficiary

A beneficiary that the policy owner may change at any time without notifying or getting permission from the beneficiary.

One-Year Term Dividend Option

A dividend option under which the insured has the company purchase one-year Term insurance with the dividend. For example, your dividend is $100, which you could have taken as cash. Instead, you have the insurer use the money to buy you an additional 1 year term policy at your current age. If you die in the term, your beneficiary will receive the proceeds of your Life policy PLUS the face amount of the one year term policy. At the end of the year, the term policy expires

Free Look Provision

A policy provision required by state law that establishes a set number of days (usually 10) for the policy owner to review a newly issued policy. The policy owner may return the policy to the insurer during this time for any reason and receive a 100% refund. Also known as refund provision, unconditional refund provision, return provision, exchange provision, or right to examine.

Reinstatement Provision

Allows a lapsed policy to be put back in force. If policy owner elects to reinstate the policy, they will have to provide evidence of insurability, pay all back premiums with interest and may be required to repay any outstanding loans.

Children's Term Rider

Allows children of the insured to be added to coverage for a limited period of time for a specified amount. ONE PREMIUM FOR ALL CHILDREN

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.

Contingent Beneficiary

An alternate beneficiary designated to receive the policy proceeds in the event that the primary beneficiary dies before the insured.

Entire Contract

An insurance policy provision stating that the application and policy contain all provisions and constitute the entire contract. (entire contract=policy+copy of application+any riders or amendments)

Collateral Assignment

Assignment of part of the proceeds of an insurance policy to a bank as collateral to settle the loan balance that may exist at the insured's death. (done to secure loan usually)

Common Disaster Clause

Clause protects the contingent beneficiaries' rights by stipulating a certain number of days the primary beneficiary must outlive the insured after a common accident causing near-simultaneous death in order for the primary beneficiary to receive the policy proceeds.

Accumulation of Interest

Dividend option in which the insurer retains the dividend to be invested. (dividends aren't taxable themselves, but INTEREST ON DIVIDENDS is)

Consideration

Something of value exchanged between parties of a contract; binding force in any contract. Both parties must provide consideration in order for the contract to be valid

national association of insurance commisioners

The National Association of Insurance Commissioners is the U.S. standard-setting and regulatory support organization created to resolve insurance regulatory issues

Paid-Up Additions

The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. insurer will automatically use dividends to increase death benefit if insured does not choose to keep the dividends

Premium Mode

The frequency with which a policy premium will be paid (annually, semi-annual, quarterly, monthly

indemnity

a principle of reimbursement on which insurance is based; in the event of loss, an insurer reimburses the insureds or beneficiaries for the loss

Incontestability Clause

a provision stating that the insurer cannot dispute the validity of a policy after a specified period (2 years)

riders

added to a policy to modify provisions that already exist

Absolute Assignment

all ownership rights in the policy are transferred to a new owner

Dividends

are the return of excess premiums, not taxable, when paid to the policy owner. Insurance co cannot guarantee premiums

settlement option

chosen by the policy owner, cannot be changed by beneficiary, only by the owner during time owner is alive. Settled upon death or age 100.

provisions

define the characteristics of an insurance contract and are fairly universal from one policy to the next

default action

dividends-purchase additional policy non forfieture- extended term settlement- cash lump sum to beneficiary

Accelerated Benefit Rider

early payment of part of policy's death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years, or has other qualifying conditions. - a terminal illness - a medical condition an extraordinary medical intervention -inability to perform activities of the daily living - any other conditions approved by the department of insurance

Primary Beneficiary

has first claim to the policy proceeds following the death of the insured

Family Term Rider

incorporates the spouse term rider along with the children's term rider in a single rider (FAMILY TERM = SPOUSE+CHILD)

Life Income Option

installment payments are paid only while the beneficiary is alive and cease on the beneficiary's death (CANNOT OUTLIVE BENEFIT PAYMENTS)

options

offer insurers and insureds ways to invest or distribute a sum of money available in a life policy

Irrevocable Beneficiary

one that cannot be changed without the beneficiary's consent

Results Clause

only excludes the death benefit if the insured is killed as a result of an act of war

Non Forfeiture Options

options available only to policy owner and only if there is cash value in the policy - Surrender for Cash - The amount of value that exceeds premium payment is taxable triggered by lapse or surrender

accidental death rider

pays some multiple of the face amount if death is the result of an accident as defined in the policy (death must occur within 90 days usually) benefit normally 2 times the amount (double indemnity)

Return of Premium Rider

pays the total amount of premiums paid+face value of the policy

activites of daily living (ADLs)

personal daily care tasks, including bathing, skin, nail, and hair care, walking, eating and drinking, mouth care, dressing, transferring, and toileting

if no beneficiary is named

policy proceeds go to the insured's estate

Other Insured Rider (spouse term)

provides coverage for one or more family members other than the insured (usually level term insurance)

exclusions

provision in an insurance policy eliminating coverage for certain risks or limiting coverage (most common are hazardous jobs-aviation, military

Insuring Clause

sets forth the basic agreement between the insurer and the insured (ex.- promises to pay death benefit)

Extended Term

the automatic nonforfeiture option: same face amount, shorter term of coverage

principal

the face value of the policy; the original amount invested before the earnings

Interest Only Option

the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient at regular intervals (usually temporary)

assignment

the transfer of contractual rights of policy ownership

long-term care coverage

these riders provide for the payment of part of the death benefit (called accelerated benefits) in order to take care of the insured's health care expenses, which are incurred in a nursing or convalescent home

Waiver of Premium Rider

waives the premium for the policy if the insured becomes totally disabled until insured is healthy (USUALLY 6 MONTHS) (this rider policy ends at 65 usually)

Disability Riders

Some riders provide benefits in the event of insured's disability, while other riders provide for partial payment of death benefit prior to the insured's death

Living Needs Rider

Provides for the payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years.

Payor Benefit Rider

Found in juvenile polices which waivers the premiums if the person paying them (often the parent) is disabled or dies while the child is still a minor. The insured (kid) premiums will be waived until he/she is (usually 21)

beneficiary does not

Have to have insurable interest in the insured.

Policy Loan Option

Is found ONLY IN POLICIES WITH CASH VALUE (WHOLE LIFE). The policy owner is entitled to borrow an amount equal to the available cash value. Any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured's death. The insurer must provide 30 days written notice to the policy owner that the policy is going to lapse. An insurance company may defer a policy loan for up to 6 months.

Suicide Provision

Most life insurance policies provide that if the insured commits suicide within a specified period, usually two years after the issue date, the company's liability will be limited to a return of premiums paid.

Status Clause Exclusion

No coverage for individuals with military status, since these individuals are provided coverage through the government.

Reduced Paid-Up Insurance

Nonforfeiture option where cash value is used to make a single premium payment to purchase as much of the same type of insurance as possible. LONGEST COVERAGE Policy can be reinstated.

Guaranteed Insurability Rider

Optional rider that enables the policy owner to purchase additional amounts of coverage at predetermined times without proof of insurability.

Fixed Amount Installment Option

Pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted.

Waiver of monthly deductions rider

Pays all monthly deductions while the insured is disabled, after a 6-month waiting period. (based on age) (usually universal or variable universal)

Accidental Death and Dismemberment

Pays the principal sum (face amount) upon accidental death, loss of sight, or loss of 2 limbs. It pays the capital sum per policy schedule (up to 50% of the face amount) for the loss of vision in 1 eye or loss of 1 limb. It may be a stand-alone policy or added as a rider to a Disability Income, Medical Expense or a Life Insurance Policy.

Reduction of premium

The insurer uses the dividend to reduce the next year's premium

automatic loan provision

To prevent an insured's policy from lapsing after its grace period, this provision pays the policy's premium by borrowing or, loaning, it from the policy's cash value. (UP TO 6 MONTHS)