Chapter 4

PROBATIONARY PERIOD

"waiting", Its purpose is to avoid providing immediate coverage for people who join the group after the effective date of the policy

earned/uneared premium

-If a life insurance policy is cancelled by the policyholder after the free-look period, the insurer has the right to keep earned premiums and return only that portion of premium that is unearned

There are two more important points to remember regarding dividends

1. A dividend from a participating policy is considered a refund of excess premiums paid and is therefore not taxable. 2. When an agent or a company presents an illustration that includes dividends it should be prefaced by the fact that the dividends shown are not guaranteed but are simply estimates or approximations of what future dividends might be.

methods to change beneficiary

1. Revocable Designation - dad can change without consent of primary 2. Irrevocable Designation - VESTED INTEREST. no changes can be made to the policy that could affect the amount of proceeds payable or to whom they are to be paid

Third-Party Ownership

An insurance contract which is owned by someone other than the insured is referred to as a "third-party contract."

Corporations

Corporations use life insurance to purchase shares from deceased shareholders through buy-sell agreements. In such cases, the purchase is treated as a non-regarded loss or gain if the shares are composed of common stock

regular group insurance (or a self-funded health plan in which benefits are paid by the employer out of company assets) can also be issued to any other legitimate group, including the following:

Labor and Credit Unions. Fraternal Societies and Co-operatives. Professional organizations.

Be able to identify that there are no "standard" life insurance policies

Life insurance policies are not standardized as they often are in the property and casualty field.

On a life policy when a settlement option has not been specified, the usual method of distribution is

Lump sum payment

Must one pay income tax on policy dividends?

No, because they are looked upon by the federal government as a return to the policyholder of excess premium charged.

Buy-Sell Agreements

Other owners can purchase interests of deceased partner at time of death This is a BUSINESS CONTINUATION AGREEMENT (a.k.a. Sell and Buy Agreement) in which the person wishing to take over the business (the "purchaser") pays for a life insurance policy covering the business owner in an amount sufficient to buy the business

extension of benefits

Policies providing hospital, medical, or surgical benefits must extend benefits for expenses directly relating to the condition causing the total disability for at least 12 months from the date premium payments cease.

Reduced Paid-Up Insurance - nonforfeiture option

The amount of paid-up insurance is reduced from the original death benefit to equal the amount the cash value will purchase as a single premium at the insured's attained age.

If death occurs during the grace period:

The death benefit is paid minus the premium due.

Group Term Life- group life insurance

The most common type written is Annual Renewable Term (ART). This allows the insurer the right to increase the premium (based on the group's experience rating) and gives the policyholder the right to renew the policy each year

fixed amount installments - settlement option

This choice, which is also known as "Principal and Interest to Exhaustion," will pay the proceeds to the beneficiary in installments of a pre-determined or fixed amount until the proceeds (principal and interest) are exhausted.

Absolute Assignment

This is a complete and irrevocable transfer of all of the policyholder's rights and "incidents of ownership" to another person (the assignee) who then receives full control over the policy and full rights to its benefits

Extended Term Insurance - nonforfeiture option

This nonforfeiture option is usually the default action if the insured has not selected another provision. Under this option the cash value is used to purchase Level Term insurance with the same death benefit as the original policy, less any loan indebtedness. Note that, while the extended coverage is purchased with cash value, it is term insurance and does not contain cash value itself.

BLANKET INSURANCE

This type of insurance is used for a group where the composition or members of the group change frequently used to cover those at particular events or locations (e.g. sporting events, universities, summer camps)

advantages to group insurance

When it is offered to a large group (51+ employees) there is usually minimal, or no evidence of insurability required There are often favorable tax benefits One of the biggest disadvantages of group insurance is that if the insured changes jobs or leaves the group, he or she may not be covered under the group contract and may be faced with the possibility of paying much higher premiums for individual coverage.

Stranger Originated Life Insurance (STOLI) arrangements

a third-party investor or speculator, with no relationship to an individual, initiates the purchase of a policy written on that individual's life

Interest only - settlement option

allows only the death benefit earnings to be paid to the beneficiary

Suicide clause in the exclusion section of insurance policy

if the insured dies by suicide within the first two years of the policy period the contract is void and the insurance company is only liable for the amount of premiums paid. After two years the insurer will pay the full death benefit in the case of suicide.

INCONTESTABILITY CLAUSE

places a time limit on the right of the insurance company to deny a claim

Who has the right to change life insurance policy beneficiaries?

the policyholder

The main benefit of reinstating an existing policy, rather than purchasing a new policy

the premium remains at the level based on the insured's "original age" at time of issue rather than a higher premium based on currently "attained age."

pure life income option - settlement

the proceeds are held by the insurer and periodic payments are made to the beneficiary for life con = only pays while beneficiary is alive this option puts the insurer in the least position of guarantee in terms of payments to be made

Assignment

the transfer of all or a portion of the policyholders ownership rights a policyholder does not need the insurer's permission to assign a policy

Life Settlement Statutes

were a requirement that any party purchasing life insurance must have an insurable interest in the person being insured, and the establishment of new requirements for individuals who transact life settlements. Therefore, anyone entering into a Stranger Originated Life Settlement is entering into a fraudulent life settlement contract.

the regulatory requirements for group insurance:

1. Incontestability: prevents an insurer from voiding a policy for misstatements after two years is 2.conversion period coverage -The plan must provide the right to convert to an individual contract of insurance upon termination of the master contract 3. Misstatement of Age- The premium or the benefit must be equitably adjusted based on the correct age. 4. Evidence of Insurability: Insurability must be proven if the individual joins the group after the eligibility or ENROLLMENT PERIOD. During this period there is usually no medical examination required.

after death of primary beneficiary - 5 options for the next beneficiary

1. cash 2. installment refund 3. Life income with period certain option - This option provides for an income payment for life and a guarantee of payments for an initial period of time, usually the first five or ten years. 4. joint and survivor -provide income to several individuals for the life of each. 5. joint life - income is paid to two or more persons until one of them dies

five standard dividend options dividend = a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).

1. cash - option is often used when the policy is already fully paid for 2. accumulate at interest 3. Application to Reduce Premium. 4. Paid-up Additions. - the annual dividend acts as a single premium to buy an additional amount of insurance based on the insured's currently attained age. 5. One Year Term.

There are two methods for naming and changing beneficiaries

1. filing method - recording 2. endorsement - This method requires the insurer to attach or type the beneficiary change directly to the policy itself.

Life insurance policies and annuities are used in various business situations for three primary reasons

1. funding method 2. form of biz interpretation insurance 3. employee benefit

identify the following business uses of life insurance

1. key business - KEY-PERSON INSURANCE (a.k.a. Key-Employee Insurance) will indemnify the business for any financial loss caused by the death of a valuable key person. 2. buy sell insurance - person wishing to take over the business (the "purchaser") pays for a life insurance policy covering the business owner in an amount sufficient to buy the business. 3. split dollar - SPLIT DOLLAR PLANS are life insurance ownership arrangements between two or more individuals or entities, whereby the premium payments, ownership rights, cash value and death benefit proceeds are split among the parties involved.

4 main parts to an insurance policy - E.P.I.C

Exclusions - suicide clause, states what the company will do Policy Face - ( title page, summary, first page) Insuring agreement - (on face page, identifies the type of policy) Conditions - duties and rights of both parties, owners rights and responsibilities

group insurance vs individual

Group insurance plans provide coverage for a specified number of people who work for the same company or have the same affiliation or interests. With individual insurance, the contract is between the policyholder, who is often also the insured, and the insurer. With group insurance, the MASTER CONTRACT is between the insurer and the group sponsor, (i.e. an employer, trade association, professional organization, union, lodge etc.). The sponsor, also known as a master policyholder, selects the types and amount of coverage the group will have and pays all or a portion of the premium.

Be able to identify the policyholder's rights and options regarding dividends/excess interest credits.

If a Mutual Insurer shows a profit in any one or more of these three areas relating to participating policies, a divisible surplus (a.k.a. earned surplus) results and the company will pay a dividend to policyholders. This dividend, or "excess interest credit," can be thought of as a return of excess premium.

lapse

If the premium is not paid within the grace period, and the policy has not been surrendered for its cash value, the policy will LAPSE, and the coverage will end

Noncontributory Plans

In a NONCONTRIBUTORY PLAN the members of the group do not contribute to the cost of the insurance; it is paid totally by the employer

Common Disaster Clause

Is used when the time of death of the insured and beneficiary cannot be determined. UNIFORM SIMULTANEOUS DEATH ACT. The Act protects the contingent/secondary beneficiary by assuming that the insured was the last person to die when the insured and the primary beneficiary die at approximately the same time in a common disaster (e.g. a car wreck) and there is no evidence as to who died first. The intent is to prevent the insurance proceeds from going to the estate of the primary beneficiary rather than to the estate of the insured or contingent beneficiary, as designated in the policy

A life insurance policy may be reinstated within certain time limits after it has lapsed for non-payment of premiums. How can this be done?

The overdue premiums are paid, interest is paid, an application is submitted and evidence of insurability is provided

Contributory Plans

The plan must be offered to all eligible employees and at least 75% of all eligible members must elect to participate and be covered by the plan.

Limit of Liability

The total amount the insurer will pay for an insured risk. Amount payable upon the occurrence

Group Accidental Death and Dismemberment (AD&D) - group life insurance

These plans provide a PRINCIPAL SUM if the insured dies as the direct result of an accident or a lesser CAPITAL SUM for a specified dismemberment. While not classed with life or health insurance since January 1, 2002, AD&D plans do provide benefits for death or injury and are frequently offered as an option in group insurance plans.

Policy Options

They specify the way in which benefits from the policy will be paid.

Sole Proprietorships

businesses owned and operated by one individual; the most common form of business organization in the United States

Entire Contract Provision

found at the beginning of the policy, saying that the policy cannot refer to any outside documents as being part of the contract and prohibiting the insurer from making any changes to the policy after it has been issued. (can only make good changes not bad)

"Automatic Premium Loan" (APL)

if a premium is not paid by the end of the grace period, and there is sufficient money built up in the policy, the insurer is authorized to withdraw the amount of the premium due from the cash value to pay the past due premium.

Fixed Period Installments - settlement option

it is possible that the beneficiary will receive more than the original face amount because of the added interest that is calculated into the payments. Payments are guaranteed to the beneficiary and can never be reduced

settlement options

methods of distributing the proceeds to a beneficiary as an income instead of a single LUMP-SUM payment

Collateral Assignment

partially and temporarily transfers rights to another. used to provide security for a debt between the assignee and the policyholder.

Types of Beneficiaries

primary contingent - secondary beneficiary if first dies tertiary - third in line class - ind. people are to share the benefits (Children) per capita - paid "by heads" or equally per stirpes - paid by family line in order

SPENDTHRIFT TRUST CLAUSE

protects proceeds from the beneficiaries creditor restricts the payment of proceeds. It protects the death benefit held by the insurer against the claims of, or attachment by, the beneficiary's creditors and prevents the beneficiary from borrowing against the proceeds or selling his/her rights to them to obtain money ahead of time.

what circumstances the right of rescission may be used and its effect

provides the policyholder/insured less than 60 years of age the right to return any life policy to the company within 10 days after receiving it (20 days if a replacement is involved). Anyone aged 60 or older is allowed a minimum of 30 days to return the policy under this clause. (a.k.a. FLAT CANCELLATION). - no fees, premiums reimbursed

Nonforfeiture Options

required to be included in individual cash value policies. They prevent the insured from having to forfeit (i.e. lose) the "living benefits" (cash values) of the policy for nonpayment of premium after a certain number of premiums have been paid or the policy has been in force for a certain period.

Cash Surrender - nonforfeiture option

the insurer may pay a cash surrender value to the policyholder. Payment of the cash value will terminate the policy and all coverage will cease

grace period

the time between the billing date and the payment due date when no interest is charged