Fundamentals of Life Insurance Chapter 9

What types of provisions do not appear in life insurance policies because they are legally prohibited in most states?

Most states prohibit provisions that would do the following: -make the producer an agent of the policyowner for the purpose of completing the application -cause forfeiture of a policy for failure to pay a policy loan, so long as the cash value of the policy exceeds total indebtedness -promise something in the declarations and take it away in the fine print -provide too short a time period for the policyowner to sue the insurer -permit backdating a policy by more than 6 months

Harold has the AIDS virus. His prognosis is not good. He has exhausted all of his financial resources on treatment. His life insurance contract includes an accelerated benefits (living benefits) provision. How can this provision benefit Harold?

Some insurers permit the insured to withdraw policy benefits under certain circumstances, such as terminal illness.

automatic premium loan option

any delinquent premiums are paid by a new policy loan, keeps policy in force as long as there is adequate cash to cover delinquent premiums

assignment provision

assignment is the act of transferring a property right; policyowner has, as a matter of law, the right to assign some or all of her rights to another person or entity

What is the difference between a contingent beneficiary and a contingent payee?

Contingent beneficiary is a person or organization that is to receive the proceeds only if the

What information appears on the declarations page of most life insurance policies?

Declarations page of most life insurance contracts contains the name of the insurance company, the identities of the insured, the policyowner, and the beneficiary, specific policy details, a general description of the type of insurance provided ; and a statement about the policy's free-look provision, insurer's promise to pay

dividend options reduction of premiums

policyowner simply subtracts the amount of the dividend from the premium currently due and remits the difference to the insurer

When Rita purchased a whole life policy, she added a double indemnity rider and was surprised to learn that adding the rider did not double her premium. Rita believes that she "slipped one past" the insurance company. Is Rita overlooking something?

Double indemnity may five the illusion of double coverage. However, certain conditions must be satisfied in order for the insurer to pay double the face amount. One is that death must be the result of an accident.

Describe the settlement options that life insurance policies most commonly provide.

Settlement options include, in addition to the lump-sum or cash option, Interest Option- death procceeds retained temporarily by the insurer and only the interest is paid to beneficiary periodically fixed-period option- installment payments of both death proceeds and interest are made to the beneficiary over a specified time period fixed-amount option- level period installments of specified amount are paid to the beneficiary; excess interest earnings do not increase the amount of the payment but extend the period of payment life income options- death proceeds are applied as a single premium to purchase an annuity for the beneficiary; various forms of annuities may be available

Do state standard policy provision laws require all life insurance policies to have identical wording?

State statutes require that life insurance policies include certain provisions that meet minimum standards. Each insurance company may select the actual wording it puts into the contract, but the wording must be approved by the state

Aetna Insurance Company developed a new life insurance policy with some innovative features, then conducted a national advertising program on tv. Robin and Diane saw the commercials and contacted Aetna, purchased the life insurance policies. Neither they nor the insurance representatives handling their application realized that these new policies had not yet been approved by insurance regulators in the state. What rights do Robin and Diane have?

The contract is voidable. Robin and Diane can seek a refund of premiums or they can seek to enforce the policy against the insurer. Aetna may also be fined or penalized by the state for selling a contract that had not been approved.

divisable surplus

portion of an insurer's surplus declared as a dividend to be distributed to the owners of participating policies

When Sara purchased her $500,000 life insurance policy five years ago, she indicated in the application that she was 45 years old. She has been paying an annual premium of $480. When she died this year, the insurance company learned that she was actually 50 years old when she completed the application and should have been paying a premium amount of $720. What amount if any, is due to the beneficiary on Sara's policy?

The insurer will adjust the death benefits to the amount that the premium paid would have purchased at the correct age, the premium at age 50 would have been $720 for $500000. If the correct rate had been applied, Sara's annual premium would purchase $333,333 of insurance. Thus the insurer will pay Sara's beneficiary $333,333

Describe the two options, in addition to cash surrender values, that life insurance companies are required to provide under the standard nonforfeiture law.

The policyowner has the option of: taking a reduced amount of paid up whole life insurance, payable upon the same conditions as the original policy or taking extended term insurance in an amount equal to the original face amount of the policy, increased by any dividend additions or deposits and decreased by any policy indebtedness

What is the difference between a primary beneficiary and a contingent beneficiary?

primary beneficiary is the person or organization that is to receive the proceeds if he or she or it survives the insured; estate of the insured may be named the primary beneficiary, although this is usually unwise because it subjects proceeds to transfer taxes that can be avoided

incontestable clause

prohibits insurer from disputing or contesting the validity of the policy after it has been in force for a certain time period

Bill purchased a $500,000 whole life policy 10 years ago. When his marriage and business recently failed, he became distraught and committed suicide. Would Bill's beneficiary receive the $500k death benefit?

Yes. Bill's beneficiary would receive the death benefit because he had the policy for more than the 1-2 years that most life insurance policies do not cover suicide.

add accidental death benefits

a form of a rider or amendment to a policy; also known as the double indemnity provision because it usually doubles the standard death benefit if the insured dies accidentally

Frank purchased a participating whole life policy many years ago, and over time, several questions have arisen regarding his coverage. Which policy provision should be reviewed to clarify each of the following questions, and what would that provision typically suggest? a. Frank just discovered that his premium was due 2 weeks ago. Is the coverage still in force?

a.grace period- life insurance policies include a grace period, during which an overdue premium may be paid without a lapse in coverage; standard length of a grace period is 30 or 31 days; Franks coverage is still in force

plan change provision

acknowledges that the parties may agree to change the terms of the contract

late remittance offer

after the grace period expires; offer solely at insurer's discretion, intended to encourage the policyowner to reinstate a lapsed policy, policyowner may reinstate without providing evidence of insurability

guaranteed purchase option

aka guaranteed insurability option; helps policyowners protect themselves against the possibility that the insured might become unsinsurable

reinstatement provisions

allow a policyowner to reacquire coverage under a policy that has lapsed; right is valuable to both policyowner and insurer; various state laws and insurance contracts impose certain requirements that policyowmer must meet to reinstate policy

suicide provision

an insurer can elect to cover suicide from the day it issues the policy, however, this is unusual, most contracts do not cover suicide for the first 1-2 years of the contract

Frank purchased a participating whole life policy many years ago, and over time, several questions have arisen regarding his coverage. Which policy provision should be reviewed to clarify each of the following questions, and what would that provision typically suggest? b. Frank is facing a liquidity crunch. He needs some cash but does not want to exercise a nonforfeiture option. Can his life insurance policy help?

b. policy loan provision- policy loan provision gives the policyowner access to the cash value that accumulates inside the policy without terminating the policy; the policyowner requests a loan and the life insurer lends the funds condidentially, loan provisions in the policy specify the portion of the cash value that is available for loans and how interest will be determined, most policies allow over 90% of cash value for loans

Susan, a 61 year old widow, has decided to stop paying the premiums on the $250,000 whole life policy that named her late husband as primary beneficiary and her three grandchildren as contingent beneficiaries. It's not that she needs the money she would receive by cashing in the policy, because Susan was the beneficiary of a substantial life insurance policy on her late husband, but rather that she no longer sees the need for life insurance. Susan had though of taking the life insurance policy's cash surrender value and using it to set up a trust to fund her grandchildren's college, but she has just learned that the policy provides other non-forfeiture options. What factors should Susan consider in evaluating her other options?

cash value to purchase annuity, thus providing a stream of income reduced paid-up option or the extended term insurance option extended term insurance would provide $250,000 to be split among 2 grand kids

Frank purchased a participating whole life policy many years ago, and over time, several questions have arisen regarding his coverage. Which policy provision should be reviewed to clarify each of the following questions, and what would that provision typically suggest? d. Frank has been using his dividends to help pay premiums. Are other options available to him?

dividend options- in addition to a reduction in premiums and cash, participating whole life policies offer- accumulation at interest, purchase of paid-up additions, purchase of term insurance

dividend options accumulation at interest

dividends are maintained in the equivalent of an interest-bearing savings accounts for the policyowner, minimum rate of interest is guaranteed, but a higher rate of interest may be credited if conditions warrant, accumulated dividends may be withdrawn at any time, if not withdrawn added to the death proceeds or the nonforfeiture value if policy is surrended

dividend options purchase of paid-up additions

each dividend is used to purchase, on an attained age basis, a small amount of additional, fully paid-up whole life insurance. The purchase is made at rates that do not contain a loading for expenses, and no additional evidence of insurability is required

misrepresentation

false representation of a material fact

grace period

grants the policyowner an additional period of time to pay any premium after it has become due; required by state law

How does a guaranteed purchase option protect an insured policyowner who may need additional life insurance protection in the future?

guaranteed purchase option, aka guaranteed insurability option, helps policyowners protect themselves against the possibility that they might become uninsurable.

What is the difference between the rights of the policyowner when the beneficiary is named revocable vs irrevocably?

if the beneficiary is named revocable, the policyowner can change the designation at any time prior to the insured's death without the beneficiaries consent; if the beneficiary is named irrevocably, the policyowner must obtain the beneficiary's consent before changing the beneficiary

Frank purchased a participating whole life policy many years ago, and over time, several questions have arisen regarding his coverage. Which policy provision should be reviewed to clarify each of the following questions, and what would that provision typically suggest? C. When Frank purchased the policy, he lied about his health history. Will this prevent his beneficiary from collecting the face amount of the coverage?

incontestable clause- the incontestable clause provides that once the policy has been in force for 2 years during Frank's lifetime, the insurer cannot deny payment to the beneficiary because of concealment or misrepresentation in the application

misstatement of age or gender clause

insured's age and gender are fundamentally important factors in evaluation of risk the life insurance company assumes; misstatement of gender/age results in adjustment of the contract and benefits to reflect the truth, adjustment would be considered an attempt to enforce the terms of the contract, not invalidate it

standard policy provisions

laws of various states require that life and health insurance policies include certain provisions but allow the insurance companies to select the actual wording as long as it is at least as favorable to the policyowner as the statutory language

ownership provision

ordinarily the insured is the applicant and the owner of the policy, ownership provision in the life insurance contract describes the rights of the owner,

primary beneficiary

person or organization that is to receive the proceeds if he, she or it survives the insured

contingent beneficiary

person or organization that is to receive the proceeds only if the primary beneficiary predeceases the insured or loses entitlement to any of the proceeds for some other reason

beneficiary

person or persons who are entitled to receive death benefits. In individual life insurance, policyowner may also be the beneficiary. Insured who dies cannot also be beneficiary. however, insured's estate may be beneficiary

settlement options

provide alternative ways of taking the death proceeds of a life insurance policy; policyowner can select the settlement option, beneficiary may or may not be permitted to change it following insured's death; Interest option, fixed-period option, fixed-amount option, life income options

nonforfeiture options

provides alternative ways in which the policy's cash value can be taken out or utilized if the contract is terminated during the insured's lifetime: require that a life insurance policy must make certain options available regarding how a policyowner can use the policy's cash value; insurer must make that value available to the policyowner in cash as a surrender value and provide a choice of two other options-1) paid-up insurance at reduced death benefit amount or 2) extended term insurance for the net face value of the policy

policy loans

required by law if policy generates a cash value, funds lent confidentially, some policies may restrict the amount of loanable funds to 90% of cash value, policy loans accrue interest on the borrowed funds

dividend options

selections from among several options indicating how any available dividends are to be used

accelerated benefits provision

some insurers have added a provision that permits the policyowner to withdraw a portion of death benefits under certain circumstances; accelerated or living benefits provisions state that if the insured becomes terminally ill, policyowner may withdraw a portion of the policy's death benefit

entire contract provision

states that the policy (including any attached riders) and the application constitute the entire contract

dividend options cash option:

the policyowner receives dividends in cash

fifth dividend option aka purchase of term insurance

use a portion of the dividend to buy 1 year term insurance equal to the policy's then cash value, with the remainder used to buy paid-up additions or to accumulate interest, other insurers use the entire fifth dividend option to buy 1 year term insurance; in either case insurance is purchased on the basis of the insured's age

direct recognition

used to reduce dividends on policies with outstanding loans; makes the distribution of dividends more equitable so that policies with outstanding loans don't receive as much in dividend payments

waiver-of-premium rider

works in the event of the insured's disability; if the insured becomes totally disabled, insurance company will waive payment of premium during the continuance of the insured's disability