Life Insurance Policy Provisions, Options, and Riders

Return of Premium Rider

*whole life policies -when added, it provides that death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to beneficiary

Conditions for payment - accelerated death benefit

-a terminal illness -a medical condition that requires an extraordinary medical intervention for the insured to survive -a medical condition that without extensive treatment drastically limits the insureds life time -inability to perform activities of daily living -permanent institutionalization or confinement to a long-term care facility -any other conditions approved by the Department of Insurance

NONFORFEITURE OPTIONS

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DIVIDEND OPTIONS

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Reduced Paid-Up

....Present cash value is used to buy a single premium, permanent paid-up policy of a reduced face amount, the longest period of coverage provided by a nonforfeiture option Immediate cash value will approximate the cash value you gave up This option is designed for people who want to continue their life insurance in later years but do not want any further payments after they retire

Advantages of Reinstatement

1) Age--since you get your original policy back, you will still be paying future premiums based on your original age 2) Your original policy may have had loan interest rates much lower than a new policy may currently offer

Collateral Assignment

Designation of a policy's death benefit or its cash-surrender value to a creditor as security for a loan. If the loan is not repaid, the creditor receives the policy proceeds up to the balance of the outstanding loan, and the beneficiary receives the remainder NOT binding upon the insurance company unless it is notified in writing

Premium Payment Mode

How frequently you pay your premium the more frequently you pay your premium, the higher your cost will be

Disability Income Benefit Rider

If purchased, this rider will pay your loss of net earned income if you are totally disabled as per the definition in the rider There is usually a short waiting period before monthly benefits start * waives the policy premium * also allows insured to receive weekly or monthly income during the disability period

Modifications

Once issued, the policy may not be modified (changed) in any way without the mutual consent of the parties -policyowner requests changes, but ONLY an executive officer can make the changes to the contract - NO AGENT has the right to waive policy provisions

Common Disaster Clause

Only goes into effect if the primary beneficiary dies within a certain number of days

Final Beneficiary

The insured's estate

Test question

Which of the following policies does not have forfeiture provisions? any *term* policy

Cash Surrender Value

You surrender your original policy and the company must send your accumulated cash value to you within six months of your request

Riders

modify provisions that already exist & are used to increase or decrease policy benefits and premium Usually are purchased at the time of application Have to pay an extra premium for them They provide extra coverage

Options

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

Spouse/Other Insured Term rider

provides coverage for one of more family members other than the insured - aka family rider - If the rider covers just the spouse of the insured it can be specified as a SPOUSE TERM RIDER

Living Needs Rider

provides the insured with the necessary finds to take care of necessary medical and nursing home expenses that incur as a result of the terminal illness

Provisions

specify the rights and obligations of an insurance contract -fairly universal from one policy to the next

Paid-Up Insurance

the insurer accumulates the dividends at interest & the uses the accumulated dividends+interest and the policy cash value to pay the policy up early

Reduction of Premium Payments

the insurer uses the dividend t reduce the next years premium

An insured stops making payments on a loan taken from his cash value policy. what will most likely happen?

the policy will terminate when the loan amount with interest equals or exceeds the cash value

3 Grace periods

28 days - Industrial Life 30 days - all other types of life insurance (including annuities) 31 days - Group Life and Group Health

Spendthrift Clause

A clause that prevents the debtors of a beneficiary from collecting the benefits before he/she receives them does NOT apply to proceeds that are payable in one lump sum This keeps the beneficiary from losing the proceeds to his creditors or from spending the money immediately himself

Settlement Options: Annuity

A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time If the beneficiary wants a lifetime income with a high degree of safety, she can use the proceeds to purchase a fixed annuity from the insurance company Buying an annuity with the lump-sum proceeds would be an Immediate annuity

Waiver of Premium Rider

A form of disability insurance attached to a life-insurance policy to pay the premium on behalf of the insured in case he becomes totally disabled The insured's sickness or disability must last for at least six months, during which time the insured must pay his premium himself After six months, the premium is paid retroactively for the insured This rider drops off the policy automatically when the insured reaches a certain age, usually 60 or 65, and the overall policy premium is then reduced

Succession

A life insurance policy can have up to three categories of beneficiaries

Designation Options: Minors

A minor may be named as beneficiary as long as a guardian is appointed to receive the funds on his behalf

Grace period

A period of time after the premium due date that the policy owner has to pay the premium before the policy lapses Grace period starts the day your premium is due and you don't pay it If you have a claim during your grace period, they will pay your claim minus your overdue premium

*Absolute Assignment*

A permanent transfer of ownership rights Irrevocably transfers all of your rights of ownership to the insured Insured now has to pay premiums NOT binding upon the insurance company unless it is notified in writing

Designation Options: Trusts

A trust, either *inter vivos* (that is, set up while the insured is still alive), or *testamentary* (created upon the insured's death according to his will), may also be designated as beneficiary A trustee (often a bank) will administer the funds in accordance with the instructions set forth in the trust agreement

Extended Term

An automatic option If the company does not hear from you within 60 days of your due date, it must automatically give you this option The company will give you a new Term insurance policy with the same face amount as your original policy had The Term policy is paid for until the expiration of the term No physical exam is required Now temporary, and no cash value * the cash value will be used to purchase term insurance that has a face amount EQUAL to the original policy for as long a period of time that the cash value can purchase

Three non-forfeiture options

Cash Surrender Value Extended Term Reduced Paid-Up These options required by law Apply to cash value policies only If you do not pay your premium when due and your policy does lapse, the company will wait 60 days from your due date to hear from you regarding the option you prefer

Withdrawals (partial surrender)

Clients with cash-value policies may withdraw their money at any time Most companies have the right to defer a request for a loan or a cash surrender up to six months

Family policy

Combination of Whole Life on the breadwinner and a Level Term Rider on the spouse and children The term coverage for both the spouse and children is renewable up to a certain age and convertible to Whole Life

Cash Payments

Company sends check to policy owner

One-Year Term Option

Company uses dividend to purchase addtl insurance in the form of one-year Term policy that increases total death benefit

Settlement Options: Interest Only

If the beneficiary selects this option, the money remains with the insurance company to accumulate additional interest over a period of time--pays the beneficiary interest at least annually The beneficiary can change her mind and elect to take the money as cash whenever she desires The interest earned is taxable in the year earned, even if not paid out

Settlement Options: Fixed-Amount Installments

If the beneficiary wants a certain amount to be paid to her monthly However, payment of a fixed amount to the beneficiary over a period of time will eventually deplete the principal balance, if the amount paid exceeds the interest earned on the unpaid balance

Designation Options: Estates

If you fail to name anyone or if all of your named beneficiaries have died before you do, your final beneficiary is considered to be your estate If no primary or contingent beneficiary is named, the policy proceeds will automatically go to the insured's estate and could be subject to estate taxes Not something you want to occur

Accidental Death

It will pay your beneficiary double or triple only in the event you die as a result of an accident You must die within 90 days of the accident or the insurance company does not consider it to be accidental death

Partial Surrenders

Many companies selling Annuities, Universal, or Variable Life will charge you a penalty for early surrender, usually during the first seven years of a policy Penalty charges must be stated clearly in the policy and/or the prospectus Usually written on a declining basis

Settlement Options: Cash

Most beneficiaries select this option and receive a lump-sum payment from the insurance company

Suicide Exclusion

Most states permit insurers to exclude death by suicide up to two years from the inception of the policy However, after two years, suicide is covered Insurance companies will refund premiums paid to the beneficiary if within 2 yrs of eff date

Incontestability

New life-insurance policies are contestable for the first two years of the policy--the insurance company may "contest" the claim and void or rescind the contract--no coverage would exist After two years, regardless of any false answers the applicant may have made on his initial application, the policy may not be voided and all claims must be paid

Cash Loans

Policyholder can borrow on cash value at any time Insurance company has up to 6 months to defer a loan request Insurance Company can charge interest on loan amount - up to 8% fixed Insurance company can limit percentage of cash value loan At your death, any outstanding loans plus interest will be subtracted from policy proceeds

Right to Examine (Free Look)

Refund provision This provision allows the policyowner a specified number of days (10 days) from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. The free look period starts when the policyowner receives the policy, not when the insurer issues the policy If you don't return it during that period, you many only get a portion of your money back, or might not get any of your money back

Reinstatement

Reinstatement allows a lapsed policy to resume active coverage -max limit for reinstatement is 3 years after the policy has lapsed MUST PROVIDE EVIDENCE OF INSURABILITY 1) You must take a physical exam, 2) Meet all company underwriting requirements 3) Pay all back premiums and interest on those premiums 4) Complete a reinstatement application

Designation Options: Classes

Should be used when you want a specific group to share the proceeds equally, such as "all my children," rather than naming them individually

Settlement Options: Fixed-Period Installment

The beneficiary advises the company to pay out the policy proceeds to her over a set period of time, say 10 or 20 years The unpaid balance continues to earn interest during this fixed period *Both the principal and interest are liquidated together over the selected period of time

*Primary Beneficiary*

The first one named by the policy owner to receive the policy proceeds in the event of the insured's death

Entire Contract

The policy, when it is issued, plus whatever is attached, including the application is contestable in court if it ever goes to court The application and anything else that's relevant have to be attached when the policy is issued

Standard Provisions: Ownership

The policyholder is the owner, all the owner's rights (naming & changing the beneficiary, receiving the polices living benefits, selecting a benefit payment option, assigning a policy) accrue ONLY to them

*Contingent Beneficiary*

The second one named to receive the policy proceeds in the event that the primary beneficiary has predeceased the insured

Revocable (does NOT need beneficiaries consent )

These are additions you put on your designations The policyholder has the right to designate any beneficiary he wants and to change it anytime he wishes

Misstatement of Age

This clause protects the insurance company against an applicant who lies about his age The insurance company has the right to adjust your benefits to an amount that the premium at the correct age or gender would have purchased. This is a separate clause from the Incontestability Clause and will not ever cause the policy to be voided

Irrevocable (needs beneficiaries consent)

This means the beneficiary can NEVER be changed without her consent, nor could a policy loan be taken without her consent, since it would affect the amount payable in the event of the insured's death

Accelerated (Living) Benefit Provision Rider

This rider allows a policy owner to "accelerate" receipt of a portion of the policy's death benefit upon the insureds occurrence of a terminal illness, a catastrophic illness, or eligibility for long-term care -remainder of policy precedes are payable to the beneficiary at the time of the insureds death

Exclusions

Types of risks the policy will NOT cover, i.e. aviation, war or military service, intentional acts, terrorism, dangerous hobbies or occupations, etc. certain exclusions are standard for all policies while others are attached to the policy as an exclusion rider

Designation Options: Individuals (Per Capita and Per Stirpes)

Under a Per Capita designation (individual), each child shares equally in the death benefit Under a per stripes Each child, grandchild, etc., moves up as necessary to replace beneficiaries ahead of them who have died

Automatic Premium Loans

Usually free Policy owner must select this option by checking the proper block on the application If you do not pay your premium when due, on the last day of the grace period the policy will automatically borrow from its own cash value to pay it for you This creates a policy loan that must eventually be paid back, plus interest. If you die with this loan outstanding, then the loan and accrued interest will be subtracted from policy proceeds This rider cannot be attached to a term policy, since there is no cash value

Cost of Living rider

addresses the inflation factor by automatically increasing the amount of insurance without evidence f insurability from the insured

Childrens Term Rider

allows children of the insured ( natural, adopted, or stepchildren) to be added to coverage for a limited period of time for a specified amount -usually expires when minor reached age 18 or 21 -most riders provide the minor the option of converting to a permanent policy without evidence of insurability - provide coverage on ALL children with ONE premium

Guaranteed Insurability Rider

allows the insured to purchase additional coverage at specified future dates (usually every 3 years) or events (such as marriage or birth of a child) without evidence of insurability, for an additional premium The extra premium does not go toward cash value accumulation

Per Stirpes designation

distributes the benefits of a beneficiary who died before the insured to that beneficiaries heirs

Paid-Up Additions

dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy - no new separate policies are issued -each of these single premium payments will INCREASE the death benefit - each of these paid-up policies will accumulate cash value & dividends

Per Capita designation (by the head)

evenly distributes benefits among the living named beneficiaries

Waiver of cost of insurance

in the event of disability of the insured, this rider waives the cost of the insurance & other expenses, but DOES NOT Waive the cost of premiums necessary to accumulate cash values

Family Term Rider

incorporates the spouse term rider along with the chidrens term rider in a single rider

Accumulation at Interest

insurance company keeps the dividend in an account where it accumulates interest - interest on the dividends is taxable to the policy owner when credited to the policy

Life Income (straight life)

provides recipient with an income that he or she cannot outlive - installment payments are guaranteed for as long as the recipient lives Single Life: provides a SINGLE beneficiary income for the rest of their life Joint & Survivor: guarantees an income for 2 or more recipients Life income with period certain option: provides lifetime income & a guaranteed installment period Joint Life with Term Certain: policy pays to 2 or more persons & stops paying at the death of the 1st (if within specified term, pymtns will continue to the other person until the end of the specified term) Life Refund Income: comes in either a cash refund form or an installment refund form

Payor Benefit Life/Disability

similar to Waiver of Premium rider It will pay the premium on the childs policy if the payor (usually a parent) becomes disabled or dies Premiums will be paid by the insurer until the child reaches either age 18 or age 21, depending upon the company, at which time the child must assume the payments

Disability Rider

some riders provide benefits in the event of the insureds disability while others provide for partial payment of the seat benefit prior to the insureds death, called accelerated or living benefits riders

Uniform Simultaneous Death provision

states that if both the insured and the primary beneficiary die as a result of the same accident, then it is always assumed that the insured died last This provision ensures that the insured's contingent beneficiary would receive the policy proceeds, rather than the heirs of the primary beneficiary