Life Insurance Policy Provisions, Options, and Riders

Nonforfeiture Options

Cash surrender value, reduced paid-up insurance, or extended term

Riders

Modify provisions that already exist and are used to increase or decrease the policy benefits and premiums.

Exclusions

are the types of risks the policy will not cover. The most common are aviation, hazardous occupation, and war and military service.

Warranty

is a statement that is guaranteed to be true.

Representation

is a written response to questions or statements made on an application for insurance which the applicant indicates are correct to the best of his or her knowledge, and upon which the underwriter has the right to void the contract.

Incontestability Clause

prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2YEARS, even if there has been a material misstatement of facts or concealment of a material fact. Does not apply in the event of non-payment of premiums, or statements relating to age, sex, or identity.

Provisions

stipulate the rights and obligations of an insurance contract and are fairly universal from one policy to the next.

Entire Contract Provision

stipulates that the POLICY AND A COPY OF THE APPLICATION, along any riders or amendments, constitute the _________ __________. No statements made before the contract was written can be used to alter the contract. Neither the insured or insurer may change policy provisions once the policy is in effect without both parties agreeing to it and the change being affixed to the contract.

Grace Period

the insured is entitled to a _____ ______ of 1 month within which the payment of any premium, after the first year, may be made, subject to a maximum interest charge of 6% per year for the number of days of grace elapsing before the payment of the premium.

Extended Term Option

the insurer uses the policy cash value to convert to term insurance for the SAME FACE AMOUNT as the former permanent policy. The duration of the new term coverage lasts for as long a period as the amount of cash value will purchase. Automatically selected by the insurer in the event the policyowner neglects to choose a nonforfeiture option.

One-year term option

The insurance company uses the dividend to purchase additional insurance in the form of one year term insurance that increases the overall policy death benefit. The policy owner's choice is to use the dividend as a single premium on as much it will buy, or to purchase term equal to the policys cash value for as long as it will last.

Cost of Living Rider

addresses the inflation factor by automatically increasing the amount of insurance WITHOUT EVIDENCE OF INSURABILITY from the insured. The face value of the policy may be increased by a _____ ____ ______ factor tied to an inflation index such as the Consumer Price Index.

Partial withdrawal (partial surrender)

allowed by universal life policies to withdrawal part of the policy cash value. There may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made. During the withdrawal, the interest earned on the withdrawn cash may be subject to taxation, depending on the plan.

Premium Mode

is the manner or frequency that the policy owner pays the policy premium. Most policies allow for annual, semi-annual, quarterly, or monthly payments.

Options

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

Spouse/Other-insured Rider

provides coverage for one or more family members other than the insured. Is usually level term insurance, attached to the base policy covering the insured. Aka a family rider. If the rider covers just the spouse of the insured, it can be specified as a SPOUSE TERM RIDER, and allows the spouse to be added to coverage for a limited period of time and for a specified amount. (usually when age 65 is attained)

Waiver of Cost of Insurance

rider is found in Universal Life Insurance. In the event of disability of the insured, this rider waives the cost of insurance and other expenses, but does not waive the cost of premiums necessary to accumulate cash values.

Dividend Options

The first dividend could be paid as early as the 1st policy anniversary, but must occur no later than the end of the 3rd policy year. From then on dividends are usually paid on an annual basis. Policy owners have the option of taking their dividends in one of several ways. (cash payment, reduction of premium payments, accumulation at interest, one-year term option, or paid up additions)

Reduction of Premium Payments

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

Accumulation at Interest (Dividend Option)

The insurance company keeps the dividend in an account where it accumulates interest. The policy owner is allowed to withdraw the funds at any time. The amount of interest is specified in the policy and compounds annually. Although dividends themselves are NOT taxable, the interest on the dividends is taxable to the policy owner when credited to the policy, whether or not the policy owner receives the interest.

Reduced paid-up

The policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a REDUCED FACE AMOUNT from that of the former policy. The new reduced policy builds its own cash value and will remain in force until death or maturity.

Disability Income Benefit

With this rider, in the event of a disability the insurer will waive the policy premiums and pay a monthly income to the insured. The amount paid is normally based on a percentage of the face amount of the policy to which it is attached.

Reinstatement Provision

allows a lapsed policy to be put back in force. The maximum time limit for reinstatement is usually 3 YEARS after the policy has lapsed. If policyowner elects to reinstate, then he/she must provide evidence of insurability. The policyowner is required to pay back all premiums, plus interest (not to exceed 6%), and may be required to repay any outstanding loans and interest. The advantage to reinstating is that the policy will be restored to its original status, retain all the values that were established at the insured's issue age.

Children's term rider

allows the 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 the minor reaches a certain age (18, 21). Most riders provide the minor with the option of converting to a permanent policy without evidence of insurability.

Riders

are written modifications attached to a policy that may add or delete benefits. Sometimes result in additional premium being charged, but can just as easily result in a reduced premium.

(NAIC) National Association of Insurance Commissioners

create uniformity among life insurance policies by creating standard policy provisions to be adopted.

Return of Premium Rider

is implemented by using increasing term insurance. When added to a whole life policy, it provides that at death prior to a given age, not only is the original face value amount payable, but an equal amount to all premiums previously paid is also payable to the beneficiary. Usually expires at age 60.

Automatic Premium Loan Provision

is not required, but is commonly added to contracts with a cash value at no additional charge. This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium.

Right to Examine (Free Look)

this provision allows the policy owner 10 DAYS from receipt to look over the policy and if dissatisfied for any reason, return it for a full premium refund. Starts when the policyowner receives the policy (policy delivery), not when the insurer issues the policy.

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 of such an accident. (Double or Triple Indemnity). No additional cash value is accumulated with this rider, or to additional benefits to purchase.

Ownership Rights

naming and changing the beneficiary, receiving the policy's living benefits, selecting a benefit payment options, and assigning the policy. - the policyowner has the responsibility of paying the policy premiums, and is also the person who must have insurable interest in the insured at the time of the application for the insurance. When the owner and the insured are not the same person, the insurance arrangement is referred to as the third-party ownership.

Misstatement of age

because the age of an insured affects the premium that will be charged for a life insurance policy, if the applicant has misstated his or her age on the application, in the event of a claim, the insurer has the right to adjust the benefit to an amount that the premium at the correct age would have otherwise purchased.

Estates

if none of the beneficiaries is alive at the time of the insured's death, or if no beneficiary has been named, the insured's _______ will automatically receive the proceeds of a life insurance policy. The death benefit of the policy may be included in the insured's taxable estate if this occurs.

Family Term Rider

incorporates the spouse term along with the children's term rider in a single rider. When added to a whole life policy, the _______ _____ rider provides level term life insurance benefits covering the spouse and all of the children. Family Term = Spouse Term + Children's Term

Collateral Assignment

involves a transfer of partial rights to another person. It is usually done in order to secure a loan or some other transaction. A partial and temporary assignment of some of the policy rights. Once the debt or loan is repaid, the assigned rights are returned to the policy owner.

Absolute Assignment

involves transferring all rights of ownership to another person or entity. This is a permanent and total transfer of all policy rights. The new policyowner does not need to have an insurable interest in the insured.

Cash Payment

is a dividend option that the insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually.

Surrender Charge

is a fee charged to the insured when a life policy or annuity is surrendered for its cash value.

No Lapse Guarantee

is an agreement by the insurance company to keep a universal life policy in force - even if the policy's cash value becomes $0. For this ____ _____ __________ to take effect, a specified minimum continuation premium must be made.

Policy Loan Option

is found only in policies that contain cash value. The policyowner 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 policyowner that the policy is going to lapse. An insurance company may defer a policy loan for up to 6 months.

Beneficiary

is the person or interest to which the policy proceeds will be paid upon the death of the insured. May be a person, class of persons, the insured's estate, or an institution or other entity such as a foundation.

Per Stirpes

meaning BY THE BLOODLINE, distributes the benefits of a beneficiary who died before the insured to that beneficiary's heirs.

Per Capita

meaning BY THE HEAD, evenly distributes benefits among the living named beneficiaries.

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. When this option is exercised, the insured purchases the additional coverage at his or her attained age. This rider usually expires at age 40. - This rider is not modified or deleted by the existence of other riders.

Payor Benefit

rider is primarily used with juvenile policies; otherwise, it functions like the waiver of premium rider. If the payor (usually the parent/guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21. This rider is also used when the owner and the insured are two different individuals.

Waiver of Premium

rider waives the premium for the policy if the insured becomes totally disabled. Most insurers impose a 6 MONTH WAITING PERIOD from the time of the disability until the first premium is waived. The rider usually expires when the insured reaches age 65.

Cash Surrender Value

simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable. Upon receipt of the cash surrender, if the cash value exceeds the premiums paid, the excess is taxable as ordinary income.

Assignment Provision

specifies the policyowner's rights to assign (transfer rights of ownership) the policy. The policyowner must advise the insurer in writing of the assignment. There are two types of policy assignment: Absolute Assignment, and Collateral Assignment

Paid-Up additions

the 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; however, each of these small single premium patents will INCREASE THE DEATH BENEFIT of the original policy by whatever amount the dividend will buy. Each of these policies will accumulate cash value and pay dividends.