Life Insurance Policy Provisions, Options and Riders

Two types of policy assignment

Absolute assignment and collateral assignment

Reinstatement provision

Allows a lapsed policy to be put back in force. Maximum time limit is usually 3 years after the policy has lapsed. Requires the policyowner to pay all overdue premiums with interest before the policy is reinstated

Per Stirpes

By the bloodline, distributes the benefits of a beneficiary who died before the insured to that beneficiaries heirs.

Per Capita

By the head. Evenly distributes benefits among the living named beneficiaries.

Reduced-paid-up policy

The original policy's cash value is used as single premium to pay for a permanent policy with a reduced face amount from the original, hence the name.

Assignment Provision

The policy owner of a life insurance policy has the right to transfer partial or complete ownership of the policy to another person without the consent of the insurer. The assignment provision specifies the policy owner's right to assign (transfer rights of ownership)

Irrevocable beneficiaries

They can be changed only with the written consent of that beneficiary

Riders

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

Aviation

Most cover fare-paying passenger or a pilot on a regularly scheduled airline, but will exclude coverage for noncommercial pilots, or require an additional premium for the coverage

Triple indemnity Rider for Accidental Death

Obligates the company to pay three times the face value if the insured dies as a result of an accident. Death must be accidental and not contributed to by any other factors and must occur within 90 days of the accident

Options

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

Incontestability clause

Prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2 years

Spouse term rider

Allows a spouse to be added for coverage. Available for a limited amount of time, typically expiring at age 65. Usually level term insurance

Right to Examine (Free Look) Provision

Allows the policyowner a specified number of days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium Starts when the policyowner receives the policy. In NY the minimum free-look period is 10 days

Hazardous occupations or hobbies

Death from hazardous occupation or hobby may exclude the coverage. Underwriter also has the option of charging a higher premium for insuring these risks

Payor Benefit Rider

Does not cause the death benefit to increase Primarily used with juvenile policies If payor becomes disabled for at least 6 months or dies then the insurer will waive the premium until the minor reaches a certain age

Status clause

Excludes all causes of death while the insured is on active duty in the military. The results clause only excludes the death benefit if the insured is killed as a result of an act of war.

Fixed amount settlement

Fixed specified amount in installments until the proceeds (principal and interest) are exhausted

Policy loan option

Found only in policies that contain cash value. Any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured's death. Not subject to income taxation

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 estate will automatically receive the proceeds of a life insurance policy.

Common Disaster Clause

If the insured and the primary beneficiary die at approximately the same time from common accident with no clear evidence as to who died first

Absolute assignment

Involves transferring all rights of ownership to another person or entity

Uniform Simultaneous Death Law

It is assumed that the primary beneficiary died first in a common disaster. This provides that the proceeds will be paid to either the contingent beneficiary or to the insured's estate Most insurers specify a certain period of time, usually 14 to 30 days in which death must occur in order for this provision to apply

Suicide provision

Protects insurers against individuals using suicide as a defense to payment of life insurance benefits. Usually stipulate a period of time during which the death benefit will not be paid if the insured commits suicide.

Automatic premium loan

Protects the insured from an unintentional policy lapse due to a nonpayment of premiumre

Fixed-period settlement option

Provides a guaranteed income for a certain amount of time

Exclusions

Risks the policy will not cover. Most common exclusions found in life insurance policies are aviation, hazardous occupation, and war and military service

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 with any riders or amendments, constitute the entire contract.

Collateral Assignment

Transfer of partial rights to another person.Usually done in order to secure a loan or some other transaction.

War or Military Service

Two different types of exclusions that may be used to limit the death benefit if the insured dies as a result of war Status clause Results clause

Cash Loans

Whenever a policy has cash value, it has loan value. Amount available to the policyowner for a loan equals the cash value minus any outstanding and unpaid policy loans including interest. Loan value = cash value - (unpaid loans + interest) if there are outstanding loans at the time of the insured's death, the loan amount will be considered a debt to the policy and the death benefit will be reduced by the amount of indebtedness