Life Insurance Policy Provisions, Riders & Options

Policy Loan and Withdrawals

**the policy loan option is found only in policies that contain cash value (whole life)** Any outstanding loan and accrued interest will be deducted from the policy proceeds upon the insured's death. Insurers must provide 30 day notice that a policy is going to lapse. Insurance companies may defer a policy loan request for up to 6 months UNLESS the reason for the loan is to pay premium

To avoid interest on insurance proceeds, the insurer must pay the death benefit within how many days of receipt of proof of loss?

30 days, a 6% interest rate will be assessed on the proceeds left on deposit with the insurer after the 30 days

Classes (beneficiary designation)

A class of beneficiary is using a designation such as "my children". Goes by Per Capita and Per Stirpes Per Capita: Meaning by the head, evenly distributes benefits only to NAMED beneficiary. Per Stirpes: meaning by the bloodline, the beneficiary's heirs would receive their dead father's portion, while the rest would go to the other named beneficiaries

Spendthrift Clause

A clause that prevents the debtors of a beneficiary from collecting the benefits before he/she receives them. Designed to protect life insurance policy that have not yet been paid to a named beneficiary from the claims of the creditors of the beneficairy or policyowner

One-Year Term Dividend Option

A dividend option under which the insured has the company purchase one-year Term insurance with the dividend. For example, your dividend is $100, which you could have taken as cash. Instead, you have the insurer use the money to buy you an additional 1 year term policy at your current age. If you die in the term, your beneficiary will receive the proceeds of your Life policy PLUS the face amount of the one year term policy. At the end of the year, the term policy expires

Fixed Amount Settlement Option

A life insurance settlement option whereby the beneficiary instructs that proceeds be paid in regular installments of a fixed dollar amount. The number of payment periods is determined by the policy's face amount, the amount of each payment, and the interest earned.

Cost of Living Rider

Addresses the INFLATION factor by automatically increasing the amount of insurance without evidence of insurability

Guaranteed Insurability Rider

Allow the Insured to purchase additional coverage at specified future dates (usually every 3 years) or special events (such as marriage or childbirth) WITHOUT evidence of insurability ** Guaranteed Insurability rider is not modified or defeated by the existence of other riders**

Reinstatement Provision

Allows a lapsed policy to be put back into force. Max time limit is 3 YEARS after policy has lapsed. 3 YEARS!!! Advantage: Policy will be restored to its original status and retain all the values that were established at the insured's original issue age.

Children's Term Rider

Allows children of the insured to be added to coverage for a limited period of time for a specified amount. Provides TEMPORARY LIFE INSURANCE COVERAGE on ALL children of the family for ONE PREMIUM

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 policyowner RECEIVES the policy, not when the insurer issues the policy. In Mass, it is 10 DAYS

Settlement Options

Choices available to the insured/owner for distribution of insurance proceeds. Triggered by the insured's death or age 100. Once selected by the policyowner, it cannot be changed

Trusts (beneficiary designation)

Commonly established for minors or to create a scholarship fund. When used properly, can keep life insurance death proceeds out of the insured's taxable estate. Expensive to administer

Exclusions Provision

Exclusions are types of risks the policy will not cover. Certain exclusions are standard for all policies, while others are attached as a rider. The most common are aviation, hazardous occupations and war

Family Term Rider

Family Term Rider = Spouse Term + Children's Term

Payor Benefit (Juvenile Insurance)

Functions like a waiver of premium rider, if the PAYOR becomes disabled for 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21

Primary Beneficiary

Has first claim to the policy proceeds following the death of the insured

Contingent Beneficiary

Has second claim in the event that the primary beneficiary dies before the insured

Misstatement of Age Provision

IF the applicant has misstated their age on the application, in the event of a claim, the insurer has the right to adjust the premiums or benefit to the amount that the premium would have purchased at the correct age of the insured

Estates (beneficiary designation)

If no named beneficaries exist, the proceeds go to the estate

Return of Premium Rider

Implemented by using increasing term insurance. Policyowner dies prematurely, the beneficiary receives the life policy total PLUS the accumulated premiums to that point

Joint and Survivor Settlement Option

Income for 2 or more that cannot be outlived. Often used with period certain. When one annuitant dies, the other receives either 1/2 or 2/3 of the original payment amount.

Waiver of Cost of Insurance

Life insurance rider that allows a UNIVERSAL life policyowner who becomes disabled to waive the cost of death protection but does not waive the cost of premium required to build cash value.

Irrevocable Beneficiary

Nothing can be changed or borrowed against without the beneficiary's consent

Individuals (beneficiary designation)

Owner of a life insurance policy may name any individual as a beneficiary for the policy proceeds. They may name more than one individual. Benefits designated to a minor will either be paid to the minor's guardian or paid to the trustee of the minor

Assignability Provision (Absolute & Collateral)

PROVISION Absolute: Involves transferring ALL rights to another person. New policy owner does not need insurable interest Collateral: Involves a transfer of PARTIAL rights. Usually done to secure a loan. Once debt is repaid, assigned rights are returned to the owner

Accidental Death Rider

Pays some multiple of the FACE AMOUNT if death is the result of accident as defined in the policy. Death must occur within 90 days after accident

Incontestibility Clause

Prevents an insurer from denying a claim due to statements in the application AFTER the policy has been in force for 2 YEARS, even after there has been a material misstatement of facts or concealment of facts. However, it does not apply to statements relating to age, sex and identity

Accelerated (Living) Benefit Rider or Living Needs Rider

Provides for an early payment of part of the DB if the insured is diagnosed with a terminal illness that will result in death within 2 years. Purpose is to provide the insured with the necessary funds to take care of necessary medical and nursing home expenses

Withdrawals or Partial Surrenders

Provision in UNIVERSAL life insurance policies that provides for withdrawals or partial surrenders of policy cash value.

Rider

Riders are WRITTEN modifications attached to a policy that provide benefits not found in the original policy

Automatic Premium Loans

Special Type of loans that prevents the unintentional lapse of a policy due to nonpayment of premium. While the insurer may defer loan requests for 6 months, loan requests for payment of premium must be honored IMMEDIATELY

Entire Contract Provision

Stipulates that the policy and a copy of the application along with any riders or amendments, constitute the entire contract and policyowner is entitled to it

Payment of Premiums Provision

Stipulates when premiums are due, how they are to be paid (monthly, quarterly, etc) and to whom. If the insured dies during a period for which the premium has been paid, the insurer must refund any unearned premium along with policy

Reduced Paid-Up Insurance

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 original policy

Paid up Additions Dividend Option

The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. Each small single premium payment will increase the DB by the amount of the dividend **IF the policyowner does not choose a dividend option, the Paid up Addition option will automatically be chosen

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. 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.

Interest Only Settlement Option

The insurance company retains the policy proceeds and pays interest on the proceeds to the recipient at regular intervals

Facility of Payment Clause

The insurer may pay to a relative or anyone it deems entitled to the benefits in the absence of a designated beneficiary and therefore saves legal expenses. It is often used in situations where the named beneficiary is a minor, deceased, costs of a funeral or final medical bills were incurred

Reduction of Premium Dividend Option

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

Cash Payment Dividend Option

The option to receive the dividend in cash is pretty self-explanatory. Each year the life insurer pays the policyholder the dividend in the form of a check. The payment comes directly to the policyholder who can then use the cash for whatever purpose he or she sees fit.

Spouse and Other-insured Term Rider

The other insured rider provides coverage for one or more family members other than the insured. This rider is usually level term insurance, attached to the base policy covering the insured, AKA Family Rider. If the rider covers just the spouse of the insured, it can be specified as spouse term rider

Grace Period Provision

The period of time after the premium of due date that the policyowner has to pay the premium before the policy lapses (usually 30-31 days). PURPOSE is to protect the policyowner against an unintentional lapse of the policy. If policyowner dies during this period, DB is payable but any unpaid premium is deducted from DB

Cash Surrender Value

The policyowner simply surrenders the policy for the cash value at a point when coverage is no longer needed or affordable. IF the cash value exceeds premiums upon surrender, the excess is taxable as ORDINARY INCOME. Must also pay a SURRENDER CHARGE

Waiver of Premium Rider

This rider waives the premium for the policy if the insured becomes totally disabled. Most insurers require a 6 month waiting period to enable this rider, and in that case, refund the premiums from the previous 6 months. Rider usually expires when the person reaches 65. Person must meet the policy's definition of "totally disabled"

Nonforfeiture Options

Three options available by law to policyowners that enable them to recover a policy's cash-value upon surrender of that policy. (1) Cash (2) Reduced Paid-Up Insurance (3) Extended Term Insurance. TRIGGERED BY A LAPSE OR SURRENDER

Fixed Period Installment Settlement Option

Under the fixed period installments option (aka period certain) a specified number of years is selected and equal installments are paid to the recipient. The payments will continue even if the person dies

Interest on Life Insurance Proceeds Provision

Upon the death of an insured, proceeds from an individual life policy must include payment of interest at the rate for proceeds left on deposit with the insurer, beginning 30 DAYS after the death. Does not begin until proof of death is provided. In the event that the insurer does not pay interest on proceeds left on deposit, the rate will be 6%!!!

Common Disaster Clause

When insured and primary die at the same time, it is assumed that the primary died first, Most insurers specify a certain period of time, usually 14 to 30 days, in which the primary beneficiary's death must occur for this to happen. PROTECTS THE CONINGENT BENEFICARY

Cash Loans

Whenever a policy has cash value, it has LOAN VALUE. The amount available for policyowner equals the cash value minus any outstanding and unpaid policy loans including interest. After premiums have been paid for at least 3 YEARS, the insured will be entitled to a loan from the company not exceeding its loan value. Must contain either an interest rate of up to 8% annually or an adjustable maximum interest rate

Life Income Settlement Option

also known as straight-life; provides the recipient with an income that he/she CANNOT outlive. Installment payments are guaranteed for as long as the recipient lives! Amount each installment is worth is based on the recipients life expectancy and amount of principal is based on the recipients life expectancy and amount of principal

Single Life Settlement Option

provides a single beneficiary income for the rest of his/her life. Upon the death of the beneficiary, payments stop

Paid-Up Insurance (Dividend Option)

the insurer accumulates the dividends at interest and then uses the accumulated dividends, plus interest, and the policy cash value to pay the policy up early

Revocable Beneficiary

the policyholder reserves the right to change the beneficiary designation without the beneficiary's consent

Cash Payment Settlement Option

upon the death of the insured the contract is designed to pay the proceeds in cash (LUMP SUM) **if no settlement option is chosen, Cash payment is automatically selected Not taxable as income

Extended Term Option

use the policy's cash value to purchase a term insurance policy in an amount equal to the original policy's face value for as long a period as the cash value will purchase. **IF the policyowner neglects to select a nonforfiture option, Extended Term is automatically selected