Policy Options

Interest Option

(or accumulation at interest option) is usually a temporary option. It provides for the insurer to simply hold any dividends until the policyowner: - selects another option. - requests payment of the dividends and interest earned on them. - is paid the dividends and interest earned, along with the policy death benefit, upon the insured's death. If the policyowner is also the insured, payment under this option would be paid to the beneficiary, along with the death benefit. While held by the insurer, the dividends earn interest at the greater of a guaranteed rate or the current interest rate. The dividends are not taxed; however, the interest earned is taxed in the year it is credited to the account. The dividends held are not part of the policy's cash value and do not add to the cash value. As such, they are not deducted from the cash value when they are finally withdrawn. For Example Since Amber took her dividend in cash, she was exercising the cash dividend option. The $230 was tax free as it is considered a return of premium. If Amber had no need for the money, she could have Gedda Life hold the dividend, allowing it to earn interest until she really needed it. Since they guaranteed 3% interest and her bank pays her only 1% interest on savings deposits, she is better off leaving it with Gedda Life. At the end of a year, Amber would have to pay tax on the $6.90 interest (3% of $230) earned by the dividend.

O died without having paid the $1,000 premium on his $100,000 life policy that was due a week before his death. If there were no outstanding policy loans, the insurer will pay - none of the proceeds. - $100,000, minus the prorated premium amount. - $100,000, upon receipt of the premium. - $100,000, since the insured died during the grace period.

- $100,000, minus the prorated premium amount. Since the policy is in the grace period, the insurer will pay the claim, but the past-due premium will be deducted.

Which of the following is NOT a nonforfeiture option? - Cash surrender - Extended term insurance - Reduced paid-up insurance - 1-year term

- 1-year term 1-year term insurance is a dividend option. The 3 nonforfeiture options are: (1) Cash surrender: surrender the policy and take the cash value. (2) Extended term insurance: use the cash value to buy paid-up term insurance of the same amount as the existing policy, with the term of the coverage based on the amount of cash value available. (3) Reduced paid-up insurance: use the cash value to purchase paid-up insurance of the same type but with a reduced face amount.

When J was out of work for three months, J's whole life insurance policy lapsed. If J was the owner of the policy, what were J's rights? - Choose a non-forfeiture benefit. - Request an extension of premium up to 3 years. - Obtain guaranteed reinstatement within 3 years. - None of these; he loses all rights under the contract.

- Choose a non-forfeiture benefit. A policyowner can select a non-forfeiture benefit to claim use of his cash value when he allows his policy to lapse. If he selects a benefit that keeps him insured (extended term or reduced paid-up insurance), he has a right of reinstatement for up to 3 years (as long as he is still insured).

S has a $50,000 whole life policy. He wants his wife to receive monthly income for at least 10 years after his death and then for life if she is still living after the 10-year period. He should choose which settlement option? - Fixed amount - Fixed period - Life income - Life income with period certain

- Life income with period certain The life income with period certain provides income for the beneficiary's life, with a guarantee that prepayments will be made for a certain period (e.g. 10 years) should the beneficiary die within that period.

Which nonforfeiture option provides the same type of coverage as the original policy? - Extended term - Reduced paid-up - Cash surrender - Automatic premium loan

- Reduced paid-up The 3 nonforfeiture options are: (1) Cash surrender: surrender the policy and take the cash value. (2) Extended term insurance: use the cash value to buy paid-up term insurance of the same amount as the existing policy, with the term of the coverage based on the amount of cash value available. (3) Reduced paid-up insurance: use the cash value to purchase paid-up insurance of the same type but with a reduced face amount. If the original policy is whole life or limited pay life, the reduced paid-up policy is whole life.

S has a $350,000 life insurance policy. Upon his death, the insurer may pay less than $350,000 to the beneficiary for any of the following reasons EXCEPT - the policy is in the grace period. - there is an outstanding policy loan. - S's age was overstated at the time the policy was issued. - S's age was understated at the time the policy was issued.

- S's age was overstated at the time the policy was issued. Death during the grace period is covered, however the insurer has the right to deduct the past-due premium from the claim payment. If not repaid prior to the insured's death, any outstanding loan balance, including interest, would be deducted from the face amount. If the age of the insured were understated, the death benefit would be reduced to reflect what the actual premium would have paid had the insurer known the correct age. If the age of the insured were overstated, the insurer would pay the full death benefit and return the overpaid premium to the beneficiary in addition to the death benefit. This is the correct response.

Which of the following describes the term "nonforfeiture values"? - The policyowner is entitled to receive the face amount of a limited-pay policy in cash. - The cash value accumulation of a permanent policy cannot be declared forfeited by the insurer if the policy lapses. - The owner of a term policy may purchase permanent insurance for the same face amount as the term policy within 60 days. - All premiums previously paid for a permanent policy will be refunded by the insurer upon request of the policyowner.

- The cash value accumulation of a permanent policy cannot be declared forfeited by the insurer if the policy lapses. "Nonforfeiture values" refer to the fact that the policyowner does not forfeit his cash value if the policy lapses. Instead the cash value is available to him in cash, or as a premium to pay-up an extended term policy or a reduced paid-up permanent policy. These values can exist only when a policy has cash value.

Which of the following statements pertaining to settlement options is true? - Under the fixed-period option, a longer payment period will result in smaller payments. - Under a life income option, income payments will continue only until the principal is depleted. - Payments under the interest-only option may not be at a rate higher than the guaranteed rate. - The interest-only option cannot be used with any other settlement options.

- Under the fixed-period option, a longer payment period will result in smaller payments. If one elects to receive the proceeds over a longer period, his payments should be smaller. Choice "B" is false because the payments under a life income option will continue for the life of the beneficiary even if the proceeds and interest have been entirely paid out. Choice "C" is false as the interest paid can exceed the guaranteed minimum. Choice "D" is false as the beneficiary can elect to take some of the proceeds under one option and have the insurer hold the rest under the interest option.

A "life insurance policy dividend" is - interest paid on cash value. - the portion of the premium not used to pay death claims. - the return on a stockholder's investment in the insurer. - a share of the insurer's excess funds or divisible surplus.

- a share of the insurer's excess funds or divisible surplus. When an insurer experiences a savings in mortality (death claims), earns greater interest than anticipated, and/or has lower operating expenses, this results in excess funds or surplus which can be divided among the participating policyowners. Distributions to the policyowners are called "policy dividends". Policies eligible for dividends are called "participating" or "par" policies. Policies sold without eligibility for dividends are called "nonparticipating" or "nonpar" policies.

W has selected a settlement option under which the principal never decreases unless he withdraws it. This is the ____ option. - interest-only - fixed period - fixed amount - life income

- interest-only Under the interest-only option, the insurer keeps the proceeds until a specified time or until another option is selected. While it holds the proceeds, the insurer will pay interest to the beneficiary. The rate of interest has a guaranteed minimum, but if the insurer earns more it can pay more. This option can remain in effect for a specified period or until another option is selected.

Policy dividends are - issued only on participating policies. - taxed as investment income. - guaranteed to be paid each year, but may vary each year. - available to insureds only up to a specified age.

- issued only on participating policies. When an insurer experiences a savings in mortality (death claims), earns greater interest than anticipated, and/or has lower operating expenses, this results in excess funds or surplus which can be divided among the participating policyowners. Distributions to the policyowners are called "policy dividends". Policies eligible for dividends are called "participating" or "par" policies. Policies sold without eligibility for dividends are called "nonparticipating" or "nonpar" policies. Dividends are not taxed, as they are considered a return of excess premiums, not investment income. Dividends cannot be guaranteed.

When X died, the insurer paid his sons, Y and Z, $1,000 per month. After Y died, Z continued to receive $500 monthly until he died. The settlement option used was - refund annuity. - life income certain. - straight life income. - joint and survivor life income.

- joint and survivor life income. "Joint and survivor life income" provides for payments to 2 or more beneficiaries until the last survivor has died.

Upon learning of an insured's death, the producer's first task is to - comfort the family. - contact the beneficiary. - provide financial counseling - notify the insurance company.

- notify the insurance company. Since the producer (agent) represents the insurer, his first responsibility is to notify the insurer. Then he should contact the beneficiary or the beneficiary's legal representative. He should fill out and have the beneficiary sign the proof of death form, and explain to the beneficiary any settlement option chosen by the insured, or all options if the beneficiary has the right to select an option.

Upon the death of the insured, the producer's responsibility is to:

- notify the insurer. - contact the beneficiary or his legal representative. - fill out and have the beneficiary sign a proof of death form. - explain to the beneficiary any settlement option chosen by the policyowner or explain all settlement options, if the policyowner left the beneficiary the right to select an option. For Example When Pete Moss died, his weeping widow, Willow, called their insurance producer, Benny Fishel. Benny informed her that she would receive $250,000 shortly after she submitted a death certificate as proof of Pete's death. He also promised to visit and explain her options for receipt of the money.

Z's settlement option provides for 200 installment payments. When Z dies after receiving 130 payments, the remaining 70 payments will be - paid to Z's estate, if a secondary payee is named. - paid to a secondary payee, if named. - paid to the insured's estate, if a secondary payee is named. - retained by the insurer, if no secondary payee is named.

- paid to a secondary payee, if named. When there is a specific number of installments to be paid, they will be paid even if the beneficiary has died. If there is a secondary payee named, installments will be paid to him. If there is no secondary payee, they will be paid to the beneficiary's estate.

All of the following are true regarding extended term insurance EXCEPT - premiums will be payable on the insurance for a reduced amount. - the amount of insurance is equal to the face value of the original policy less any policy loan balance. - all supplementary benefits included with the original policy are dropped. - the insurance will not extend beyond the original policy's maturity date.

- premiums will be payable on the insurance for a reduced amount. "Premiums will be payable on the insurance for a reduced amount" is the false answer as there will be no premiums due. The cash value buys paid-up coverage. The other choices are true. The amount of the coverage is the original face amount less any debts owed the insurer. Supplementary coverages provided by riders are dropped when the option goes into effect. The maximum term of coverage is the original term.

When F bought his life insurance policy, he noticed that the policy had a spendthrift clause included. This clause will - protect creditors against the acts of beneficiaries. - apply to proceeds paid to beneficiaries in a lump sum. - protect the money held by the insurer under a settlement option. - allow a beneficiary receiving proceeds under the fixed-amount option to have the insurer send the monthly payments to a creditor.

- protect the money held by the insurer under a settlement option. The spendthrift clause applies only to proceeds held by the insurer as part of a settlement option; it does not apply to proceeds paid in a lump sum to the beneficiary. It protects beneficiaries from creditors, not creditors from beneficiaries.

All of the following accurately describe the policyowner's rights EXCEPT the right to - select settlement options only with the consent of the beneficiary. - select settlement options and restrict the beneficiary's right to change them. - allow the beneficiary to select the settlement option. - allow the beneficiary to change settlement options only at certain times or without any restriction.

- select settlement options only with the consent of the beneficiary. A policyowner has the right to select a settlement option for the beneficiary without the consent of the beneficiary. If he does select an option, he can restrict the beneficiary's right to change it by not allowing any changes for a certain period or by not allowing any changes at all. He can also allow the beneficiary to make changes without any restrictions. He can also elect to not select any option and instead allow the beneficiary to make the selection. In any event, the policyowner has the right to take any action only up until the insured dies. After the insured dies, if nothing had been decided earlier, the beneficiary has control over the proceeds.

Under the fixed-period settlement option, - the higher the rate of interest, the larger each installment payment. - the amount of the interest rate does not affect the amount of the installment payments. - the higher the rate of interest, the smaller each installment payment. - the larger the installment amount, the longer the selected period of income.

- the higher the rate of interest, the larger each installment payment. This option will pay the proceeds and interest over a specified period of time. Therefore, the higher the interest rate, the greater each payment will be. In a fixed amount option, a higher interest rate will result in payments for a longer period, as the payment amount will remain fixed.

Under the life income option, the older the beneficiary - the shorter the payment period. - the longer the payment period. - the smaller the monthly payment per $1,000 of proceeds. - the larger the monthly payment per $1,000 of proceeds.

- the larger the monthly payment per $1,000 of proceeds. Life income payments are calculated based on having to pay for the remainder of the beneficiary's expected lifetime all proceeds and interest earned on the proceeds held by the insurer. Therefore the older the beneficiary, the fewer the number of payments expected to be made and the larger each payment must be in order to get all the proceeds and interest to the beneficiary before he dies. The "the shorter the payment period" choice is false because the beneficiary could live longer than expected. There is no assurance his payment period will be shorter than a younger beneficiary's.

B and C receive $600 per month under a joint and 2/3 survivor settlement option. - the balance of the proceeds in a lump sum. - $300 per month for life. - $600 per month for life. - $400 per month for life.

-$400 per month for life. A joint and 2/3 survivor option provides for 2/3 of the original payment (2/3 of $600) to be paid to the surviving beneficiary.

settlement

Choices as to how to receive the claim other than in a lump sum are called ___________ options.

options for receipt

Insurance companies offer policy owners up to five basic options for receipt of dividends, including: - cash. - interest. - paid-up additions. - reduced premium. - one-year term. Cash Option The cash option provides for the dividend to be paid to the policyowner in cash. The IRS does not consider this to be a taxable event, classifying dividends, if taken in cash, to be a return of "excess" premiums and, therefore, not taxable.

review 2

Insurers generally pay death claims in a lump sum cash payment immediately after receiving notification and proof of death. Proof of death would include a form signed by the beneficiary plus the death certificate. When paying a claim, the insurer will deduct from the face amount of the policy the balance of any policy loan, plus accrued interest and past-due premiums (if the death occurred during the grace period). If the death benefit is not paid within a prescribed period of time, the insurer is required to add interest to the settlement. There are other settlement options by which a claim settlement may be made other than in the form of a lump sum payout. A lump sum payout is not technically considered a settlement option as "settlements" occur over a period of time. The settlement choices are very similar to annuities. The insurance producer is the person best equipped to explain the different options to the beneficiary. They include interest only, fixed period, fixed amount, life income, joint life, joint life and survivor life and life income certain. Some policies will contain a spendthrift clause, the purpose of which is to protect the beneficiary by preventing the beneficiary from losing the settlement proceeds to creditors; and preventing creditors from including settlement proceeds in legal actions against the beneficiary. This clause applies to proceeds held by the insurer as part of a settlement option. It does not apply to proceeds paid in a lump sum to the beneficiary or to proceeds that have actually been received by the beneficiary. The beneficiary may not use or receive the proceeds in any other manner.

Settlement Options Overview

Interest-Only - Pays the beneficiary interest only - Insurer will hold the principal death benefit until another option is chosen - Interest is taxable in the year it is paid to the beneficiary - Considered a temporary choice Fixed-Period Installment - Payout to the beneficiary made for only a fixed, specified period of time - If beneficiary dies prior to complete payout, the secondary payee (or annuitant's estate) will receive the balance of the payments Fixed-Amount Installments - Payout to the beneficiary made in specified dollar amounts with each payment - If the beneficiary dies prior to complete payout , the secondary - payee (or annuitant's estate) will receive the balance of the payments Life Income - Payout will be made for the beneficiary's life, regardless of the length, and is based on the beneficiary's life expectancy - No secondary payee as payments are made only for the beneficiary's lifetime Joint Life Income - Payment to two or more beneficiaries until one of them dies - Payments stop at the first death Joint and Survivor Life Income - Payment to two or more beneficiaries - Payments continue after the first death to the surviving beneficiary, normally at a reduced amount Life Income with Period Certain - Payments made for at least a certain number of years (the certainty period) - If beneficiary dies within that period, secondary payee will receive payments for the balance of the certainty period - If the beneficiary outlives the certainty period, payments continue until his death.

Joint Life Option

Like a joint life annuity, the joint life settlement option pays income to more than one beneficiary until one of them dies, which will end the payments, even if only one payment was received.

Claim Payments

Note Claims are commonly required to be paid within a specific period of time after the death of the insured and upon the insurer receiving the proper forms (death certificate and a claim form signed by either the beneficiary or estate representative). If not paid within a state-mandated period of time, an insurer may be penalized for its lack of timely payment. See your state laws and rules for specifics on associated penalties. Insurers generally pay death claims in a lump sum cash payment immediately after receiving notification and proof of death. Proof of death would include a form signed by the beneficiary plus the death certificate. When paying a claim, the insurer will deduct from the face amount of the policy: - the balance of any policy loan, plus accrued interest. - past-due premiums (if the death occurred during the grace period). Note Past-due premiums are deducted from claim payments but not from nonforfeiture values.

Par and Non-Par Policies

Policies may be sold as eligible or not eligible for dividends. However, even if a policy is eligible for dividends, they are not, and cannot be, guaranteed. Policies offering dividends are called participating or par policies. Those policies sold without eligibility for dividends are called nonparticipating or non-par policies. Non-par policies do not offer dividends. For Example Amber could have bought a non-par policy for a monthly premium of $100. Instead, she bought a par policy that cost $110 per month. Last year she received a policy dividend of $230. Although the premium for the non-par policy was less, Amber's net cost for the par policy was actually lower than her net cost for the non-par policy because of the dividend she received.

participating.

Policies offering dividends are called ____________ .

Dividend Options

Premiums are based on three factors: - Mortality (anticipated death claims) - Loading (insurance company operating expenses) - Interest credited for use of the premium The insurer will have excess funds or a divisible surplus when: - it experiences savings because death claims are lower than anticipated; - interest earnings are greater than anticipated; or - operating expenses are lower than expected. This surplus can be distributed to policyowners in the form of policy dividends on each policy anniversary date.

Spendthrift Clause

Some policies will contain a spendthrift clause, the purpose of which is to protect the beneficiary by: - preventing the beneficiary from losing the settlement proceeds to creditors; and - preventing creditors from including settlement proceeds in legal actions against the beneficiary. This clause applies to proceeds held by the insurer as part of a settlement option. It does not apply to proceeds paid in a lump sum to the beneficiary or to proceeds that have actually been received by the beneficiary. It provides that the beneficiary must receive the settlement payments only as scheduled. The beneficiary may not: - assign or transfer payments to another. - encumber the proceeds (i.e., use them as collateral for a loan). - commute the proceeds (i.e., take the present value of the settlement payments in a lump sum).

review

Standard nonforfeiture law requires that any policy which will develop cash value must have some cash value available to the policyowner by the end of the policy's third year. The nonforfeiture provision in such policies (i.e., permanent policies) provides that the cash value cannot be forfeited when the policyowner lets the policy lapse. Instead, the cash value must be made available to the policyowner to either take in cash (considered a total surrender), use as a single-premium to pay up an extended term policy; or use as a single-premium to pay for a reduced paid-up permanent policy. These choices are called the nonforfeiture options. The insurer will have excess funds or a divisible surplus when it experiences savings because death claims are lower than anticipated, interest earnings are greater than anticipated or operating expenses are lower than expected. This surplus can be distributed to policyowners in the form of policy dividends on each policy anniversary date. Policies may be sold as eligible or not eligible for dividends. However, even if a policy is eligible for dividends, they are not, and cannot be, guaranteed. Policies offering dividends are called participating or par policies. Those policies sold without eligibility for dividends are called nonparticipating or non-par policies. Non-par policies do not offer dividends. Insurance companies offer policyowners up to five basic options for receipt of dividends, including cash, interest, paid-up additions, reduced premium and one-year term insurance.

Nonforfeiture Options

Standard nonforfeiture law requires that any policy which will develop cash value must have some cash value available to the policyowner by the end of the policy's third year. The nonforfeiture provision in such policies (i.e., permanent policies) provides that the cash value cannot be forfeited when the policyowner lets the policy lapse. Instead, the cash value must be made available to the policyowner to: - take in cash (considered a total surrender); - use as a single-premium to pay up an extended term policy; or - use as a single-premium to pay for a reduced paid-up permanent policy. These choices are called the nonforfeiture options.

Cash Surrender Option

The cash surrender option allows the policyowner to surrender the policy and, in return, receive from the insurer the policy's cash value less the amount of any unpaid policy loan(s) and interest. The insurer will not deduct any unpaid premium, since there would be no premium charge for the coverage being terminated. However, there is a delay clause included with this option that allows the insurer to delay payment of the cash value for up to six months. For Example Amber bought a $150,000 whole life policy from Gedda Life Insurance Company a few years ago. Her cash value has accumulated to $5,000. Over the next three years, it should grow by another $2,000. She is thinking about canceling that policy and purchasing a new one that has lower premiums. If she cancels her policy now, she can get her $5,000 cash value from the canceled policy but may not have any cash value for the next three years under her new policy. In effect, she will lose $2,000 over the next three years if she replaces her policy. If Amber does surrender her policy and take the cash value, she is exercising her cash surrender option.

extended term option

The extended term option lets the policyowner use the cash value (less the amount of any outstanding loan) to buy single-premium, paid-up term insurance. This insurance would have the same death benefit amount as the lapsed policy (i.e., face amount less any outstanding loan), but it would not include any supplementary coverages provided by riders on the original policy. The term of coverage would be based on the amount of cash value available to pay for the coverage but could not extend beyond the original policy term. This option provides the greatest amount of insurance coverage but will only provide that coverage for a specified period of time. The extended term option is automatically applied if the policyowner does not choose a nonforfeiture option, as it keeps the same amount of coverage in effect until the term expires.

Fixed-Amount Installments Option

The fixed-amount installments option is used when a specified amount of periodic income may be needed by the beneficiary(ies). It provides for the insurer to pay the policy proceeds in installments of equal, fixed amounts. These payments are not made for a fixed period of time. They are made only until all proceeds and interest earned on the proceeds have been paid. Because the amount of each payment will not change: - any excess interest credited to the proceeds will increase the number of payments. - policy loans will decrease the number of payments. For Example When she considered her choices, Willow determined that, if she changed to a 20-year fixed-period option, she would receive monthly payments of at least $1,386.49, and more if interest earnings were credited at more than 3%. If she died before receiving all 240 payments, her children, Laurel and Lily, would receive the remainder of the payments, just as Willow would have received them had she lived. Willow also determined that, if she changed to a fixed-amount option, she could still receive monthly payments of $1,386.49 for the next 20 years. With this option, if interest earnings were credited at more than 3%, the number of payments would be extended (rather than the amount increased) until all the proceeds and interest were paid out. If she died before receiving all the money due her, Laurel and Lily, her secondary payees, would receive the remaining payments.

Fixed-Period Installments Option

The fixed-period installments option is used when the beneficiary and/or dependents will need income for a known period of time (e.g., until the children are out of school). It provides for the insurer to make regular payments of principal and interest over a fixed period of time to the beneficiary or a contingent payee. Each payment will include a portion of the proceeds plus interest earned on the proceeds held by the insurer. The amount of each payment will be based on: - the amount of the proceeds. - the interest rate. - the fixed period selected (the longer the period selected, the smaller the payments). With this option, the period over which the payments are made is fixed, so the number of payments will never change. Even if the beneficiary dies during the period, installment payments will continue for the entire length of the period, paid to: - a secondary (i.e., contingent) payee, if one is named. - the beneficiary's estate, if there is no secondary payee. While the period is fixed, the amount of the installment payment may change. If a higher interest rate is credited to the account, the payment amount will increase. If a policy loan is outstanding at the time of the insured's death, the payment amount will be smaller.

Interest-Only Option

The interest-only option is a temporary option. It provides for the insurer to hold the proceeds themselves and only pay out the interest earned on the proceeds, which will later be paid to the beneficiary or to a secondary (i.e., contingent) payee. The proceeds will earn at least a minimum guaranteed rate of interest, but if the insurer earns a higher rate, it can pay more. In choosing this option, the policyowner can restrict the right of the beneficiary to get the proceeds before a certain time or date or even for the beneficiary's lifetime. If it is selected by the beneficiary, the option would remain in effect until the beneficiary chooses another option. As this option will not provide much in the way of monthly income, it is best used when the beneficiary does not need the policy proceeds right away. For Example When Willow selected the interest-only option, she was promised payments of $7,500 annually (3% of the $250,000 proceeds) while the insurer held the proceeds. However, due to favorable earnings by the insurer, she was actually paid $10,000 (4%).

Joint and Survivor Life Income Option

The joint and survivor life income option will pay income to two or more beneficiaries until the last surviving beneficiary dies. As with the joint and survivor life income annuity, payments after the first beneficiary dies may be reduced (e.g., one half, two thirds). This option is often used by a husband and wife to ensure there is income as long as either is alive.

Life Income Option

The life income option is like a life income annuity. It provides for payments of the settlement proceeds and interest for the life of the beneficiary and the payments are based on the beneficiary's life expectancy at the time of settlement. Because payments cease upon the beneficiary's death: - there is no guaranteed minimum. Payments will stop when the beneficiary dies, even if all the policy proceeds have not been paid out. No payments are made to any other person after the beneficiary dies. - there is no maximum limit on the amount to be paid. Payments will continue, even after the proceeds and the interest earned on them are exhausted, as long as the beneficiary is alive.

Life Income with Period Certain Option

The life income with period certain option (or life income certain option) guarantees to make payments for: - the beneficiary's lifetime. - a guaranteed minimum period even if the beneficiary dies early.

One-Year Term Option

The one-year term option is called the fifth dividend option because it is not always offered. It provides for the dividend to be used to purchase one-year term insurance. Generally, the amount of term insurance that may be purchased is limited to the policy cash value amount. Since the insurer's risk is limited, evidence of insurability is not needed to buy the insurance. For Example Amber could have Gedda Life apply the $230 as a single premium to buy paid-up additional whole life insurance. If this were the first time she had been paid a dividend, she would not have to show she was in good health, but if she had previously chosen other dividend options, she would have to show she was in good health. At Amber's age, this premium might buy $1,200 of whole life insurance. If Amber had asked for the reduced premium option, Gedda Life would have applied the dividend to her next premiums due. With her monthly premium of $110 per month, she could have skipped two full payments and paid only $100 on the third payment. If Amber wanted to use the dividend to get the most insurance she could, she would exercise the one-year term option. In her case, the $230 might purchase $50,000 of one-year term insurance.

Settlement Options

The policyowner has the right to select and change the settlement option for the beneficiary without his consent while the insured is alive. The policyowner could choose to: - allow the beneficiary to make changes without any restrictions. - not allow the beneficiary to change an option for a certain period of time. - not allow any changes at all. If the policyowner does not select any settlement option, the beneficiary has the right to make the selection. After settlement payments begin, however, the beneficiary may not change the option selected unless it is the interest-only option or the fixed-amount option. These may be changed only if change is not prohibited by the settlement agreement. For Example In checking Pete's policy, Benny determined that Willow was free to select her settlement option and advised her to select the interest-only option if she was unsure of which option to take. The interest-only option may be changed later to any other option.

nonforfeiture.

The provision that cash value of policy cannot be lost when policyowner let policy lapse is called ____________ .

reduced paid-up insurance option

The reduced paid-up insurance option allows the policyowner to use the cash value (less the amount of any outstanding loan) to buy single-premium, paid-up insurance of the same type as the lapsed policy. Under this option, the face amount is reduced, since no more premiums will be paid, and the policy will provide protection for a period equal to the term of the original policy. This is because it is the same type of policy, simply paid in full, and has all of the features (loans, surrenders, endowment, etc.) that the original policy had, but without any riders that may have existed prior to the lapse of the original policy. For example, if the original policy was whole life, the reduced paid-up policy will be whole life. The premium is based on the insured's attained age, but it is less than a standard premium because the insurer does not have to include a charge to recover sales costs. This option provides the insured with the longest coverage period. For Example If Amber stops paying premiums on her $150,000 whole life policy and tells the insurer nothing, Gedda Life will apply her cash value as a single premium to buy $150,000 of term insurance. The insurer would also do that at Amber's request. In this case, Amber would be exercising her extended term option. If Amber stops paying premiums and tells Gedda Life to apply her cash value as a single premium to buy paid-up whole life insurance, she would be exercising the reduced paid-up option. The insurance would be paid up with no more premiums due, but instead of $150,000 in coverage, she will only have $45,000.

Single Life Option

The single life option pays income for the life of one beneficiary. The amount of the income payments is based on payment of the policy proceeds and anticipated interest earnings for the remainder of the beneficiary's expected lifetime. As such, the older the beneficiary, the fewer the number of payments expected, and each payment would be larger in order to get all the proceeds and interest paid to the beneficiary before he dies. This option may be used by a beneficiary who has no dependents and wants to make sure he receives the largest possible income payments for the rest of his life. Because it does not have any guaranteed minimum payments, it provides the greatest monthly income of any of the life income options. For Example If Willow has no need to be concerned about her children being taken care of, she could choose the life-income option. Benny Fishel shows her that, based on her age, her monthly payments would be $1,500, even if she lived to be 110. The payments would cease once she died, even if she only received one payment.

settlement options

There are other settlement options by which a claim settlement may be made other than in the form of a lump sum payout. A lump sum payout is not technically considered a settlement option as "settlements" occur over a period of time. The settlement choices are very similar to annuities. The insurance producer is the person best equipped to explain the different options to the beneficiary. They include: - interest only. - fixed period. - fixed amount. - life income. - joint life. - joint life and survivor life. - life income certain.

Paid-Up Additions

Under the paid-up additions option, current and future dividends are used to buy additional paid-up insurance of the same type as the original policy. Past dividends being held by the insurer cannot be used to purchase paid-up additions. The premium rate is a net single premium based on the insured's attained age. Proof of insurability generally is not required when this is the first dividend option selected but may be required if other options had previously been chosen.

Reduced Premium Option

Under the reduced premium option, the dividend is applied to reduce the amount of the next premium due.