Ch.4- Standard provisions and Options

Paul is the insured and policyowner. Paul named Danny and Kayla as co-primary beneficiaries of Paul's $100,000 policy. Danny is to receive 70% and Kayla is to receive 30%, therefore Danny gets $________ and Kayla gets $______ when Paul dies.

70k/30k, When more than one primary beneficiary is listed, and the percentage for each is specified, then that is how much of the total death benefit each will receive.

_________ Options allow for the distribution of the life insurance death benefit, to the named beneficiary or contract owner, as the situation warrants.

A Settlement Option dictates a mode of payment to a beneficiary (e.g. Fixed Amount, Fixed Period, Life Income, etc.) The owner may choose Settlement Option for a beneficiary that may not be changed by the beneficiary.

An insured with a participating life insurance policy receives an annual dividend check in the mail. He must have selected which Dividend Option:

A cash dividend is payable at the anniversary of a policy, and is paid directly to the owner under the Cash Option.

The entire contract typically consists of all of the following, except:

A copy of the cancelled check and receipt. The entire contract consists of the policy, riders, amendments, and a copy of the application. Nothing can be incorporated by reference.

Accelerated Death Benefits

Accelerated Death Benefits provide for an early payment of a portion of the face amount prior to death. This provides tax free access to policy benefits based on an insured qualifying as terminally ill or chronically ill.

Which of the following beneficiary designations is a class designation?

Any of the children. A class designation is when the beneficiary is not directly identified by name.

The policy loan amount cannot exceed the ____________.

Available cash surrender value

Which of the following statements regarding life insurance policy exclusions is TRUE?

Generally, aviation is excluded, except for fare-paying passengers on a commercial flight

Frank purchases a life insurance policy and names his wife Jean as his beneficiary. They divorce several years later. If Frank dies before making any changes to his policy, can Jean still collect as his beneficiary?

Insurable interest must be present at the time of a life insurance application, but not necessary at the time of the loss. So, if Frank never changed his listed beneficiary, Jean will still collect his life insurance proceeds.

An insured, whose policy is in force, intentionally kills herself 7 months after purchasing the policy. How much will the insurer pay?

Refund of premiums paid only. Suicide within 2 years of policy issue is a common exclusion in life insurance (the time can vary by state). Only premiums paid are refunded.

What is the primary purpose of the reinstatement provision?

Reinstatements are designed to put a policy back in force as if the lapse never occurred. Upon reinstatement, a new Incontestability clause takes effect, since a new application is required.

A policyowner who wishes to maintain all rights in the policy should designate a(n):

Revocable beneficiary. In order to maintain all rights in the policy, a policyowner should name a revocable beneficiary. An irrevocable beneficiary would have to provide consent for certain changes to a policy. Primary, contingent, and tertiary beneficiaries can be named as either revocable or irrevocable.

Common Disaster Clause

The Common Disaster Clause provides that if an insured and primary beneficiary die as a result of the same event, the primary beneficiary must survive the insured by a specific period of time (usually 90 days) or the insurance company will assume the insured died last (the primary beneficiary died first). This provision is designed to pay the benefits to either the contingent beneficiary or the insured/policyowner's estate if no contingent beneficiary has been designated.

Individual Policies Only

Contractual provisions explain what the contract consists of, what duties and responsibilities the parties to the contract have, how the policy works, and basically spells out the agreement between the policyowner and the insurance company. Provisions and clauses, unlike riders, are included in the contract for no additional charge.

The bank may require its borrowers to have a life insurance policy to secure a loan in the event of the borrower's death. Which provision gives the bank proportional protection but not control of the policy?

Collateral Assignment- Under the law, an assignment is a transfer of a right to another person or entity of rights by the owner of such rights. Collateral Assignment simply creates a lien against the death benefit but does not affect the owner's rights.

Dividend options do not include which of the following choices?

Lifetime income. Lifetime income is a death benefit settlement option.

Burt named Liz as his beneficiary; however, he did not choose a Settlement Option. At the time of his death, who determines the option to be used to receive the benefits?

Liz the beneficiary determines which option she would like to have. If the owner of the policy does not select a Settlement Option while alive, then the beneficiary may choose an option at the time of claim.

The grace period in a life insurance policy is typically 31 days and provides for the:

Payment of the premium to be received after its due date without a penalty or lapse in coverage The grace period allows payment of the past due premium without a penalty or lapse in coverage. Any claim arising in the grace period is payable, but any unpaid premium will be deducted from the claim when paid.

All of the following are TRUE of Policy Loan Rate provisions, except:

Policies with fixed interest loan rates have a maximum interest rate of 10% --- The policies with fixed interest loan rates usually have a maximum interest rate of 8%.

The _________ clause identifies the parties to the contract and the perils it covers.

The insuring clause identifies the parties to the contract and the perils covered.

An aunt and uncle purchase a life insurance policy on their niece, for whom they are the legal guardians. Both guardians perish in an accident some time later. Who receives the death benefit?

no claim is paid out - The policy insures the life of the niece, and she has not died.

A contingent beneficiary has the right to:

Receive the policy proceeds if the primary beneficiary predeceases the insured. A contingent beneficiary has no interest in the policy proceeds if there is a surviving primary beneficiary. Contingent and primary beneficiaries do not share the death benefit. Only an irrevocable primary beneficiary has the right to interfere with certain of the owner's rights in a life insurance policy.

Beth exercised an owner's option on a life policy to stop paying premiums but continue to be covered until she was age 100. Which Nonforfeiture Option did she choose?

Reduced Paid-Up The Nonforfeiture Option that would allow Beth to stop making premium payments and continue to be covered to age 100, but for a reduced face amount, is Reduced Paid-Up. Paid-Up Additions and the Paid-Up Option are Dividend Options.

Frank, the owner of a life insurance policy, chooses a Settlement Option whereby the proceeds of his policy will be paid out over 20 years. Frank has chosen:

The Fixed Period settlement option pays out proceeds over a specified period of time.

If overdue premiums are not paid by the end of the grace period, a traditional Whole Life policy will automatically:

The automatic option at the end of the grace period for a traditional Whole Life policy is the extended term nonforfeiture option. This will keep the original face amount in place for a certain number of years and days as indicated on the table inside the policy.

K has a $10,000 traditional whole life policy with a loan outstanding of $1,000 and a 5% interest charge. At the end of the first year of the loan, K did not pay the loan interest. What is the result of K's inaction?

The cash value is used as collateral against the loan. Interest will be charged annually, and if unpaid, will be added to the balance of the unpaid loan. $1,000 x 5% = $1,050.

Policy loan provisions include all of the following, EXCEPT:

The death benefit of a policy is automatically reduced when a loan is requested. Policy loans do not automatically reduce the death benefit in a policy. If an outstanding loan exists at the time of death, the amount of the loan will then reduce the benefit paid to the beneficiary.

Maria's policy was issued with an incorrect age. She was actually older than what was listed in the policy. Which of the following will the insurer most likely do if she had died 5 years after policy issue, but prior to this discovery?

The insurer would pay out a reduced benefit in proportion to the underpayment of premium--- The Misstatement of Age or Sex provision allows the insurer to pay out the benefit that the correct premiums would have purchased. This means that the death benefit could be reduced if the age was understated.

The ________ decides which dividend option is in effect and can change his/her election at any time.

The policyowner decides which dividend option is in effect and can change his/her election at any time.

The __________ has the right to change the premium mode.

The policyowner has the right to change the premium mode.

What are the two types of life insurance assignments?

The two types of assignment are Collateral (temporary), and Absolute (permanent).

If an applicant for life insurance misstates his age on the application, what would be the consequence if/when it is discovered?

Death benefit will be what the premium paid would have purchased at issuance at the correct age. The Misstatement of Age or Sex Provision prevents the policy from automatically being voided, but protects the insurer's right to protect its interests by adjusting the death benefit based on what the actual premiums paid would have purchased had the correct age been known.

All of the following regarding revocable beneficiaries is true, except:

They have rights in the policy just like any other party to the contract. The policyowner may change a revocable beneficiary at any time. This beneficiary does not have a vested interest in the policy. Most named beneficiaries are revocable and have no rights.

The insuring clause is found:

The insuring clause is typically found on the front or first page of the policy.

What is the primary advantage to the policyowner in the reinstatement of a life insurance policy?

The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium. Reinstatement restores the policy to its original condition as if it were never lapsed. Even though the policy is reinstated at a later age, the original issue premium is all that the insurer will require.

Interest only, life income with period certain, lump sum, and life income only are all forms of which of these life insurance policy options?

These are all examples of death benefit settlement options—how the beneficiary will receive the policy proceeds.

An insured forgets to pay his insurance premium. Instead of the policy lapsing, the premium is paid by the company. This would suggest that a __________ policy was purchased.

Whole Life- Only cash value policies can provide for missed premium payments to be paid with the policy's cash value through an automatic premium loan.

If an insured dies during the policy's grace period, the insurer will:

Pay the death benefit, less the amount of premium due. The policy is in force during the grace period and if death occurs during the grace period, the insurer pays the death benefit, minus any premiums or loans due.

Alice is the insured, Bill is the primary beneficiary, and Claire is the contingent beneficiary. Bill dies, then Claire dies, then Alice dies, so who receives the policy proceeds?

With no surviving beneficiaries, the policy proceeds go to Alice's estate.