chapter 4 - part 2

what are considered the three common life insurance nonforfeiture options?

- cash surrender - extended term insurance - reduced paid-up insurance

three nonforfeiture options from which policy owners can select:

- cash surrender (available for ordinary whole life insurance after the first 3 years) - reduced paid-up option (take a paid-up policy for a reduced amount of insurance- don't pay premiums but still retains some amount of life insurance) - extended term option (purchase level term insurance in an amount equal to the original policy's face value)

the most common types of exclusions:

- war - aviation - hazardous occupations or hobbies - commission of a felony - suicide

all of these are common exclusions to a life insurance policy EXCEPT: 1. accidental death 2. military service 3. aviation 4. hazardous occupations

1. accidental death

life insurance policies will normally pay for losses arising from: 1. commercial aviation 2. war 3. suicide 4. hazardous jobs

1. commercial aviation

which of these is NOT considered to be a nonforfeiture option in a whole life insurance policy? 1. interest only 2. reduced paid-up insurance 3. extended term insurance 4. cash surrender

1. interest only

which situation accurately describes a reduced paid-up nonforfeiture option? 1. policy has a decreased face amount 2. face amount of the new policy equals that of the original policy 3. cash value is surrendered to policy owner 4. premiums must continue to be paid

1. policy has a decreased face amount

which of the following is a reinstatement condition? 1. proof of insurability 2. changes in the insuring clause 3. premium increase 4. premium decrease

1. proof of insurability

what is an insurance policy's grace period?

Period of time after the premium is due but the policy remains in force

A policyowner may exercise which of these dividend options that uses the dividend to pay all or part of the next premium due? 1. Reduction of premium dividend option 2. Extended term option 3. Paid-up option 4. Cash dividend option

1. reduction of premium dividend option using the dividend to pay all or part of the next premium due on the policy

If an insured dies during the grace period with no premiums paid: 1. the policy would be payable, minus the premium amount 2. the policy would be payable only after the beneficiary makes past due premium payment 3. all past premiums will be refunded with interest 4. the claim would be denied

1. the policy would be payable, minus the premium amount

which of these would limit a company's liability to provide insurance coverage? 1. waiver 2. exclusion 3. rider 4. provision

2. exclusion

what is an insurer required to do when faced with an error made under the misstatement of age provision? 1. cancel the policy 2. pay age-corrected benefits 3. pay full benefits as stated in the policy 4. bill the policy owner for back premiums

2. pay age-corrected benefits

A rider that assures premiums will be paid on a juvenile policy until the child reaches a specific age is called a(n) 1. waiver of premium rider 2. payor rider 3. automatic premium loan rider 4. juvenile waiver rider

2. payor rider

Loans obtained by a policy owner against the cash value of a life insurance policy: 1. are treated as taxable income 2. would not be treated as taxable income 3. are limited by the face amount of the policy 4. would be subject to a Federal estate tax

2. would not be treated as taxable income loans may generally be obtained against the cash value of a personal life insurance policy and are not treated as taxable income

a waiver of premium rider allows an insured to waive premium payments if the insured is 1. temporarily disabled 2. unemployed 3. completely and permanently disabled 4. experiencing financial hardship

3. completely and permanently disabled

which of the following protests a policyowner from a misrepresentation caused by an innocent mistake? 1. reinstatement clause 2. entire contact clause 3. incontestable clause 4. nonforfeiture clause

3. incontestable clause

all of the following are considered to be nonforfeiture options available to a policyowner EXCEPT: 1. extended term insurance 2. cash surrender 3. reduction of premium 4. reduced paid-up insurance

3. reduction of premium

James is the insured on a life insurance policy where his age was misstated on the application. Which of the following is CORRECT regarding the death benefit amount? 1. The original face amount will be paid to the beneficiary 2. The policy will be voided with no death benefits paid 3. The death benefit paid will be what the premium would have purchased at the correct age 4. The amount of premiums paid will be returned with interest

3. the death benefit paid will be what the premium would have purchased at the correct age

Ron has a life insurance policy with a face value of $100,000 and a cost of living rider. If the consumer price index has gone up 4%, how much may Ron increase the face value of the policy? 1. $400 2. $800 3. $2,000 4. $4,000

4. $4,000 Ron may increase the face value of his policy by $4,000. $100,000 x .04 = $4,000

which of the following is NOT part of an insurance contract? 1. policy 2. application 3. riders 4. certificate of authority

4. certificate of authority

An insurer will accept a premium from the insured and continue the coverage in full force as though it was NOT late during which time period? 1. Incontestable period 2. Probation period 3. Reinstatement period 4. Grace period

4. grace period

a guaranteed issue insurance policy has no: 1. initial premium requirement 2. incontestable period 3. waiting period 4. medical underwriting

4. medical underwriting

Automatic Premium Loan Provision

A provision that is now commonly added to most cash value policies is the automatic premium loan provision. This provision authorizes the insurer to withdraw from the policy's cash value the amount of overdue premium if the premium has not been paid by the end of the grace period.

rights of policy ownership

Generally, the person who pays the premium for an insurance contract is designated as the policyowner or policyholder. Although there are no provisions in a life insurance policy specifically titled "Rights of Ownership", the fact is, owning a life insurance policy does entail important rights. These rights are woven throughout the policy in various clauses and provisions. The most significant rights of ownership include the following: • The right to designate and change the beneficiary of the policy proceeds • The right to select how the death proceeds will be paid to the beneficiary • The right to cancel the policy and select a nonforfeiture option • The right to assign ownership of the policy to someone else

incontestable clause

The incontestable clause or provision specifies that after a certain period of time has elapsed (usually two years from the issue date), the insurer no longer has the right to contest the validity of the life insurance policy so long as the contract continues in force. This means that after the policy has been in force for the specified term, the company cannot contest a death claim or refuse payment of the proceeds even on the basis of a material misstatement, concealment, or fraud. Even if the insurer learns that an error was deliberately made on the application, it must pay the death benefit at the insured's death if the policy has passed the contestable period. Although the incontestable clause applies to death benefits, it generally does not apply to accidental death benefits or disability provisions if they are part of the policy. Because conditions relating to accidents vary and are often uncertain, the right to investigate them usually is reserved by the company. • The incontestable clause applies to the policy face amount plus any additional riders that are payable at death • The incontestable clause allows an insurer to contest a claim during the contestable period The time limit for a legal action provision in a contract is limited to no more than 5 years.

suicide provision

The suicide provision, found in most life policies, protects the insurer against the purchase of a policy in contemplation of suicide. With this provision, a life insurance policy discourages suicide by stipulating a period of time (usually one or two years from the date of policy issue) during which the death benefit will not be paid if the insured commits suicide. If that happens, the premiums paid for the policy will be refunded. Of course, if an insured takes his own life after the policy has been in force for the period specified in the suicide clause, the company will pay the entire proceeds, just as if death were from a natural cause.

Beneficiary Designation

Where the policy owner indicates who is to receive the proceeds.

Settlement Options

Where the ways in which the proceeds can be paid out or settled are explained.

the two types of assignments:

absolute and collateral

what is the alternative to a life settlement?

accelerated death benefit rider

the double indemnity provision in a life insurance policy pertains to an insured's death caused by a(n):

accident

of the dividend option, which is taxable?

accumulation at interest

what dividend option would an insurer invest the policy owner's money and add any interest earnings as the dividends accrue?

assimilation at interest option

the two additional provisions that appear in ALL policies

beneficiary designation & settlement options

grace period provision

common in aa lot go other financial products such as consumer loans, mortgages, credit card payment, etc. grace period in life insurance policy's are meant to protect the insured. if there is a sight lapse in the payment of a premium, it is to prevent the life insurance company from forcing the insured to provide insurability again. in policies for which premiums are paid monthly, the grace period is one month, but no less than 30 days. if an insured dies during the grace period and the premium has not been paid, the policy benefit is payable. however, the premium amount due is deducted from the death benefits paid to the beneficiary

owner's rights provisions

defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy

discretionary provision

designed to protect the insurance company

Matt is applying for life insurance and requests a double indemnity rider. A double indemnity benefit will be payable to Matt's beneficiary if Matt

dies instantly from a car accident

excess interest provision

if a beneficiary decides to leave life insurance proceeds with an insurer following the death of the insured, the insurance company must pay interest on the proceeds. the interest credited to or paid to the beneficiary is taxable as ordinarily done

what is the purpose for having an accelerated death benefit on a life insurance policy?

it allows for cash advantages to be paid against the death benefit if the insured becomes terminally ill

reinstatement provision

it's always possible that, due to nonpayment of premiums, a policy may lapse, either deliberately or unintentionally. in cases where a policy owner wishes to reinstate a lapsed policy, the reinstatement provision allows the policy owner to do so with some limitations with reinstatement, a policy is restored to its original status and its values are brought up to date. most insurers require the following to reinstate a lapsed policy: - all back premiums must be paid - interest on past-due premiums may be required to be paid - any outstanding loans on the lapsed policy may be required to be paid - the policy owner typically will be asked to prove insurability in addition, there's a limited time in which policies may be reinstated after a lapse (normally 3 years, some as long as 7). a new contestable period usually goes into effect with a reinstated policy, but there is no new suicide exclusion period

collateral assignment

one in which the policy is assigned to a creditor as security, collateral, or for a debt. If the insured dies, the creditor is entitled to be reimbursed out of the benefit proceeds for the amount owed. The insured's beneficiary is then entitled to any excess of policy proceeds over the amount due to the creditor.

the automatic premium loan provision authorizes an insurer to withdraw from a policy's cash value the amount of:

past due premiums that have not been paid by the end of the grace period

dividend options

policy owners are generally permitted by insurers to utilize their dividends through one of five options: 1. cash dividend option: automatically receive their dividend check after the company approves a dividend 2. accumulation at interest option: leave the dividends with the company to accumulate with interest, available for withdrawal at any time. (the taxable option) 3. paid-up additions option: dividends can also be used to purchase paid-up additions of life insurance 4. reduced premium dividend: allows a policy owner to use the dividend to pay all or part of the next premium due on the policy. sometimes called the reduction of premium dividend option. 5. one year term dividend: though not utilized as frequently as the others, is to use dividends to purchase as much one-year term insurance as possible

the two major actions required for a policyholder to comply with the reinstatement clause are:

provide evidence of insurability, pay past due premiums

free-look provision

required by most states, gives policyowners the right to return the policy for a full premium refund within a limited period of time after the delivery of the policy.

Kurt is an active duty serviceman who was recently killed in an accident while home on leave. Which military service exclusion clause would pay upon his death?

results clause this states the insurer is excused from paying the amount only if the death is a result of war

policy loan provision

state insurance laws require that cash value life insurance policies include a policy loan provision. meaning, its prescribed limits, policy owners may borrow money from the cash values of their policies. if not repaid by the time the insured dies, the loan balance and any interest accrued are deducted from the policy proceeds act the time of the claim. if the policy is surrendered for cash, the cash value available to the policy owner is reduced by the amount of any outstanding loan plus interest.

modification provision

states that any changes made to the contract must be in writing and endorsed or attached to the policy. states that only an officer of the insurer or authorized home office personnel possess the authority to make changes or modifications, or waive a policy provision. a producer or agent need not countersign any such modification

Entire Contract Provision

the entire contract provision, found at the beginning of the policy, states that the policy document, the application (attached to the policy), and any attached riders constitute the entire contract. nothing may be incorporated by reference, meaning that the policy cannot refer to any outside documents as being part of the contract the contract also prohibits the insurer from making any change to the policy, either through policy revisions or changes in the company's bylaws, after the policy has been made however the clause doesn't prevent a mutually agreeable changed from being made to the policy if the policy specifically provides a means for modifying the contract after it has been issued (for ex changing the face amount of an adjustable life policy)

An insured individual and the policy's beneficiary die from the same accident. The common disaster provision states the insurer will continue as if

the insured outlived the beneficiary a common disaster provision states states this - this allows the proceeds to go to the contingent beneficiary

Under a life insurance policy, what does the insuring clause state?

the insurer's obligation to pay a death benefit upon an approved death claim

insuring clause

the insuring clause or provision sets forth the company's basic promise to pay benefits upon the insured's death. generally, this clause is not actually titled as such, by appears on the cover of the policy.

the major difference between participating (par) and nonparticipating (nonpar) is the presence of what:

the presence of policy dividends

absolute assignment

the transfer is complete and irrevocable, and the assignee receives full control over the policy and full rights to its benefits

assignment provision

the transfer of ownership is known as assignment. the assignment provision in a life insurance contract sets forth the procedure necessary for ownership to transfer. an insurable interest does not have to exist between the insured and assignee (Ex: individual gives a policy to his church as a donation, the church would be the new assignee) as the now owner of the policy, the assignee is granted all the right of policy ownership, including right to name a beneficiary. if a policy owner names an irrevocable beneficiary (meaning the beneficiary cannot be changed), the policy owner must get the beneficiary's agreement to any assignment

consideration clause

the value given in exchange for a contractual promise. in a life insurance policy, the consideration clause states that the policy owner's consideration consists of completing the application and paying the initial premium. this will specify the amount and frequency of premium payments that the policy owners must make to keep the insurance in force