Chapter 6: Life Insurance Policy, Provisions, Options, and Riders

Whose recommendations do most state legislatures follow when it comes to changing Insurance Codes?

National Association of Insurance Commissioners (NAIC)

Guaranteed Insurability Rider

Permits the insured, at specified intervals or stated ages in the future, to buy specified amounts of additional insurance w/o evidence of insurability.

Accidental Death Benefit Rider

(Double Indemnity Provision) provides an additional amount of insurance, usually equal to the face amount of the base policy, if death occurs under stated conditions. If death occurs under the circumstances, the total benefit paid would be double the policy's face-the benefit payable under the policy + the same amount payable under the rider. Any policy loans are subtracted from the policy's face amount, not from the rider.

What doesn't the Entire Contract Provision prevent?

It does not prevent a mutually agreeable change from being made to the policy if the policy specifically provides a means for modifying the contract after it has been issued (Ex: changing the face amount of an adjustable life policy)

Why is the Entire Contract provision an important provision for the policy holder?

It prohibits the insurer from making any changes to the policy after the policy has been issued.

Delayed Payment Provision

Most states permit insurers to postpone payment of cash surrender values for up to 6 months after policyowners request payment. This provision is a proactive measure for companies should an economic crisis arise, but such delays are rarely invoked.

If a policy owner borrows money against his insurance, whose money is he actually borrowing?

The Beneficiary

Reduced Paid-Up Option

The cash value is used as the premium for a single-premium whole life policy, at a lesser face amount then the original policy.The policyowner does not pay any more premiums but still retains some amount of life insurance. Once the paid-up policy has been issued, the new face value remains the same for the life of the policy, which also builds cash values.

What happens to the endowment policy if one was to choose the extended term option?

The extended term ins. will not go beyond the maturity date of the original endowment policy. Since the cash value of the endowment policy will eventually exceed the amount needed to buy extended term ins. (because endowment policies are characterized by cash values that grow at a rapid pace), the excess cash value is used to purchase a pure endowment policy with the same maturity date as the original policy.

Assignment Provision

The owner of the policy has the right to assign (transfer of ownership) his policy to someone else as long as he notify the company in writing of the assignment.

Who is generally designated as the policyowner/policyholder?

The person who pays the premiums for an insurance contract.

Under the Entire Contract Provision, what constitutes the entire contract?

The policy document, the application (attached to the policy),and any attached riders

Why is the Automatic Premium Loan Provision beneficial for a policyowner?

The policy does not lapse and coverage continues should the policyowner forget to pay the premium within the grace period or who cannot pay the current premium due to financial difficulties.

Collateral Assignment

The policy is assigned to a creditor as security, or collateral, 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. Once the debt is repaid, the assignment terminates because the bank has no further vested interest in the death benefit.

Under the Entire Contract Provision, can a company claim that a special rider, not attached to the policy but on file at the home office, is part of the policy?

NO

What are the requirements for reinstatement?

(1) All back premiums must be paid (2) Lost interest on the past due premiums must be pad (3) the insured may have to prove insurability (4)any outstanding loans on the lapsed policy may be required to be paid

What 3 situations to which the incontestable clause does NOT apply?

(1) Impersonation (2) Non Insurable Interest (3) Intent to murder

What is defined as "Accidental Death"?

(1) does not include accidents resulting directly/indirectly from an ailment or physical disability that might have led to the accident (2)Benefit is only payable if the insured dies from a bodily injury from an external and violent and purely accidental cause. (3)Death must occur within a specified time (usually 90 days) following the accident

What are the rights of ownership of a life insurance policy?

(1)the right to change the beneficiary. (2)select how the death benefits will be paid (3) to cancel the policy and select a nonforfeiture option (4)take out policy loans, assuming that it is a living benefit type of policy with equity (5) to receive policy dividends and select a dividend payment option, if it is a participating policy (6) to assign ownership of the policy to someone else.

What are the 5 dividend options available?

(CARPT) Cash, Accumulate at interest, Reduce the Premium, Paid up additions, Term equal to the current cash value.

Interest rates on policy loans vary, but most states stipulate a max allowable rate. What is FL?

10%

Although the incontestable clause applies to death benefits, it generally does not apply to what 2 types of benefits?

Accidental Death Benefits or Disability Provisions because conditions relating to accidents vary and are often uncertain, the right to investigate them usually is reserved by the co.

Incontestable Clause

After a policy has been in force for a specified term (Usually 2 yrs & while the insured is living), 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.

Automatic Premium Loan Rider

Allows the insurer to pay premiums from the policy's cash value if premiums have not been paid by the end of the grace period. These "loans" are charged interest;if the loan is not repaid, the interest will also be deducted from the cash value. Should the insured die, the loan + interest will be deducted from the benefits payable. Available at no additional charge.

Automatic Premium Loan Provision

Authorizes the insurer to withdraw from the policy's cash value the amount of premium due if the premium has not been paid by the end of the grace period. The amount withdrawn becomes a loan against the cash value, bearing the rate of interest specified in the contract. If the loan is not repaid, the interest will also be deducted from cash value. Should insured die, the loan + interest will be deducted from benefits payable.

Why are the premiums higher for par policies?

Because an extra charge to cover unexpected contingencies is built into premiums for par policies. In the long run, the par policy net cost will probably be no higher than a non par because the excess premiums paid in are returend in the form of dividends.

Misstatement of Age or Sex Provision

Because the age and sex of an applicant are critical factors in establishing the premium rate for a life insruance policy, the company reserves the right to make an adjustment at any time.

Suicide Provision

Discourages suicide by stipulating a period of time (usually 1 or 2 yrs from the date of policy issue) during which the death benefit will not be paid if the insured commits suicide. If that happens, during the 2 yr period, the death benefit will not be paid. The ins. co. will rescind the contract and return premiums that have been paid. They will not pay any interest. If after stated period, its as if the person died of natural causes and benefits will be paid.

Free-Look Provision

Gives the policyowners the right to return the policy for a full premium refund within a specified period of time (14 days,FL) if they decide not to purchase the insurance.

Mixed Plan

If a stock company issues both participating and nonparticipating policy.

Waiver of Premium Rider

If the co. determines that the insured is totally disabled, the policyowner is relieved of paying premiums as long as the disability continues. Available for both permanent and term ins. policies. Does NOT apply to short term illnesses or injuries.

Cash Surrender Option

If they desire, policyowners may request an immediate cash payment of their cash values when their policies are surrendered. The amount of cash value the policyowner receives is reduced by an outstanding policy indebtness

Payor Provision or Rider

In juvenile insurance, when adults are buying policies for juveniles who are not capable of paying the premium, this rider provides for a waiver of premiums if the adult payor should die or become totally disabled until the juvenile reaches a specified age such as 21 or 25.

Three clauses are on the front page of every Policy, what are they?

Insuring, Consideration, Free Look

Policy Loan Provision

Policyowners may borrow money from the cash values of their policies if they wish to do so. These loans may not be called by the company and can be repaid at any time by the policyowner. If not repaid by the time the insured dies, the loan balance and any interest accrued are deducted from the policy proceeds at the time of claim.

Accelerated Death Benefit

Provide for early payment of some portion of the policy face amount should the insured suffer from a terminal illness or injury. The benefit can be used for final nursing home expense. It is normally limited to 75% of the policy face value.The death benefit, less the accelerated payment is still payable to the beneficiary.

Return of Premium Rider

Provides that, at the death of the insured within a specified period of time, the policy will pay, in addition to the face amount, an amount equal to the sum of all premiums paid to date.

Other Insured's Option

Providing insurance for more than one family member. Offered as a term rider, covering a family member other than the insured, and is attached to the base policy covering the insured

What is referred to as the "fifth dividend option"?

Term Equal to the current cash value

What type of policy is the COLA rider commonly found?

Term policies

Grace Period Provision

That period after the due date of the premium payment, during which the policy stays in effect even though the premium for that period has not been paid. Allows an extra 30 days/4 wks during which the premium may be paid to keep the policy in force. If the insured dies during the grace period, the policy is effective, and the death benefit will be paid less the amount of the back premium.

Absolute Assignment

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

What type of policy would the COLA rider NOT be found?

Universal Life

Extended Term Option

Use the policy's cash value to purchase a term insruance policy in an amount equal to the original policy's face value, for as long a period as the cash value will purchase. When the term ins. expires, there is no more protection.

What are the most common types of life insurance policy exclusions?

War, Aviation, Hazardous occupations or hobbies, Commission of a felony, Suicide.

What are the 3 nonforfeiture options?

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

Cost of Living Rider

designed to increase the face value of the policy to compensate for the diminishing purchasing power due to inflation.

If a policy owner borrows money from his cash value, why should he have to pay interest?

he deprives the insurer of the investment income that is required to build the policy's cash value. Therefore, the policyowner has to pay interest to replace the insurer's lost investment income.

What would happen to premium rates if there were no exclusions?

premium rates would be much higher

Nonforfeiture values

refers to the fact that a policy's cash value is not forfeitable.

Insuring Clause

sets forth the company's basic promise to pay benefits upon the insured's death. Includes (1) what company will pay (2) how much (3) to whom

Consideration Clause

specifies the amount and frequency of premium payments that the policyowners must make to keep the insurance in force

If there was an error in the age of the individual when the policy was purchased, what happens to the premium?

the death benefit is prorated either up or down to match the death benefit that would have been paid with the proper premium. The older you are, the shorter the period before endowment at age 100, and therefore the less time that interest can be earned. As a result, the premium must be higher as one ages.

How long does an insured have to exercise an option?

usually 90 days

Who has a lower premium, men or women?

women