Life Chapter 3
Chapter Recap
Chapter Recap In this chapter, you learned about provisions, options and riders available in life insurance policies. Remember that provisions state the rights and obligations under the contract; riders modify provisions, and options specify ways to distribute policy proceeds. Let's recap the major points of this chapter: POLICY PROVISIONS Standard Provisions Consideration - parties to a contract exchange something of value Entire contract - policy (with riders and amendments) and copy of the application Grace period - time period after the premium is due during which the policy will not lapse Incontestability - insurer cannot contest misstatements on the application after a time period Insuring clause - basic agreement between the insurer and the policyowner Misstatement of age or gender - death benefit is adjusted according to the correct age and gender at policy issue Payment of premiums - premiums are paid in advance Reinstatement - a policy can be restored within a specified period of time with proof of insurability Other Provisions Assignment - absolute or collateral Exclusions - aviation (noncommercial), hazardous occupation, war or military service, suicide within a specified time period Free look - policy can be returned for a refund of premium within a specified time period Ownership - policyowner's rights Beneficiaries Designations - individuals (including minors), classes, estates Succession - the levels of priority. Each level in the succession is only eligible if the beneficiary in the level above has died:- Primary - first claim to the policy proceeds- Contingent (secondary, tertiary) - next claim after primary Policyowner's right to change a beneficiary:- Revocable - can be changed at any time- Irrevocable - can only be changed with the beneficiary's consent Common disaster clause - protects the rights of contingent beneficiaries; if the insured and the primary beneficiary died at approximately the same time, it is assumed that the primary beneficiary died first Policy Loans, Withdrawals and Partial Surrenders Cash loans available - policy's cash value minus any unpaid loans and interest Automatic premium loans - prevent unintentional policy lapse due to nonpayment of premium RIDERS Disability Waiver of premium - waives the premium if the insured becomes totally disabled; 6-month waiting period before benefits begin Waiver of monthly deductions - waives the cost of insurance in the event of the insured's disability Payor benefit - functions like a waiver of premium rider; used for juvenile policies Accelerated Benefit Early payment if insured is diagnosed with a specified catastrophic illness A portion of the death benefit Death benefit is reduced by the amount paid plus earnings lost by the insurer Additional Insured Spouse/other insured - term rider (limited time, limited coverage); usually expires when spouse turns age 65 Children's term - covers all children of the insured (limited time, limited coverage); can be converted to a permanent policy Nonfamily insured - used by businesses (e.g. key person insurance) Riders that affect the Death Benefit Accidental death - pays double or triple indemnity if accidental death occurs as defined in the policy; death must occur within 90 days of accident Guaranteed insurability - allows for purchase of additional insurance at specified times without evidence of insurability, at the insured's attained age Return of premium - increasing term is added to a whole life policy that provides that if death occurs prior to a given age, not only is the death benefit payable to the beneficiary, but all premiums paid as well OPTIONS NonforfeitureReduced paid-up insurance - uses cash value as a single premium to purchase a permanent policy with a reduced face amountExtended term - automatic option; uses cash value to convert to term insuranceCash surrender value - after that, no more insuranceDividendCash - insurer sends a check to the insuredReduction of premium - dividend is applied to the next year's premiumAccumulation at interest - insurer keeps the dividend in an account where it accumulates interestPaid-up addition - dividend is used to increase the face amountPaid-up insurance - dividend is used to pay up a policy earlyOne-year term - dividend is used to buy additional insurance Settlement Cash - lump-sum payment; usually not taxable Life income - provides an income the beneficiary cannot outlive; no guarantee that the entire principal will be paid out (if the beneficiary dies too soon); available as single life or as joint and survivor Interest only - insurer retains the principal and only pays out interest Fixed period - payments for a specified time period until all the proceeds are paid out Fixed amount - payments in specified amounts until all the proceeds are paid out
Level or Flexible
Level or Flexible Most life insurance policies have a level premium, which means that the premium remains the same throughout the duration of the contract. Flexible premium policies allow the policyowner to increase or decrease the premium during the policy period.
NAIC
NAIC - National Association of Insurance Commissioners, an organization composed of insurance Commissioners from all states and jurisdictions formed to resolve insurance regulatory issues
Return of Premium
Return of Premium The return of premium rider is implemented by using increasing term insurance. When added to a whole life policy, it provides that at death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary. The return of premium rider usually expires at a specified age such as age 60.
Principal -
the face value of the policy; the original amount invested before the earnings
Assignment -
transfer of rights of policy ownership
Indemnity
- a principle of reimbursement on which insurance is based; in the event of loss, an insurer reimburses the insureds or beneficiaries for the loss
accumulation of interest dividend
Accumulation at Interest The insurance company keeps the dividend in an account where it accumulates interest. The policyowner is allowed to withdraw the dividends at any time. The amount of interest is specified in the policy and compounds annually. Although the dividends themselves are not taxable, the interest on the dividends is taxable to the policyowner when credited to the policy, whether or not the policyowner receives the interest.
Automatic Premium Loans
Automatic Premium Loans The automatic premium loan provision is not required, but is commonly added to contracts with a cash value at no additional charge. This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium. For example, a loan against the policy cash value for the amount of premium due is automatically generated by the insurer when the policyowner has not paid the premium by the end of the premium-paying grace period. It is a loan for which the insurer will charge interest. If the loan and interest are not repaid and the insured dies, then it will be subtracted from the death benefit. While the insurer may defer requests for other loans for a period of up to 6 months, loan requests for payment of due premiums must be honored immediately. Usually, the policyowner must specifically elect this provision in writing to make it effective.
aviation
Aviation — Most life insurance will cover an insured as a fare-paying passenger or a pilot on a regularly scheduled airline, but will exclude coverage for noncommercial pilots, or require an additional premium for the coverage.
Consideration
Both parties to a contract must provide some value, or consideration, in order for the contract to be valid. The consideration provision states that the consideration (value) offered by the insured is the premium and statements made in the application. The consideration given by the insurer is the promise to pay in accordance with the terms of the contract. The consideration clause is not always a separate provision, but is often included in the entire contract provision. A separate provision concerning the payment of policy premiums is usually also found in the policy.
Cash dividend options
Cash The insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually.
Disability Riders Some riders provide benefits in the event of the insured's disability, while other riders provide for partial payment of the death benefit prior to the insured's death, called accelerated or living benefits riders.
Disability Riders
Entire Contract
Entire Contract The entire contract provision stipulates that the policy and a copy of the application, along with any riders or amendments, constitute the entire contract. No statements made before the contract was written can be used to alter the contract. Neither the insurer nor the insured may change policy provisions once the policy is in effect without both parties agreeing to it and the change being affixed to the contract. Know This! Entire contract = policy + copy of application + any riders or amendments
Hazardous Occupations or Hobbies
Hazardous Occupations or Hobbies — If the insured is engaged in a hazardous occupation or participates in hazardous hobbies (such as skydiving or auto racing), death that results from the hazardous occupation or hobby may be excluded from coverage. The underwriter also has the option of charging a higher premium for insuring these risks.
Misstatement of Age and Gender
Misstatement of Age and Gender Because the age and gender of an insured are important to the premium that will be charged for a life insurance policy, a provision which allows the insurer to adjust the policy at any time due to a misstatement of age or gender is included in the policy. If the applicant has misstated his or her age or gender on the application, in the event of a claim, the insurer is allowed to adjust the benefits to an amount that the premium at the correct age or gender would have purchased. The proceeds calculations should be based on the insurer's rate at the date of policy issue. Know This! Misstatement of age on the application will result in adjustment of premiums or benefits.
Paid-Up Additions
Paid-up Additions The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. No new separate policies are issued; however, each of these small single premium payments will increase the death benefit of the original policy by whatever amount the dividend will buy. In addition, each of these paid-up policies will accumulate cash value and pay dividends. The amount of additional coverage that can be purchased with the dividend is based on the insured's attained age at the time the dividend is declared. If the policyowner did not chose the dividend option, the insurer will automatically use paid-up additions to increase the death benefit of the original policy by the amount the dividend will buy.
Payor Benefit
Payor Benefit The payor benefit rider is primarily used with juvenile policies (any life insurance written on the life of a minor); otherwise, it functions like the waiver of premium rider. If the payor (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21. This rider is also used when the owner and the insured are two different individuals.
Policy Loan and Withdrawal Options
Policy Loan and Withdrawal Options The policy loan option is found only in policies that contain cash value. The policyowner is entitled to borrow an amount equal to the available cash value. Any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured's death. The policy will not lapse with an outstanding policy loan unless the amount of the loan and accrued interest exceeds the available cash value. However, the insurer must provide 30 days' written notice to the policyowner that the 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 the policy premium. Policy loans are not subject to income taxation. Know This! Policy loans are ONLY available in policies that have cash value (whole life).
Policy Riders
Policy Riders Riders are written modifications attached to a policy that provide benefits not found in the original policy. Riders sometimes require an additional premium, but they also help tailor a policy to the specific needs of the insured, and can be classified according to their primary purpose.
Riders Affecting the Death Benefit Amount
Riders Affecting the Death Benefit Amount Some riders affect the amount of the death benefit paid out to the beneficiary, and either increase it through multiple indemnity or refunds of premiums, or decrease it if a portion of the death benefit was paid out to the insured while still living.
Lump sum -
payment of the entire benefit in one sum
Accelerated (Living) Benefits and and Long-Term Care Riders
Accelerated (Living) Benefits and and Long-Term Care Riders Accelerated death benefits allow the early payment of a portion of the death benefit if the insured has any of the following conditions: A terminal illness; A medical condition that requires an extraordinary medical intervention (such as an organ transplant) for the insured to survive; A medical condition that without extensive treatment drastically limits the insured's lifetime; Inability to perform activities of daily living (ADLs); Permanent institutionalization or confinement to a long-term care facility; or Any other conditions approved by the Department of Insurance. The maximum benefit is typically a percentage of the face amount of insurance, usually 50%, but it is legal for the insurer to pay up to 100% of the death benefits before the insured dies. There may also be a dollar limit, such as $100,000. The face amount of insurance is reduced after the payments. The accelerated death benefit payout will not necessarily result in a reduction of the premium; however, premium may be waived.
Assignment of Policy
Assignments The policyowner of a life insurance policy has the right to transfer partial or complete ownership of the policy to another person without the consent of the insurer. However, the owner must notify the insurer in writing of the assignment. Without a written notice, the insurer may not recognize the assignment and would not assume responsibility for its validity. The company's major concern is paying the claim twice. Transfer of the life insurance policy does not change the insured or amount of coverage; it only changes who has the policy ownership rights. The assignment provision specifies the policyowner's right to assign (transfer rights of ownership) the policy. The policyowner must advise the insurer in writing of the assignment. There are 2 types of policy assignment: Absolute Assignment - involves transferring all rights of ownership to another person or entity. This is a permanent and total transfer of all the policy rights. The new policyowner does not need to have an insurable interest in the insured. Collateral Assignment - involves a transfer of partial rights to another person. It is usually done in order to secure a loan or some other transaction. A collateral assignment is a partial and temporary assignment of some of the policy rights. Once the debt or loan is repaid, the assigned rights are returned to the policyowner. Know This! Absolute assignment is the complete and permanent transfer of ownership rights; collateral assignment is the partial and temporary transfer of rights.
extended term
Extended Term Under the extended-term option, the insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy. The duration of the new term coverage lasts for as long a period as the amount of cash value will purchase. If the policyowner has neglected to select one of these nonforfeiture options, the insurer will automatically implement the extended-term option in the event of termination of the original policy. Know This! Extended term is the automatic nonforfeiture option: same face amount, shorter term of coverage. Example: (review a sample Table of Guaranteed Values below): If the insured chooses to exercise the reduced paid-up option at the end of 15 years, the cash value of $8,100 can be used as a single premium to purchase paid-up insurance of the same type as the original policy. The insured doesn't have to pay any more premiums, while still retaining some amount of life insurance (in this example, $21,750). The extended-term option indicates the option to use the policy's cash value to purchase in a single premium a term insurance policy in an amount equal to the original policy's face value (in this case, term insurance with $50,000 face amount). The insurance company determines that for this particular insured, $8,100 of cash value is worth 18 years and 8 days of $50,000 of protection.
Incontestability
Incontestability The incontestability 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 if there has been a material misstatement of facts or concealment of a material fact. During the first 2 years of the policy, an insurer may contest a claim if the insurer feels that inaccurate or misleading information was provided in the application. The incontestability period does not apply in the event of nonpayment of premiums; it also does not usually apply to statements relating to age, sex or identity.
Interest Only
Interest Only With the interest-only option, the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals (monthly, quarterly, semiannually, or annually). The insurer usually guarantees a certain rate of interest and will often pay interest in excess of the guaranteed rate. The interest option is considered to be a temporary option since the proceeds are retained by the insurer until some later point when the proceeds are paid out in a lump sum or paid under one of the other settlement options. When the beneficiary is allowed to select a settlement option, the interest option is sometimes used as a temporary option if the beneficiary needs some time to decide which settlement option to select. For example, the policyowner may specify that interest only will be paid annually to the surviving spouse, with the principal to be paid to their children when they reach a certain age or at the death of the surviving spouse
Reduced Paid-Up Insurance
Reduced Paid-up Insurance Under this option, 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 former policy. The new reduced policy builds its own cash value and will remain in force until death or maturity.
Revocable and Irrevocable
Revocable and Irrevocable Beneficiary designations may be either revocable or irrevocable. The policyowner, without the consent or knowledge of the beneficiary, may change a revocable designation at any time. An irrevocable designation may not be changed without the written consent of the beneficiary. Irrevocable beneficiaries have a vested interest in the policy; therefore, the policyowner may not exercise certain rights without the consent of the beneficiary. In addition to being unable to change the beneficiary designation, the policyowner cannot borrow against the policy's cash value (as this would decrease the policy face value until repaid) or assign the policy to another person without the beneficiary's agreement.
term riders
Term Riders Term riders allow for an additional amount of temporary insurance to be provided on the insured, without the need to issue another policy. They are usually attached to a whole life policy to provide greater protection at a reduced cost.
The life income joint and survivor option
The life income joint and survivor option guarantees an income for two or more recipients for as long as they live. Most contracts provide that the surviving recipient will receive a reduced payment after the first recipient dies. Most commonly, the reduced option is written as "joint and ½ survivor" or "joint and 2/3 survivor," in which the surviving beneficiary receives ½ or 2/3 of what was received when both beneficiaries were alive. This option is commonly selected by the policyowner who wants to protect two beneficiaries, such as elderly parents. Unless a period certain option is also chosen, as with the life income option, there is no guarantee that all the life insurance proceeds will be paid out if all beneficiaries die shortly after the installments begin. This option guarantees, however, an income for the lives of all beneficiaries.
What are ownership rights of the party
The parties to the insurance contract are the insurer, the policyowner, the insured, and the beneficiary. The policyowner and the insured may be the same person or different persons. Regardless, only the policyowner has the ownership rights under the policy, and not the insured or the beneficiary. Among the ownership rights are naming and changing the beneficiary, receiving the policy's living benefits, selecting a benefit payment options, and assigning the policy. The policyowner has the responsibility of paying the policy premiums, and is also the person who must have an insurable interest in the insured at the time of application for the insurance. When the owner and the insured are not the same person, the insurance arrangement is referred to as the third-party ownership.
Reinstatement
The reinstatement provision allows a lapsed policy to be put back in force. The maximum time limit for reinstatement is usually 3 years after the policy has lapsed. If the policyowner elects to reinstate the policy, he/she will have to provide evidence of insurability. The policyowner is required to pay all back premiums plus interest, and may be required to repay any outstanding loans and interest. The advantage to reinstating a lapsed policy as opposed to purchasing a new one is that the policy will be restored to its original status, and retain all the values that were established at the insured's issue age. Note that a policy that has been surrendered cannot be reinstated.
suicide
The suicide provision in life insurance policies protects the insurers from individuals who purchase life insurance with the intention of committing suicide. Insurance policies usually stipulate a period of time during which the death benefit will not be paid if the insured commits suicide. If the insured commits suicide within 2 years following the policy effective date (issue date), the insurer's liability is limited to a refund of premium. If the insured commits suicide after the 2-year period, the policy will pay the death proceeds to the designated beneficiary the same as if the insured had died of natural causes
life income with period certain option
Under life income with period certain option, the recipient is provided with the "best of both worlds" in terms of a lifetime income and a guaranteed installment period. Not only are the payments guaranteed for the lifetime of the recipient, but there is also a specified period that is guaranteed. For example, a life income with 10 years certain option would provide the recipient with an income for as long as he or she lives. If the recipient dies shortly after starting to receive the payments, the payments will be continued to a beneficiary for the remainder of the 10-year period. As already stated, the installments for the life income with period certain option will be smaller than the life income only option.
Waiver of Monthly Deduction
Waiver of Monthly Deduction The waiver of monthly deductions rider pays all monthly deductions while the insured is disabled, after a 6-month waiting period. This rider only pays the monthly deductions, and not the full premium necessary to accumulate cash values. The length of time this rider will pay monthly deductions will vary based on the age at which the insured becomes disabled. This rider is usually found in Universal Life and Variable Universal Life policies. Monthly deductions include the actual cost of insurance charges, expense charges, and costs or charges for any benefits added to the policy by rider, endorsement or amendment, and which are specified in the policy to be deducted from the account value
Consideration -
something of value that each party gives to the other (binding force in any contract)
reduction of premium divident
Cash The insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually. Reduction of Premium The insurer uses the dividend to reduce the next year's premium. For example, if the policyowner usually pays an annual premium of $1,000 and the insurer declares a $100 dividend, the policyowner would only pay a $900 premium that year.
Effect of Death Benefit
Effect of Death Benefit If an insured withdraws a portion of the face amount by the use of the accelerated benefits rider, the benefit payable at death will be reduced by that amount, plus the amount of earnings lost by the insurance company in interest income. Payable Death Benefit = Face Amount - Amount withdrawn - Earnings lost by insurer in interest Example: The policy's face amount is $100,000; however, due to a terminal illness, the insured had to withdraw $30,000 from the policy 3 years before his death. Since this amount was withdrawn, the insurance company lost $300 worth of interest. Upon the insured's death, the beneficiary received $69,700 in death benefit: $100,000 (face amount) - $30,000 (accelerated benefit) - $300 (lost interest) = $69,700
Exclusions
Exclusions Exclusions are the types of risks the policy will not cover. Certain exclusions are standard for all policies, while others are attached to the policy as an exclusion rider. The most common exclusions found in life insurance policies are aviation, hazardous occupation, and war and military service.
fixed period
Fixed Period Under the fixed-period installments option (also called period certain), a specified period of years is selected, and equal installments are paid to the recipient. The payments will continue for the specified period even if the recipient dies before the end of that period. In the event of the recipient's death, the payments would continue to a beneficiary. The size of each installment is determined by the amount of principal, guaranteed interest, and the length of period selected. The longer the period selected, the smaller each installment will be. This option does not guarantee income for the life of the beneficiary; however, it does guarantee that the entire principal will be distributed. Fixed Amount
Premium Payment Grace period
Grace Period The grace period is the period of time after the premium due date that the policyowner has to pay the premium before the policy lapses (usually 30 or 31 days, or one month). The purpose of the grace period is to protect the policyholder against an unintentional lapse of the policy. If the insured dies during this period, the death benefit is payable; however, any unpaid premium will be deducted from the death benefit. Know This! Grace periods protect policyholders from losing insurance coverage if they are late on a premium payment.
Insuring Clause
Insuring Clause The insuring clause (or insuring agreement) sets forth the basic agreement between the insurer and the insured. It states the insurer's promise to pay the death benefit upon the insured's death. The insuring clause usually is located on the policy face page, and also defines who the parties to the contract are, the premium to be paid, how long coverage is in force, and the amount of the death benefit.
cash
Cash The policyowner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable. Upon receipt of the cash surrender value, if the cash value exceeds premiums paid, the excess is taxable as ordinary income. Once this option is selected, the insured is no longer covered. A policy that has been surrendered for its cash value cannot be reinstated. A surrender charge is a fee charged to the insured when a life policy or annuity is surrendered for its cash value.
life income
Life Income The life-income option, also known as straight life, provides the recipient with an income that he or she cannot outlive. Installment payments are guaranteed for as long as the recipient lives, irrespective of the date of death. The amount of each installment paid is based on the recipient's life expectancy and the amount of principal. If the beneficiary lives for a very long time, payments may exceed the total principal. However, if the beneficiary dies shortly after he or she begins receiving installments, the balance of the principal is forfeited to the insurer. Because there is a chance that the beneficiary may not live long enough to receive all the life insurance proceeds, insurers make options available which provide at least a partial guarantee that some or all of the proceeds will be paid out. With each of the guarantees, the size of the installment is decreased. Know This! Under life-income (straight life) settlement option, the recipient cannot outlive the benefit payments.
Other Insureds
There are riders that allow the policyowner to add additional insureds under the original policy, such as children's term or family term. There is also a nonfamily term rider that allows the policyowner to change the insured under the policy. The other insured rider provides coverage for one or more family members other than the insured. The rider is usually level term insurance, attached to the base policy covering the insured. This is also known as a family rider. If the rider covers just the spouse of the insured, it can be specified as a spouse term rider, and allows the spouse to be added to coverage for a limited period of time and for a specified amount (it usually expires when the spouse reaches age 65). The children's term rider allows children of the insured (natural, adopted or stepchildren) to be added to coverage for a limited period of time for a specified amount. This coverage is also term insurance and usually expires when the minor reaches a certain age (18 or 21). Most riders provide the minor with the option of converting to a permanent policy without evidence of insurability. Children's term riders provide temporary life insurance coverage on all children of the family for one premium. The premium does not change on the inclusion of additional children; it is based on an average number of children. Know This! Children's term rider: one premium for ALL children.
War or Military Service
War or Military Service — Most life insurance policies issued today do not exclude military service. However, there are actually two different types of exclusions that may be used to limit the death benefit if the insured dies as a result of war, or while serving in the military. The status clause excludes all causes of death while the insured is on active duty in the military. The results clause only excludes the death benefit if the insured is killed as a result of an act of war (declared or undeclared).
Beneficiary Designations
Beneficiary Designations The beneficiary is the person or interest to which the policy proceeds will be paid upon the death of the insured. The beneficiary may be a person, class of persons (sometimes used with children of the insured), the insured's estate, or an institution or other entity such as a foundation, charity, corporation or trustee of a trust. Trusts are commonly used in conjunction with beneficiary designations to manage life insurance proceeds for a minor or for estate tax purposes (although naming a trust as beneficiary does not avoid estate taxes). The beneficiary does not have to have an insurable interest in the insured. In addition, the policyowner does not have to name a beneficiary in order for the policy to be valid. Benefits designated to a minor will either be paid to the minor's guardian, or paid to the trustee of the minor if the trust is the named beneficiary, or paid as directed by a court. The guardian and trustee can be the same person. It is generally accepted not to be a good practice to have life insurance benefits payable to a minor.
Cash (Lump-sum)
Cash (Lump-Sum Payment) Upon the death of the insured, or at the point of endowment, the contract is designed to pay the proceeds in cash, called a lump sum, unless the recipient chooses a different mode of settlement. If no selection is made, the proceeds are automatically paid to the beneficiary in a single cash payment. As a rule, payments of the principal face amount after the insured's death are not taxable as income.
Free Look
Free Look This provision allows the policyowner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. The free-look period starts when the policyowner receives the policy (policy delivery), not when the insurer issues the policy. Certain life insurance transactions, such as replacement, may require a longer free-look period.
Paid-up Option
Paid-up Option Usually, the insurer first accumulates the dividends at interest and then uses the accumulated dividends, plus interest, and the policy cash value to pay the policy up early. In other words, if the insured had a continuous premium whole life policy (in which premiums are paid to age 100), using the paid-up option the policyowner is able to pay up the policy early.
Succession - Primary and Contingent
Succession - Primary and Contingent The beneficiary designation can provide for three levels of priority or choice. In the event that the first beneficiary predeceases the insured, the second (or sometimes third) level in the succession of beneficiaries will be entitled to the death proceeds. Each level in the succession of beneficiaries is only eligible for the death benefit if the beneficiary(s) in the level(s) above them has died before the insured. The primary beneficiary has first claim to the policy proceeds following the death of the insured. The policyowner may name more than one primary beneficiary, as well as how the proceeds are to be divided. The contingent beneficiary (also referred to as secondary or tertiary beneficiary) has second claim in the event that the primary beneficiary dies before the insured. Contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time of the insured's death. If none of the beneficiaries is alive at the time of the insured's death, or if no beneficiary has been named, the insured's estate will automatically receive the proceeds of a life insurance policy. The death benefit of the policy may be included in the insured's taxable estate if this occurs. Know This! If NO beneficiary is named, policy proceeds go to the insured's estate.
The Common Disaster Clause,
The Common Disaster Clause, when added to a policy, provides that if the insured and the primary beneficiary died in a common disaster (even if the beneficiary outlived the insured by a specified number of days), it is presumed that the primary beneficiary died first, so the proceeds will be paid to either the contingent beneficiary or to the insured's estate, if no contingent beneficiary is designated. Most insurers specify a certain period of time, usually 14 to 30 days, in which the primary beneficiary's death must occur in order for the Common Disaster Clause to apply. As long as the beneficiary dies within this specified period of time following the death of the insured, it will still be interpreted that the beneficiary died first. The intent is to fulfill the wishes of the policyowner in regard to payment of proceeds to beneficiaries. For example: James had a life insurance policy that included a Common Disaster Clause. James was the insured; his wife Maggie was named the primary beneficiary, and his son Ben was named the contingent beneficiary. James and Maggie got in a terrible car accident, and James died immediately, but Maggie died 4 days later from her injuries from the same accident. Because the policy included the Common Disaster Clause, the death benefit would be paid to Ben, the contingent beneficiary, as if Maggie, the primary beneficiary, had died before James, the insured.
The Living Needs Rider
The Living Needs Rider provides for the payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years. The purpose of this rider is to provide the insured with the necessary funds to take care of necessary medical and nursing home expenses that incur as a result of the terminal illness. Many insurance companies do not charge for this rider since it is simply an advance payment of the death benefit. The remainder of the policy proceeds are payable to the beneficiary at the time of the insured's death. Know This! Accelerated benefit = early payment of part of death benefit to the insured from the insurer for qualifying medical expenses.
The accidental death and dismemberment rider (AD&D
The accidental death and dismemberment rider (AD&D) pays the principal (face amount) for accidental death, and pays a percentage of that amount, or a capital sum, for accidental dismemberment. The accidental death portion is the same as that already discussed with the accidental death rider. The dismemberment portion of the rider will usually determine the amount of the benefit according to the severity of the injury. The full principal amount will usually be paid for loss of two hands, two arms, two legs or the loss of vision in both eyes. A capital amount is usually limited to half the face value and is payable in the event of the loss of one hand, arm, leg, or eye. The dismemberment can be defined differently by insurance companies, from the actual severance of the limb to the loss of use.
The accidental death rider
The accidental death rider pays some multiple of the face amount if death is the result of an accident as defined in the policy. Death must usually occur within 90 days of such an accident. The benefit is normally two times (double indemnity) the face amount. Some policies pay triple the face amount (triple indemnity) for accidental death. Each policy specifies what will be considered accidental death. Accidental death does not include death that results from any health problem or disability. In addition, deaths that result from self-inflicted injuries, war, or hazardous hobbies or avocations are usually not covered. They would be covered under the base policy unless specifically excluded. This rider often expires at the insured's age 65. No additional cash value is accumulated as a result of this rider. The accidental death benefits apply only to the policy's base face amount, and not to any additional benefits that may be purchased from policy dividends.
Family Term Rider
The family term rider incorporates the spouse term rider along with the children's term rider in a single rider. When added to a whole life policy, the family term rider provides level term life insurance benefits covering the spouse and all of the children in the family. Family Term = Spouse Term + Children's Term Other riders are also available to insure somebody who is not a member of the insured's family - nonfamily insureds. The substitute insured or change of insured rider does not permit an additional insured, but instead allows for the change of insureds, subject to insurability. It is most commonly used with Key Person insurance when the key person or employee retires or terminates employment. The rider permits the policyowner, owner or employer, to change the insured to another key employee, subject to insurability. This rider is often used by businesses that have a joint life policy that covers multiple key persons. Assume that the business has a joint life insurance policy covering key employees Jack and Jake. Jake retires and Jim is hired to replace him. Now the business would like a joint policy covering Jack and Jim, but Jack would no longer meet the underwriting requirements for a new policy because of changes in his health. If the policy covering Jack and Jake had a "Change of Insured Rider", the same policy could be maintained preserving Jack's insurability and Jim could be substituted for Jake as an insured, with only Jim needing to prove insurability
The waiver of premium rider
The waiver of premium rider waives the premium for the policy if the insured becomes totally disabled. Coverage remains in force until the insured is able to return to work. If the insured is never able to return to work, the premiums will continue to be waived by the insurance company. Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived. If the insured is still disabled after this waiting period, the insurer will refund the premium paid by the insured from the start of the disability. This rider usually expires when the insured reaches age 65. Know This! Waiver of premium rider waives the premium for a total disability after a waiting period. In order for the insured to qualify for this benefit, he or she must meet the policy's definition of total disability. Although this definition will differ from one policy to another, it is generally defined as the inability to engage in any work. More specifically, total disability refers to the insured's inability to perform the duties of his/her own occupation for the first 2 years; then any gainful employment for which the insured is reasonably suited by education, training and experience. No benefits are payable for partial disability.
Nonforfeiture Options
1. Nonforfeiture Options Because permanent life insurance policies have cash values, certain guarantees are built into the policy that cannot be forfeited by the policyowner. These guarantees (known as nonforfeiture values) are required by state law to be included in the policy. A table showing the nonforfeiture values for a minimum period of 20 years must be included in the policy. The policyowner chooses one of the following nonforfeiture options: cash surrender value, reduced paid-up insurance, or extended term. Know This! Nonforfeiture options are triggered by policy surrender or lapse
Settlement Options
3. Settlement Options Settlement options are the methods used to pay the death benefits to a beneficiary upon the insured's death, or to pay the endowment benefit if the insured lives to the endowment date. The policyowner may select a settlement option at the time of policy application, and may also change that option at any time during the life of the insured. Once selected by the policyowner, the settlement option cannot be changed by the beneficiary. If the policyowner does not select a settlement option, the beneficiary will be allowed to choose one at the time of the insured's death. Know This! Settlement options are triggered by the insured's death or age 100.
Activities of daily living (ADLs) -
Activities of daily living (ADLs) - a person's essential activities that include bathing, dressing, eating, transferring, toileting, continence
Dividends and Dividend Options
Dividends and Dividend Options Dividends are paid only on participating policies. When the policyowner purchases a policy from a participating insurer, he or she actually pays a "grossed-up" premium. The higher premium is charged as a safety margin in the event the insurer's losses are higher than anticipated. If this extra amount is not needed by the insurer to pay death claims and expenses, or if actual mortality experience improves or interest earned by the company exceeds the assumptions, a dividend will be returned to the policyowner. In other words, dividends are a return of excess premiums, and for that reason they are not taxable to the policyowner. Insurance companies cannot guarantee dividends. The first dividend could be paid as early as the first policy anniversary, but must occur no later than the end of the third policy year. From then on dividends are usually paid on an annual basis. Policyowners have the option of taking their dividends in one of several different ways. Know This! Dividends are a return of excess premiums; therefore, not taxable when paid to the policyowner.
fixed amount
Fixed Amount The fixed-amount installments option pays a fixed, specified amount in installments until the proceeds (principal and interest) are exhausted. The recipient selects a specified fixed dollar amount to be paid until the proceeds are gone. If the beneficiary dies before the proceeds are exhausted, installments will continue to be paid to a contingent beneficiary until all proceeds have been paid out. With this option, the size of each installment will determine how long benefits will be received. The larger the installment, the shorter the income period will be. As with the fixed-period option, this option does not guarantee payments for the life of the beneficiary, but does guarantee that all proceeds will be paid out.
Premium Payment Mode
Modes The policy stipulates when the premiums are due, how often they are to be paid (monthly, quarterly, semiannually, or annually) and to whom. The premium mode is the manner or frequency that the policyowner pays the policy premium. Most policies allow for annual, semi-annual, quarterly, or monthly payments. If the insured selects a premium mode other than annual, there will be an additional charge to offset the loss of earnings since the company does not have the entire premium at once, and there are additional administrative costs associated with more frequent billing. If the insured dies during a period of time for which the premium has been paid, the insurer must refund any unearned premium along with the policy proceeds
Long-Term Care
Long-Term Care Long-term care policies, which can be marketed in the form of individual policies, group policies, or as riders to life insurance policies, provide coverage for individuals who are no longer able to live an independent lifestyle and require living assistance at home or in a nursing home facility. Long-term care policies can vary in the number of days of confinement covered, the number of home health visits covered, the amount paid for nursing home care, and other contract provisions. They also must provide coverage for at least 12 consecutive months in a setting other than an acute care unit of a hospital. Normally to be eligible for benefits from a long-term care policy, the insured must be unable to perform some of the activities of daily living (ADLs). Activities of daily living include bathing, dressing, toileting, transferring positions (also called mobility), continence, and eating. Long-term care policies usually include an elimination (waiting) period similar to those found in disability income policies. Long-term care elimination periods may range from 0 to 365 days (make sure to check your state-specific requirement in the regulations section). The longer the waiting period, the lower the premium. Insurers usually give insureds an option to select the elimination period that best suits their needs. LTC policies also define the benefit period for how long coverage applies, after the elimination period. The benefit period is usually 2 to 5 years, with a few policies offering lifetime coverage. The longer the benefit period, the higher the premium will be. In Georgia, long-term care benefits begin after a 90-day waiting period in which the insured or a covered family member has an eligible physical or cognitive disability. Benefits from long-term care insurance are not taxed when the insured receives them. The benefit amount payable under most LTC policies is usually a specific fixed dollar amount per day, regardless of the actual cost of care. For example, if an insured has a fixed daily coverage of $100 and the care facility only charges $90 a day, the insurance company will pay the full amount of $100 a day. Some policies pay the actual charge incurred per day. Most LTC policies are also guaranteed renewable; however, insurers do have the right to increase the premiums. When long-term care (LTC) coverage is purchased as a rider to a life insurance policy, it provides for the payment of part of the death benefit (called accelerated benefits) in order to take care of the insured's health care expenses, which are incurred in a nursing or convalescent home. Benefits from an LTC rider are often triggered by an impairment of activities of daily living (ADLs) regardless of the cause. Once the elimination period has been met, the policy will pay the benefits. As with the living needs rider, payment of LTC benefits will reduce the amount payable to the beneficiary upon the insured's death.
one year term policy
One-year Term Option The insurance company uses the dividend to purchase additional insurance in the form of one-year term insurance that increases the overall policy death benefit. The policyowner's choice is to either use the dividend as a single premium on as much one-year term insurance as it will buy, or to purchase term insurance equal to the policy's cash value for as long as it will last. If the insured dies during the one-year term, the beneficiary receives both the death benefit of the original policy and the death benefit of the one-year term insurance.
Common Disaster
Common Disaster If the insured and the primary beneficiary die at approximately the same time from a common accident with no clear evidence as to who died first, a problem may arise in identifying which party is eligible for the death benefit. The Uniform Simultaneous Death Law has been adopted by most states to address this problem, and to protect the policyowner's original intent, as well as to protect the contingent beneficiary. This law stipulates that if the insured and the primary beneficiary died in the same accident and there is no sufficient evidence to show who died first, the policy proceeds are to be distributed as if the primary beneficiary died first.
Guaranteed Insurability
Guaranteed Insurability The guaranteed insurability rider allows the insured to purchase additional coverage at specified future dates (usually every 3 years) or events (such as marriage or birth of a child), without evidence of insurability, for an additional premium. When this option is exercised, the insured purchases the additional coverage at his or her attained age. This rider usually expires at the insured's age 40. The guaranteed insurability rider is not modified or defeated by the existence of other riders. Example: Alan's life insurance policy contains both guaranteed insurability and waiver of premium rider. Three years after the policy was issued, Alan was totally and permanently disabled. Not only are Alan's life insurance premiums waived, but at the specified times or events stated in the policy, Alan may purchase additional amount of insurance with the premiums on those increases also waived.
