Life insurance Policy Options and Riders
For the test
-Policy options --Select among several choices --Must be selected --Ex. non-forfeiture options ---Cash payments, extended term life insurance, reduced paid-up permanent life insurance -Policy riders= --A truly optional feauture --Costs extra, but adds value to the policy --Think of riders like an optional equipment package on a new vehicle
Policy Nonforfeiture Options
All forms of permanent life insurance have a cash value element. As long as the policy remains in force, this cash value grows over the life of the policy. The policyowner owns this cash value. If the policy lapses or is surrendered, the policyowner cannot be deprived of the cash value. In other words, those amounts cannot be forfeited to the insurance company. All permanent policies include nonforfeiture options that provide ways for the owner to obtain the cash value.
Key points
All permanent policies include nonforfeiture options that provide ways for the owner to obtain the cash value. Surrendered policies cannot be reinstated.
Three Standard Options
Nonforfeiture options prevent the loss of the cash value and apply when the policy is surrendered or lapses. (A policy lapse occurs when the policy's premium is not paid. A policy surrender occurs when the owner actively cancels the policy.) Life insurance policies commonly contain three nonforfeiture options: 1. cash surrender option 2. extended term insurance option 3. reduced paid-up insurance option
Automatic Option
Sometimes an owner of a lapsed policy that was issued on a standard basis fails to elect one of the nonforfeiture options. Insurers typically apply the extended term insurance option automatically when no other option is elected
Cash Surrender Option
Under the cash surrender option, the policy is surrendered and the insurer simply pays the cash value to the policyowner in a lump sum. At that point, the policy is canceled, and the insurer's responsibility under the terms of the contract ends. Surrendered policies cannot be reinstated. Most states allow insurers to delay paying the cash surrender value for up to six months. However, few companies elect to defer payment.
Nonforfeiture Options and UL Insurance
Unlike other permanent policies, universal life (UL) policies do not contain the three standard nonforfeiture options. This is due largely because UL policies remain in force as long as their cash value allows the insurer to make a monthly deduction to cover the policy's insurance and operational costs. A UL policy lapses when the cash value no longer covers those deductions. In those situations, a UL policy has very little or no cash value left. Nothing is left to apply the nonforfeiture option against. However, a UL policyowner always has the option of surrendering the policy for its full (or partial) cash value.
Extended Term Insurance Option
Under the extended term insurance option, the insurer applies the cash value of the lapsed policy to buy a term insurance policy. The term insurance is bought in an amount equal to the face amount of the lapsed policy. The term coverage lasts for whatever period the cash value buys. For example, assume Ted bought a $50,000 whole life insurance policy at the age of 39. Fifteen years into the policy, Ted decides to apply the extended term nonforfeiture option. At that point, the cash value in his policy is $12,000. The $12,000 is used to buy $50,000 of term life insurance based on Ted's current age of 54. This will provide him with life insurance for about 14 years. An extended term option allows the policyowner to have insurance coverage for some period with no further premium payments required. Unlike the reduced paid-up option (described in the next section), policies under extended term insurance are not eligible to receive dividends, even if the original policy was a participating policy. In cases where the original policy was issued on a substandard (rated) basis, the extended term nonforfeiture option is normally not available. --Participating Policy= policy in which the owner is paid a dividend out of the insurance company's earnings that are available for distribution --nonforfeiture option= Guarantee given to the policyowner that prevents the loss of the cash value. This option applies when the policy is surrendered or lapses. The purpose of the option is to identify how the cash value will be used.
Reduced Paid-Up Insurance Option
Under the reduced paid-up insurance (RPU) option, the lapsed policy's cash value is applied as a single premium to buy a paid-up policy (all required premiums have been paid, but the policy has not matured. No more premiums are necessary or possible) of the same type as the lapsed policy. The paid-up death benefit is the amount that the cash value buys as a single premium at the insured's age. Returning to our example, if Ted elects the reduced paid-up option to apply his $12,000 in cash value, that amount will buy $28,000 of paid-up whole life coverage. The reduced coverage will apply for the length of Ted's life. A paid-up policy under the RPU option requires no further premiums. The paid-up policy does retain a cash value. The cash value will continue to grow throughout the life of the policy. However, it will do so at a sharply reduced rate when compared to the policy during the period that premiums were being paid. The new policy has all the features of the original policy. If the lapsed policy was a participating policy, the paid-up policy is eligible for dividends if and when the insurer declares them. Furthermore, a policyowner of a lapsed policy can elect the RPU nonforfeiture option regardless of whether the lapsed policy was issued on a standard or substandard (rated) basis.
Overview
Compared with other financial products, life insurance policies are fairly complicated. One reason for their complexity is that life insurance policies can be used in so many different ways. Providing much of this flexibility in a life insurance policy are options and riders. Through options and riders, policyowners can structure a life insurance policy to meet their own unique insurance needs. Each meets these needs in a different way. Options enable policyowners to apply the provisions of a policy to suit their needs. For example, policyowners can choose how they want the death proceeds paid out (settlement options). Likewise, policyowners can choose how they want to apply any policy dividends they may receive (dividend options). Selecting an option does not increase the premium the policyowner pays. By comparison, a policy rider adds an additional benefit or an additional provision to a base policy. Hence, riders get their name because they sit on top of, or "ride," on a policy. As a result, riders and the additional benefits they provide almost always involve additional premiums. This unit examines the most common options and riders, including: -nonforfeiture options -policy loan and withdrawal provisions -dividend options -settlement options -disability riders -riders covering additional insureds -accelerated living benefit provisions/riders -riders affecting the death benefit amount
Quiz
Kevin owns a whole life insurance policy, issued on a standard basis, that has lapsed for nonpayment of the premium. If Kevin has NOT chosen a nonforfeiture option, which of the following actions will the insurer most likely take? automatically suspend coverage until Kevin either reinstates coverage or notifies the insurer of his option choice automatically surrender the policy and pay Kevin the cash value automatically apply the reduced paid-up option *automatically apply the extended term option If an owner of a lapsed policy issued on a standard basis does not choose a nonforfeiture option, the insurer will automatically apply the extended term insurance option-not lapse the policy. Question 2 Which of the following is NOT recognized as a standard life insurance nonforfeiture options? extended term insurance cash surrender -policy loans reduced paid-up insurance Under the cash surrender option, the owner surrenders the policy and the insurer pays the cash value to the policyowner in a lump sum. Question 3 Under which nonforfeiture option does permanent life insurance continue in force with no further need for premiums? -reduced paid-up option cash withdrawal provision extended term option cash surrender option Under the extended term insurance option, the insurer applies the cash value of the lapsed policy to buy a term insurance policy. The term insurance is bought in an amount equal to the face amount of the lapsed policy. The term coverage lasts for whatever period the cash value buys. Question 4 Melissa asks to continue her lapsed universal life insurance policy under the extended term option. How will the insurance company respond? It will ask Melissa to complete the nonforfeiture option selection form. It will tell Melissa that lapsed universal life policies automatically go on the extended term option. -It will tell Melissa that her policy does not have the extended term option and she may only take any remaining cash value in cash. It will tell Melissa that she cannot elect the extended term option but may elect either the reduced paid-up or cash value payment options. Unlike other permanent policies, universal life policies normally do not contain the standard nonforfeiture options for policy lapses. Question 1 All of the following statements regarding the extended term nonforfeiture option are correct EXCEPT If the extended term option is elected, the face amount of the term policy is the same as the face amount of the lapsed policy. An extended term option allows the policyowner to have insurance coverage for some period with no further premium payments required. Policies under the extended term insurance option typically do not qualify for policy dividends. *The extended term option is available whether the original policy was issued on a standard or substandard (rated) basis. Policies under extended term insurance are not normally eligible to receive dividends. Question 2 Jerry asks his insurance company to pay him the cash value of his permanent life insurance and cancel the policy. Jerry is using which of the following nonforfeiture options? policy loan and withdrawal provision *cash surrender option extended term option reduced paid-up insurance option Under the reduced paid-up insurance option, the lapsed policy's cash value buys a paid-up policy of the same type as the lapsed policy. Question 3 What happens when a universal life insurance policy's cash value no longer covers the monthly deductions to cover the policy's insurance and operational costs? *The policy lapses. The policy goes on the reduced paid-up option. The policy is surrendered for cash. The policy goes on the extended term option. When the cash value no longer covers those deductions, a universal life insurance policy lapses. Question 4 Which statement regarding the reduced paid-up life insurance nonforfeiture option is NOT correct? *The paid-up policy will not build any more cash value A paid-up policy under the reduced paid-up insurance option requires no further premiums nor can any be paid. If the lapsed policy was a participating policy, the paid-up policy is eligible for dividends. A policyowner of a lapsed policy can take the reduced paid-up option regardless of whether the lapsed policy was issued on a standard or substandard (rated) basis A paid-up policy requires no further premiums. Therefore, the policyholder cannot pay any more.
