Life Insurance Policy Provisions, options and riders 10.5 7%

Entire Contract Provision

Says that the policy and a copy of the app, 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.

Term Rider

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The Primary beneficiary

He has first claim to the policy proceeds following the death of the insured. The policyowner may name more than 1 beneficiary, as well as how the proceeds are to be divided.

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.

The results clause

Only excludes the death benefit if the insured is killed as a result of an act of war (declared or undeclared).

What happens if the insured dies during the grace period?

The death benefit is still payable; however, any unpaid premium will be deducted from the death benefit.

Where does the death benefit go if there are no beneficiaries?

To the estate...

A Warranty

A statement that is guaranteed to be true.

What are the two types of assignments?

Absolute assignment Collateral Assignment

Per capita

By the head, evenly distributes benefit among the living named beneficiaries

Return of premium Rider:

Implemented by using increasing term insurance. When added to a WL 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. Usually expires at 60.

Effect on death benefit:

Payable death benefit=face amount-amount withdrawn-earnings lost by insurer in interest. Refer to page 59

Waiver of cost of insurance Rider:

This is found in UL. In the event of disability of the insured, this rider waives the cost of insurance and other expenses, but does not waive the cost of premiums necessary to accumulate cash value.

How long is the waiting period for waiver of premium?

6 months.

Exclusions

The types of risks the policy will not cover.

Spouse/other insured term:

Provides coverage for 1 or more family members other than the insured. Usually level term insurance, attached to the base policy covering the insured. Usually expires when the spouse reaches 65.

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. It provides the insured with the necessary funds to take care of necessary medical and nursing home expenses that incur as a result of a TI.

Hazardous occupations or hobbies exclusion

Such as skydiving or auto racing The coverage may not be offered or the UW will charge a higher premium for the coverage.

Cost of living rider:

Addresses the inflation factor by automatically increasing the amount of insurance without E of I from the insured. The face value of the policy may be increased by a cost of living factor tied to an inflation index such as the CPI.

Cash loans:

Cash value = loan .... Lon value = cash value - (unpaid loans + interest)

The status clause

Excludes all causes of death while the insured is on active duty in the military

Who are the parties in the insurance contract?

Insurer, policyowner, the insured, and the beneficiary

Payor Benefit Rider:

Primarily used with juvenile policies; otherwise, it functions like the waiver of premium rider. If the payor (usually a parent or guardian) becomes disabled for a 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.

Reinstatement Provision

Allows a lapsed policy to be put back in force. The max time limit for reinstatement is usually 3 years after the policy has lapsed. If the policy, he/she will have to provide E of I. The policy owner is required to pay all back premiums plus interest (usually will not exceed 6%), and may be required to repay any outstanding loans and interest. The advantage to reinstating a lapsed policy is that the policy will be restored to its original status, retain all the values that were established at the insured's issue age.

The contingent beneficiary (secondary or tertiary)

Has the second claim in the event that the primary beneficiary dies before the insured. They do not receive anything if the primary beneficiary is still living at the same time of the insured's death benefit.

Disability Income:

In the event of disability the insurer will waive the policy of premiums and pay a monthly income to the insured. The amount paid is normally based on a percentage of the face amount of the policy to which it is attached.

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 two years of the policy, an insurer may contest a claim if the insurer feels that inaccurate or misleading information was provided in the app. 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.

Suicide provision

Protects the insurer against individuals using suicide as a defense to payment of life insurance benefits. Under 2 years will not be paid After 2 years the policy will pay the death proceeds to the designated beneficiary the same as if the insured had died from natural causes.

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 additional premium. This rider usually expires at age 40.

Per stirpes

By the bloodline Distributes the benefits of the beneficiary who died before the insured to that beneficiary's heirs

Policy loan Option:

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. The insurer must provide 30 days written notice to the policy owner that the policy is going to lapse. Insurance companies may say up to 6 months.

What is the difference between a representation and a warranty?

If a warranty is untrue, the insurer has the right to void the contract. if the representation is untrue, the insurer has the right to cancel the contract only if the representation was material to the creation of the contract.

Family Term Rider:

Incorporates the spouse rider along with the children's term rider in the single rider. The family term rider provides level term life insurance benefits covering the spouse and all the children in the family. Family term=spouse term + children's term

Accidental Death Rider:

Pays some multiple of the face mount if death is the result of an accident as defined in the policy. Death must occur within 90 days of such an accident. The benefit is normally two times the face amount. Some are triple. This usually expires when the insured turns 65.

Irrevocable

The designation may not be changes without written consent from the beneficiary. The policyowner cannot borrow against the policy's cash value or assign the policy to another person without the beneficiary's agreement.

Revocable

The designation of the beneficiary can be changed at any time.

Long term care (LTC):

This rider provides for the payment of part of the death benefit in order to take care of the insured's heath care expenses, which are incurred in a nursing or convalescent home. ****

When does the free look period begin?

When the policyowner receives the policy, not when the insurer issues the policy. In NY there is a minimum of 10 days. If it was sold by a mail order, it must contain a 30-day free-look provision.

Partial withdrawal (partial surrender):

When you can take out a partial amount of the cash value. There may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made.

Automatic premium loans:

This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium. This loan will have interest charged by the insurer. If the loan and interest are not repaid and the insured dies, then it will be subtracted from the death benefit.

Accelerated (Living) Benefit:

An early payment of a portion of the death benefit. 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 life time Inability to perform activities of daily living (ADLs) Permanent institutionalization or confinement to a long-term care facility Any other conditions approved by the department of insurance Usually 50%, but can pay up to 100% of the death benefits before the insured dies. There may also be a dollar limit such as $100,000. The premium may be waived, but it may not result in a lower premium.

Aviation Exclusion

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.

Uniform Simultaneous Death Law:

The law will assume that the primary beneficiary died first in a common disaster. This provides that the proceeds will be paid to either the contingent beneficiary or to the insured's estate, if no contingent beneficiary is designated. The intent is to fulfill the wishes of the policy owner. Most insurers specify a certain period of time such as 30, 60, or 90 days, in which death must occur in order to follow this provision. 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.

Grace Period

The period of time after the premium due date that the policyowner has to pay the premium before the policy lapses (usually 30-31 days). The purpose of the grace period is to protect the policyholder against an unintentional lapse of the policy. In NY, policies in which the amount and frequency of premiums may vary, must allow the policyholder a 61 day grace period. For all other policies, the grace period must be 31 days ( or 1 month).

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.

Representation

A written response to questions or statements made on an application for insurance which the applicant indicates are correct to the best of his or her knowledge, and upon which the underwriter relies to issue the policy.

War or Military service exclusion

Most today do not exclude military service. Two types of exclusions that could limit the death benefit of someone who dies due to war, or while serving in the military... The status clause The results clause

What happens if a policyowner gives the death benefit to a minor?

They will either be paid to the minor's guardian, or paid ot the trustee of the minor if the trust is the named beneficiary, or paid as directed by the court.

Right to examine (free look)

This allows the policyowner a specified number of days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium.

Common disaster clause:

When the insured and the primary beneficiary die at the same time (are in the same accident). If it is ruled that the insured died first, then the policy proceeds are to be paid to the estate of the primary beneficiary, if no contingent beneficiary is named. If it is ruled that the beneficiary died first, the proceeds will be paid to the contingent beneficiary or its estate of the insured if there is no contingent beneficiary.