Life Insurance Policy Provisions, Options, and Riders

The automatic premium loan provision is activated at the end of the

Grace period: provided there is sufficient cash value in the policy, this provision triggers a loan at the end of the grace period to keep a policy in force

Children's riders attached to whole life policies are usually issued as what type of insurance?

Term insurance: coverage expires when the minor reaches a certain age.

All of the following are true regarding the guaranteed insurability rider EXCEPT

This rider is available to all insureds with no additional premium.

The Waiver of Cost Insurance rider is found in what type of insurance?

Universal Life: if the insured becomes disabled, the rider allows the cost of insurance to be waived, with the exception of premium costs required to accumulate cash value.

When a policyowner designates a group of individuals as the beneficiary of a life insurance death benefit without specifically naming the individuals, this is caleld

Class designation

What does the incontestability clause do?

Prevents an insurer from denying a claim due to false statements after the policy has been in force for 2 years.

What provision in an insurance policy extends coverage beyond the premium due date?

Grace period: mandatory provision in all life/health policies that provides coverage for a period of time after the premium becomes past due.

An insured has a life insurance policy from a participating company and receives quarterly dividends. He has instructed the company to apply the policy dividends to increase the death benefit. The dividend option that the insured has chosen is called

Paid-up addition: when this option is select, the annual dividend acts a single premium each year to buy additional amounts of insurance, based on the insured's currently attained age.

Which of the following is true regarding the spendthrift clause in life insurance policies?

It can protect the policy proceeds from creditors of the beneficiary.

Which of the following is true about warranties?

They are guaranteed to be true.

Under which nonforfeiture option does the company pay the surrender value and have no further obligations to the policyowner?

Cash surrender: once cash surrender value is paid, the contract is over

An insured states her age as 40 on the application. When she dies, the insurer discovers that she was actually only 37 at the time of application. What will the insurer do?

Pay the death benefit in the amount that the premium at the correct age would have been purchased: if insured overstates his/her age, the insurer will pay the full death benefit and refund the excess premiums paid.

A policyowner who is also the insured wants to name her husband as the beneficiary of her life policy. She also wishes to retain all of the rights of ownership. The policyowner should have her husband named as the

Revocable beneficiary: policy owner may change designation at any time without beneficiary consent.

The provision which states that both the policy and a copy of the application form the contract between the policyowner and the insurer is called the

Entire contract: limits the use of evidence other than the contract and attached application in a test of the contract's validity. This is a MANDATORY provision in life insurance.

Which of the following may contribute to proof of death for the purposes of insurance benefits payment?

A death certificate

Which of the following allows the insurer to relieve a minor insured from premium payments if the minor's payments have died or become disabled?

Payor benefit: if the payor (parent/guardian) becomes disabled for at least 6 months or dies, the insurer will waive premiums until the minor reaches a certain age, such as 21

The Ownership provisions entitles the policyowner to do all of the following EXCEPT

Set premium rates: the insurer sets premium rates based upon underwriting considerations

Which of the following is true of a children's rider added to an insured's permanent life insurance policy?

It is TERM coverage that is convertible to permanent insurance at or prior to the child reaching the maximum coverage age.

Which of the following statements about a suicide clause in a life insurance policy is true?

Suicide is excluded for a specific period of years and covered thereafter.

The interest earned on policy dividends is

Taxable: dividends are a return of unused premiums on which the insured has already paid taxes.

When a whole life policy lapses or is surrendered prior to maturity, the cash value can be used to be

Purchase a single premium policy for reduced face amount

Which nonforfeiture option provides coverage for the longest period of time?

Reduced paid-up; provides protection until the insured reaches 100, but the face amount is reduced to what the cash would buy

When an insured under a life insurance policy died, the designated beneficiary received the face amount of the policy as well as a refund of all of the premiums paid. Which rider is attached to this policy?

Return of premium: pays beneficiary face amount and premium paid amount, death must occur prior to a certain age for amount to be returned, funded using increasing term insurance

Which of the following statements is TRUE concerning irrevocable beneficiaries?

They can be changed only with the written consent of that beneficiary.

A rider attached to a life insurance policy that provides coverage on the insured's family members is called the

Other-insured rider: usually term insurance, with the right to convert to permanent insurance; useful in providing insurance for more than one family member.

An insured has chosen joint and 2/3 survivor as the settlement option. What does this mean to the beneficiaries?

The surviving beneficiary will continue receiving 2/3 of the benefit paid when both beneficiaries were alive.

If an insured receives accelerated death benefits, what is the least amount of the original death benefit that the beneficiary would receive after the insured's death?

0%: if insured accepts accelerated death benefit, death benefit received is reduced by amount paid by accelerated death benefit and insurer's earnings lost in interest income. Sine the insurer can pay 100% of death benefit before the insured dies, it is possible for a beneficiary to not receive any benefits after insured's death.

Which rider, when attached to a permanent life insurance policy, allows the policyowner to customize the policy to provide an additional amount of temporary insurance on the insured, or allows amounts of temporary insurance to cover other family members?

Term rider

If a beneficiary wants a guarantee that benefits paid from principal and interest would be paid for a period of 10 years before being exhausted, what settlement option should the beneficiary select?

Fixed period/period certain: specified period and equal installments paid to recipient; payments continue for period even if recipient dies.

The paid-up addition option uses the dividend

To purchase a smaller amount of the same type of insurance as the original policy: dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy

An insured owns a life insurance policy. To be able to pay some of her medical bills, she withdraws a portion of the policy's cash value. There is a limit for a withdrawal and the insurer charges a fee. What type of policy does the insured most likely have?

Universal life: allow for policyholders to withdraw a limited portion of the policy's cash value, but withdrawals are usually charged and amount/frequency of withdrawals are limited

What is the clause that describes the method of paying the death benefit in the event that the insured and the beneficiary are both killed in the same accident?

Common Disaster Clause: if both the insured and beneficiary die in a COMMON accident, the insurer proceeds as if the insured outlived the beneficiary.

The law states that an insurer is allowed to pay the entire Death Benefit to the insured if they qualify to use the Accelerated Death Benefit Rider; however, most insurers limit the amount of the Death Benefit paid to

50%: while the law technically allows an insurance company to advance the entire death benefit, most carriers impose their own cap, such as 50% of the death benefit.

An insured receives an annual life insurance dividend check. What term best describes this arrangement?

Cash option: allows an insurer to send a policyholder an annual, nontaxable dividend check.

Which rider does NOT cause the Death Benefit to increase?

Payor Benefit Rider: only pays premium if the payor is disabled/dies. With Guaranteed Insurability, policy owner can increase DB at specified ages/events; Cost of Living Rider increases DB to keep pace with inflation; Accidental Death Rider, the DB is a multiple of the face amount if the insured dies from an accident

What is the purpose of a fixed-period settlement option?

To provide a guaranteed income for a certain amount of time.

Which of the following methods to designate a beneficiary means "by the head"?

Per capita; each person named as beneficiaries would receive equal portions.

When a life insurance policy is cancelled and the insured has selected the extended term nonforfeiture option, the cash value will be used to purchase term insurance that has a face amount

Equal to the original policy for as long a period of time that the cash values will purchase: the cash is used as a single premium to purchase the SAME face amount as the original policy for as long a period of time as the cash will buy at the insured's current age

Which of the following explains the policyowner's right to change beneficiaries, choose options, and receive proceeds of a policy?

Owner's rights; policyowners can learn about their ownership rights by referring to the policy.

An individual purchased a life insurance policy on his life naming his wife as primary beneficiary, and their daughter as contingent beneficiary. Under what circumstances could the daughter collect the death benefit?

If the primary beneficiary predeceases the insured.

When a life insurance policy stipulates that the beneficiary will receive payments in specified installments or for a specific number of years, what provision prevents the beneficiary from changing or borrowing from the planned installments?

Spendthrift provision; all rights of the beneficiary to change time of payment/amount of installments, surrender for cash, borrow against, or assign for any purpose, are withdrawn and those parts of the policy that may give the beneficiary such rights are declared inoperative and void.

Under an extended term nonforteiture option, the policy cash value is converted to

The same face amount as in the whole life policy.

Which of the following is true about the premium on the children's rider in a life insurance policy?

It remains the same no matter how many children are added to the policy: it is based on an average number of children.

All of the following are beneficiary designations EXCEPT

Specified.

In a case where the primary beneficiary predeceases the insured, in the event of the insured's death, the death benefit proceeds will be paid to

The contingent beneficiary

A life insurance policy does not have a war clause. If the insured is killed during a time or war, what will the beneficiary receive from the policy?

The full death benefit.

All of the following are true statements regarding the accumulation at interest option EXCEPT... A) The interest is credited at a rate specified by the policy. B) The policyholder has the right to withdraw the accumulations at any time. C) The interest credited under this option is not taxable since it remains inside the insurance policy. D) The annual dividend is retained by the company.

C) The interest credited under this option is TAXABLE, whether or not the policyowner receives it.

An insured will be allowed to reactivate her lapsed life insurance policy if action is taken within a certain period time, and proof of insurability is provided. Which policy provision allows this?

Reinstatement provision: a lapsed policy may be reinstated within 3 years by paying back premiums, with interest, and proving insurability.

An absolute assignment is a

Transfer of all ownership rights in a policy: the new policyowner does not need to have an insurable interest in the insured.

Upon submission of a death claim under a life insurance policy, when should the insurer pay the policy benefit?

Immediately after receiving written proof of loss.

Which of the following statements is true concerning the accidental death rider?

It will pay 2 or 3 times the face amount if death is the result of an accident and occurs within 90 days of such an accident.

A couple towns a life insurance policy with a Children's Term rider. Their daughter is reaching max age of dependence, which of the following will she need to provide for proof of insurability?

Proof of insurability is not required; coverage can be converted to a new policy without proof.

What is the waiting period on a Waiver of Premium rider in life insurance policies?

6 months: most insurers impose a 6-month waiting period from the time of disability until the first premium is waived.

During partial withdrawal from a universal life policy, which portion will be taxed?

Interest: during withdrawal, interest earned on withdrawn cash value may be subject to taxation.

Which entity determines the amount of accelerated death benefits that will be paid to an insured?

The insurer: the law stipulates that up to 100% of death benefits can be paid in advance, but it is legal for insurers to decide the max AMOUNT of accelerated death benefits that they will pay

If an insured continually uses the automatic premium loan option to pay the policy premium,

The policy will terminate when the cash value is reduced to nothing: with the automatic premium loan option, the premium is automatically paid from the contract's guaranteed cash value. Once the cash value is exhausted, the policy will terminate.

Which of the following is true regarding a single life settlement option?

It provides income the beneficiary cannot outlive: payments stop upon death of the beneficiary

Which of the following is true about the mandatory free look in a Life Insurance policy?

It commences when the policy is delivered.

The two types of assignments are

Absolute and collateral: absolute assigns the entire policy, collateral assigns a part or all of the benefits

The policyowner pays for her life insurance annually. Until now, she has collected a nontaxable dividend check each year. She has decided that she would rather use the dividends to help pay for her next premium. What option would allow her to do this?

Reduction of premium: allows the policyholder to apply policy dividends toward the next year's premium. The dividend is subtracted from the premium amount, yielding the new premium due for the next year.

The owner of a life insurance policy wishes to name two beneficiaries for the policy proceeds. What will the soliciting insurance producer say?

The policy owner can specify the way proceeds are split in the policy.

An insured committed suicide one year after his life insurance policy was issued. The insurer will

Refund the premiums paid: if the insured commits suicide within 2 years following the policy effective date, the insurer's liability is limited to a refund of premium.

An insured has had a life life insurance policy that he purchased 3 years ago when he was 40 years old. He is killed in an automobile accident and it is discovered that he is actually 45 years old, and not 43, as stated on the application. What will the company do?

Pay a reduced death benefit: the incontestability clause prevents an insurer from denying a claim due to statements after the policy has been in force for TWO years. It does not apply to statements relating to sex, age, and identity.

What kind of policy allows withdrawals or partial surrenders?

Universal life.

What is the benefit of choosing extended term as a nonforfeiture option?

It has the highest amount of insurance protection: has the same face amount as the original policy, but for a shorter period of time. Under this 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.