Life Insurance Policy Provisions, Options, Riders
Under which non-forfeiture option does the company pay the surrender value and have no further obligations to the policyowner?
cash surrender non forfeiture option. Once the cash surrender value is paid, the contract is over.
other insureds/ family term rider
coverage for one or more family members. spouse term0 covers just spouse.
LI Riders
adds or deletes coverage. also called exclusions. there's a cost to adding them.
consideration provision
"consideration" remember means something of value each party promises to each other. for insured= answers on app + premiums. for the insurer= promise to pay in event of loss for insurer
Joe took out a policy on his daughter. Joe became disabled in a car accident. His daughter's policy has the Payor Benefit Rider included. What does this mean for his daughter?
After Joe has been disabled for 6 months, the premiums will be waived on her policy until she is age 21. Payor Benefit Rider is when there is 3rd Party Ownership. Since the owner was disabled, after 6 months the premiums will be waived on the daughters policy for as long as he is disabled or until she reaches age 21.
Under which non-forfeiture option does the company pay the surrender value and have no further obligations to the policyowner?
Cash surrender. Once the cash surrender value is paid, the contract is over.
What is the clause that describes the method of paying the death benefit in the event that the insured and beneficiary are both killed in the same accident?
Common Disaster Clause
settlement options- interest only
DB tax free but iNTEREST TAXED. temporary option. just pay you the interest. only option that conserves the pricnipal. not paying any DB just the interest.
If a life policy allows the policyowner to make periodic additions to the face amount at standard rates, without proving insurability, the policy includes a
Guaranteed Insurability rider. allows the policyowner to purchase specific amounts of additional insurance at specific dates or events, without proving continued insurability. Rates for the additions are based upon attained age.
When a whole life policy is surrendered prior to maturity, the cash value can be used to
Purchase a single premium policy for a reduced face amount. When a whole life policy lapses or is surrendered prior to maturity, the cash value can be 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.
A father owns a life insurance policy on his 15-year-old daughter. The policy contains the optional Payor Benefit rider. If the father becomes disabled, what will happen to the life insurance premiums?
The insured's premiums will be waived until she is 21. 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.
Joe's agent delivered his policy on June 1st. Underwriting began on the policy on May 1st. Joe had a paramedical exam on May 15th and the policy was issued on May 20th. When does coverage become effective?
When the agent delivers the policy, gets a statement from Joe that he hasn't had any health problems in the last month and collects enough money to cover at least the first month's premium. We don't see that any money was collected at the time of application, so coverage would begin when the agent delivers the policy, gets a Statement of Good Health signed and collects premium.
2. nonforfeiture options- extended term option
- insurer uses policy CV to CONVERT TO TERM insurance for the same FACE AMT as the former permanent policy. TERM POLICY W/ SAME FACE AMT.
A life insurance policy does not have a war clause. If the insured is killed during a time of war, what will the beneficiary receive from the policy?
The full death benefit. War or Military Service Clause specifically excludes or limits the insurer's liability for losses caused by war or active military service. If a life insurance policy does not have that exclusion, the benefits are paid to the beneficiary, as if the insured died of any other clause.
minors provision
benefits designated to a minor will either be paid to minor's guardian or to trustee of minor if the trust is the named beneficiary, or paid as directed by a court. ONLY TIME DB DOESN'T GO DIRECTLY TO SOMEONE.
which nonforfeiture has highest amt of protection?
extended term
incontestable clause provision
incontestability clause prevents insurers from denying a claim due to statements in app. after the policy has been in force for TWO YEARS
settlement options- cash payment
lump sum. TAX FREE PAY OUT OF DB.
If a settlement option is not chosen by the beneficiary or policyowner, which option will be used?
lump sum. Upon the death of the insured, or endowment, the contract is designed to pay the proceeds in cash, called a lump sum, unless the recipient chooses an optional mode of settlement.
settlement options
methods used to pay the DB to a beneficiary upon the insured's death, or to pay the endowment if the Insurured lives to the endowment date. beneficiary would decide where it went. similar to pay out of annuities
accidental death rider
pays 2x or 3x face amount (indemnity) if death occurs within 90 days of the accident. expires at age 65.
What is the advantage of reinstating a policy instead of applying for a new one?
The original age is used for premium determination. The reinstatement provision allows the policyowner an opportunity to put a lapsed policy back in force, subject to proving continued insurability. If the policyowner elects to reinstate the policy, as opposed to purchasing a new policy, the reinstated policy is restored to its original status.
Which of the following riders is often used in business life insurance policies when the policyowner needs to change the insured?
The substitute insured rider, or change of insured rider, allows the policyowner to change the insured listed under the policy, subject to insurability. This rider is often used in business life insurance policies.
What is the purpose of a fixed-period settlement option?
To provide a guaranteed income for a certain amount of time. When the fixed-period installments option is selected, the insurer agrees to pay the proceeds in equal installments over a specified period of time.
dividend option- application to reduce premium payments
e.g. if policy owner usually pays annual premiums f 1k and the insurer declares a 100 dollar dividend, the policy owner would only pay 900 for the year. just reduces next year's annual premium.
settlement options- fixed period installments
you'd choose how long and so the insurance company would choose how much each installment cuz dealing w/ interest
Which is NOT true about beneficiary designations?
*The beneficiary must have insurable interest in the insured* The beneficiary may be a natural person The policy does not have to have a beneficiary named in order to be valid Trusts can be valid beneficiaries Explanation: *A beneficiary is the person or interest to whom the policy proceeds will be paid upon the death of the insured. Beneficiaries do not have to have an insurable interest in the policyholder.*
Which non-forfeiture option provides the longest period of protection?
Reduced Paid up. Under the Reduced Paid Up option, you use your cash value to purchase another permanent policy with a reduced face amount from what you had before.
Joe purchased a life insurance policy with a $100,000 death benefit and added the Accidental Death Rider, paying double indemnity for an accidental death. Joe lied about having had open heart surgery last year, on his application. 3 years later, Joe dies in a car accident. How much does his beneficiary receive?
Since Joe died after the 2 year period of incontestability had gone by, and it was also an accidental death, his beneficiary will receive the $200,000.
misstatement of age provision
TRUMPS 2 YEAR PERIOD OF INCONTESTABILITY. insurer is allowed to ADJUST THE BENEFITS to an amount that the premium at the correct age would have otherwise purchased (so the age that they pretended to be would be the payout they'd get)
Which is true about a spouse term rider?
The rider is usually level term insurance. The spouse term rider allows a spouse to be added for coverage. It is available for a limited amount of time, typically expiring at age 65. A spouse term rider (just like any other insured rider) is usually level term insurance.
policy loan provision
found only in permanent policies that contain cash value. insurance can charge interest on policy loans you're not taxed tho. if you die before the loan's back, the insurance will deduct from DB
waiver of premium rider
if the INSURED were to become disabled, after 6 months were to become disabled, premiums would be waived on the policy and the last 6 mo. of premiums would be refunded
succession provision
primary beneficiray has first claim. revocable- owner maintains all rights. irrecovable- have written permission to make any changes. contingent beneficiary (also referred to as secondary of tertiary beneficiary) has second claim, like if primary beneficiary dies
AD&D (Accidental Death and Dismemberment)
similar to AD rider. will state amt. it will pay for accidental death (principal sum)- for accidental death or double dismemberment or blindness or deafness if it happens within 90 days of accident. if you lost 1 limb or one eye it would pay CAPITAL sum (%percentage of principal sum)
change of insured rider
used in key person coverage. if original key person had quit and employer hired another then the employer could use change of insured rider. would have to prove insurability.
All of these are part of an insurance contract, except...
*Conditional receipt* Application Rider Ammendments Explanation: *The Entire Contract provision says the only things that can make up the contract are the application, policy, riders and ammendments. The receipt is just given to the insured.*
3. nonforfeiture options- reduced pay option-
- insurer uses the policy CV as a single premium to purchase a completely paid up PERMANENT policy that has REDUCED FACE AMOUNT.
1. nonforfeiture options- cash surrender value option
- policy owner simply surrenders policy for the current cash value at a time when coverage no longer needed/affordable
DIVIDEND OPTIONS
-divdiends are paid on all participating policies. are so if the mutual owners make money then will share with the policy owner as dividends. - insurance companies CANNOT GUARANTEE divdiends - they're NOT TAXABLE to the policy owner.
guaranteed insurability rider
can add additional coverage at future dates w/o proof of insurability. expires usually at age 40. if you decide to add coverage later that cost of coverage based on attained age.
policy provisions
gonna be part of every policy. don't ask for one they're just there.
owner's rights provision
has all rights like paying premium, changing beneficiary, have insurable interest. Owner gives up some rights if beneficiary is IRREVOCABLE (means beneficiary has to sign off on changes now too)
insuring clause
heart <3 of policy. states parties to contract, premium amt, coverage amt, states insurer promising to pay
automatic premium loan provision
helps prevent the unintnetional lapse of a permanent policy due to nonpayment of premium. INSURER would just take that premium from the cash value at end of grace period. if it depletes all the way (all the CV) the policy would lapse
mode of premium payments provision
how often are premiums to be made. annual least expensive but there's also semi-annually, quarterly, monthly. annual will save you money
dividend options- paid up additions options
increase death benefit of the original policy by whatever amt the dividend will buy
settlement options- fixed amount instalments
you'd choose how MUCH each payment was so insurance payment would choose how lONG it gets paid out cuz dealing w/ interest
Joe's son turns 18 and Joe wants his son to start paying for a policy so he transfers all rights over to him. What has Joe done?
He has transfered all rights of ownership through the Absolute Assignment Provision
Which nonforfeiture option has the highest amount of insurance protection?
The Extended Term nonforfeiture option has the same amount as the original policy, but for a shorter period of time.
return of premium rider
INCREASING TERM INSURANCE RIDER. returns all premiums paid AS WELL as the death benefit.
suicide provision
IS EXCLUDED during first two years a policy is in force. so if you were to commit suicide w/i 2 years of policy enforce, insurer would only return PREMIUMS to beneficiary. after two years would pay entire DB
The owner makes changes to his life insurance policy without letting the beneficiary know. How is this accomplished?
If the beneficiary is set up as revocable, the owner maintains all rights in the policy and doesn't need the permission of the beneficiary to make changes.
An insured is in a car accident. He permanently loses the use of his leg and is blinded in one eye. Under the Presumptive Disability Provision, to what extent will he receive benefits?
NONE. Presumptive Disability applies for loss of 2 limbs, permanent blindness or deafness. These automatically qualify the insured for their full disability benefits.
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 the premiums paid. Which rider is attached to the policy?
The Return of Premium Rider (ROP) pays the beneficiary not only the face amount of the policy, but also the amount that had been paid in premiums. The rider stipulates that death must occur prior to a certain age in order for the premium amount to be returned. The Return of Premium Rider is funded by using increasing term insurance.
right to examine provision (Free look)
allows policy owner 10 days from receipt to look over the policy. the 10 days start whenever they get it in their grubby little hands. older people get a longer free look like medicare and long term care
dividend options- paid up option
dividends accumulate at interest and are used to pay up the policy early
dividend options- accumulation at interest
e.g. a dividend is being paid out to you in the sum of 200 but you've decided to choose the accumulate at interest option, so the insurance company will hold onto your 200 and let it earn interest. YOU WILL BE TAXED ON THE INTEREST It earns. you may withdraw on your dividend acct at any time. dividend still not taxable, only interest.
estates provision
if none of the beneficiaries is alive at time of insured's death or if none have been named, the insured's ESTATE will automatically receive proceeds of a LI policy. the DB of the policy may be included in the insured's TAXABLE ESTATE if this occurs. DB IS FULLY TAXABLE TO THE ESTATE. ONLY TIME A DB IS TAXABLE!!!
settlement options- accelerated benefits option
insured diagnosed w/ a terminal illness. insurer will pay out portion of death benefit. reduces amt payable to a beneficiary. all benefits are tax free. Long term care rider means that insurance company can accelerate the benefits for nursing home or something but only a certain percentage will be tax free. exclusions: aviation, war/,military, dangerous hobbies/occupations
children's term rider
minors up to 18 or 21. the kids can convert to a perm policy once reach attained age of 18 or 21 WITHOUT evidence of insurability.
dividend options- one year term option
one year TERM INSURANCE for a year to increase the overall policy death benefit. SO ADDS TERM insurance but only for a year then it'll go back to what it was prolly 100k.
nonforfeiture options
only included in permanent policies that have cash values b/c that cash value cannot be forfeited by policy owner.
entire contract provision
only thing that can make up an entire contract is policy and copy of application PLUS MAYBE riders and amendments. insurers can only refer to what's in the contract!
assignment (transfer of owner's rights) provision
policyower's right's to assign the policy: two types: 1. absolute assignment- complete and permanent. transfers all rights of ownership. vatical settlement. where insured has terminal illness and so give it to a viatical company so the owner can get some of the face amount. 2. collateral assignemnt- partial transfer of rights to another person for a period of time. go to bank and get a loan, can use life insurance as COLLATERAL on the loan. would transfer partial rights over to bank so if i die b4 bank gets paid back they collect whatever's owed, the rest to beneficiary. once paid off, all to beneficiary.
which nonforfeiture option has the longest coverage term?
reduced paid up
term rider
to add additional coverage for a PERIOD OF TIME to a PERMANENT policy at a much LESSER cost.
payor benefit rider
whenever there's 3rd party owner. whenever POLICYOWNER becomes disabled, premiums would be waived until minor reaches age 21. (usually parent, grandparent, biz owner)
Which of the following determines the length of time that benefits will be received under the Fixed-Amount settlement option?
*Size of each installment* Predeteremined length of time stated in the contract Length of income period Amount of interest Explanation: *The size of each installment determines the length of time that benefits are received under the Fixed-Amount settlement option. It logically follows that larger installments translate into shorter benefit periods.*
grace period provision
prevents a policy from lapsing due to non payment of premium. usually 30 days for individual life, 31 days for group life. if you die during grace period they'd still pay death benefit to beneficiary but would deduct that last unpaid premium.
reinstatement provision
reinstate a lapsed policy. you must prove insurability AND pay back premiums. you have up to 3 years to reinstate. the benefit of doing this is that by reinstating a lapsed policy your premiums would be based on the issue age as opposed to your attained age.
dividend option- cash payment
send me my money tax free!!!
settlement options- life income
single life. joint life (payments stop after 1st dies). joint and survivor dies (stop after last person dies). life w/ period certain (life certain for beneficiary but period certain for their beneficiary?)
common disaster provision; uniform simultaneous death law
the law will assume that a primary beneficiary died first in a common disaster even if that's not the case. it preserves the insureds original intent when purchasing policy. protects contingent beneficiary so they can pass DB tax free.
Which provision allows the policyowner to change beneficiaries?
Owner's rights. The owner has all of the rights in any policy, such as paying the premium, making changes to a policy and naming beneficiaries.
Joe purchases a life insurance policy with a $50,000 death benefit. While this is all the insurance he feels he can afford at this time, he wants to make sure that he can get additional coverage in the future. Which rider should be included in his policy?
The Guaranteed Insurability Rider guarantees he can add more coverage at a future date, without proof of insurability. If he adds coverage later, the cost of that coverage would be based on his attained age.