cHAPTER 4

Automatic Premium Loans (APL)

- available on cash value policies only and does not require an additional premium - enables the insurer to automatically borrow against the cash value to cover a premium payment to prevent the contract from lapsing unintentionally

Insuring Clause (Proof of Death)

- found on 1st page most important clause the insurance company's promise to pay the policy's death benefit to the named beneficiary, after receiving due proof of death of the insured

Dividend Options

1: Cash (tax-free); 2: Apply to future premiums; 3: Retained by Insurer @ interest; 4: Buy Paid-up WL policy add-ons; 5: Pay-up existing policy; 6: Buy 1-yr. Term policy.

A policy is applied for on September 2, accepted as an insurable risk on September 20, mailed to the producer on September 22, and delivered by the producer in-person to the policyowner on September 25. The free look begins September ___. A 25 B 2 C 22 D 20

A The free look period begins on the date the policyowner takes possession of the policy.

The insuring agreement in a life insurance policy states the: A Insurance company is obligated to pay the policy proceeds upon presentation of valid proof of the death of the insured which occurred while the policy is in force B Insurance company may refuse to pay a death claim in the event a mistake is found in the original application for insurance at the time of the insured's death C Insurance company will not pay death claims in the event of suicide or other exclusion named in the policy unless all premiums are paid in advance D Policyowner will indemnify the insurance company the policy proceeds if the beneficiary is not named in the application

A The insuring agreement is the basic promise to pay the benefit described in the policy when a claim is proved. In life insurance, a true certified copy of the death certificate is valid proof of death.

Interest only, life income with period certain, lump sum, and life income only are all forms of which of these life insurance policy options? A Settlement options B Dividend options C Nonforfeiture options D Beneficiary options

A These are all examples of death benefit settlement options—how the beneficiary will receive the policy proceeds.

Reduced Paid-Up Insurance Option

A non-forfeiture option under which the insured uses the cash value of his present policy to purchase a single-premium Whole Life policy, at attained-age rates, for a reduced face amount. The policy will then stay in force to age 120.

partial surrender

A partial withdrawal of cash value is only permitted in a Universal or a Variable Universal Life policy - reduces both the amount of the death benefit and the amount of cash value in the policy - FIFO method, or "first-in, first-out" -Any amount withdrawn in excess of the premium is a return of earnings and subject to taxation

Automatic Premium Loans

APL

Individual/Named

An individual is specified by name as the beneficiary, such as Mary Doe (wife) or John Doe (husband)

The grace period in a life insurance policy is typically 31 days and provides for the: A Insurance company to delay payment of the death benefit until it can determine the validity of the proof of death B Payment of the premium to be received after its due date without a penalty or lapse in coverage C Policyowner to reinstate the policy before it lapses D Payment of the premium to be received after its due date with a maximum 5% penalty

B The grace period allows payment of the past due premium without a penalty or lapse in coverage. Any claim arising in the grace period is payable, but any unpaid premium will be deducted from the claim when paid.

The incontestability clause states that after 2 years the: A Insurer will not argue about which beneficiary is primary or contingent B Policyowner cannot sue the insurer for misstatements made by the producer in the sale of the policy C Insurer will not refuse to pay a death claim based on misinformation in the original application for insurance D Insurer will only pay for suicide if the insured was insane at the time

C Incontestability means that the insurance company cannot use the statements in the original application for insurance as a reason to avoid paying a death claim. The policy becomes incontestable after two years in most states.

Policy loan provisions include all of the following, EXCEPT: A Interest is charged annually B Unpaid interest is added to the value of the loan C The death benefit of a policy is automatically reduced when a loan is requested D Outstanding loans will be deducted from the face amount at time of claim

C Policy loans do not automatically reduce the death benefit in a policy. If an outstanding loan exists at the time of death, the amount of the loan will then reduce the benefit paid to the beneficiary.

What is the primary advantage to the policyowner in the reinstatement of a life insurance policy? A The insurance company cannot start a new period of contestability B All policy loans that were outstanding at the time of lapse are forgiven and full cash value is restored C The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium D The insured is not required to prove insurability if under age 40

C Reinstatement restores the policy to its original condition as if it were never lapsed. Even though the policy is reinstated at a later age, the original issue premium is all that the insurer will require.

Dividend Options

Cash Paid-up Option One-Year Term Accumulate with Interest Premium Reduction Paid-up Additions

Nonforfeiture Options

Cash Surrender Reduce Paid-up Extended Term

A policyowner who wishes to maintain all rights in the policy should designate a(n): A Irrevocable beneficiary B Contingent beneficiary C Primary beneficiary D Revocable beneficiary

D In order to maintain all rights in the policy, a policyowner should name a revocable beneficiary. An irrevocable beneficiary would have to provide consent for certain changes to a policy. Primary, contingent, and tertiary beneficiaries can be named as either revocable or irrevocable.

A contingent beneficiary has the right to: A Prevent the policyowner from taking a loan against the cash value B Share in the death benefit with the primary beneficiary C Receive the policy proceeds if the primary beneficiary is a minor child D Receive the policy proceeds if the primary beneficiary predeceases the insured

D A contingent beneficiary has no interest in the policy proceeds if there is a surviving primary beneficiary. Contingent and primary beneficiaries do not share the death benefit. Only an irrevocable primary beneficiary has the right to interfere with certain of the owner's rights in a life insurance policy.

Match the policy provisions with the correct description Provisions Insuring Clause Reinstatement Mode of Premium Payment Consideration Clause Grace Period Suicide Clause Description The frequency of premium payments Payment that is made in exchange for the contract; something of value 2 -year time limit from policy issue before death due to suicide is covered This provision identifies the parties, perils, and promises of the contract Time period after the premium due date before the policy lapses Allows the owner to bring the policy up to date if it has lapsed due to nonpayment

Description Mode of Premium Payment The frequency of premium payments Consideration Clause Payment that is made in exchange for the contract; something of value Suicide Clause 2 -year time limit from policy issue before death due to suicide is covered Insuring Clause This provision identifies the parties, perils, and promises of the contract Grace Period Time period after the premium due date before the policy lapses Reinstatement Allows the owner to bring the policy up to date if it has lapsed due to nonpayment

three nonforfeiture options

Extended Term Reduced Paid-Up Cash Surrender

Misstatement of Age or Gender

If the age and/or gender of the insured have been misstated in a policy, all benefits under the policy will be provided based upon the insured's correct age and/or gender according to the premium scale in effect at the time the policy was issued

Settlement Options

Joint Life Fixed Amount Life Income Period Certain Interest only Life Income Joint and Survivor Fixed Period Life Income Only

Match the policy provisions with the correct description Riders Incontestability Free Look Entire Contract Misstatement of Age Assignment Ownership Provision Description Policy, riders, copy of application must be in writing and attached Party who has all rights to cash, loan values, dividends and other benefits Transfer of ownership rights Insurer cannot contest statements (errors, misstatements, fraud) in application after 2 years Benefits will be adjusted according to what premiums paid would have purchased at correct age or sex Insured may return policy for a full refund typically within 10 days of receipt of policy

Match the policy provisions with the correct description Description Entire Contract Policy, riders, copy of application must be in writing and attached Ownership Provision Party who has all rights to cash, loan values, dividends and other benefits Assignment Transfer of ownership rights Incontestability Insurer cannot contest statements (errors, misstatements, fraud) in application after 2 years Misstatement of Age Benefits will be adjusted according to what premiums paid would have purchased at correct age or sex Free Look Insured may return policy for a full refund typically within 10 days of receipt of policy

Hazardous Hobbies or Avocation Exclusion

No coverage if death is related to a hazardous hobby as stated in the policy, such as sky diving or hot air ballooning.

Hazardous Occupation Exclusion

No coverage if death is related to a hazardous occupation as stated in the policy, such as stunt drivers or auto racers.

Results Clause (War Clause)

No coverage if death is the result of war declared or undeclared. If death occurs during the period of war, only the premiums are refunded.

Fixed Amount

Payments are for a specified dollar amount paid monthly until the benefits, along with interest, are exhausted interest portion of the benefit is taxable

Fixed Period

Payments are guaranteed for a specified period of time, such as 10 or 20 years, after which time payments will cease The interest will increase the amount of each payment, and the interest is taxable.

Joint and Survivor Income Option

Payments are guaranteed for the lifetime of 2 or more recipients

Life Income Period Certain

Payments are guaranteed for the lifetime of the recipient or a specified period of time, whichever is longer

Straight Life (Pure or Life Income Only)

Payments are guaranteed for the lifetime of the recipient. Upon death, payments will cease. example of a single life option since payments will not be made to anyone other than the original recipient

Joint Life Income Option

Payments are guaranteed to 2 or more recipients until the first recipient dies, then all payments cease.

Life Refund

Payments are made for the lifetime of the recipient

Policy Loan Rate Provisions

Policy loans with fixed rates can have a maximum fixed interest rate of 8% or less as stated in the policy. For policy loans with an adjustable (variable) interest rate, the maximum rate is based upon Moody's corporate bond yield average and is stated in the policy. The policy loan amount cannot exceed the available cash surrender value.

List of exclusions

Suicide Hazardous Hobbies or Avocation Aviation Status Clause Results Clause (War Clause) Hazardous Occupation

contingent (or secondary) beneficiary

The beneficiary in case the first-named beneficiary has died; also called the secondary beneficiary

Surrender Charge

The difference between the cash value and the cash surrender value

revocable

The policyowner may change the beneficiary at any time. This beneficiary does not have a vested interest in the policy.

capital conservation

The principal amount does not decrease, and the interest generated is taxed as ordinary income when paid to the beneficiary

Class or Classification

The wording of the class designation must be specific and carefully worded to remove any doubt of the owner's intentions

Mode of Premium

This provision addresses the frequency of premium payments (monthly, quarterly, semiannually or annually), and to whom the premiums are payable. The more frequent the payment, the greater the cost. The policyowner has the right to change the premium mode.

Incontestability Clause

a provision stating that the insurer cannot dispute the validity of a policy typically after 2 years

Absolute Assignment

all ownership rights in the policy are transferred to a new owner - permanent assignment aka transfer of ownership

Free Look (Right to Examine Period)

allows the insured/policyowner a specified number of days following receipt of the policy to look it over and if dissatisfied for any reason to return it for a full refund of premium (usually 10 days).

Exclusions

conditions stipulated in the contract for which the insurer will not provide coverage

Collateral Assignment

does not cause a permanent change in ownership. - the rights of the owner will be subject to the assignment - typically used when an insurance policy is used as collateral for a loan.

Accelerated Death Benefits

early receipt of life insurance proceeds that are not taxable under certain circumstances, such as the taxpayer is medically certified with an illness that is expected to cause death within 24 months.

Aviation Exclusion

exclude aviation deaths other than as a fare-paying passenger on a regularly scheduled airline student pilots or those with a newly issued pilot's license with a limited number of hours of flying experience

contractual provisions

explain what the contract consists of, what duties and responsibilities the parties to the contract have, how the policy works, and basically spells out the agreement between the policyowner and the insurance company

Minors beneficiary

funds are placed in a settlement option (held with interest), with the insurer acting as trustee

Primary Beneficiary

he first in line to receive the death benefit upon the death of the insured

Grace Period

he time period provided after the premium due date before a policy lapses. If the insured dies during this period, the death benefit is payable minus any premiums or loans due

Suicide Clause

insured commits suicide within typically 2 years from the issue date, the insurer's liability is limited to a refund of premium if date expired, the insurer must pay out the death benefit to the named beneficiary.

Settlement options include:

interest-only, fixed amount, fixed period, and life income option

Policy Loans Provision

may be made in a cash value policy once there is sufficient cash value to borrow against, which must be made available no later than by the end of the third policy year

Status Clause Exclusion

military status

Irrevocable Beneficiary

one that cannot be changed without the beneficiary's consent

Reinstatement Provision

permits the owner to reinstate a lapsed policy - typically 3 years from lapse, but can be as long as 5 years - NOT ALLOWED IF OWNER SURRENDERS POLICY - NEED INSURCABLE PROOF

Owner's Rights (Ownership Provision)

policyowner retains all rights in the policy. Unless the insured is also the policyowner, the insured does not have rights. The policyowner has the right to name or change revocable beneficiaries, borrow against the cash values or access living values, receive dividends and select among the dividend options made available, and assign the policy on an absolute or a collateral basis, to name a few

Nonforfeiture Options (Guaranteed Values)

protect the policyowner against total loss of benefits if the policy should lapse due to nonpayment of premium or is intentionally cancelled

Common Disaster Clause

provision is designed to pay the benefits to either the contingent beneficiary or the insured/policyowner's estate if no contingent beneficiary has been designated if an insured and primary beneficiary die as a result of the same event, the primary beneficiary must survive the insured by a specific period of time

Tertiary Beneficiary

receives policy proceeds if both the primary and the contingent beneficiaries predecease the insured

Consideration Clause

specifies the amount and frequency of premium paid by the owner as something of value provided in exchange for the company's promise to pay

Entire Contract Clause

states that the life insurance policy and attached application constitute the entire contract between the parties

Cash Surrender

surrendering the policy back to the insurer

Cash Refund

the balance is refunded to the beneficiary either in a lump sum

Installment Refund

the balance is refunded to the beneficiary in installments

Assignment

transfer of ownership 2 types 1. absolute 2.collateral

Extended Term Option

use the policy's cash value to purchase a term insurance policy in an amount equal to the original policy's face value for as long a period as the cash value will purchase.

beneficiary designation

usually selected at the time of application and can be changed by the owner at any time. Beneficiaries can be designated by name or classification