Chapter 4-Life Policy Provisions and Options

Assignment

Assignment is the transfer of ownership. There are two types of assignments: absolute and collateral.

Premium Reduction

Dividends are applied toward the next premium due. The same could be accomplished if the policyowner received the dividends in cash and remitted the full premium. If the declared dividends equal or exceed the premium, the policyowner will not have to pay premiums for the next year.

Status Clause -

No coverage for individuals with military status since these individuals are provided coverage through the government.

Cash

The policyowner receives the declared dividends in the form of a check on or near each policy anniversary. -income tax free

Primary Beneficiary

The primary beneficiary is the first in line to receive the death benefit upon the death of the insured.

Dividend Options Summary

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

What is the primary purpose of the free look period? A. It forces producers to deliver policies in person to resell the policy to reduce returns and early policy lapses B. It is a way to offer a legal rebate, 10-30 days of 'free' insurance C. To allow the applicant time to reconsider their purchase decision and to see if the policy was issued as applied for D. It is a marketing strategy of major insurers to get applicants to sign up for a policy

C. To allow the applicant time to reconsider their purchase decision and to see if the policy was issued as applied for

Minors

If minors are named as beneficiaries, but no trust has been established, the funds are placed in a settlement option (held with interest), with the insurer acting as trustee. The guardian or legally responsible adult may receive payments for the benefit of the child, until the child is eligible to receive the lump sum at the age of majority.

Provisions Specific to Cash Value Policies

Policy Loans Provision Policy Loan Rate Provisions Partial Withdrawals or Partial Surrenders

Reduced Paid-Up

Present cash value is used to buy a single premium, permanent paid-up policy of a reduced face amount. This option provides the longest period of coverage provided by a nonforfeiture option. Coverage, although reduced in face value, will continue to age 100.

Dividend Options Available

-Cash -Premium Reduction -Accumulate at Interest -Paid-up additions -1-year term -Paid-up option

Payment of Premium Provisions

-Mode of Premium -Grace Period -Automatic Premium Loans (APL) -Reinstatement

How long, typically, is the grace period on a $500,000 level term life insurance policy? A. One month B. One year C. One week D. One quarter

A. One month Typically, the grace period runs one month (30 or 31 days) from the premium due date.

Beneficiary Succession

-Primary Beneficiary -Contingent or Secondary Beneficiary -Tertiary Beneficiary

Nonforfeiture Options

-Reduced paid up -Extended term -Cash surrender value

Beneficiary Provisions Types of Beneficiaries

-Revocable -Irrevocable

Which of the following is the proper sequence of beneficiaries? A. Estate, contingent, primary B. Primary, contingent, tertiary C. Primary, tertiary, contingent D. Primary, estate, tertiary

B. Primary, contingent, tertiary

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 with a maximum 5% penalty C. Policyowner to reinstate the policy before it lapses D. Payment of the premium to be received after its due date without a penalty or lapse in coverage

D. Payment of the premium to be received after its due date without a penalty or lapse in coverage 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.

Paid-Up Option

Pays off the policy more quickly than scheduled. If the company's overall performance declines, premiums may have to be resumed.

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

Within the first 2 years of a policy, the insurer may contest a claim and void the contract upon proof of a material misstatement or fraud. A material misstatement is one in which the insurer would not have issued the policy had they known the true information. Except for nonpayment of premiums, the policy will be incontestable after it has been in force for typically 2 years from the policy issue date, even in cases of fraud.

Exclusions

Exclusions are conditions stipulated in the contract for which the insurer will not provide coverage. The insurer cannot add or alter any of the exclusions after the policy has been issued. Such exclusions are normally limited to the following: -Aviation -Status Clause -Results

Accelerated Death Benefits

provide for an early payment of a portion of the face amount prior to death. This provides tax free access to policy benefits based on an insured qualifying as terminally ill or chronically ill. A person is considered terminally ill when a physician has certified that person has a condition which is expected to result in death within 24 months. A person is considered chronically ill if a licensed health care professional has determined within the last 12 months that person is unable to perform at least 2 activities of daily living for at least 90 days without substantial assistance. Accelerated death benefits do not have to be repaid if the insured's health improves, but the amount received reduces the remaining death benefit.

Absolute Assignment

In Absolute Assignment, the original owner, the assignor, will name a new owner, the assignee, of the policy. Since a new owner is named, this is considered a permanent assignment. The full amount of the policy is assigned, and this is referred to as a transfer of ownership.

Hazardous Hobbies or Avocation -

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

Fixed Amount

Payments are for a specified dollar amount paid monthly until the benefits, along with interest, are exhausted. In this example, the interest will extend the time period in which the benefits are paid. Only the interest portion of the benefit is taxable.

Individual/Named

This designation is very specific. An individual is specified by name as the beneficiary, such as Mary Doe (wife) or John Doe (husband).

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

A. Revocable beneficiary 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.

Grace Period

The grace period is the 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. The typical grace period is a month (30 or 31 days) unless state law specifies otherwise. If applicable, additional information about this topic is presented in the state law chapter. Coverage continues during the grace period, but if the premium is not paid, the policy lapses at the end of the grace period. the amount of time you have to make a payment after the due date and bring your life insurance policy back to good standing

Beneficiary Designations

A beneficiary designation is 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: -Individual/Named -Class/Classification -Minors

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

A. The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium 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.

What is a material misstatement? A. Stating that the proposed insured is 34 when in fact he or she is 35 B. One which would have caused the insurer to not issue the policy had it been known C. One that is beyond the applicant's knowledge and belief D. Responding to a height and weight question with measurements 1 inch taller and 5 pounds lighter than is actually the case

B. One which would have caused the insurer to not issue the policy had it been known A material misstatement is one which would have caused the insurer to not issue the policy had it been known.

Policy loan provisions include all of the following, EXCEPT: A. Unpaid interest is added to the value of the loan B. Interest is charged annually 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. The death benefit of a policy is automatically reduced when a loan is requested 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.

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

D. Receive the policy proceeds if the primary beneficiary predeceases the insured 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.

Suicide Clause

If the insured commits suicide, while sane or insane, within typically 2 years from the issue date, the insurer's liability is limited to a refund of premium. If the insured commits suicide after the suicide clause has expired, the insurer must pay out the death benefit to the named beneficiary. The intent of this clause is to discourage individuals from purchasing an insurance policy while contemplating suicide.

Hazardous Occupation -

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.

Life Income Period Certain

Payments are guaranteed for the lifetime of the recipient or a specified period of time, whichever is longer. If the recipient dies prior to the end of the period certain, the payments continue to another person until the end of the period certain.

Life Refund

Payments are made for the lifetime of the recipient. Upon death, if a recipient has not received an amount equal to the total death benefit, the balance is refunded to the beneficiary either in a lump sum called Cash Refund, or in installments as in the Installment Refund.

Extended Term

Present cash value is used to buy a single premium term policy of the same face amount for as long a period as it will buy, expressed as a combination of years and days. This option provides the largest death benefit and is sometimes referred to as the Automatic (or Default) Option if no other option has been selected. The insured no longer has rights to the cash value under this option, and the policy will expire prior to age 100.

Insuring Clause (Proof of Death)

Specifically, the insuring clause is found on the face page (first page) of the policy and is considered the most important clause in the policy. It identifies the parties to the contract and the perils or conditions in which it will pay. The insuring clause is 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, as long as the insured died while the policy was in force.

Consideration Clause

The 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 (the insuring clause).

Contingent or Secondary Beneficiary

The contingent beneficiary receives the death benefit only if there is no primary beneficiary alive following the death of the insured. In other words, the benefit is payable to the contingent beneficiary only if the primary beneficiary predeceases the insured.

Revocable

The policyowner may change a revocable beneficiary at any time. This beneficiary does not have a vested interest in the policy. Most named beneficiaries are revocable and have no rights.

Tertiary Beneficiary

The tertiary beneficiary receives policy proceeds if both the primary and the contingent beneficiaries predecease the insured. If there is no surviving named beneficiary at the time of the insured's death, the proceeds are payable to the policyowner if living or to the insured's estate. There may be multiple primary or contingent beneficiaries named. When naming multiple beneficiaries, it is important to indicate each beneficiary's share of the proceeds in percentages rather than in dollar amounts unless they are to share in the proceeds equally.

Class or Classification

This designation is used in instances where each beneficiary is not directly identified by name. ---The wording of the class designation must be specific and carefully worded to remove any doubt of the owner's intentions. For example, "any children of this marriage", or "the insured's spouse" may be classified as beneficiaries. This could cause complications if the insured has step children or has been married more than once.

T/F The owner of a juvenile policy wishes to name the insured child as the new owner once the insured turns age 18. This is considered an absolute assignment.

True

Common Disaster Clause

provides that 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 (usually 90 days) or the insurance company will assume the insured died last (the primary beneficiary died first). This 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. For example, Mr. and Mrs. Smith each had an insurance policy naming each other as the primary beneficiary to their respective policies and their children from previous marriages as the contingent beneficiaries. If Mr. and Mrs. Smith were both killed in a car accident at the same time, each insurer would assume that both died last to protect the next named beneficiaries in the policies.

The insuring agreement in a life insurance policy states the: A. 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 B. 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 C. Policyowner will indemnify the insurance company the policy proceeds if the beneficiary is not named in the application D. 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

D. 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

Policy Loans Provision

A policy loan 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. A loan against the cash value does not immediately reduce the cash value in a policy. Rather the cash value is used as collateral against the loan. Interest will be charged annually and, if unpaid, will be added to the balance of the unpaid loan. Interest charged may be fixed or variable. The insurer may defer granting a loan for up to 6 months unless the loan was intended to repay any premium, such as an automatic premium loan. ---Failing to repay a loan or interest will not void the policy until the total amount of the outstanding loan and unpaid interest equals or exceeds the policy's total cash surrender value. ---Any outstanding loans along with any interest due will be deducted from the face amount at time of claim or from the cash values upon surrender.

Standard Provisions --- Individual Policies Only Contractual provisions

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. Provisions and clauses, unlike riders, are included in the contract for no additional charge.

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.

Life Income Option

This option allows the insurer to use the death benefit to purchase an annuity on behalf of the beneficiary. As with other settlement options, any interest paid is taxed as ordinary income. There are several additional options available: -Straight Life (Pure or Life Income Only) -Life Income Period Certain -Life Refund -Joint and Survivor Income Option -Joint Life Income Option

Owner's Rights (Ownership Provision)

The 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. It is also the owner's responsibility to make the premium payments. The beneficiary does not have rights in the policy.

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. An insurer can refund any overpaid premiums if the amount of premium paid was greater than should have been paid. ---The insurer can reduce the face amount in cases where the amount of premium paid was less than that which should have been paid. For example, if the premium amount paid for the policy was 50% less than what should have been paid, then the death benefit will be reduced by 50%. There is no time limit for discovery, and this provision never cancels or voids a policy. The incontestability clause does not apply. Age and/or gender are not considered material to the policy issuance.

Joint and Survivor Income Option

Payments are guaranteed for the lifetime of 2 or more recipients. Upon the death of the first recipient, payment continues to the survivor(s) until death of the survivor. The survivor's payment may be full (100%), 2/3, or 1/2 of the original payments. This payout option may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor, depending on which option is selected.

Collateral Assignment

Collateral Assignment does not cause a permanent change in ownership. ---However, the rights of the owner will be subject to the assignment. A collateral assignment is typically used when an insurance policy is used as collateral for a loan. This is a temporary assignment until the debt is paid in full. In this case, the assignor is the original owner and the assignee is the creditor. This assignment takes precedence over any beneficiary designation. It can reduce the dollar amount of the beneficiary's claim at the time of the insured's death because the assignee has a priority claim against the policy and must be paid first. No assignment of the policy will be binding on the insurer unless it is in writing and received at the insurer's home office. The insurer is not responsible for determining the validity of the assignment.

Dividend Options

Dividends represent the favorable experience of the insurer and result from excess investment earnings, favorable mortality, and expense savings. Dividends are available on participating policies issued by mutual insurers. They are paid annually, if declared, and cannot be guaranteed. Since dividends essentially are a return of excess premiums paid, they are not taxable as income until all of the premiums paid in have been recovered. Should the total accumulation of dividends exceed the total premiums paid, the excess amount is taxable as ordinary income. Interest earned on dividends left to accumulate is taxable as ordinary income. The policyowner decides which dividend option is in effect and can change the election at any time. If dividends are designated for any option other than cash and all current accumulations are withdrawn, the option will begin again at the next declared dividend.

Entire Contract Clause

This provision describes the parts of the life insurance contract. The entire contract consists of the policy, riders (endorsements), amendments, and a copy of the application. All statements made in the application are, in the absence of fraud, deemed to be representations and not warranties. All parts to the contract must be attached and in writing. Nothing can be incorporated by reference. Any change in the contract will not be effective until approved by a company officer; the producer may not change the policy or waive any of its provisions.

Settlement Options

-Life Income only -Joint Life -Fixed Period -Life Income Period Certain -Life Income Joint & Survivor -Interest Only -Fixed Amount

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. 2 B. 22 C. 20 D. 25

D. 25 The free look period begins on the date the policyowner takes possession of the policy.

Cash Surrender

Upon surrendering the policy back to the insurer, the policy owner will receive the cash surrender value stated in the policy less any outstanding loans and accrued interest. Any amount that exceeds the premiums paid into the policy will be taxable as ordinary income. The insured no longer has insurance coverage if this option is selected.

Paid-Up Additions

Purchases single premium, additional permanent benefits at the insured's attained age. The additional insurance is paid out in addition to the face amount if the insured dies. While the insured is living, it generates cash value and dividends as if the paid-up additional benefit was part of the original policy. additional cash value insurance that is added to the existing policy but does not require additional premiums in the future

After a life insurance policy has been in force for 5 years the insured dies. During the claims process, the insurer discovers that the insured did not disclose material health information that had it known, would have caused the application to be rejected. What can the insurer do at this point in time? A. The insurer can contest the claim B. The insurer must pay out the death benefit but can then take legal action against the beneficiary based on insurance fraud C. The insurer must pay out the death benefit of the policy to the named beneficiary D. The insurer can void the contract and refund any and all premium payments received plus interest

C. The insurer must pay out the death benefit of the policy to the named beneficiary After the policy has been in force for 2 years, except for cases of nonpayment of premium, meaning the policy has lapsed, the insurer cannot contest any claim. The policy has become incontestable.

Dividend options do not include which of the following choices? A. Lifetime income B. Paid-up additional insurance C. Refund in cash D. Reduce premiums due

A. Lifetime income Lifetime income is a death benefit settlement option.

Straight Life (Pure or Life Income Only)

Payments are guaranteed for the lifetime of the recipient. Upon death, payments will cease. The dollar amount of each payment will depend upon the age and gender of the recipient. This is an example of a single life option since payments will not be made to anyone other than the original recipient.

Automatic Premium Loans (APL)

This provision must be elected by the policyowner and can be cancelled at any time. It enables the insurer to automatically borrow against the cash value to cover a premium payment to prevent the contract from lapsing unintentionally. APL is available on cash value policies only and does not require an additional premium. It becomes effective at the end of a grace period. The APL loan is treated as all other loans. If the APL is used to pay premiums, interest on the loan accumulates on an annual basis.

Life Settlement Options-Characteristics

A settlement option directs the insurance company how to pay out the death benefits. ---are used in place of receiving a lump sum death benefit or living benefit at the time of maturity. The choice of a settlement option may be made by the policyowner if the insured is living or by the beneficiary if the insured is not living and if no option has been previously selected. ---It is important to note that if the owner has selected a settlement option, a beneficiary cannot change that option. Principal payments of the death benefit made after an insured's death are not taxable as income. ---However, any interest received from a settlement option distribution is taxed as ordinary income. ---Benefits paid in a lump sum are income tax free. Settlement options include: interest-only, fixed amount, fixed period, and life income option.

Fixed Period

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

Joint Life Income Option

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

1-Year Term

Purchases a single premium, 1-year term benefit. Premiums are calculated at the insured's attained age; also referred to as the fifth dividend option.

Accumulate at Interest

The dividends are retained by the insurer and the interest rate paid the policyowner is compounded annually. -taxable but dividend payout will not be taxed

Nonforfeiture Options (Guaranteed Values)

These options are required in policies that accumulate cash values and protect the policyowner against total loss of benefits if the policy should lapse due to nonpayment of premium or is intentionally cancelled. The three nonforfeiture options add flexibility to a cash value policy. -Reduced Paid-Up -Extended Term -Cash Surrender

What is one of the main reasons for a Universal Life policy to have a surrender charge? A. It is a way to recoup interest paid, but not earned by the policyholder B. It motivates the producer to properly sell the policy C. This provides a means for the insurer to recapture their upfront expenses involved in issuing the policy D. It encourages large additional premium deposits from policyowners

C. This provides a means for the insurer to recapture their upfront expenses involved in issuing the policy Surrender charges provide a means for the insurer to recapture their upfront expenses involved in issuing the policy.

Partial Withdrawals or Partial Surrenders

A partial withdrawal of cash value is only permitted in a Universal or a Variable Universal Life policy. A partial withdrawal, also called a partial surrender, of the policy is paid directly from the cash value and reduces both the amount of the death benefit and the amount of cash value in the policy. Partial withdrawals and any surrenders are paid based on the FIFO method, or "first-in, first-out". ---All amounts withdrawn up to the amount of premiums paid (first-in) are not taxable. ---Any amount withdrawn in excess of the premium is a return of earnings and subject to taxation. There may be a surrender or withdrawal charge associated with the withdrawal. The insurer may limit the number of withdrawals that can be made annually or the amount of the withdrawal specifying minimums and maximums.

Z elects the life refund settlement option for a $250,000 death benefit. Z lives long enough to recover $150,000 of the $250,000 death benefit. How much does his beneficiary receive? A. $100,000 B. $50,000 C. 250,000 D. $150,000

A. $100,000 With Life Refund, payments are made for the lifetime of the recipient. Upon death, if a recipient has not received an amount equal to the total death benefit, the balance is refunded to the beneficiary, either in a lump sum (cash refund), or in installments (installment refund).

All of the following are Settlement Options, except: A. Reduced Paid-Up B. Fixed Period C. Fixed Amount D. Life Income Joint and Survivor

A. Reduced Paid-Up

Maria's policy was issued with an incorrect age. She was actually older than what was listed in the policy. Which of the following will the insurer most likely do if she had died 5 years after policy issue, but prior to this discovery? A. The insurer would pay out a reduced benefit in proportion to the underpayment of premium B. The insurer would simply reduce the death benefit by the amount of the premium underpayment C. The insurer would have to pay out the full face amount since the policy is now beyond the contestable period D. The insurer would bill the beneficiary for the underpayment in premiums

A. The insurer would pay out a reduced benefit in proportion to the underpayment of premium The Misstatement of Age or Sex provision allows the insurer to pay out the benefit that the correct premiums would have purchased. This means that the death benefit could be reduced if the age was understated.

Which of the following is FALSE about the Automatic Premium Loan Provision (APL)? A. It is only available on cash value policies B. It is designed to prevent unintentional policy lapse C. The APL is treated like any other policy loan D. For it to be included in the policy, there is an additional premium charge

D. For it to be included in the policy, there is an additional premium charge The Automatic Premium Loan provision automatically becomes effective at the end of the grace period to prevent the policy from lapsing. There is no charge for having this provision in a cash value policy.

Failure to repay a loan or loan interest will void a life insurance policy: A. After the loan has been outstanding for more than 5 years B. After the insurer calls in the loan with 30 days advance notice C. If interest rates increase by more than 3% in any 1 year D. If the total amount due equals or exceeds the policy's cash values

D. If the total amount due equals or exceeds the policy's cash values Failing to repay a loan or loan interest will not void a policy until the total amount due becomes greater than the policy's cash value.

Beth exercised an owner's option on a life policy to stop paying premiums but continue to be covered until she was age 100. Which Nonforfeiture Option did she choose? A. Paid-Up Additions B. Paid-Up Option C. Extended Term D. Reduced Paid-Up

D. Reduced Paid-Up The Nonforfeiture Option that would allow Beth to stop making premium payments and continue to be covered to age 100, but for a reduced face amount, is Reduced Paid-Up. Paid-Up Additions and the Paid-Up Option are Dividend Options.

Reinstatement

If a policy has lapsed unintentionally due to nonpayment, it can be reinstated by the owner. ---The reinstatement time period is typically 3 years from lapse, but can be as long as 5 years. In order to reinstate, the insured must provide evidence of insurability and the owner must pay all back premiums from the date of lapse plus interest. Reinstatements are designed to put a policy back in force as if the lapse never occurred. Upon reinstatement, a new incontestability period takes effect.

Interest-Only

The death benefit proceeds may be left with the insurer while interest payments are paid at least annually or more frequently. The principal amount does not decrease, and the interest generated is taxed as ordinary income when paid to the beneficiary. This method of providing income is known as capital conservation, since the initial benefit is left untouched with the insurer. When this option is selected, the owner or beneficiary must direct the insurer as to when the principal will be paid as a benefit.

Aviation -

The exclusion does not apply to fare-paying passengers on regularly scheduled commercial flights. This exclusion applies most specifically to student pilots or those with a newly issued pilot's license with a limited number of hours of flying experience.

Free Look (Right to Examine Period)

The free look allows the policyowner a specified number of days following receipt of the policy to look it over. If dissatisfied for any reason, the owner has the right to return it for a full refund of any premiums paid. The free look period is usually 10 days, unless state law specifies otherwise. The free look period starts on the date when the policy is delivered to the policyowner. For this reason, it is important for a producer to collect a delivery receipt when delivering the policy.

Irrevocable

The policyowner may not change an irrevocable beneficiary unless the beneficiary dies or provides written consent for the change. If an irrevocable beneficiary is named, the owner gives up the right to make changes to the policy that affect the coverage or benefits without consent of the beneficiary. These changes include assigning the policy, canceling or surrendering the policy, or taking a policy loan. An irrevocable beneficiary has a vested interest in the policy benefits. A divorced spouse with a vested interest in the policy is an example of an irrevocable beneficiary.

Suicide -

Within the first 2 years, death due to suicide is excluded from coverage as stated in the suicide clause.