Chapter 4 - Life Policy Provisions & Options

Cash Surrender Reduced Paid-Up Extended Term

*Three nonforfeiture options add flexibility to a cash value policy:* ______________ - Upon surrendering the policy back to the insurer, the policy owner will receive the ______________ 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. ______________ - 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. ______________ - 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.

producer

A _____________ cannot alter, change, modify or waive any policy provisions

POLICY LOAN

A _______________ may be made in a cash value policy once there is sufficient cash value to borrow against. In most policies, cash value must be made available to borrow against after 3 years. 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.

C (*The policy proceeds only when there is no primary beneficiary* 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.)

A contingent beneficiary has the right to which of the following? A. Share in the death benefit with the primary beneficiary B. Prevent the policyowner from taking a loan against the cash value C. The policy proceeds only when there is no primary beneficiary D. The policy proceeds if the primary beneficiary is a minor child

executive officer

Changes or modifications must be in writing, signed by an ______________ of the insurer, approved by the policy owner and made part of the entire contract.

grace

Coverage continues during the __________ period, but if the premium is not paid, the policy lapses at the end of the ____________ period.

C (*Lifetime income* Income for life is an annuity form of death benefit settlement option.)

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

incontestable

Except for nonpayment of premiums, the policy will be _______________ after it has been in force for typically 2 years from the policy issue date, even in cases of fraud.

B (*Settlement options* These are all forms of settlement options - how the beneficiary will receive the policy proceeds. Nonforfeiture options are concerned with cash value.)

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. Nonforfeiture options B. Settlement options C. Dividend options D. Beneficiary options

beneficiary

Life insurance benefits are paid in a lump sum, unless another mode of settlement has been selected. A settlement option directs the insurance company how to pay out the death benefits. It is important to note that if the owner has selected a settlement option, a _____________ cannot change that option.

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.)

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

8 Moody's

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

not ordinary income income tax free

Principal payments of the death benefit made after an insured's death are __________ taxable as income. However, any interest received from a settlement option distribution is taxed as _______________. Benefits paid in a lump sum are ______________.

insuring (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 policy is in-force.)

Specifically, the _____________ clause is found on the 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.

A (*Creditors of the insured and/or the beneficiary* Spendthrift laws and policy provisions protect the death benefit from the claims of creditors of the deceased insured, the policyowner, and those creditors of any named beneficiary to whom the death benefit becomes payable. When death benefit principal is left with the insurance company, spendthrift laws prevent creditors from attacking that money, too.)

The spendthrift laws of each state protect life insurance proceeds against the claims of which of the following? A. Creditors of the insured and/or the beneficiary B. Primary beneficiaries only C. Contingent beneficiaries only D. Creditors of the insured only

absolute

There are two types of assignments: ______________ 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.

collateral

There are two types of assignments: ______________ Assignment - which 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

2

Within the first ___ years of a policy, the insurer may contest a claim and void the contract upon proof of a material misstatement or fraud.

Per stirpes

____________ - This is a designation that will pay a deceased beneficiary's share to the heirs of the beneficiary who predecease the insured.

Per capita (Note: It is assumed that proceeds will be paid on a per capita basis unless otherwise specified.)

____________ - This is a designation that will pay to surviving beneficiaries equally if a named beneficiary predeceases the insured.

Suicide

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

Provisions Clauses

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

Status

_____________ Clause - No coverage for individuals with military status, since these individuals are provided coverage through the government.

Nonforfeiture Options

________________ (Guaranteed Values): These options are found 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.

change of insured

A __________________ benefit allows the owner to exchange the insured covered by the policy for a new insured in which the owner has an insurable interest or to exchange the policy for a new policy covering a new insured in which the owner has an insurable interest. *This is typically a rider found in corporate owned life insurance when an executive moves to another company or retires.

Universal Variable Universal Life

A partial withdrawal of cash value is permitted in a ______________ or a _____________ policy. A partial withdrawal is considered a partial surrender of the policy. A partial surrender is actually paid from the policy value and either reduces the amount of the death benefit or the amount of cash value in the policy.

Dividend Options

________________ - Are declared under Participating Programs. They return excess premiums and is not guaranteed. The dividend is NOT taxable but any interest generated from from the dividend will be taxable as ordinary income.

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.

entire

The __________ contract consists of the policy, riders (or endorsements), amendments, and a copy of the application.

free look

The _____________ 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 ______________ period is usually 10 days, unless state law specifies otherwise.

consideration

The _____________ 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).

Policy owner

The _______________ retains all rights in the policy. Unless the insured is also the _____________, the insured does not have rights.

Spendthrift (This clause does not protect the beneficiary if the benefits are payable in a lump sum, only when the proceeds are held by the insurance company under a settlement option)

The ________________ Clause denies the beneficiary the right to assign his/her interest in the policy proceeds. The purpose is to prevent creditors of a beneficiary from claiming any benefits payable to the beneficiary before they are actually received.

Uniform Simultaneous Death

The __________________ Act has been adopted by all states and provides that when the insured and primary beneficiary die as the result of the same event and the order of death cannot be determined, it is assumed the insured died last, protecting their secondary beneficiary or heirs.

surrender

The difference between the cash value and the cash surrender value is the ____________ charge (the percentage charged, reducing on an annual basis). This provides a means for the insurer to recapture the upfront expenses involved in issuing the policy.

War Aviation Suicide Hazardous Occupations or Hobbies

The four most common exclusions found in life insurance policies are the "WASH" exclusions:

B (*The payment of the premium after the 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.)

The grace period in a life insurance policy is typically 31 days, which allows: A. The insurance company to delay payment of the death benefit while it determines the validity of the proof of death B. The payment of the premium after the due date without a penalty or lapse in coverage C. The payment of the premium after the due date with a maximum 5% penalty D. The policyowner to reinstate the policy before it lapses

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.

A (*The obligation of the insurance company to pay the policy proceeds upon presentation of valid proof of the death of the insured which occurred while the policy is in force* 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.)

The insuring agreement in a life insurance policy states which of the following? A. The obligation of the insurance company 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. The 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. The 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 D. The policyowner will indemnify the insurance company the policy proceeds if the beneficiary is not named in the application

incontestability

There is no time limit for discovery, and this provision never cancels or voids a policy. The _______________ clause does not apply. Age and/or gender are not considered material to the policy issuance.

C (*After 2 years, the insurer will not refuse to pay a death claim based on misinformation in the original application for insurance* 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.)

What is meant when a life insurance policy becomes incontestable? A. After 2 years, the insurer will not argue about which beneficiary is primary or contingent B. After 2 years, the insurer will only pay for suicide if the insured was insane at the time. C. After 2 years, the insurer will not refuse to pay a death claim based on misinformation in the original application for insurance D. After 2 years, the policyowner cannot sue the insurer for misstatements made by the producer in the sale of the policy

D (*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 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. The insured is not required to prove insurability if under age 40 C. All policy loans that were outstanding at the time of lapse are forgiven and full cash value is restored D. The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium

D (*They are vague descriptions of beneficiaries that could result in a court having to decide which person(s) will or will not receive the policy proceeds* Class designations of beneficiaries are intended to provide benefits to a number of unnamed persons but can be problematic when there is insufficient understanding about who is being named as a beneficiary. "All my children" does not clearly identify which children are included - the children of a former marriage, the current marriage, or both. Likewise, "My minor children" disregards the fact that children will eventually become adults, and can unintentionally exclude a child as a result)

Which of the following is a reason why "class" designations of beneficiaries may be a problem? A. They are intended to allow unnamed persons to share policy proceeds B. They specify the exact persons who may claim policy proceeds C. They prevent contingent beneficiaries from being named D. They are vague descriptions of beneficiaries that could result in a court having to decide which person(s) will or will not receive the policy proceeds

Provisions (AKA "Clause")

_____________ - Benefits provided in the policy as part of the contract without an additional charge.

Interest Only capital conservation

_____________ - 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 _________________.

Hazardous Hobbies or Avocation

_____________ Clause - 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

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

Results (War Clause)

_____________ 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.

Aviation

_____________ Clause - 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.

Options (Ex - choosing which settlement option you want for the policy)

______________ - Are provisions that provide choices which must be specified by the policy owner.

Assignment

______________ is the transfer of ownership.

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.

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.