Chapter 9 Life Insurance Policy Provisions

In most policies, over ____% of the cash value in life insurance policy is available for loans

90

Misrepresentation

A false statement or lie that can render the contract void.

(T/F) If an application is attached to a life insurance contract, it becomes part of the contract.

True

(T/F) The use of dividends to purchase paid-up additions may be advantageous because the purchase is made at rates that do not contain a loading for expenses.

True

a provision in a life insurance policy that allows death benefits to be paid to the policyowner prior to the insured's death under certain circumstances such as if the insured is terminally ill

accelerated benefits provision

a life insurance rider that increases the death benefit, usually doubling it, if the insured dies accidentally

accidental death benefit rider

This rider is also known as the double indemnity provision because it usually doubles the standard death benefit if the insured dies accidentally

accidental death benefits

Most insurance contracts, including life insurance contracts, are contracts of _____________, which means that the policyowner and the insurer do not negotiate the contract's terms

adhesion

the person who normally inherits the annuity proceeds at the death of the annuitant

beneficiary

dividend options

cash option reduction or premiums accumulation at interest purchase of paid up additions purchase of term insurance

3 types of riders that policyowners usually add to their life insurance policies

1. accidental death benefits 2. guaranteed purchase option (guaranteed insurability) 3. waiver of premium

normal period of incontestable clause

2 years

The insurer must make that value available to the policyowner in cash as a surrender value and must give the policyowner a choice of two other nonforfeiture options:

(1) paid-up insurance at a reduced death benefit amount (2) extended term insurance for the net face amount of the policy.

Who are the people that are 'interested parties' in a policy?

1. Applicant 2. Policy owner 3. Insured 4. Beneficiary 5. Assignee (IF there is one)

Optional Provisions in Life Insurance Policies

1. Primary Beneficiary 2. Contingent Beneficiary 3. Suicide Provision 4. Ownership Provision 5. Assignment Provision 6. Plan Change Provision 7. Accelerate Benefits Provision

1. When Rita purchased a whole life policy, she added a double indemnity rider and was surprised to learn that adding the rider did not double her premium. Rita believes that she "slipped one past" the insurance company. Is Rita overlooking something?

Double indemnity may give the illusion of double coverage. However, certain conditions must be satisfied in order for the insurer to pay double the face amount. One requirement is that death must occur as a result of an accident.

(T/F) If the premium for a whole life insurance policy is overdue at the end of the grace period, the policy will lapse and automatically pay the cash surrender value to the policyowner.

False. If the premium for a whole life insurance policy is not paid by the end of the grace period, the policy will lapse and automatically go under a nonforfeiture option, usually extended term. The policyowner then has a period of time to decide to keep the policy under the automatic option, surrender it for its cash value, or switch to the paid-up whole life option.

what are the rights of the policyowner when the beneficiary is named revocably versus irrevocably?

If a beneficiary is named revocably, the policyowner can change the designation at any time prior to the insured's death without the beneficiary's consent. If the beneficiary is named irrevocably, the policyowner must obtain the beneficiary's consent before changing the beneficiary. Normally, an irrevocable designation requires the beneficiary's consent to the exercise of various other ownership rights in the policy, such as surrendering for cash or borrowing against the nonforfeiture value.

automatic premium loan option

Life insurance policy provision by which a delinquent premium is automatically paid by a policy loan.

Prohibited Life Insurance Provisions

Most states prohibit provisions or practices that would do the following: • make the producer an agent of the policyowner for purposes of completing an application • cause forfeiture of a policy for failure to pay a policy loan, so long as the cash value of the policy exceeds the total indebtedness • promise something in the declarations and take it away in the fine print (spelled out in less value statutes) • provide too short a time period for the policyowner to sue the insurer • permit backdating a policy by more than 6 months

According to the _______________________________-, the condition that permits the payment of the accelerated benefits must be a medical condition that drastically limits the insured's normal life span expectation (for example, to 2 years or less).

NAIC Accelerated Benefits Model Regulation

Following the death of her invalid husband, Rob, who was the beneficiary on her life insurance policy, Becky no longer wishes to pay premiums on the whole life insurance policy she has carried for the past 20 years. She contacts her financial advisor, who reminds her that her policy has accumulated a substantial cash value and that she will not need to forfeit this value because she has several options. Becky must select one of them:

Non-forfeiture provisions • She can surrender the policy and take the money in cash. • Rather than taking cash, Becky can probably arrange to surrender the policy and take the money as an annuity (periodic payments for the remainder of her life). • She can stop paying premiums but keep permanent insurance in force with a reduced face limit. • She can stop paying premiums and keep the full face limit of the insurance in force as term insurance that will expire at the end of a specified term. If Becky chooses to keep life insurance in force, she will need to change the beneficiary to, perhaps, her children, her grandchildren, and/or a charity.

difference between primary bene and contingent bene

The primary beneficiary is the person or organization that is to receive the proceeds if he, she, or it survives the insured. The estate of the insured may be named primary beneficiary, although this is usually unwise because it subjects the proceeds to transfer taxes and costs that can be avoided. A contingent beneficiary is a person or organization that is to receive the proceeds only if the primary beneficiary predeceases the insured or loses entitlement to any of the proceeds for some other reason. If the primary beneficiary is eligible to receive the policy proceeds, the rights of the contingent beneficiary to the proceeds are extinguished.

standard policy provisions (in laymans terms)

They don't just hand you a template and say 'hey say this' they tell you what HAS to be included in the policy and then YOU select the wording because you're allowed to be more favorable than the state requires. Insurance companies can always give more and never give less

in life insurance, the person or entity designated to receive the remaining death proceeds if the beneficiary dies after the insured but before the beneficiary has received the full amount of the proceeds payable

contingent payee

The standard length of the grace period is ___________ days in fixed-premium policies. In flexible-premium policies, such as universal life insurance, a grace period of ___________days is common

30 or 31 60 or 61

an attempt to increase the equity (fairness) of dividend distributions reflects the "contribution" principle; that is, that policy choices made by a policyowner are reflected in the dividend. This is commonly found in cases in which a policy with a loan may receive a lower dividend.

direct regonition

purchase of paid up additions

dividend option Each dividend is used to purchase, on an attained age basis, a small amount of additional, fully paid-up whole life insurance. The purchase is made at rates that do not contain a loading for expenses, and no evidence of insurability is required.

(T/F) · refusal to pay a claim because of nonpayment of the premium is governed by the incontestable clause

FALSE

(T/F) If the insured dies 2 weeks after the premium was due but not paid, the life insurance company must pay the beneficiary only an amount equal to the premiums paid in the past plus interest.

False. If the insured dies 2 weeks after the premium was due but not paid, the policy remains in force under the grace period provision, and the life insurance company must pay the beneficiary an amount equal to the full death benefit (possibly minus 1 month's premium).

accumulation of interest

dividend option in life insurance policy The dividends are maintained in the equivalent of an interest-bearing savings account for the policyowner. A minimum rate of interest is guaranteed, but a higher rate of interest may be credited if conditions warrant. The accumulated dividends may be withdrawn at any time. If not withdrawn, they are added to the death proceeds or to the nonforfeiture value if the policy is surrendered.

guaranteed purchase option rider

This provision helps policyowners protect themselves against the possibility that the insured might become uninsurable. • Allows purchase of specified additional amounts of insurance at specified times and ages • No need to show evidence of insurability • No new suicide exclusion or incontestable period • Options not cumulative

with respect to a life insurance policy, the person who will receive the death proceeds of the policy if the primary beneficiary does not survive the insured

contingent beneficiary

an insurance policy provision that states the parties may agree to change the terms of the contract

plan change provision

A nonforfeiture provision in a cash value life insurance policy provides

alternative ways in which the policy's cash value can be taken out or utilized if the contract is terminated during the insured's lifetime.

a life insurance policy provision that specifies the conditions under which a policyowner can transfer some or all of his or her rights in the policy to another

assignment provision

If an insurer issues a policy that the insurance department has not approved, the policyowner can

can seek a refund of premiums, or they—or a designated beneficiary if they should die—can seek to enforce the policy against the insurer. Aetna may also be fined or penalized by the state for selling a contract that has not been approved

a set of provisions in a participating life insurance policy that describe how the policyowner can use the dividends, usually to reduce the premium payment, to buy additional paid-up permanent insurance, to accumulate at interest, to buy term insurance, or to make the policy a paid-up policy at an earlier age than originally planned

dividend options

Which policy provision should be reviewed to clarify: Frank has been using his dividends to help pay premiums. Are other options available to him?

dividend options. In addition to a reduction in premiums (and cash), participating whole life policies generally offer • accumulation at interest. The insurer retains the dividends in the equivalent of a savings account with a minimum guaranteed rate of interest, although a higher rate may be credited if conditions warrant. The accumulated dividends may be withdrawn at any time. If not withdrawn, they are added to the death proceeds or to the nonforfeiture value if the policy is surrendered. • purchase of paid-up additions. Each dividend purchases a small amount of additional fully paid-up whole life insurance on an attained age basis. The purchase premium does not contain expense loading, and no evidence of insurability is required. • purchase of term insurance ("fifth dividend"). Some insurers use a portion of the dividend to buy 1-year term insurance equal to the policy's then cash value, with the remainder used to buy paid-up additions or to accumulate at interest. Alternatively, other insurers use the entire dividend to buy 1-year term insurance. In either case, the term insurance is purchased on the basis of the insured's attained age.

that portion of an insurer's surplus that is declared as a dividend to be distributed to policyowners and/or stockholders of the insurer

divisible surplus

n life and health insurance, a provision that specifies that the policy and the attached application constitute the entire agreement between the parties

entire contract provision

o The policy document + riders + initial premium deposit receipt o Application +amendments + copy of signed application + any attached documents o "no statement shall void this policy or be used in defense of a claim under it unless contained in the application"

entire contract provision

If the policyowner fails to elect a nonforefiture option within a specified period after default of premiums, which option usually goes into effect automatically?

extended term insurance option

an arrangement that provides for the automatic purchase of an additional amount of term insurance each year in the exact or approximate amount that the cash value increases

fifth dividend options

As with all renewal premiums, the policyowner has no obligation to pay the premium for the insurance coverage provided under the ________________ clause.

grace period

the period of time between the date the policy's premium is due and the date the policy will lapse. Most policies have a 31-day grace period. This means that the premium can be paid any time within the 31-day period after it is due, and during this period the policy will remain in force.

grace period

Which policy provision should be reviewed to clarify: Frank just discovered that his premium was due 2 weeks ago. Is the coverage still in force?

grace period. Life insurance policies include a grace period, during which an overdue premium may be paid without a lapse in coverage. The standard length of the grace period is 30 or 31 days. Frank's coverage is still in force.

a rider to a life insurance policy that gives the insured the right to buy additional insurance in specified amounts at specified times or ages without having to provide evidence of insurability

guaranteed purchase option

accidental death rider

i. Dies in 90 days of accident ii. Pays 2x or 3x of Death Benefit

types of settlement options for life insurance policies

i. lump-sum or cash option, ii. interest option iii. fixed-period option iv. fixedamount option v. and one or more life income options.

a provision in the life insurance contract that gives the insurance company up to 2 years to void the contract on the basis of material misrepresentation, concealment, or fraud in applying for coverage. After that 2-year period, the insurer will not be able to void the coverage on those grounds unless the insured died during that period.

incontestable clause

Which policy provision should be reviewed to clarify When Frank purchased the policy, he lied about his health history. Will this prevent his beneficiary from collecting the face amount of the coverage?

incontestable clause. The incontestable clause provides that once the policy has been in force for 2 years during Frank's lifetime, the insurer cannot deny payment to the beneficiary because of concealment or misrepresentation in the application.

an offer made by an insurer to the owner of a lapsed life insurance policy that invites him or her to pay the premium and reinstate the coverage without having to provide evidence of insurability

late remittance offer

a life insurance policy provision that specifies that if the insured's age or gender has been misstated, the benefits payable under the policy will be adjusted to what the premium paid would have purchased at the correct age or gender

misstatement of gender or age

what takes precedence: the policy provision relating to misstatement of the insured's age OR gender or the incontestable clause?

misstatement of the insured's age or gender

a set of choices available to a policyowner regarding how a life insurance policy's cash value can be used, including cash surrender value, reduced paid-up insurance, and extended term insurance

nonforetiure options

Assure the customer that if they pay money into a policy, for some period of time, and it has value, the customer will not lose that value should they chose to terminate the policy

nonforfeiture provisions

because term policies do not build a cash value, these policies are not required to include __________________ that would preclude loss of the cash value when a policy terminates

nonforfeiture provisions

reinstatement

o If the policy has not been surrendered, its cash surrender value has not been exhausted, and its paid up term insurance has not expired, it can be reinstated at any time within 3 years (PA) from the date of premium default o To reinstate a policy: individual must submit an application to the insurer, produce satisfactory evidence of insurability, if required by the insurer, pay back premiums and pay any debts

ownership rights provision

optional · The insured is the owner of a policy UNLESS the application of the policy says otherwise · The owner can change the bene unless its irrevocable, assign the policy, and exercise all of the ownership rights

in life insurance, a provision that specifies that the insured is the owner of the policy, unless the application states otherwise, and that the owner can exercise ownership rights, such as changing the beneficiary (unless irrevocable), assign the policy, take a policy loan, and so on.

ownership provision

Which policy provision should be reviewed to clarify: Frank is facing a liquidity crunch. He needs some cash but does not want to exercise a nonforfeiture option. Can his life insurance policy help?

policy loan provision. The policy loan provision gives the policyowner access to the cash value that accumulates inside the policy without terminating the policy. The policyowner requests a loan, and the life insurer lends the funds confidentially. The loan provisions in the policy specify the portion of the cash value that is available for loans and how interest will be determined. In most policies, over 90 percent of the cash value is available for loans.

an advance of money available to a policyowner from a policy's cash values

policy loans

When does the guaranteed purchase option allows purchases?

provision allows additional purchases every 3 years, upon marriage, and after the birth of a child, provided the events occur before the insured reaches a specified maximum age (often age 45)

in life insurance, a clause giving the owner of a lapsed policy the right to reacquire the coverage under certain conditions

reinstatement provisions

periodic income choices available to beneficiaries and policyowners for payout of death benefits, including the interest option, fixed-amount option, fixed-period option, and life income option

settlement options

state laws that require life and health insurance policies to include certain provisions but allow insurers to select the actual wording as long as it is at least as favorable to the policyowner as the statutory language

standard policy provision laws

a life insurance policy provision that specifies that if an insured, whether sane or insane, commits suicide during the first 1 or 2 years of the policy, the insurer will be liable only for a return of the premium

suicide provision

If I waive 1200 of premiums on 25k policy, and I die tomorrow, insurance company pays 25k of death benefit

waiver of premium rider

a rider under which, if the insured becomes totally disabled, the insurer will waive the premiums on the policy during the continuance of the disability. It is commonly used in life and health insurance.

waiver-of-premium rider

entire contract provision

· 'prego rule' 'its in there' · If it's in the contract it must physically be in the contract · You can't do referral or reference anything outside that particular contract

accelerate benefits provision

· Allows a portion of the death benefit to be paid to the policyowner prior to the insured's death under certain circumstances (usually terminal illness) · Came out around 1980s/ AIDs

waiver of premium rider

· If the insured becomes totally disabled, the insurer will waive premiums on the policy during the continuance of the disability · Normally there's a minimum of 6 month period waiting period

Misstatement of Age or Gender (very important)

· If there is a mistake made of either age or gender, you can fix it! It is not of reason to void a contract. · Whichever has been an error, the gender or the age, and the person is alive, we simply fix it! · If we've been charging too much, we'll either increase the face amount or give them a refund · If we haven't been charging enough, we will lower the face and require that they pay additional funds

assignment provision

· Life Insurance Policies don't limit your right to assign them, but they are allowed to give you specific conditions under which you can transfer some or all of the ownership when you do an assignment (how to notify them, what form to use, where to notify them) and if you fail to do that, they will not be held responsible for your assignment · Rest assured, the lender who's arranging the loan they'll make sure the assignment is done correctly

what is on the policy declaration page

· Name of Insurance Company · identifies of the insured, policy owner, and bene · Specific Policy Details · General Description of Insurance Type · Free Look Provision (usually 10 days) · Insurer's Promise To Pay (insuring clause)

plan change provision

· This states that the parties may agree to change the terms of the contract · 'no changes may be made without the signatures of these individuals'

Policy Loan Provision

• No credit questions asked • Policyowner may borrow up to 90 percent to 100 percent of cash value • Technically, insurer can delay lending for up to 6 months • Fixed or variable interest rates charged • Unpaid interest added to the loan balance • No repayment schedule or requirement • Indebtedness repaid when policy is surrendered or matures as a claim • May include automatic premium loan feature

3 exceptions to the incontestable clause

• The applicant had no insurable interest at the inception of the policy. • The policy was purchased with the intent to murder the insured. • There was a fraudulent impersonation of the insured by another person (for example, for purposes of taking the medical exam)