Exam FX Chapter 4: Life Insurance Policy Provisions, Riders and Options

Activities of daily living (ADLs)

a person's essential activities that include bathing, dressing, eating, transferring, toileting, continence

Standard Provisions and Exclusions

(no standard policy form in life insurance) However, standard policy provisions adopted by NAIC create uniformity among life insurance policies

Insurance companies may defer a policy loan request for up to ___ months

6

life refund

comes in either a cash refund form or an installment refund form. Both options guarantee the total annuity fund will be paid out to the annuitant or to the beneficiary. Cash refund option- if the annuitant dies before the annuity fund is depleted, a lump sum settlement of the remainder would be made to the beneficiary. Installment refund option- the beneficiary would receive the remaining funds in the form of continued annuity payments

Condition for payment probationary period

does not exceed 90 days or 180 days

The return of premium rider

provides that at death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary.

Life income

provides the recipient with an income that he or she cannot outlive.

Family term=

spouse term + children's term

NAIC

National Association of Insurance Commissioners, an organization composed of insurance commissioners from all 50 states, D.C and the 4 US territories, formed to resolve insurance regulatory issues

Can a policy that has been surrendered be reinstated?

No

Primary beneficiary

a beneficiary who has the first claim to the policy proceeds after the death of the insured

A revocable designation

a policyowner can change the beneficiary designation without consent or the knowledge of the current beneficiary.

Contingent beneficiary

a beneficiary who has second claim to the policy proceeds after the death of the insured

Entire Contract

a provision that stipulates that the policy and a copy of the application, along with any riders or amendments, constitute the entire contract.

Fixed period Installments

a specified period of years is selected and equal installments are paid to the recipient. The payments continue for the specified period even if the recipient dies before the end of that period.

Effects of divorce on designation of beneficiaries

a spouse who has consented to a divorce (or the likes) has in effect terminated all marital property rights.

cost of living rider

addresses the inflation factor by automatically increasing the amount of insurance without evidence of insurability from the insured.

Reinstatement

allows a lapsed policy to be put back into force. The max time limit is usually 3 years after the policy has lapsed. If the policyowner elects to reinstate the policy, he/she will have to provide evidence of insurability.

Children's term rider

allows children of the insured to be added to coverage for a limited period of time for a specified amount. The coverage is also term insurance and usually expires when the minor reaches 18 or 21. Most riders also provide the minor with the option of converting to a permanent policy without evidence of insurability.

A irrevocable designation

beneficiary designation may not be changed without the written consent of the beneficiary.

Loan Value=

cash value -(unpaid loans + interest)

The Status Clause

excludes all causes of death while the insured is on active duty in the military.

Family term rider

incorporates the spouse term rider along with the children's term rider in a single rider.

Collateral Assignment

involves a transfer of partial rights to another person. It is usually done in order to secure a loan or some other transaction. A collateral assignment is a partial and temporary assignment of some of the policy rights. Once the debt or loan is repaid, the assigned rights are returned to the policyowner.

Absolute Assignment

involves transferring all rights of ownership to another person or entity. This is a permanent and total transfer of all the policy rights. The new policyowner does not need to have an insurable interest in the insured.

Ownership

only the policyowners have ownership rights. These rights include naming and changing the beneficiary, receiving the policy's living benefits, selecting a benefit payment option, and assigning the policy.

Dividends are only paid on (participating or nonparticipating policies)?

participating

Fixed amount installments

pays a fixed specified amount in installments until the proceeds are exhausted. The recipient selects a specified fixed dollar amount to be paid until the proceeds are gone. Despite death of the beneficiary , payments will continue to be made until all proceeds have been paid out.

The accidental death rider

pays some multiple of the face amount if death is the result of an accident as defined in the policy. Benefit is normally two times (double indemnity) the face amount, but some policies pay triple.

joint life with term certain

policy pays 2 or more persons and stops paying at the death of the first.

Incontestability

prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2 years, even if there has been a material misstatement of facts or concealment of a material fact.

The Spendthrift clause

protects beneficiaries from the claims of their creditors.

The suicide provision

protects the insurers from individuals who purchase life insurance with the intention of committing suicide. If the insured commits suicide within 2 years, the insurance company must only refund premiums. After 2 years, the death benefits are to be paid as if the insured died of natural causes.

Long-term care (LTC)

provide for the payment of part of the death benefit in order to take care of the insured's health care expenses.

The accelerated benefit or living needs rider

provides for an early payment of part of the policy death benefits if the insured is diagnosed with a terminal illness that will result in death within 2 years, or has other qualifying conditions.

straight life

provides the recipient with an income that he or she cannot outlive.

Nonforfeiture options

since permanent life insurance policies have cash values, certain guarantees are built into the policy that cannot be forfeited by the policyowner.

Paid-up additions

the dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. Will increase the death benefit of the original policy.

Principal amount

the face value of the policy; the original amount invested before the earnings.

Accumulation at interest

the insurance company keeps the dividend in an account where it accumulates interest. The interest on the dividends is taxable.

Interest Only

the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals.

One year term option

the insurance company uses the dividend to purchase additional insurance in the form of one-year term insurance that increases the overall policy death benefit.

Payment of Claims

the insurer must make death claims immediately upon receipt of a written proof of a loss. They have 30 days to do so.

Reduction of Premium Payments

the insurer uses the dividend to reduce the next year's premium.

Extended term option

the insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy. The insurer automatically implements this option if the policyowner does not select a different nonforfeiture option.

Settlement options

the methods used to pay the death benefits to a beneficiary upon the insured's death, or to pay the endowment benefit if the insured lives to the endowment date. Types: Lump sum life income interest only fixed period installments fixed amount installments retained asset accounts

Grace Periods

the period of time after the premium due date that the policyowner has to pay the premium before the policy lapses (usually 30 or 31 days).

Payments of Premiums

the policy stipulates when the premiums are due, how often they are to be paid, and to whom.

The Policy Loan option

the policyowner is entitled to borrow an amount equal to the available cash value.

Lump-sum payment

the proceeds are paid in cash and not taxed

Right to Examine (Free Look)

this provision allows the policyowner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. This starts when the policy is delivered, rather than when it is issued..

Assignment

transfer of rights of policy ownership

Exclusions

types of risks policy will not cover. Most common exclusions are aviation, hazardous occupation, and war and military service.

The Common Disaster Clause

when the insured a primary beneficiary die in the same accident, the proceeds will be paid to either the contingent beneficiary or to the insured's estate.

the single life option

provides a single beneficiary income for the rest of his/her life. Their death stops the payments.

The results clause

only excludes the death benefit if the insured is killed as a result of an act of war.

Guaranteed insurability rider

allows the insured to purchase additional coverage at specified future dates (usually every 3 years), or events (marriage or birth of a child), without evidence of insurability, for an additional premium.

Misstatement of Age and Gender

allows the insurer to adjust the policy at any time due to a misstatement of age or gender.

Trust

an arrangement in which funds or property are held by a person or corporation for the benefits of another person (trust beneficiary)

Retained Asset Accounts (RAA)

an interest-bearing money market checking account that is established for the beneficiary of a life insurance policy.

Dividends

are a return of excess premiums and are not taxable to the policyowner. These are not guaranteed, however.

Payable death benefit=

face amount - amount withdrawn - earnings lost by insurer in interest

life income joint and survivor

guarantees an income for two or more recipients for as long as they live.

Primary beneficiary

has first claim to the policy proceeds following the death of the insured. Can be more than 1 personn

Contingent beneficiary

has second claim in the event that the primary beneficiary dies before the insured.

Cash Payment

insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually.

Assignment

the policyowner has the right to transfer partial or complete ownership of the policy to another person without the consent of the insurer. However, the owner must advise the insurer in writing of the assignment. Transfer of the life insurance policy does not change the insured or amount coverage, it only changes who has the policy ownership rights.

Cash Surrender Value

the policyowner simply surrenders the policy for the current cash value at a time where coverage is no longer needed or affordable.

life with period certain

the recipient is provided with the "best of both worlds" in terms of a lifetime income and a guaranteed installment period. The payments are not only guaranteed for the lifetime of the recipient, but there is also a specified period that is guaranteed.