Life and Health Chapter 4 - Life Policy Provisions and Options

Beneficiary Designations

A beneficiary designation is selected at the time of application. A beneficiary can be changed by endorsement to the policy, or by written request filed or recorded with the insurer. A change by endorsement requires the insurer to add an endorsement to the policy, naming the new beneficiary, and mailing it to the policyowner. A change of beneficiary filed by written request will take effect on the date the request was signed by the owner, whether or not the insured is alive at the time the insurer actually receives the notice.

Partial Withdrawals or Partial Surrenders

A partial withdrawal of cash value is permitted in a Universal or a Variable Universal Life 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. Since this is not considered a loan, annual interest is not charged. Taxation applies to any interest on the cash value paid out as a withdrawal. In other words, any amount paid in excess of the premium is subject to taxation. When a partial withdrawal is made, the policy's cash or account value will be reduced by the amount of the withdrawal. 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.

Policy Provisions Prohibited By Law

As always, please refer to the state law section for specific requirements. It is prohibited in most states to have a contract with a provision: -Limiting the time for any legal action to be taken against an insurer to less than 1 year after the act (or lack of an act) occurs. The statute of limitations cannot be less than one year. -Allowing for the backdating a policy for more than 6 months. If backdating is allowed, the insurer may only allow this for a maximum of 6 months. -For any settlement at maturity of less value than the amount insured by the policy, plus dividend additions, less any outstanding policy loans and loan interest and less any unpaid premium. -For forfeiture of the policy for failure to repay any loan on the policy or to pay interest on the loan while the total indebtedness on the policy is less than the cash value of the policy.

Change of Contract (Modifications)

Changes or modifications must be in writing, signed by an executive officer of the insurer, approved by the policyowner and made part of the entire contract. A producer cannot alter, change, modify or waive any policy provisions.

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

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.

Creditor

Designated by assignment or named at application to cover indebtedness. The creditor may either be the named beneficiary or can be the assignee under a collateral assignment. The creditor can only receive the amount of the indebtedness. The benefit may be purchased as decreasing term insurance so the benefit will decrease by the amount of the loan automatically.

Dividend Option - 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 premium payment may be suspended.

Payment of Premium Provisions: 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.

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 receives the lump sum at the age of majority.

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

Lifetime income Income for life is an annuity form of death benefit settlement option.

Settlement Option-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.

Settlement Option-Life Income Option-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.

Settlement Option-Life Income Option-Joint Life Income Option

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

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 a 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.

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

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

Uniform Simultaneous Death Act

The Uniform Simultaneous Death 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.

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.

Dividend Option - Accumulate at Interest

The dividends are retained by the insurer and the interest rate paid the policyowner is compounded annually.

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. If applicable, additional information about this topic is presented in the state law chapter. The free look period starts on the date when the policy is delivered to the owner of the policy. For this reason, it is important for a producer to collect a delivery receipt when delivering the policy.

Payment of Premium Provisions: 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.

Surrenders

The owner of a cash value policy may surrender the entire policy. This action will cancel the insurance coverage. The policyowner is entitled to receive the cash surrender value in the policy. Universal life and variable universal life policies may have a surrender charge schedule which might last 10-20 years. The schedule would show what percent of the cash value is subject to a surrender charge. The surrender charge schedule typically shows the percentage charged, reducing on an annual basis. The difference between the cash value and the cash surrender value is the surrender charge. This provides a means for the insurer to recapture the upfront expenses involved in issuing the policy.

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

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.

Beneficiary Provisions-Types of Beneficiaries: 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.

Beneficiary Succession: Primary beneficiary

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

Nonforfeiture Options (Guaranteed Values)-Characteristics

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. Three nonforfeiture options add flexibility to a cash value policy.

Entire Contract Clause

This provision describes the parts of the life insurance contract. The entire contract consists of the policy, riders (or 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.

Trust

When a recipient is not to have direct access to the death benefits, such as in the case of minor children, and the proceeds are to be distributed as per the insured's directions set forth in a trust. A trust beneficiary may also be used in estate tax planning strategies when using an irrevocable life insurance trust.

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.

Absolute Agreement

he 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. Example: 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.

Policy Loans Provision

A policy loan 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. 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 will be deducted from the face amount at time of claim or from the cash values upon surrender along with any interest due.

Assignment

Assignment is the transfer of ownership. There are two types of assignments: The first is an 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. The second type is a collateral 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. 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-Characteristics

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.

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. Example: An owner of a policy wishes to take out a loan and use an existing life insurance policy as collateral for the loan in case he dies prior to the payoff of the loan. The owner may temporarily assign the policy to the creditor until the loan is repaid. This option is cheaper than purchasing a separate policy to pay off the debt. The beneficiary cannot challenge this decision and may receive a reduced benefit if the insured dies before the loan is repaid. Once the debt is resolved, the assignment will be removed, and all rights will be restored. This is considered a collateral assignment.

Provisions Specific to Cash Value Policies: Excess Interest Provision

Excess interest is the interest earned on the cash value above the minimum guaranteed rate. This interest is added to the cash value and may be applied to pay future premiums payments.

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 - 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. Status Clause - No coverage for individuals with military status, since these individuals are provided coverage through the government. 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. Hazardous Occupation - No coverage if death is related to a hazardous occupation as stated in the policy, such as stunt drivers or auto racers. 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. Suicide - Within the first 2 years, death due to suicide is excluded from coverage as stated in the suicide clause.

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.

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.

Life Policy Settlement Options-Characteristics

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. Settlement Options 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 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.

Settlement Option-Life Income Option-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.

Settlement Option-Life Income 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.

Settlement Option-Life Income Option-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 the Cash Refund Option, or in installments as in the Installment Refund Option.

Dividend Option - Paid-up Option

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

Nonforfeiture Options (Guaranteed Values)-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.

Nonforfeiture Options (Guaranteed Values)-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 Option - 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.

Dividend Option - 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.

Insuring Clause (Proof of Death)

Specifically, the insuring 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. 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.

Common Disaster Clause

The Common Disaster Clause provides that if an insured and primary beneficiary are in the same accident, the primary beneficiary must survive the insured by a specific number of days (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, let's say 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.

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 to select among the dividend options made available, and to assign the policy on a collateral basis or an absolute 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.

Spendthrift Trust Clause

The Spendthrift 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. 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.

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

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.

Settlement Option-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. The principal (capital) is left with the insurer at interest, conserving the capital. When this option is selected, the owner or beneficiary must direct the insurer as to when the principal will be paid as a benefit.

Estate

The estate may be the tertiary beneficiary in case the insured outlives all other beneficiaries. By default, if the insured outlives all other beneficiaries, benefits are paid to the insured's estate. The death benefit increases the estate value and may have tax implications.

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

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.

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

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.

Beneficiary Provisions-Types of Beneficiaries: 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 may not make changes to the policy that affect the coverage or benefits without consent of the beneficiary. These changes include assigning the policy, cancelling 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.

Dividend Option - Cash

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

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.

Which of the following is a reason why "class" designations of beneficiaries may be a problem? They are intended to allow unnamed persons to share policy proceeds They specify the exact persons who may claim policy proceeds They prevent contingent beneficiaries from being named 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

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.

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/insured'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.

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). This prevents probate proceedings.

Per stirpes

This is a designation that will pay a deceased beneficiary's share to the heirs of the beneficiary who predecease the insured. If an insured names his/her 3 children as beneficiaries and one of the children predeceases the insured, the deceased beneficiary's share will be paid to their heirs. The surviving beneficiaries will each receive 1/3 of the benefit and the remaining 1/3 will be paid to the deceased beneficiary's heirs in this example.

Per capita

This is a designation that will pay to surviving beneficiaries equally if a named beneficiary predeceases the insured. For example, if an insured names his/her 3 children as beneficiaries and one of the children predeceases the insured, the benefit will pay equally to the surviving named beneficiaries. Each beneficiary receives 50% of the death benefit in this example. Note: It is assumed that proceeds will be paid on a per capita basis unless otherwise specified.

Settlement Option-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:

Payment of Premium Provisions: 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.

Change of Plan

This provision allows the policyowner to exchange a policy to another policy issued by the same company. As long as the benefits do not increase, most companies do not require evidence of insurability. Term insurance may have a conversion option allowing the policyowner to exchange the policy for a cash value policy. Permanent policies are typically exchanged for other types of permanent policies. If a plan switches from a higher premium to a lower premium, the insurer will reimburse the difference in cost between the two plans.

Payment of Premium Provisions: 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.

Nonforfeiture Options (Guaranteed Values)-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.