Life and Health Ins. Ch 9

Ownership Rights (4)

1. Changing the beneficiary 2. Receiving dividends if any are paid 3. Borrowing funds from the cash value if they exist 4. Assigning of some or all the rights of the contract to another party

Naming Beneficiaries Methods

1. Filling Method 2. Endorsement Method

Succession Of Beneficiaries (2) and Definitions

1. Primary Beneficiary - person designated by applicant to receive the face amount of the proceeds upon the insured's death. 2. Contingent Beneficiary - individual who will be paid the policy proceeds if the primary beneficiary predeceases the insured. Will receive the face amount of contract if primary beneficiary is not living at the time the insured dies.

Facility of Payment Provision

Allows the insurer to select a beneficiary if the named beneficiary is a minor, deceased, or cannot be found. Most commonly in group life insurance contracts and industrial life policies. Normally insurer would select an immediate family member.

Exclusions and Limitations

Defined circumstances that would not be covered if death occurs

Reinstatement

If a life insurance contract was not surrendered for the cash savings value, many contracts permit the reinstatement of the policy if it is effected within 3 years of the policy lapse. Proof of insurability may be requested by insurer. All owed premiums as well as outstanding loans must be pad.

Uniform Simultaneous Death Act

If the insured and the primary beneficiary are killed in the same accident and there is insufficient evidence to show who died first, the policy proceeds are to be distributed as if the insured died last. This allows the insurance company to pay the proceeds to a secondary or contingent beneficiary. If no contingent beneficiary, insured's estate will receive the proceeds.

War or Military Service Exclusion 2 Types?

Normally provides for the return of premium with interest in the event that death occurs under conditions excluded in the policy 1. Status-Type Clause - will not pay in event of death while insured is in the military, regardless of the cause of death (even if it had nothing to do with military action). 2. Results-Type Clause - Would not provide coverage for a member of the military if the member was killed as a result of military exercises or service in general. However, if at home or on leave and fatally injured in an accident or died as a result of a non service related illness, the insurer would pay the face amount of the contract.

Revocable Beneficiary

One that may be changed by the policy owner. They can be changed without their knowledge or consent.

Inter Vivos Trust

One that takes effect during the lifetime of the grantor

The Consideration Clause -What is the insured's consideration? -What is the insurer's consideration?

Provides that the insurance coverage is granted in consideration of the application and payment of the initial premium. The payment of the initial premium is required to place the insurance coverage in effect. -The insured's consideration is the premium paid and the representations made in the application. -The insurer's consideration is the promise to pay the face amount of the contract to the named beneficiary upon death of the insured

Policy Change Provision (Conversion Option)

Provision that permits the insured to exchange a policy for another type of policy form permitted by the company. -If higher premium, merely pay higher premium and no proof of insurance -If lower premium, proof of insurance may be required as this could result in adverse selection agains insurer.

Classes as Beneficiaries

Rather than specifying one or more beneficiaries by name, the policy owner can designate a class or group of beneficiaries. For ex: "children of the insured" and "my children"

Endorsement Method

Requires that the beneficiary change be typed of affixed directly to the policy. The insured must make written request and mail the request along with the policy to the insurance company.

Aviation Exclusion

Restricts coverage in the event of death from aviation activities, except when insured is a fare-paying passenger. Restricts coverage for military pilots and crew members. Commercial airline pilots and crew are usually covered at standard rates.

Withdrawal from life insurance? What type of life insurance permits withdrawals? (2)

Same as a loan, but there is no presumption that it will be repaid (taxable). 1. Universal Life 2. Variable Life

Grace Period

The period of time following the date that each premium is due during which the insurance remains in force and coverage is provided, even though the premium has not yet been paid. Protects the policy owner from unintentional lapse of the policy. Grace period is in every life insurance contract and is usually 31 days.

Testamentary Trust

Trust created after the grantor's death, according to the provisions of the grantor's will.

Beneficiaries Examples (6)

Few restrictions on who may be named the beneficiary. When a third-party applicant names himself as beneficiary, insurable interest must exist between applicant and insured at time of application. Examples: 1. Individuals 2. Businesses 3. Trusts 4. Estates 5. Charities 6. Minors

Policy Provisions

Identify the rights and obligations of both the policy owner and the insurer under the insurance contract.

Assignment of a life insurance contract

Involves a transfer of some of all of the policy owner's legal rights under the contract to another party.

Absolute, Voluntary, Complete Assignment

Policyowner owner decides to sell or make a gift of a life insurance policy by assigning all rights in the policy to the assignee. Involves turning all rights - including the right to use cash value - over to the assignee. When an absolute assignment is made, the original policy owner usually has no means of recovering surrendered rights; permanent.

Minor as Beneficiary

A minor is not legally competent to receive payment and provide receipt of policy proceeds if the insured dies before the minor comes of age. Insurance company may hold on to the proceeds, paying interest on them until the beneficiary reaches legal age or the company may insist that a trustee gaurdian be appointed for the minor, someone who is legally entitled to receive and manage the policy proceeds

Filling Method

Aka Recording Method Request must be filed in writing to the insurer and is made effective by the insurance company recording the change in its records

Per Stirpes

By the root or by way of branches. Means that a beneficiary's share of a policy's proceeds will be passed down to the beneficiary's ;icing child or children in qual shares should the predecease the insured. *Proceeds go to decedents of the named beneficiary. Don't have to be named because it goes through the bloodline.

Beneficiaries Assignment Rights

Can assign a portion of the proceeds. Unless beneficiary has been named irrevocably there is little to assign.

Modifications

Changes in the policy, or any agreement in connection with the policy, such as changes in the beneficiary, face amount, or additional coverage, must be endorsed on or attached to the policy in writing over the signature of a specified officer of officers of the company. Only an executive officer of the insurer can change the contract not the agent.

Suicide Clause (in a life insurance contract)

Death by suicide is not covered during the policy's first two years. If suicide occurs during this initial two-year period, premiums are refunded but no face amount is paid. Following the 2 year period, coverage is provided for suicide

Why are Class Designations Good?

Ex: "All of my children" Saves the policyowner the trouble of making changes if the membership of the group is altered because of births or deaths.

Automatic Premium Loan (APL) Provision

May be added to a cash value life insurance contract and protects the policy owner against the inadvertent lapsing of the contract. If the cash value is sufficient, a loan amount equal to the premium due is subtracted from the cash value to pay the premium (must be completed at time of application, not after policy issued). Policy will lapse when cash value is reduced to zero. If this happens policy owner will not be able to reinstate the policy. All outstanding loan amounts deducted from death benefit upon death of insured.

Per Capita

Means, per person or by the head. Policy's proceeds are paid only to the named beneficiaries who are living. *Proceeds go to the named beneficiary

How is the interest on policy loans calculated?

Payable annually at the rate specified. If interest that is not paid when due will be added to the loan and bear interest at the same rate. If total indebtedness equals or exceeds the cash value of the contract, the policy will terminate.

Medical Examinations and Autopsy

Some states require life insurance policies to include a provision that gives the insurer, at its own expense, to examine an insured while a claim is pending, and in the event of death to perform an autopsy, at its own expense and where not prohibited by law.

Payment of Premium

Specifies when and how premiums are to be paid. Usually premiums are to be paid in advance rather at company;s home office or to the agent. Mode of paying is also identified, such as monthly, quarterly, semiannually, and annually. Least expensive =annually Other require payment of a service charge.

Spendthrift Clause Features (2) Preventions (3)

Spendthrift - a person that spends money extravagantly. Th insured can protect the proceeds of an insurance policy from the actions of a spendthrift beneficiary. Features: - The proceeds will be paid in some way other than a lump sum -The proceeds or payments are protected from beneficiary's creditors while they are still held by insurance company. Prevents - Transferring of proceeds - assigning payments to a creditor -Commuting the Proceeds - taking the present value of future payments in a lump sum -Encumbering the proceeds - borrowing money on the strength of the proceeds in the policy.

A trust as beneficiary

The policy proceeds provide funds for the trust. Upon death, the trustee administers the funds in accordance with the instructions set forth in the trust provisions. Used to provide management of insurance proceeds on behalf of the beneficiary.

Misstatement of Age or Sex Provision

The policy provides for an adjustment of benefits payable if it is discovered that, after an insured's death or at the time of claim, the insured's age was misstated on an insurance policy application. Adjusted to the amount that the premium would have purchased at the correct age.

The insured's estate as beneficiary

Insured may direct that the policy proceeds be payable to his executors, administrators, or assignees to pay estate taxes, expenses of past illness, funeral expenses, and any other outstanding debts before settlement of the estate. Generally not desirable to name estate as beneficiary because when money enters an estate and there is no will, the court handling the dispassion of that estate is required to distribute the assets according to state law, which may or may not be the way the deceased would have wished. Adding life insurance policy proceeds to the probate estate increases the cost of settling the estate. Also, when proceeds go into the estate, the heirs receive proceeds in chase which is more vulnerable to creditors.

Prohibited Provisions

Life insurance policies are not permitted to contain: 1. Limits the time for bringing lawsuit against the insurance company to less than one year after reason for lawsuit 2. Allows a settlement at maturity less than the face amount plus any dividend additions, less indebtedness to company and premium deductible 3. Allows forfeiture of the policy because the failure to repay any policy loan or interest on the loan if the total owed is less than the loan value of the policy 4. Agent must only be agent of the company, not the insured 5. Backdating: insurer may not backdate a policy for more than six month before original application was made to preserve age and reduce premium. Premium must be collected for each month the policy is backdated

Free Look

Permits the policy owner to take a specified number of days to examine the life insurance contract. Policy can be cancelled with entire premium refunded by insurer.

Policy Loan Provisions

Policy-owner has the right to borrower from the cash value, and there is no legal obligation to repay the loan. Interest is asses by the insurer for these borrowed funds, and the interest rates are determined by each state. Currently, most life insurance contracts charge approx 8% on some contracts and a variable rate on others.

How much cash value can a policy owner usually borrow up to?

Policyowner can usually borrow: Whole Life: up to 90% Variable Policy: 75%-90%

Collateral, Partial, Conditional Assignment Example?

Some but not all policy rights to an assignee. Transfers a portion of the ownership right temporarily. Rights are returned to the policy owner when the debt is repaid. The amount of the assignment cannot exceed the amount of debt. Example: A lender may wish that a life contract be collaterally assigned so that it may draw upon the cash savings value if loan payments are not paid promptly

Incontestable Clause (of a life insurance policy)

States that after a specified period of time (two years), the insurer may not dispute or contest the valid it of the contract or the statements. After the contract has been in effect for a specific length of time, the insurance company agrees not to challenge any statements made by the applicant on the application. It indicates that an insurer, following the contestable period, may not claim that any misstatements in the application were made with the intent of the policy owner/insured to defraud.

Common Disaster Provision

States that in the case of death in a common accident, the insured will be resumed to have survived the beneficiary. This prevents the payment of the insurance proceeds to the estate of the beneficiary and thus permits the proceeds to be distributed to any contingent beneficiaries or wherever else provided by the policy. Primary beneficiary death must occur within 30 to 90 days of the accident. If primary beneficiary lives past the minimum time period than the death benefit will be paid to the estate of the primary beneficiary.

Insuring Clause

States that the insurer agrees to provide life insurance protection for the named insured which will be paid to a designated beneficiary when proof of death is received by the insurer. Lists the name of the company, insured, amount of insurance carried, the mode and amount of premium, and when coverage is effective.

Entire Contract Clause

States that the policy and a copy of the application constitutes the entire contract between the insurer and the insured. Provides that all statements made by the insured in the application will be considered as representations and not warranted.

Irrevocable Beneficiary Example of when used

The beneficiary designation cannot be changed without the convent and signature of that named beneficiary. Need consent and signature from irrevocable beneficiary in order to exercise ownership rights such as borrowing from cash value, assigning, or canceling the policy. Ex: When a court orders a husband in a divorce settlement to continue payment on insurance policy on is own life, with an irrevocable beneficiary designation on behalf of his wife (primary) and his children (contingent beneficiaries)

Applicant Control or Ownership Clause

When proposed insured is a minor, the applicant can be the minor's parent or other relative or legal guardian. Parent will probably want to maintain control of the policy until the insured is of age, which is accomplished by including a clause the designates the parent (applicant) as the controller (owner) of the policy.