Life policy Provision , Riders and Options

Misstatement of Age and Gender

Because the age and gender of an insured are important to the premium that will be charged for a life insurance policy, a provision which allows the insurer to adjust the policy at any time due to a misstatement of age or gender is included in the policy.

Consideration

Both parties to a contract must provide some value, or consideration, in order for the contract to be valid. (offered by the insured is the premium and statements made in the application.) (given by the insurer is the promise to pay in accordance with the terms of the contract)

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Children's term rider: one premium for ALL children.

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Dividends are a return of excess premiums; therefore, not taxable when paid to the policyowner.

Dividends and Dividend Options

Dividends are paid only on participating policies.

Dividends and Dividend Options

Dividends are paid only on participating policies. ( are taxable)

Exclusions

Exclusions are the types of risks the policy will not cover. Certain exclusions are standard for all policies, while others are attached to the policy as an exclusion rider.( The most common exclusions found in life insurance policies are aviation, hazardous occupation, and war and military service.)

Effect of Death Benefit

If an insured withdraws a portion of the face amount by the use of the accelerated benefits rider, the benefit payable at death will be reduced by that amount, plus the amount of earnings lost by the insurance company in interest income. ( Payable Death Benefit = Face Amount - Amount withdrawn - Earnings lost by insurer in interest)

Hazardous Occupations or Hobbies

If the insured is engaged in a hazardous occupation or participates in hazardous hobbies (such as skydiving or auto racing), death that results from the hazardous occupation or hobby may be excluded from coverage. The underwriter also has the option of charging a higher premium for insuring these risks.

spouse term

If the rider covers just the spouse of the insured, it can be specified as a spouse term rider, and allows the spouse to be added to coverage for a limited period of time and for a specified amount (it usually expires when the spouse reaches age 65

Long-Term Care

Long-term care policies, which can be marketed in the form of individual policies, group policies, or as riders to life insurance policies, provide coverage for individuals who are no longer able to live an independent lifestyle and require living assistance at home or in a nursing home facility. ( usually include an elimination (waiting) period similar to those found in disability income policies. ( LTC policies must be guaranteed renewable.)

War or Military Service

Most life insurance policies issued today do not exclude military service. However, there are actually two different types of exclusions that may be used to limit the death benefit if the insured dies as a result of war, or while serving in the military. The status clause excludes all causes of death while the insured is on active duty in the military. The results clause only excludes the death benefit if the insured is killed as a result of an act of war (declared or undeclared).( status clause, results clause)

Aviation

Most life insurance will cover an insured as a fare-paying passenger or a pilot on a regularly scheduled airline, but will exclude coverage for noncommercial pilots, or require an additional premium for the coverage.

NAIC -

National Association of Insurance Commissioners, an organization composed of insurance Commissioners from all states and jurisdictions formed to resolve insurance regulatory issues

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Nonforfeiture options are triggered by policy surrender or lapse.

Minor

- a person under legal age

Activities of daily living (ADLs)

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

Indemnity

- a principle of reimbursement on which insurance is based; in the event of loss, an insurer reimburses the insureds or beneficiaries for the loss

Accelerated (Living) Benefits and and Long-Term Care Riders

A terminal illness; A medical condition that requires an extraordinary medical intervention (such as an organ transplant) for the insured to survive; A medical condition that without extensive treatment drastically limits the insured's lifetime; Inability to perform activities of daily living (ADLs); Permanent institutionalization or confinement to a long-term care facility; or Any other conditions approved by the Department of Insurance.

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Accelerated benefit = early payment of part of death benefit to the insured from the insurer for qualifying medical expenses.

irrevocable

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

Nonforfeiture Options

Because permanent life insurance policies have cash values, certain guarantees are built into the policy that cannot be forfeited by the policyowner. (The policyowner chooses one of the following nonforfeiture options: cash surrender value, reduced paid-up insurance, or extended term.)

Policy Options

Policyowners have decisions to make about how the cash value in the policy should be protected, how the return of excess premium (dividends) should be invested, and how benefit payments will be made. ( different choices available to them are categorized as Nonforfeiture Options, Dividend Options, and Settlement Options.)

Owner's Rights

Regardless, only the policyowner has the ownership rights under the policy, and not the insured or the beneficiary. ( The policyowner has the responsibility of paying the policy premiums, and is also the person who must have an insurable interest in the insured at the time of application for the insurance)

Policy Riders

Riders are written modifications attached to a policy that provide benefits not found in the original policy ( Riders sometimes require an additional premium, but they also help tailor a policy to the specific needs of the insured, and can be classified according to their primary purpose)

Settlement Options

Settlement options are 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.

Settlement Options

Settlement options are 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. ( Once selected by the policyowner, the settlement option cannot be changed by the beneficiary.)

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Settlement options are triggered by the insured's death or age 100.

Riders Affecting the Death Benefit Amount

Some riders affect the amount of the death benefit paid out to the beneficiary, and either increase it through multiple indemnity or refunds of premiums, or decrease it if a portion of the death benefit was paid out to the insured while still living.

Disability Riders

Some riders provide benefits in the event of the insured's disability, while other riders provide for partial payment of the death benefit prior to the insured's death, called accelerated or living benefits riders.

Term Riders

Term riders allow for an additional amount of temporary insurance to be provided on the insured, without the need to issue another policy. They are usually attached to a whole life policy to provide greater protection at a reduced cost.

Common Disaster

The Uniform Simultaneous Death Law has been adopted by most states to address this problem, and to protect the policyowner's original intent, as well as to protect the contingent beneficiary. This law stipulates that if the insured and the primary beneficiary died in the same accident and there is no sufficient evidence to show who died first, the policy proceeds are to be distributed as if the primary beneficiary died first

Accidental Death and Accidental Death and Dismemberment

The accidental death rider pays some multiple of the face amount if death is the result of an accident as defined in the policy. ( The benefit is normally two times (double indemnity) the face amount. Some policies pay triple the face amount (triple indemnity) for accidental death). ( In addition, deaths that result from self-inflicted injuries, war, or hazardous hobbies or avocations are usually not covered.)

Automatic Premium Loans

The automatic premium loan provision is not required, but is commonly added to contracts with a cash value at no additional charge. This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium.( If the loan and interest are not repaid and the insured dies, then it will be subtracted from the death benefit. While the insurer may defer requests for other loans for a period of up to 6 months, loan requests for payment of due premiums must be honored immediately.)

Succession - Primary and Contingent

The beneficiary designation can provide for three levels of priority or choice. In the event that the first beneficiary predeceases the insured, the second (or sometimes third) level in the succession of beneficiaries will be entitled to the death proceeds

Beneficiary Designations

The beneficiary is the person or interest to which the policy proceeds will be paid upon the death of the insured. (beneficiary does not have to have an insurable interest in the insured.)

Paid-up Additions

The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. ( each of these small single premium payments will increase the death benefit of the original policy by whatever amount the dividend will buy.) (will accumulate cash value & dividend). If the policyowner did not chose the dividend option, the insurer will automatically use paid-up additions to increase the death benefit of the original policy by the amount the dividend will buy.

Paid-up Additions

The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. (No new separate policies are issued; however, each of these small single premium payments will increase the death benefit of the original policy by whatever amount the dividend will buy). (using the paid-up option the policyowner is able to pay up the policy early.)

Entire Contract

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

Grace Period

The grace period is 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, or one month). ( The purpose of the grace period is to protect the policyholder against an unintentional lapse of the policy. If the insured dies during this period, the death benefit is payable; however, any unpaid premium will be deducted from the death benefit.)

Guaranteed Insurability

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

Incontestability

The incontestability clause 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 incontestability period does not apply in the event of nonpayment of premiums; it also does not usually apply to statements relating to age, sex or identity.)

Accumulation at Interest

The insurance company keeps the dividend in an account where it accumulates interest. (the interest on the dividends is taxable to the policyowner when credited to the policy, whether or not the policyowner receives the interest.)

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. If the insured dies during the one-year term, the beneficiary receives both the death benefit of the original policy and the death benefit of the one-year term insurance.

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.

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. ( If the insured dies during the one-year term, the beneficiary receives both the death benefit of the original policy and the death benefit of the one-year term insurance.)

Reduction of Premium

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

Insuring Clause

The insuring clause (or insuring agreement) sets forth the basic agreement between the insurer and the insured. ( The insuring clause usually is located on the policy face page, and also defines who the parties to the contract are, the premium to be paid, how long coverage is in force, and the amount of the death benefit.)

Life Income

The life-income option, also known as straight life, provides the recipient with an income that he or she cannot outlive. Can not outlive

Payor Benefit

The payor benefit rider is primarily used with juvenile policies (any life insurance written on the life of a minor); otherwise, it functions like the waiver of premium rider.

Provisions

define the characteristics of an insurance contract and are fairly universal from one policy to the next.

Policy Loan and Withdrawal Options

The policy loan option is found only in policies that contain cash value. The policyowner is entitled to borrow an amount equal to the available cash value. (However, the insurer must provide 30 days' written notice to the policyowner that the policy is going to lapse. Insurance companies may defer a policy loan request for up to 6 months, unless the reason for the loan is to pay the policy premium. Policy loans are not subject to income taxation.)

Premium Payment

The policy stipulates when the premiums are due, how often they are to be paid (monthly, quarterly, semiannually, or annually) and to whom.

Cash

The policyowner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable. ( A policy that has been surrendered for its cash value cannot be reinstated. A surrender charge is a fee charged to the insured when a life policy or annuity is surrendered for its cash value.)

Reinstatement

The reinstatement provision allows a lapsed policy to be put back in force. The maximum time limit for reinstatement is usually 3 years after the policy has lapsed. ( Note that a policy that has been surrendered cannot be reinstated.)

Return of Premium

The return of premium rider is implemented by using increasing term insurance. ( The return of premium rider usually expires at a specified age such as age 60.)

Suicide

The suicide provision in life insurance policies protects the insurers from individuals who purchase life insurance with the intention of committing suicide(. If the insured commits suicide within 2 years following the policy effective date (issue date), the insurer's liability is limited to a refund of premium) . (If the insured commits suicide after the 2-year period, the policy will pay the death proceeds to the designated beneficiary the same as if the insured had died of natural causes.)

Waiver of Monthly Deduction

The waiver of monthly deductions rider pays all monthly deductions while the insured is disabled, after a 6-month waiting period. (This rider only pays the monthly deductions, and not the full premium necessary to accumulate cash values. This rider is usually found in Universal Life and Variable Universal Life policies.)

Waiver of Premium

The waiver of premium rider waives the premium for the policy if the insured becomes totally disabled. ( Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived. If the insured is still disabled after this waiting period, the insurer will refund the premium paid by the insured from the start of the disability. This rider usually expires when the insured reaches age 65.

Other Insureds

There are riders that allow the policyowner to add additional insureds under the original policy, such as children's term or family term. ( There is also a no n family term rider)

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. ( The free-look period starts when the policyowner receives the policy (policy delivery),

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Under life-income (straight life) settlement option, the recipient cannot outlive the benefit payments.

Extended Term

Under the 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. ( Extended term is the automatic nonforfeiture option: same face amount, shorter term of coverage.)

Fixed Period

Under the fixed-period installments option (also called period certain), a specified period of years is selected, and equal installments are paid to the recipient.

Reduced Paid-up Insurance

Under this option, the policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a reduced face amount from that of the former policy.The new reduced policy builds its own cash value and will remain in force until death or maturity.

Cash (Lump-Sum Payment)

Upon the death of the insured, or at the point of endowment, the contract is designed to pay the proceeds in cash, called a lump sum, unless the recipient chooses a different mode of settlement. If the selections is made the processed are automatically paid to the beneficiary in a single cash payment ( not taxable income)

Interest Only

With the interest-only option, the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals (monthly, quarterly, semiannually, or annually). The interest option is considered to be a temporary option

children's term rider

allows children of the insured (natural, adopted or stepchildren) to be added to coverage for a limited period of time for a specified amount. ( This coverage is also term insurance and usually expires when the minor reaches a certain age (18 or 21).

contingent beneficiary

also referred to as secondary or tertiary beneficiary) has second claim in the event that the primary beneficiary dies before the insured. Contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time of the insured's death.

Riders

are added to a policy to modify provisions that already exist.

life income joint and survivor option

guarantees an income for two or more recipients for as long as they live. Most contracts provide that the surviving recipient will receive a reduced payment after the first recipient dies. Most commonly, the reduced option is written as "joint and ½ survivor" or "joint and 2/3 survivor," in which the surviving beneficiary receives ½ or 2/3 of what was received when both beneficiaries were alive. This option is commonly selected by the policyowner who wants to protect two beneficiaries, such as elderly parents.

primary beneficiary

has first claim to the policy proceeds following the death of the insured. The policyowner may name more than one primary beneficiary, as well as how the proceeds are to be divided.

family term rider

incorporates the spouse term rider along with the children's term rider in a single rider. ( When added to a whole life policy, the family term rider provides level term life insurance benefits covering the spouse and all of the children in the family.). Family Term = Spouse Term + Children's Term

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.

premium mode

is the manner or frequency that the policyowner pays the policy premium. ( If the insured dies during a period of time for which the premium has been paid, the insurer must refund any unearned premium along with the policy proceeds.)

revocable

may change a revocable designation at any time

Waiver

of premium rider waives the premium for a total disability after a waiting period.

Options

offer insurers and insureds ways to invest or distribute a sum of money available in a life policy.

Lump sum

payment of the entire benefit in one sum

accidental death and dismemberment rider (AD&D)

pays the principal (face amount) for accidental death, and pays a percentage of that amount, or a capital sum, for accidental dismemberment. ( A capital amount is usually limited to half the face value and is payable in the event of the loss of one hand, arm, leg, or eye)

Flexible premium

policies allow the policyowner to increase or decrease the premium during the policy period.

Assignments

policyowner of a life insurance policy has the right to transfer partial or complete ownership of the policy to another person without the consent of the insurer. (Transfer of the life insurance policy does not change the insured or amount of coverage; it only changes who has the policy ownership rights)

other insured rider

provides coverage for one or more family members other than the insured. ( The rider is usually level term insurance, attached to the base policy covering the insured.)

Living Needs Rider

provides for the payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years.

Consideration

something of value that each party gives to the other (binding force in any contract)

Principal

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

Assignment

transfer of rights of policy ownership

Common Disaster Clause

when added to a policy, provides that if the insured and the primary beneficiary died in a common disaster (even if the beneficiary outlived the insured by a specified number of days), it is presumed that the primary beneficiary died first, so the proceeds will be paid to either the contingent beneficiary or to the insured's estate, if no contingent beneficiary is designated. ( common disaster clause protects the contingent beneficiary)

level premium

which means that the premium remains the same throughout the duration of the contract.