Policy Provisions

Credit

(Designation Option) Designated by assignment or named at application to cover indebtedness. 1) The named beneficiary is normally the creditor. 2) The debtor makes a collateral assignment (partial) to the lender covering the amount of loan. If the loan remains outstanding until insured's death, the death benefit (consideration) received by the name beneficiary will be reduced.

Per stirpes

(Designation Option) Means "per beneficiary." The heirs of those beneficiaries who predecease the insured will receive their portion of the claim proceeds and not have it split between living beneficiaries.

Per capita

(Designation Option) Means "per person." The surviving beneficiaries share equally in death benefits.

Estate

(Designation Option) Normally the unnamed tertiary beneficiary resulting in an estate tax liability. 1) If the only named beneficiary predeceases the insured or if a beneficiary isn't named, benefits are paid to the insured's estate, increasing the estate value. 2) Commonly utilized by an administrator or executor.

Individual/Named

(Designation Option) The designation is very specific, such as Mary Doe - wife; John Doe - husband. This prevents probate proceedings.

Class

(Designation Option) Used in instances where each beneficiary is not directly identified by name. Normally minor children are designated by class.

Trust

(Designation Options) 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.

Primary Beneficiary

(Succession) Has first claim to policy proceeds following death of insured.

Tertiary Beneficiary

(Succession) Receives policy proceeds if both primary and contingent beneficiaries predecease the insured. At this time the benefits are typically paid to the estate of the insured.

Contingent Beneficiary

(Succession) Receives policy proceeds if primary beneficiary dies before insured.

Revocable

A beneficiary provision that states that the policyowner may change the beneficiary at any time. This beneficiary does not have a vested interest in the policy.

Irrevocable

A beneficiary provision that states that the policyowner may not change the beneficiary, assign the policy, transfer or surrender the policy without written consent of this beneficiary. Unlike the revocable, this beneficiary has a vested interest in the policy benefits. A minor would not likely be designated as an irrevocable beneficiary due to legal capacity.

Premiums

A payment or periodic payments made by the insured/owner to the insurer to keep an insurance policy in effect.

Grace Period

A time after the premium due date and before a policy lapses (may be 30 or 31 days). If the insured dies during this period, the death benefit is payable minus any premiums or loans due. The cash value remains unchanged and the policy may be surrendered, or loans may be taken against the policy during the grace period.

Conversion Option

Allows the insured to convert to some other type of policy, such as a term policy to a cash value policy.

Rider

An endorsement to an insurance policy that modifies the contract provisions of that policy. Life insurance riders normally increase the benefits, but may also be written to reduce benefits.

Aviation

An exclusion; Does not apply to fare-paying passengers on regularly scheduled commercial flights.

Status Clause

An exclusion; No coverage for individuals with military status (seldom used).

War Clause (Results Clause)

An exclusion; 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

An exclusion; stunt people, auto racing, etc.

Exclusions

Conditions stipulated in the contract for which the insurer will not provide coverage. The insurer cannot add or alter any of the exclusions. Such exclusions are normally limited to the following: aviation, status clause, war clause, and hazardous occupation.

Entire Contract

Consists of the policy, plus any riders, and a copy of the application. All statements made by the insured in the application are, in the absence of fraud, deemed representations and not warranties.

Insuring Clause

Defines who is insured by whom and the amount of benefit/coverage provided by the policy. It states the obligation of the insurer and the risk that is considered: premature death.

Suicide

If ____ is committed within a specified period of time (usually 2 years), the insurer's liability is limited to a refund of premium(s), not the death benefit or face amount.

Annulment and Divorce

Insurance is considered a form of property in a divorce. The owner of the insurance policy controls the policy and has the right to name the beneficiaries. Although some laws prohibit the changing of insurance policies while this provision is pending, once it is final, insurance can become an important issue. Some decrees include a provision for life insurance on the provider, to protect the support order.

Changes (Modifications)

Must be in writing, signed by an executive officer of the insurer, approved by the policyowner and made part of the entire contract. An agent cannot alter or waive provisions.

Misstatement of Age or Gender

On the application allows the insurer, at time of claim, to adjust benefits according to the amount the premiums would have purchased at the correct age or gender. Adjustments required due to misstatement of age are normally computed as a fraction with what was being paid, divided by what should have been paid. This provision never cancels or voids a policy. The incontestability clause does not apply to this provision.

Consideration

Policyowner must pay something of value (premium) in exchange for the insurer's promise to pay benefits.

Owner's Rights (Ownership)

Policyowners have the right to all cash values, loans, dividends, and any other benefits. He/she may change the beneficiary, assign the policy and exercise all privileges and options of ownership. The insured and owner need not be the same person.

Incontestability

States that the insurer cannot contest statements contained in the application after the policy has been in force (usually 2 years) including errors, misstatements, and even fraud.

Mode of Premium

Stipulates when the premiums are due, frequency of payment (monthly, quarterly, semiannually or annually), and to whom. The more frequent the payment the greater the cost.

Beneficiary

The designated recipient of the life insurance benefits or proceeds upon the death of the insured. The designated recipient is the right and responsibility of the policywoner.

Assignment

The transfer of ownership rights to another party. The two types are Collateral (partial) and Absolute (the entire face amount). This provision can reduce a beneficiary's claim settlement at the time of death because an assignment must be paid first. An insurer is not responsible for the validity or effect of this provision but will recognize the notice upon receipt.

Spendthrift Clause

This provision denies the beneficiary the right to commute, alienate, or assign his/her interest in the policy proceeds. The purpose is to prevent creditors of a beneficiary from claiming any benefits payable to him/her before he/she actually receives the benefits.

Automatic Premium Loans (APL)

This provision enables the insurer to automatically borrow from the cash value to cover a premium payment to prevent the contract from lapsing. 1) This provision becomes effective at the end of the grace period. 2) This provision is treated as all other loans. 3) This provision is available on cash value policies only and no additional premium.

Changes of Insured

This provision is found in corporate owned life insurance when an executive moves to another company or retires, etc. This provision authorizes: a. Changing the insured. b. Removes new policy loading at the time of change. c. Proof of insurability is always required.

Common Disaster Clause (Uniform Simultaneous Death Law)

This provision provides that if it cannot be determined whether the insured or primary beneficiary died first, the insured will be presumed to have survived the beneficiary and proceeds will be paid to the estate of the insured (beneficiary sequence).

Free Look (Right to Examine Period)

allows the insured/policyowner a specified number of days following receipt of the policy to look it over and if dissatisfied for any reason to return it for a full refund of premium (usually 10 days).