Policy Provisions

Policy Loans and Withdrawals Provision

-*policy loan* option is found only in policies that contain cash value -owner is entitled to borrow an amount equal to the available cash value -any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured's death -policy will not lapse with an outstanding policy loan unless the amount of the loan and accrued interest exceeds its available cash value -in that situation insurer must provide *30 days written notice* to the owner 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 premium. -policy loans are not subject to income tax -there can also be an automatic premium loans provision

Insuring Clause

-sets for the basic agreement between insurer and insured -states insurer's promise to pay the DB upon insured's death -usually located on the face page -defines parties of the contract, coverage length, and amount of DB

Entire Contract Provision

-stipulates that the policy and a copy of the application, along with any riders or amendments, constitute the entire contract -no statement made before the contract was written can be used to alter the contract -neither the insurer nor the insured may change policy provisions once the policy is in effect without both parties agreeing to it and the change being affixed in the contract

Exclusions Provision

Most Common Exclusions Include: 1. Aviation 2. Hazardous Occupations or Hobbies 3. War or Military Service

(PP) Premium Payment Modes

-*premium mode* is the manner or frequency that the policyowner pays the premium (e.g. annual, semi-annual, quarterly, or monthly) - if the insured selects a premium mode other than annual, there will be an additional charge to offset the loss of earnings since the company does not have the entire premium at once and there are additional administrative costs associated w/ more frequent billing -if the insured dies during a time for which the premium has been paid, the insurer must *refund any unearned premium* along w/ policy proceeds

Reinstatement Provision

-allows a lapsed policy to be put back in force -max time limit is usually 3 years after lapse -if the policy is reinstated, the policyowner must provide proof of insurability -also must pay all back premiums plus interest (usually does not exceed 6%), and may be required to repay any outstanding loans and interest -advantage to reinstating rather than getting a new policy is that the policy will be restored to its original status, retain all the values that were established at the insured's issue age

Misstatement of Age or Gender Provision

-allows the insurer to adjust the policy at any time due to a misstatement of age or gender on the app, in the event of a claim, the insurer is allowed to adjust the benefits to an amount that the premiums at the correct age or gender would have purchased -proceeds calculation should be based on the insurer's rate at the date of the policy issue

Free Look Provision

-allows the policyowner *10 days* from receipt to look over the policy, and if dissatisfied return it for a full refund of premium -starts when the policyowner receives the policy, *not when the insurer issues the policy* -some policies may require a longer free look period

Beneficiary Designations

-beneficiary does not have to have insurable interest in the insured -policyowner doesn't necessarily have to have a beneficiary -benefits designated to a *minor* will either be paid to the minor's guardian, or paid to the trustee of the minor if the trust is named the beneficiary, or paid as directed by court -guardian and trustee can be the same person -generally not good practice to have LI benefits payable to a minor

Consideration

-both parties must provide some value, or *consideration* in order for the contract to be valid -states that the consideration (value) offered by the insured is the premium and statements made in the app -consideration given by the insurer is the promise to pay according to the terms of the contract -not always a separate provision, but is often included in the entire contract provision -a separate provision concerning the payment of policy premiums is usually also found in the policy

Hazardous Occupations or Hobbies Exlusion

-examples are skydiving or car racing -death from these activities may be excluded from coverage -underwriter can also charge a higher premium

(BD) Succession- Primary and Contingent

-if the first beneficiary predeceases the insured, then the 2nd or 3rd level of beneficiaries will be entitled to the DB -*primary beneficiary* has first claim (there can be more than 1 primary beneficiary) -*contingent beneficiary* has second claim on the benefits -*tertiary beneficiary* is 3rd in line -if none of the beneficiaries are alive at the time of the insured's death, or if no beneficiary has been named, the insured's *estate* automatically receives the proceeds

(BD) Common Disaster

-if the insured and primary beneficiary die at approx. the same time from a common accident w/ no clear evidence as to who died first, a problem may arise -if it's ruled that the insured died first, the policy proceeds are paid to the estate of the primary beneficiary (if no contingent beneficiary) -vice versa if the beneficiary died first -The Common Disaster Clause, provided under the Uniform Simultaneous Death Law addresses the issue

Uniform Simultaneous Death Law

-law will assume the primary beneficiary died first in a common disaster -intent is to fulfill the wishes of the policyowner -most insurer's specify a period of time, such as 30, 60, or 90 days, in which death must occur in order to follow this provision -as long as the beneficiary dies w/i this specified timeframe following the death of the insured, it will still be interpreted that the beneficiary died first

(PP) Level or Flexible

-most LI policies have a *level premium* (the premium remains the same throughout the duration of contract -policies such as UL policies allow the owner to pay more or less than the planned premium, aka *flexible premium*

War or Military Service Exclusion

-most LI policies today do not have this exclusion -2 types of exclusions used to limit the DB if insured dies as a result of war, or while 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 DB if the insured is killed as a result of an act of war (declared or undeclared)

Automatic Premium Loans Provision

-not a required, but commonly added to contracts with cash value -it's a special type of *loan that prevents the unintentional lapse of a policy* due to nonpayment of premium -although insurer may defer requests for other loans for up to 6 months, loan requests for for payment of due premiums must be honored immediately

Owner's Rights

-only the policyowner has ownership rights *not the insured or beneficiary* -rights include: 1.naming and changing the beneficiary 2. receiving the policy's living benefits 3. selecting a benefit payment option 4. assigning the policy -responsible for paying the premiums -must have insurable interest in the insured at the time of application -when the owner and insured are not the same person, the insurance arrangement is referred to as the *third-party ownership*

(BD) Changes

-policyowner can typically change beneficiaries at will; however, if a policyowner names an irrevocable beneficiary, the consent of the beneficiary is required to change beneficiaries

Assignments

-policyowner of a LI policy can transfer partial or complete ownership of the policy to another person without consent from the insurer -transfer of the LI policy *does not change the insured or amount of coverage* -2 types of Policy Assignment: 1. *Absolute Assignment*-involves transferring *all rights* of ownership to another person or entity. This is a permanent and total transfer of all rights. The new policy owner doesn't have to have insurable interest in the insured

Incontestability Clause

-prevents an insurer from denying a claim due to statements in the app after te polic has been in force for *2 years* even if there has been a material misstatement of facts or concealment of a material fact -does not apply in the event of a nonpayment of premiums -also does not usually apply to statements regarding age, sex, or identity

Suicide Provision

-protects insurers against individuals using suicide as a defense to payment of life insurance benefits -policies usually stipulate a period of time during which the DB will not be paid if the insured commits suicide -if the insured commits suicide w/i *2 years* following the policy effective date, the insurer's liability is limited to a refund of premium -if insured commits suicide after the 2 year period, the policy will pay the death proceeds to the designated beneficiary as they normally would

(PP) Grace Period

-the period of time after the premium is due that the owner has to pay the premium before the policy lapses (usually 30 or 31 days) -purpose of the grace period is to protect the policyholder against unintentional lapses -if the insured dies during the grace period, the DB is payable; however any unpaid premium will be deducted from the DB

(BD) Revocable and Irrevocable

-the policyowner w/o the consent or knowledge of the beneficiary may change a *revocable* designation at any time -an *irrevocable* designation may not be changed without the *written consent of the beneficiary* -irrevocable beneficiaries have vested interest in the policy; therefore the policyowner may not exercise certain rights *w/o consent of the beneficiary* -if irrevocable, the policyowner cannot borrow agains the policy's cash value (since it would decrease the policy face value until repaid) or assign the policy to another person *w/o the beneficiary's agreement*

Aviation Exclusion

-will cover 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

Provisions

1. Entire Contract Provision 2. Insuring Clause 3. Free Look Provision 4. Consideration provision 5. Owner's Rights 6. Assignments 7. Beneficiary Designations 8. Premium Payment 9. Reinstatement 10. Incontestability 11. Misstatement of Age and Gender 12. Policy Loans and Withdrawals 13. Exclusions 14. Suicide