Policy Provisions, Options, and Other Features (Chapter 3)
An insured purchased a 15-year level term insurance policy with a face amount of $100,000. The policy contained an accidental death rider, offering a double indemnity benefit. The insured was a severely injured in an auto accident, and after 10 weeks of hospitalization, died from the injuries. What amount would his beneficiary receive as a settlement?
$200,000.
An insured had a $10,000 term life policy. The annual premium of $200 was due on February 1; however, the insured failed to pay the premium. He died on February 28. How much would the beneficiary receive from the policy?
$9,800.
What is the waiting period on a Waiver of Premium rider in life insurance policies?
6 months.
Which of the following protects the insured from an unintentional policy lapse due to nonpayment of premium?
Automatic premium loan.
What are the three nonforfeiture options in life insurance policies?
Cash surrender, reduced paid-up, and extended term.
What required provision protects unintentional policy lapse?
Grace period.
At the time the insured purchased her life insurance policy, she added a rider that will allow her to purchase additional insurance in the future without having to prove insurability. This rider is called
Guaranteed insurability.
Which of the following is used to determine interest rates on variable products?
Interest rate index.
When a reduced paid-up nonforfeiture option is chosen, what happens to the face amount of the policy?
It is reduced to the amount of what the cash value would buy as a single premium.
A nonpayment of premiums may result in a what?
Lapsed policy.
Which life insurance settlement option guarantees payments for the lifetime of the recipient, but also specifies a guaranteed period, during which, if the original recipient dies, the payment will continue to a designated beneficiary?
Life income with period certain.
If a settlement option is not chosen by the policyowner of the beneficiary, which option will be used?
Lump sum.
What is the other term for the cash payment settlement option?
Lump sum.
If a settlement option is not chosen by the policyowner or the beneficiary, what option will be used by the insurer?
Lump-sum payment.
A rider attached to a life insurance policy that provides coverage on the insured's family members is called the
Other-insured rider.
An insured has a continuous premium whole life policy. She would like to use the policy dividends to pay off her policy sooner than would have been possible otherwise. What dividend option could she use?
Paid-up option.
An insured has had a life insurance policy that he purchased 3 years ago when he was 40 years old. He is killed in an automobile accident, and it is discovered that he is actually 45 years old, and not 43, as stated on the application. What will the company do?
Pay a reduced death benefit.
Which is true about a spouse term rider?
The rider is usually level term insurance.
When is Partial Surrender or Withdrawal used?
a. Only on Universal Life policies b. May be a charge c. Limits on withdrawal amount d. Interest may be taxable
What do you find in the Insuring Clause?
a. Parties to the contract b. Premium to be paid c. Length of coverage d. Amount of death benefit
Contingent beneficiary
A beneficiary who has second claims to the policy proceeds after the death of the insured (usually after the death of the primary beneficiary).
Primary beneficiary
A beneficiary who has the first claim to the policy proceeds after the death of the insured.
To meet the requirement of the entire contract policy provision, an insurance policy must contain what?
A copy of the original insurance application.
Activities of daily living (ADLs)
A person's essential activities that include bathing, dressing, eating, transferring, toileting, continence.
What are the 3 nonforfeiture values a policyowner has to choose from?
Cash surrender value, reduced paid-up insurance or extended term option.
Under what nonforfeiture option does the company pay the policy's surrender value and have no further obligations to the policyowner?
Cash surrender.
What are the dividend options in life insurance policies?
Cash, reduced premium, accumulation at interest, paid-up additions, paid-up option, one-year term, and acceleration of endowment.
Know This!
Children's term rider: one premium for ALL children.
What type of assignment is used to secure the payment of a debt with an existing life insurance policy?
Collateral assignment.
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Common disaster clause protects the contingent beneficiary.
What type of beneficiary is next in line after the primary beneficiary?
Contingent beneficiary.
What are policy dividends?
Dividends are a return of excess (unused) premiums, and for that reason they are not taxable to the policyowner.
Know This!
Dividends are a return of excess premiums; therefore, not taxable when paid to the policyowner.
What does the term "double indemnity" mean and what rider is it used with?
Double indemnity means the insurer will pay the benefit twice the face amount. It is used with the Accidental Death rider.
Know This!
Entire contract = policy + copy of application + any riders or amendments.
What life insurance policy provision states that both the policy and a copy of the application form the contract between the policyowner and the insurer?
Entire contract.
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Extended term is the automatic nonforfeiture option: same face amount, shorter term of coverage.
Assuming a similar initial premium, which settlement option pays more, a life and 20-year certain or life only?
The installments for the life income with period certain option will be smaller than the life income only option.
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Type of Rider (Disability Riders) Available Riders: 1. Waiver of Premium 2. Waiver of Monthly Deduction 3. Payor Benefit 4. Disability Income 5. Accelerated (Living) Benefit Type of Rider (Riders Covering Spouse Additional Insured) Available Riders: 1. Children 2. Family 3. Nonfamily Type of Rider (Riders Affecting Death Benefit) Available Riders: 1. Accelerated Death Benefit 2. Accidental Death or AD&D 3. Guaranteed Insurability 4. Return of Premium 5. Term Riders
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Under life-income (straight life) settlement option, the recipient cannot outlive the benefit payments.
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Waiver of premium rider waives the premium for a total disability after a waiting period.
What life policy rider allows the company to forgo collecting the premium if the insured becomes disabled?
Waiver of premium.
What are the most common exclusions in life insurance policies?
War and military service, hazardous occupation, and aviation.
When can an insurance company use suicide as a defense against paying a death claim?
When a suicide is committed within a specified period of time after the policy is purchased (usually 2 years).
When will a contingent beneficiary receive death benefits from a life insurance policy?
When the primary beneficiary dies before the insured.
If the Guaranteed Insurability rider is used to increase the death benefit (face amount) of a policy, will the premium increase and when?
Yes, at the time the increase is made.
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Absolute assignment is the complete and permanent transfer of ownership rights; collateral assignment is the partial and temporary transfer of rights.
Which of the two types of policy assignments requires transfer of all ownership rights in the policy to a third party?
Absolute assignment.
What does an absolute assignment do to a life insurance policy?
An absolute assignment permanently transfers all rights of ownership to another person or entity.
Trust
An arrangement in which funds or property are held by a person or corporation for the benefits of another person (trust beneficiary).
What nonforfeiture option gives an insured the highest death benefit?
Extended term because the insure matches the death benefit from the original contract.
What nonforfeiture option is automatically selected by the company if not chosen by the policyowner?
Extended term.
What provision in a life insurance policy extends coverage beyond the premium due date?
Grace period.
Know This!
Grace periods protect policyholders from losing insurance coverage if they are late on a premium payment.
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If NO beneficiary is named, policy proceeds go to the insured's estate.
If a claim is made, what happens if the insured has misstated his or her age?
If the applicant has misstated his or her age on the application, the insurer, in the event of a claim, is allowed under the Misstatement of Age provision to adjust the benefits to an amount that the premium at the correct age would have otherwise purchased.
Which nonforfeiture option is automatically selected if the policyowner does not choose one?
If the policyowner has neglected to select one of these nonforfeiture options, the insurer will automatically implement the extended term option in the event of termination of the original policy.
Know This!
Incontestability does NOT apply to nonpayment of premiums or misstatements of age, gender, or identity. Incontestability = first 2 years from the policy issue date; insurer can deny a claim due to material misrepresentations on the application. Anytime after 2 years, claim CANNOT be denied even due to misstatement of facts or concealment.
What life insurance policy provision prevents an insurer from disputing or denying a claim due to misstatements on the application after a certain period of time?
Incontestability.
Who does the common disaster clause protect?
The contingent beneficiary.
In the fixed-period settlement option, how will the number of installments for the death benefit proceeds determine the amount of the installments?
The longer the period selected, the smaller each installment will be.
What constitutes the entire contract?
The policy and a copy of the application, along with any riders or amendments, constitutes the entire contract.
Assignment
Transfer of rights of policy ownership.
What does the insurance company (insurer) do when they discover a misstatement of age on a death claim?
a. Provision that adjusts the amount of insurance to match the amount that the premium would have been at the time of purchase had the insured's actual age been known. b. The amount of the death benefit will be adjusted once the correct age is discovered, so the beneficiary will receive a lower amount than what they would have.
With the reduction of premium dividend option, how is the dividend used?
The dividend is applied to the next year's premium (it reduces the next year's premium).
An applicant for life insurance misstated her age on the policy application. How will this affect the death benefit?
The death benefit will be adjusted to the amount that the insured could obtain for her correct age.
With the reduction of premium option, how must a policyowner use the dividend?
The dividend is applied to next year's premium.
Principal amount
The face value of the policy; the original amount invested before the earnings.
How does the guaranteed insurability rider work?
The guaranteed insurability rider allows the insured to purchase additional coverage at specified future dates or events, such as marriage, or birth of a newborn child, without evidence of insurability.
What happens if a policyowner takes the reduced paid-up option?
The policy's cash value is used as a single premium to secure a completely paid-up policy for a reduced amount.
What does the insurance company (insurer) do is a misstatement of age is discovered while the policy is still in force?
a. If the age has been "understated", the policyowner is given the option of paying the difference in premiums with interest or having the policy reissued for the reduced amount. b. If the age has been "overstated", a refund is usually made by paying the difference in reserves.
What is the purpose of the Automatic Premium Loan provision?
It prevents the unintentional lapse of a policy due to nonpayment of the premium.
The sole beneficiary of a life insurance policy dies before the insured. If the policyowner does not amend the beneficiary designation, what will happen to the policy's death benefit?
It will be paid to the insured's estate.
How long will a life income with 10-year certain settlement option pay?
It would provide the recipient with an income for as long as he or she lives. If the recipient dies shortly after starting to receive the payments, the payments will be continued to a beneficiary for the remainder of the 10-year period.
Know This!
Life Policy Standard Provisions / Characteristics Ownership - Policyowner has ownership rights Assignment - Absolute or collateral Entire Contract - Policy (with riders and amendments) + copy of the application Right to Examine/Free Look - 10 days to return the policy for a full refund of premium Payment of Premium - Paid in advance Policy Modifications - Must be in writing and signed by the insurer's executive officer Grace Period - 30/31 days after premium is due to prevent policy lapsing Reinstatement - Specified number of years to reinstate a lapsed policy with proof of insurability Incontestability - 2 years for the company to contest misstatements of the application Misstatement of Age or Gender - Death benefit is adjusted to the amount according to the right age or gender at policy issue Exclusions - Aviation, hazardous occupation/hobbies, and war or military service. Suicide is excluded within a specified period of time
What settlement options are available in life insurance policies?
Lump-sum/cash, fixed period, fixed amount, life income, interest only.
Know This!
Misstatement of age on the application will result in adjustment of premiums or benefits.
What are the 3 factors that determine the premium for a particular policy?
Mortality, interest, and expense determine a policy's premium.
NAIC
National Association of Insurance Commissioners, an organization composed of insurance commissioners from all 50 states, the District of Columbia and the 5 U.S. territories, formed to resolve insurance regulatory issues.
Know This!
Net premium plus expenses (loading) equals the gross premium: · Mortality - Interest = Net Premium // Net Premium + Expense (loading) = Gross Premium · Mortality - Interest + Expense (loading) = Gross Premium
Is the beneficiary required to have insurable interest in the insured?
No. Beneficiaries do not have insurable interest in the insured.
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Nonforfeiture options are triggered by policy surrender or lapse.
What dividend option can increase the death benefit of the existing life policy?
Paid-up additions.
What is the advantage of reinstating a life insurance policy as opposed to applying for a new one?
Policy premium in the reinstated policy will be set according to the insured's original age.
With the interest only settlement option, what happens to the policy's death benefit?
Policy proceeds are retained by the insurance company; only the interest is paid to the beneficiary.
What term is used to describe methods of payment of the death benefit to the beneficiary upon the insured's death?
Settlement options.
What happens to a policy's cash value under an extended term nonforfeiture option?
The cash value is converted to the same face amount as in the whole life policy.
Explain how the number of installments might determine the amount of the installments in settlement options with fixed period installments.
The size of each installment is determined by the amount of principal, guaranteed interest, and the length of period selected. The longer the period selected, the smaller each installment will be.
What is the purpose of a free-look period?
To allow the insured to return the policy with a full refund.
Can a policy be reinstated after the grace period expires? If so, why?
The reinstatement provision allows the policyowner an opportunity to put a lapsed policy back in force, subject to the policyowner proving continued insurability.
Under what circumstances does the contingent beneficiary receive the death benefit?
The secondary beneficiary (who is also referred to as contingent beneficiary) has second claim to the death benefit in the event that the primary beneficiary dies before the insured.
What is the purpose of settlement options in life insurance policies?
To determine how the death benefit will be paid to the beneficiary.
Know This!
Option Type (Nonforfeiture Options) Available Options: 1. Reduced Paid-up 2. Extended Term (automatic) 3. Cash Option Type (Dividend Options) Available Options: 1. Cash 2. Reduction of Premium 3. Accumulation at Interest 4. Paid-up Additions (automatic) 5. Paid-up Insurance 6. One-year Term Option Type (Settlement Options - CLIFF) Available Options: 1. Cash (automatic - lump sum) 2. Life Income 3. Interest Only (temporary) 4. Fixed Period (ex. 10 years) 5. Fixed Amount (ex. $10,000)
What is the name for a life insurance policy rider that provides coverage on the insured's family members?
Other-insured rider.
Which dividend option increases the death benefit?
Paid-up additions increase the death benefit of the original policy by whatever amount the dividend will buy.
What dividend option is automatically selected by the company if not chosen by the policyowner?
Paid-up additions.
An insurer has discovered a representation on a life insurance policy application regarding the insured's age. The insured is 10 years older than he stated on the application. What will the insurer do regarding the death benefit?
Pay a reduced death benefit.
Know This!
Policy loans are ONLY available in policies that have cash value (whole life).
Who controls changes in premium payments, face values, and loans in a life insurance policy?
Policyowner.
Who has the right to the cash value of a life insurance policy?
Policyowner.
What beneficiary designation has first claim to the death proceeds of a life insurance policy?
Primary beneficiary.
What nonforfeiture option gives an insured the longest coverage?
Reduced paid-up because it goes all the way to age 100.
What nonforfeiture option provides coverage for the longest period of time?
Reduced paid-up.
What provision allows the policyowner to reactivate a lapsed life insurance policy within a specified period of time with proof of insurability?
Reinstatement.
What type of beneficiary can be changed at any point by the policyowner?
Revocable.
Know This!
Settlement options are triggered by the insured's death or age 100.
What is the common disaster clause? Who does it protect?
The Common Disaster Clause protects the rights of the contingent beneficiary in cases when the insured and the primary beneficiary die at approximately the same time from a common accident with no clear evidence as to who died first.
When do benefit payments stop under a Joint and Survivor settlement option?
The Life Income Joint and Survivor option guarantees an income for two or more recipients for as long as they live.
A policyowner borrowed a portion of cash value from his whole life policy. If the loan is not repaid, how will that affect the death benefit to the beneficiary?
The amount of the loan will be subtracted from the death benefit.
What could potentially be a downfall of selecting the life income option?
The beneficiary could die shorty after receiving payments. If this happens, the balance of the principal is forfeited.
With regards to the Interest Only Option, what are the roles of the beneficiary and the insurance company?
The beneficiary receives payments of the interest on the policy proceeds. The insurance company retains control of the policy proceeds until the proceeds are paid
With the accumulation at interest option, what happens to the dividend?
The insurance company keeps the dividend, and it accumulates interest.
Under the cash option, how does a policyowner receive the dividend?
The insurer sends the policyowner a check (usually annually).
What does the term double indemnity mean?
The insurer will pay a benefit of twice the face amount.
Under what circumstances can a revocable beneficiary be changed?
The policyowner, without the consent or knowledge of the beneficiary, may change a revocable designation at any time.
What happens to the proceeds of a life insurance policy if there is no named beneficiary?
The proceeds are paid to the insured's estate.