Unit 5: Life Insurance Riders

Long-term care rider

-Advance of death benefits while insured is living -Percentage of face amount each month -May pay for home care, assisted living, and nursing home care -reduces death benefit payable upon death

Insured term rider

-added to a permanent policy -premium lower than a separate policy -limited time for rider -expires at a certain age or number of years

Other (additional) insured riders

-convertible term insurance for a spouse or immediate family member of primary insured -called spouse rider or children's rider

Family rider

-covers both insured's spouse and children

Waiting period

-the insured must be unable to work for a certain period before the waiver takes effect -waiting period is usually 90-180 days -if insured is still disabled at the end of the waiting period, the company retroactively refunds any premiums paid during the period

Exchange privilege (substitute insured) riders

-used to change the insured to a different person -typically used when a business owns the policy and is also the beneficiary and the insured is a key employee

The insured in a $25,000 life insurance policy died of a heart attack. Since the policy had a "double indemnity" provision, the policy beneficiary received A) $12,500 B) $25,000 C) nothing D) $50,000

B) $25,000 *Under a double indemnity provision, the policy beneficiary would receive double the face amount in the event of a fatal accidental injury. Since the insured's death was not due to an accident, the policy paid its $25,000 face amount.

For a waiver of premium rider to become operative, the insured must be A) chronically ill B) terminally ill C) partially disabled D) totally disabled

D) totally disabled *An insured must be totally disabled for a waiver of premium rider to become operative. The policyowner does not have to pay premiums as long as the disability continues. Instead, the insurer continues to pay all premiums that become due with the insured is disabled to the age listed in the policy.

Which of the following types of life insurance riders is NOT based on term life insurance? A) cost-of-living B) spousal C) return-of-premium D) waiver of premium

D) waiver of premium *The waiver of premium rider is based more on the actuarial principles of disability insurance than life insurance. All the other riders listed are based on some form of term life insurance.

Accelerated death benefit rider

-advances part of the death benefit while insured is still alive -insured must have a limited life expectancy or meet certain medical circumstances in order to be eligible for an advanced payment -reduces death benefit payable to beneficiary upon death of insured -disclosure by company of effect on death benefits and other benefits (Medicaid, etc.)

Independent Approach (long-term care rider)

benefit is independent from the life policy because the benefits paid to the insured will not affect the life policy's face amount or cash value

Accidental death benefit (ADB) rider

-This life policy rider provides additional death benefit coverage if the insured dies as a result of an accident. -also known as double or triple indemnity (death benefit is 2x or 3x face amount of the policy) -for extra benefit to be payable, insured must die within 90 days of accident -extra benefit only payable if insured's death was result of accident -does not cover illness, disability, self-inflicted injury, war, commission of crimes, aviation activities other than a commercial flight -usually expires when insured reaches age 60 or 65

Life insurance riders

-benefit options to tailor a policy to the owner's needs -customize coverage to fit the insured's needs -policyowners are charged an additional premium for certain types of riders

Which of the following statements about accelerated death benefit provisions is NOT correct? A) the insured must be expected within 6 months B) the death benefit, less than the accelerated payment, is still payable C) they are standard in life insurance policies D) they provide for the early payment of part of a policy's face amount if the insured suffers from a terminal illness or injury

A) the insured must be expected within 6 months *An accelerated benefit rider provides for the early payment of a portion of a policy's face amount if the insured is expected to die within 24 months.

For a beneficiary to receive accidental death benefits, the death of the insured generally must occur within how many days following the accident? A) 60 days B) 90 days C) 30 days D) 45 days

B) 90 days *For a beneficiary to receive accidental death benefits, the death of the insured generally must occur within 90 days following an accident.

3 Term Insurance Riders

-level -decreasing -increasing *term rider expires at a specified age or after a certain number of years

Josie has been totally disabled for 2 years. During that time, the insurance company has paid all premiums (a total of $1,200) on her $25,000 life policy, which has a waiver of premium clause. If Josie dies now, the insurance company will pay a death benefit of A) $25,000 B) $12,500 C) $23,300 D) $23,800

A) $25,000 *The waiver of premium rider only waives the policyowner's responsibility of paying the life policy premiums if she suffers a disability and is unable to work after 90 days. The waiver of premium only waives the policyowner's responsibility to pay; it does not accelerate any portion of the death benefit to the insured. Therefore, Josie's life policy pays its death benefit of $25,000.

What can an insured add to a permanent insurance policy which will provide additional coverage, yet cost less than purchasing a separate policy? A) other insured rider B) term insurance rider C) double indemnity rider D) return of premium rider

B) term insurance rider *A term insurance rider may be added to a permanent policy. If the insured dies while the term rider is in force, the beneficiary will receive the death benefit from the permanent policy and the term policy. Adding a rider to an existing policy has a lower premium than writing it as a stand-alone policy.

Jay has a $50,000 life insurance policy with an accidental death benefit that pays triple the face amount. If Jay commits suicide three years after purchasing the policy, how much will his beneficiary receive? A) $150,000 B) $100,000 C) $50,000 D) $0

C) $50,000 *An accident is defined as an event that is unknown and unforeseen by nature. Therefore, suicide does not qualify as an accident because it is done willfully, and there is no coverage under the accidental death rider. Moreover, the base policy includes a 2-year suicide clause that excludes coverage if the insured commits suicide during that period following the effective date. Because the suicide occurred more than 2 years after the policy effective date, the face amount will be paid from the base policy only.

Principal sum

amount of the rider and 100% of death benefit paid upon accidental death of the insured

Integrated Approach (long-term care rider)

links the LTC benefits paid to the life policy's face amount and/or cash value

Disabled

often changes after a period of time to the inability to work at any job that fits with the insured's education, training or experience

Cost of living rider

-based on the Consumer Price Index (CPI) -extra coverage to keep up with inflation -as inflation increases, so does the death benefit of the policy -if CPI decreases, insured's coverage is NOT reduced -premium based on attained age -without proof of insurability

A rider on a whole life policy that adds temporary coverage for a spouse and children is A) a family term rider B) a family maintenance rider C) a multiple protection policy D) a family income rider

A) a family term rider *The family term rider is attached to the base policy covering the insured and insures family members other than the insured.

Because increasing term insurance can be added to permanent policies and, when added, is less expensive than a stand-alone policy, it is almost sold as A) a rider B) an option C) an endorsement D) a whole life policy

A) a rider *Increasing term insurance is used primarily to provide a benefit that increases over time. As such, it is usually sold as a rider.

Sarah owns a life insurance policy with a $50,000 face amount and a 10-year return-of-premium rider. She pays an annual premium of $700. If she were to die six years after purchasing the policy, what would be the total amount payable to the beneficiary? A) $50,700 B) $54,200 C) $50,000 D) $57,000

B) $54,200 *The return-of-premium rider increases the death benefit by the sum or premiums paid to date.

If an insured does not exercise the option to increase coverage under a guaranteed insurability rider, what is the result? A) the premiums on the underlying policy are lowered proportionately because no increase in insurance coverage was purchased B) the policy is cancelled C) the coverage will not change and the option automatically expires D) the insurer automatically increases the coverage, per the amount stated in the option

C) the coverage will not change and the option automatically expires *When no purchase is made under a guaranteed insurability option, the option for that particular age expires automatically. There is no change in the underlying policy. Normally, the insured will have 90 days to exercise an optional purchase.

Capital sum

dismemberment benefit and is 50% or 1/2 of the principal sum

How can an insured access all or a portion of a life insurance benefit to pay for a long-term illness or a life-threatening disease? A) use the nonforfeiture option B) use the accelerated death benefit rider C) purchase an inflation protection rider D) use the grace period provision

B) use the accelerated death benefit rider *An accelerated benefit option allows for the early payment of a portion (or all, in some cases) of a policy's face amount. To qualify for early payment, the insured either must suffer from a terminal medical condition or have a qualified covered condition that requires skilled nursing care.

Which of the following statements regarding accelerated death benefits is NOT correct? A) the inability to perform activities of daily living (i.e., eating, dressing, bathing, etc.) is considered a qualifying event B) an insured may request an accelerated death benefit payment if death is expected within 24 months due to terminal illness C) accelerated death benefit payments are always 100% of the death benefit D) a written disclosure must be given to the applicant explaining the effect on various aspects of the policy

C) accelerated death benefit payments are always 100% of the death benefit *Because accelerated death benefit payments reduce the actual death benefit, payments range anywhere from 25-100% of the death benefit.

Return of premium rider

-death benefit always equals the total of premiums paid for the rider and the underlying permanent policy -increasing term insurance rider -the rider does not return the actual premiums but pays for an additional term of insurance death benefit that equals the amount of premiums paid -death must occur while rider is in force

Which of the following statements regarding a disability income rider is NOT correct? A) a disability income rider is a form of health insurance B) a disability income rider does not provide benefits for partial or temporary disability C) the only way to provide disability benefits in a life insurance policy is through a disability income rider D) most disability income riders do not cover disabilities that develop after age 60 or 65

C) the only way to provide disability benefits in a life insurance policy is through a disability income rider *A waiver of premium rider (a type of disability coverage) is generally included with guaranteed renewable and noncancelable individual disability income policies. It is a valuable provision because it exempts the policyowner from paying premiums during periods of total disability.

6 Riders affecting amount of death benefit

-insured term rider -return of premium rider -accidental death rider -accidental death or dismemberment rider -guaranteed insurability rider -cost of living rider

Accidental death and dismemberment (AD&D)

-principal sum 100% of death benefit; paid if death due to accident; within 90 days of accident date -pays benefit if dismemberment occurs: severance of feet, arms, legs or hands; loss of sight or hearing; paralysis -dismemberment is capital sum-50% of principal sum -for multiple dismemberment claims, maximum paid is principal sum -if policy is $100,000 and insured dies, benefit is $100,000 -if policy is $100,000 and insured does not die but loses a limb, 50% benefit received (losing 2 or more limbs would compound for a full benefit payment)

An accidental death and dismemberment (AD&D) policy rider's principal sum is equal to A) the death benefit on the base life insurance policy B) principal twice C) double consideration D) a reimbursement policy

A) the death benefit on the base life insurance policy *An AD&D principal sum is paid out if the insured dies within 90 days of an accident. The principal sum paid from the rider is equal to the death benefit on the base life insurance policy. Essentially, this could be considered a double death benefit, or double indemnity.

Waiver of premium

-one of the most common types of life insurance riders -insured and owner are the same person -waives premiums as long as the insured is disabled -insured pays premiums during the waiting period -company pays premiums after the waiting period -premiums paid during the waiting period are reimbursed -insured pays premiums when disability ends

Disability income rider

-pays monthly income while disabled -benefit amount 1% of face amount/value (original amount that the policy owner agreed to pay premiums for at the time of application) -length of time that income payments will continue depends on the definition of disability in the policy -during the time that premiums are waived, the life insurance policy stays in force, so that if the insured dies, the beneficiary receives the face value of the policy -cash values continue to build and if the policy is participating, dividends continue to be paid

Qualifying events for accelerated death benefits

-terminal illness, death expected within 24 months -serious illness (i.e., cancer), resulting in reduced life expectancy -long-term care due to inability to perform daily activities -hospice or permanent confinement in a nursing home -catastrophic illness requiring extraordinary treatment (i.e., organ transplant)

Payor benefit rider

-usually found with juvenile policies -if the person responsible for premiums (i.e., parents) becomes disabled or dies before the child legally becomes an adult, the rest of the premiums are waived until the child reaches a state age, usually 18 or 21 -this rider requires evidence of insurability (medical underwriting may be required) as an adult

A life insurance policy may pay death benefits before the insured dies for all of the following reasons EXCEPT A) catastrophic illness B) financial difficulties C) eligibility for long-term care D) terminal illness

B) financial difficulties *Life insurance policies may pay death benefits before the insured dies if the insured has a catastrophic or terminal illness, or becomes eligible for long-term care. This is called an accelerated benefit provision. Proceeds do NOT have to spent on medical expenses.

Steve is diagnosed with inoperable cancer and learns that he has only a few months to live. He wants to take an extended vacation with his wife and needs some immediate funds. He has held a whole life insurance policy for many years. Which of the following options would be the BEST source of funds, if Steve wants a lump sum payment? A) policy loan B) Steve cannot withdraw any cash value C) policy surrender D) accelerated benefit rider

D) accelerated benefit rider *The accelerated benefit rider allows the insured to access a portion of the death benefit if he has been diagnosed as terminally ill and is expected to die within 24 months. The portion of the death benefit given to the insured is not taxable. The death benefit is reduced by the amount accelerated to the insured, and the remaining amount of death benefit is paid to the beneficiary upon the insured's death.

Which of the following life insurance policy riders will allow insureds to purchase additional insurance at future dates, regardless of their health? A) guaranteed insurability option B) conversion option C) double indemnity option D) waiver of premium option

A) guaranteed insurability option *The guaranteed insurability option (or rider) permits the insured, at stated intervals, to buy specified amounts of additional insurance without evidence of insurability. The option requires an additional premium and is usually attached to a permanent life policy at the time of the purchase.

Waiver of cost of insurance (universal life)

-cash account deductions waived -waiting period (3-6 months) & standard expiration (age 60-65) -only applicable to flexible premium policies (i.e., universal life)

Term rider on the insured

-term insurance can be added to permanent insurance policy -premiums lower than purchasing a separate policy -in event of insured's death, both term insurance rider and underlying permanent insurance policy's death benefit would be paid to the named beneficiary

4 Disability Riders

-waiver of premium -waiver of cost of insurance (universal life) -disability income rider -payor rider (juvenile)

Guaranteed insurability rider (GIR)

-also called a guaranteed-insurability option (GIO) or guaranteed-insurability benefit (GIB) -attached to a permanent life insurance policy -add life insurance up to a specified amount: certain ages - between 25-40 at 3-year intervals; life events - marriage, birth or adoption of a child; no medical questions asked; cost based on insured's attained age

Upon the insured's death, which of the following policies will pay the face amount of the policy plus a sum equal to all or a portion of the premiums paid? A) cost-of-living policy B) adjusting benefit policy C) guaranteed dividend policy D) return-of-premium policy

D) return-of-premium policy *Return-of-premium policies promise to pay the policy face amount plus a sum equal to all or a portion of the premiums paid.

At the age of 34, Ben purchased a whole life policy with a guaranteed insurability option. How many opportunities will he have to purchase additional life insurance in the future? A) 2 B) 5 C) 3 D) 4

A) 2 *Typically, the guaranteed insurability option allows the insured to purchase additional insurance at 3-year intervals between ages 25 and 40. In this case, Ben would be able to exercise this option at age 37 and at age 40.

Which of the following riders provides for changes in the benefit payable based on changes in the Consumer Price Index (CPI)? A) cost-of-living adjustment rider B) Social Security rider C) guaranteed insurability rider D) payables rider

A) cost-of-living adjustment rider *The cost-of-living adjustment (COLA) rider allows for indexing the monthly or weekly benefit payable under a disability policy to changes in the Consumer Price Index.

An option whereby additional insurance may be purchased at various times without evidence of insurability is known as A) guaranteed insurability B) waiver of premium C) payor benefit D) constructive delivery

A) guaranteed insurability *Many insurance companies now offer a guaranteed insurability option (GIO), also known as guaranteed insurability benefit (GIB), which allows a policyholder to purchase specified amounts of additional insurance without evidence of insurability.

The payor benefit option or rider is typically used with A) juvenile policies B) adjustable life policies C) family life policies D) joint life policies

A) juvenile policies *The juvenile policy's payor benefit rider provides that policy premiums will be waived if the policyowner dies or becomes totally disabled. (until a certain age)

Which of the following statements regarding a cost-of-living rider on a life insurance policy is NOT correct? A) the cost-of-living adjustment is tied to the gross domestic product (GDP) B) a cost-of-living rider seeks to protect against inflation's erosion of life insurance policies C) the cost-of-living rider provides increases in insurance without requiring the insured to provide evidence of insurability D)

A) the cost-of-living adjustment is tied to the gross domestic product (GDP) *A cost-of-living (COL) or cost-of-living adjustment (COLA) rider is tied to an increase in an inflation index, most commonly the Consumer Price Index (CPI). The COL rider provides for automatic increases in the policy death benefit in proportion to increases in the CPI.

They payor benefit typically waives premiums on a juvenile policy if A) the person who pays the premium dies or becomes disabled before the insured child reaches a certain age B) the policy is converted before the insured reaches a specified age C) the insured child becomes disabled D) the insured child dies before reaching a specified age, usually 21 or 25

A) the person who pays the premium dies or becomes disabled before the insured child reaches a certain age *The payor benefit rider provides that in the event of the premium payor's death or disability, premiums on the policy will be waived until the insured child attains a specified age or until the maturity date of the contract, whichever occurs first.

Which of the following statements regarding a spousal rider to a life insurance policy is NOT correct? A) this rider usually provides coverage that lasts as long as the coverage that is provided through the base policy B) there is a premium for this coverage in addition to the base policy premium C) this is a form of other insureds rider D) this rider usually consists of level term life insurance

A) this rider usually provides coverage that lasts as long as the coverage that is provided through the base policy *Like any additional insured rider, the spousal rider usually consists of level term life insurance coverage that terminates at a specified date (i.e., 10 years after policy issue) or age (i.e., the spouse's 65th birthday).

Which of the following statements regarding the cost-of-living rider is NOT correct? A) if the face amount is increased through the cost-of-living adjustment, there is typically an increase in the premium B) a drawback of the rider is that a drop in the Consumer Price Index (CPI) can result in a decrease in the coverage previously added C) the typical cost-of-living rider is provided through a form of term insurance coverage D) it is not necessary for the insured to demonstrate evidence of insurability to receive the increased coverage provided through a cost-of-living adjustment

B) a drawback of the rider is that a drop in the Consumer Price Index (CPI) can result in a decrease in the coverage previously added *Declines in the CPI are not matched by a decline in the amount of coverage; instead, future increases are held off until the CPI exceeds its prior high point.

Which of the following statements about accelerated living benefits is NOT correct? A) they are provided at no additional cost to the policyowner B) they allow access to the policy's face value C) the proceeds must be spent on the insured's medical expenses D) they are standard in life insurance policies

C) the proceeds must be spent on the insured's medical expenses *Accelerated benefit provisions are standard in life insurance policies and are included at no additional cost to the policyowner. They allow access to the policy's face value if the insured suffers from a terminal illness or injury. (The death benefit, less any accelerated payment, is still payable..?) The insured can spend the proceeds in any manner.

What are accelerated benefits? A) health insurance benefits paid in advance to providers of health care services B) health benefits paid before the expenses are incurred C) life insurance cash values paid in a lump sum to the beneficiary D) life insurance death benefits paid before the death of an insured with a terminal illness

D) life insurance death benefits paid before the death of an insured with a terminal illness *Accelerated benefits are life insurance death benefits that are paid before the death of an insured if he is suffering from a terminal illness.

Which of the following statements regarding the standard cost-of-living rider used with life insurance policies is NOT correct? A) there is typically a percentage cap on the amount of yearly increase that is available to the policyowner with this rider B) this rider provides the policyowner with the option to increase the death benefit of her life policy to match an increase in the cost-of-living index C) a cost-of-living rider can involve attaching an increasing term insurance rider to the base policy D) there is no additional premium required to pay for increases in the death benefit resulting from the cost-of-living rider

D) there is no additional premium required to pay for increases in the death benefit resulting from the cost-of-living rider *With the cost-of-living rider, any increase in the death benefit as a result of this rider will also result in an increase in premium.