Unit 9- Policy Provisions (in life insurance)

Policy loan provisions

-Insured has the right to borrow from their own cash value w/ no obligation to repay it but the interest is assessed by the insurer for these borrowed funds. Most charge about 8% and some charge a variable interest rate. -Partial surrenders are allowed w/ universal life or variable life policies -Interest that is not paid when due will be added to the loan and bear interest at the same rate -If total debt equals or exceeds the cash value then the policy will terminate -In a whole life policy, insured can usually borrow up to 90% and in variable, they can borrow up from 75-95%

Absolute, voluntary, complete assignment

A VOLUNTARY assignment where the policy owner gives it as a gift or sells it to an assignee. It usually involves turning ALL rights over (even cash value) so that's why it's called an ABSOLUTE/COMPLETE assignment and the policy owner has NO means of recovering their surrendered rights (so it's permanent).

Spendthrift

A person who is known to spend money extravagantly.

Classes as beneficiaries

A policy owner can pick a class or group of beneficiaries (instead of one or more by name). It would say something like, "children of the insured"

Trust as a beneficiary

A trust is formed when the owner of property (the grantor) gives legal title of that property to another (the trustee) to be used for the benefit of a 3rd individual (the trust beneficiary). Life ins. trusts are often used as a ways to provide MANAGEMENT of insurance proceeds on behalf of the beneficiary.

Entire contract clause

Aka the entire contract provision-- states that the policy and a copy of the application constitutes the entire contract b/w the insurer and the insured. The basic purpose of the clause is to provide assurance to the policyowner that they have possession of all necessary docs w/ regard to their life ins. coverage and also prevents the policyowner and the producer from unilaterally amending the policy (only the exec. officer of the ins. company can do that). From test: "The clause that identifies the components of the contract."

Assignment of life insurance

An assignment involves the transfer of some or all of the policy owner's legal rights under the contract to another party. Insured doesn't actually have the rights to assign, but they must be notified if their policy is. The party receiving the rights is the ASSIGNEE and the person transferring them is the ASSIGNOR.

Minor as a beneficiary

Can present problems because most minors are not legally competent to receive payment and provide receipt of policy proceeds. An ins. company may hold on to the proceeds, paying interest on them until they reach legal age, or they might assign a trustee/guardian for them to manage the proceeds.

Suicide clause

Death by suicide isn't covered during the first 2 years of the policy and if it does, premiums are refunded but no face amount (death benefit) is paid.

Applicant control/Ownership clause

Designates someone else to be the controller/owner of a policy for a specified time-- common for parents who buy life on their kids until they reach a certain age.

Modifications

I.e. changes in the policy, or any agreement in connection w/ the policy, such as changes in the beneficiary, face amount, or additional coverage, must be endorsed on or attached to the policy in writing over the signature of a specified officer in the company. Only an exec. officer can change the contract, NOT the agent.

Beneficiaries assignment rights

In some cases the policy's beneficiary can assign a portion of the proceeds (but only if the beneficiary has been named IRREVOCABLY). A irrevocable beneficiary is more likely to receive the death benefit and more likely to find a lending institution willing to lend money. *A revocable benef. expects to receive the proceeds and a lending institution is unlikely to advance money on such an expectancy.

War or military service exclusion

Normally provides for the return of premium w/ interest in the event that death occurs under conditions excluded in the policy.

Testamentary trust

One that is created AFTER the grantor's death, according to the provisions of the grantor's will.

Revocable beneficiary

One that may be changed by the policy owner and this can be done w/out their knowledge or consent.

Policy change provision (conversion option)

Provision that permits the insured to exchange a policy for another type of policy form permitted by the company.

Intervivos trust

Takes effect during the lifetime of the grantor

Incontestability

The incontestable clause states that after a specified period of time (i.e. 2 years), the insurer may not dispute or contest the validity of the contract or the statements made on the application.

Policy provisions

The provisions on the insurance policy that identify the rights and obligations of both the policy owner and the insurer under the insurance contract.

Common disaster clause

This clause states that in case of death in a common accident/disaster, the insured will be presumed to have survived the beneficiary; this is when they are both in the same accident and makes it so that the proceeds go to the next beneficiary/contingent beneficiary and NOT the beneficiary who died's estate.

Hazardous occupation/hobby exclusion

Underwriters typically focus on the applicant hobbies (e.g. car racing) that could be risky and then use that in deciding the premium or give them a limited death benefit (the benefit could even be excluded if they died doing one of their hazardous activities)

Spendthrift clause

Way to protect the proceeds of a policy from the actions of a spendthrift beneficiary by putting rules on how they spend/allocate their benefit

Irrevocable beneficiary

When the beneficiary designation cannot be changed w/out the consent and signature of that named beneficiary and needs consent and signature from them in order to borrow from the cash value, assign the policy, or cancel it. Usually used for things like divorce settlements.

Who/what can be beneficiaries

individuals, businesses, trusts, estates, charities, and minors

Collateral, partial, or a conditional assignment

involves the assignment of some, but not all, policy rights to an assignee; collateral assignments transfer a PORTION of the ownership right TEMPORARILY and rights are returned to the owner when debts are repaid

Per capita/per stirpes

*Refers to how proceeds will be distributed to the descendants 1. Per stirpes- "by the root/branches"; means the proceeds go to the descendants of the beneficiary if the beneficiary dies before the insured does 2. Per capita- "per person or by the head"; means the proceeds are paid only to the named beneficiaries who are LIVING (aka only the named beneficiary)

3 types of assignments

1. Collateral, partial, conditional assignment 2. Absolute, voluntary, complete assignment 3. Beneficiaries assignment rights

2 methods for naming beneficiaries

1. Filing method/recording method- the request must be filed in writing to the insurer and is made effective by the insurance company recording the change in its records. 2. Endorsement method- requires that the beneficiary change be typed or affixed directly to the policy; the insured must make a written request and mail the request along w/ the policy to the ins. company

Succession of beneficiaries

1. Primary beneficiary- the person chosen to get the face amount upon the insured's death (like husband/wife) 2. Contingent beneficiary- the person who will be paid the proceeds if the primary beneficiary dies before the insured does. In other words, they are the SECONDARY BENEFICIARY and will receive the face amount if the primary dies. Can go on to be tertiary and so on. If no contingent benef. is present, proceeds go to the insured's estate.

Results-type clause

Much less restrictive than status-type; This clause would not provide coverage for a member of the military ONLY if they died while doing something for the military (if they were on home leave and got in an accident then that's fine)

Aviation exclusion

Restricts coverage in the event of death from aviation activities except if they are just an airline paying passenger. Generally found in double indemnity (accidental death) provisions as well.

Medical exams/autopsy

Some states require life ins. policies to include a provision that an insurer has the right (at their own expense) to exam an insured while their claim is pending and in the event of death, to perform an autopsy.

Misstatement of age or sex

This provision allows for an adjustment of benefits payable if it is found that after an insured's death or at the time of the claim, that they misstated their age or sex because it would affect how much their premiums would have been.

Free look

This provision allows the policy owner to take a specified number of days to examine the life insurance contract. If the new policy owner decides they don't want it, the contract can be cancelled and the entire premium refunded. These free look laws vary and can range from 10-20 days and begins when the policy owner receives the policy.

Withdrawals and partial surrenders

*Partial cash value distributions may be classified as loans or withdrawals -a LOAN is just that-- a loan against one's OWN money. It is withdrawn w/ the presumption that it will be repaid w/ an accrued interest or the understanding that if they don't repay then their benefit/death benefit amount will be reduced by the loaned amount plus accrued interest. -a WITHDRAWAL has basically the same impact on policy benefits, but there is no presumption that it will be repaid. Generally only universal and variable universal life policies permit withdrawals. Withdrawals are TAXABLE income to the extent they exceed the cost basis in the contract (withdrawn amounts above basis are regarded as "loans", which are NOT taxable).

Facility of payment provision

Allows the insurer to select a beneficiary if the named beneficiary is a minor, deceased, or cannot be found. Most common for group life ins. and industrial life policies. Insurer usually selects an immediate family member.

Backdating

An insurer may not backdate a policy for more than six months before the original application was made to preserve age and reduce premium. Premium MUST be collected for EACH MONTH the policy is backdated.

Grace period

Every life ins. contract has this and it's the period of time following the date that each premium is due during which the insurance policy remains in force and coverage is provided (even though the premium has NOT been paid yet). Grace periods protect the owner from an unintentional lapse of the policy. Usually is 31 days and allows the beneficiary to get their $$ if the insured dies during this time. The outstanding premium would just be subtracted from the death benefit amount.

Reinstatement

If a contract lapses and is not surrendered for the cash savings value, many contracts will allow reinstatement of the policy if it is effected w/ in 3 years of the lapse. Advantage is that proof of insurability may not be requested but they often will have to fill out a reinstatement application that shows all their statements in the lapsed years.

Uniform simultaneous death act

If the insured and beneficiary die at the same time (like in a car crash) then the policy is distributed as if the insured died LAST and allows the proceeds to be paid to the secondary beneficiary or to the estate, whichever they named.

Status-type clause

Says that the policy will not pay if the insured dies while they are in the military, regardless of the cause of death (even if they are home but still enlisted)

Insuring clause

The clause that contains the basic promise of the life insurance company to pay a specified sum of money to a beneficiary upon the death of the insured. States the party to be covered and the beneficiaries or the insured's estate if no beneficiary is stated.

Ownership rights

The owner of a life policy is usually the applicant, the insured, or the premium payer. Their rights include: changing the beneficiary, receiving dividends if any are paid, borrowing funds from the cash value, assigning some or all of the rights of the contract to another party.

Automatic premium loan (APL)

This provision may be added to a cash value life insurance contract and protects the policy owner against the inadvertent lapsing of the contract. If the cash value is SUFFICIENT, a loan in the amount equal to the premium due is subtracted from the cash value to pay the premium. However, if the cash value reaches 0 bc no premiums can be paid and are just being taken from the cash, then the contract will lapse.

payment of premium

This provision specifies how the premiums will be paid and how often, at the home, in advance, etc. The least expensive way to pay premium is ANNUALLY bc other ones like monthly add an extra service charge onto them.

Consideration clause

This provision/clause in a life insurance policy provides that the insurance coverage is granted in consideration of the application and the payment of the initial premium. The insured's "consideration" is the premium that needs to be paid and the representations made in the application. The insurer's "consideration" is the promise to pay the face amount of the contract to the named beneficiary upon the death of the insured. From test: "The clause that identifies the fact that the policy owner must pay something of value for the insurer's promise tp pay benefits."