Chapter 4 - Life Policy Provisions and Options

Beneficiary provisions

- Primary - first in line to receive benefits - contingent - receives proceeds if primary beneficiary dies before insured - tertiary - third in line to receive benefits if primary and contingent predecease insured

dividend options - declared under participating policies - return of excess premium - not guranteed - not taxable - interest is taxable

- cash - income tax free - premium reduction -leave dividend with company to accumulate interest - one year term additional term insurance for an year - paid up additions additional cash value insurance added to existing policy - paid up option provide future premium by dividend

Spendthrift Trust Clause

- denies the beneficiary the right to assign interest in the policy procees - protecs against claims of creditors Spendthrift laws and policy provisions protect the death benefit from the claims of creditors of the deceased insured, the policyowner, and those creditors of any named beneficiary to whom the death benefit becomes payable. When death benefit principal is left with the insurance company, spendthrift laws prevent creditors from attacking that money, too.

Policy Loans Provision

- loans with fixed rates cant exceed 8 % - loans with adjustable rates have maximum rate based upon moody's corporate bond yield average - loan amount cannot exceed cash value - interest not paid when due is added to total debt

Change of Insured

This is typically a rider found in corporate owned life insurance when an executive moves to another company or retires. A change of insured benefit allows the owner to exchange the insured covered by the policy for a new insured in which the owner has an insurable interest or to exchange the policy for a new policy covering a new insured in which the owner has an insurable interest. Change of insured benefits are most often used in the business insurance market to exchange insureds in the case of personnel departures, without having to purchase an entirely new policy and without upfront loads and surrender charges. The new insured must be insurable.

Facility of Payment Clause

This provision allows the insurer to pay a relative or anyone it deems entitled to the benefits in the absence of a properly designated beneficiary or in cases of no living beneficiaries. This can alleviate any lawsuits and can be used to reimburse someone who may have paid expenses on the insured's behalf, such as funeral costs.

designation options

beneficiary designation selected at time of application ;specific for individual named and ssn ; classification estate - increases estate value , commonly the unnamed tertiary beneficiary trust - when recipient is not to have direct access to the death benefits creditor - used to cover indebtedness

provision

benefits provided in the policy as part of the contract without an additional charge

misstatement of age or sex

benefits will be addressed to what premium paid would have purchased at correct age or sex

exclusions

conditions not covered - aviation - military - war clause - hazardous occupation/hobbies - suicides in 2 yrs

ownership

has all right to cash loan value and dividient and benefits dont need to be insured

Common disaster clause

if primary beneficiary and insured both got in accident , then primary has to live 90 days and receive the benefit , if not secondary gets it

payment of premium provisions

1. mode of premium addresses the frequency of premium payments (monthly, quarterly, semiannually or annually), and to whom the premiums are payable. The more frequent the payment, the greater the cost. The policyowner has the right to change the premium mode. 2. grace period the time period provided after the premium due date before a policy lapses. If the insured dies during this period, the death benefit is payable minus any premiums or loans due. The typical grace period is a month (30 or 31 days) unless state law specifies otherwise. Coverage continues during the grace period, but if the premium is not paid, the policy lapses at the end of the grace period. 3. Automatic Premium Loans (APL) This provision must be elected by the policyowner and can be cancelled at any time. It enables the insurer to automatically borrow against the cash value to cover a premium payment to prevent the contract from lapsing unintentionally. APL is available on cash value policies only and does not require an additional premium. It becomes effective at the end of a grace period. The APL loan is treated as all other loans. If the APL is used to pay premiums, interest on the loan accumulates on an annual basis. 4. Reinstatement If a policy has lapsed unintentionally due to nonpayment, it can be reinstated by the owner. The reinstatement time period is typically 3 years from lapse (but can be as long as 5 years). In order to reinstate, the insured must provide evidence of insurability and the owner must pay all back premiums from the date of lapse plus interest. Reinstatements are designed to put a policy back in force as if the lapse never occurred. Upon reinstatement, a new incontestability period takes effect.

Life Income Option - one of settlement option - This option allows the insurer to use the death benefit to purchase an annuity on behalf of the beneficiary. As with other settlement options, any interest paid is taxed as ordinary income.

3 additional options available: 1. Straight Life (Pure or Life Income Only) - Payments are guaranteed for the lifetime of the recipient. Upon death, payments will cease. The dollar amount of each payment will depend upon the age and gender of the recipient. This is an example of a single life option since payments will not be made to anyone other than the original recipient. 2. Life Income Period Certain - Payments are guaranteed for the lifetime of the recipient or a specified period of time, whichever is longer. If the recipient dies prior to the end of the period certain, the payments continue to another person until the end of the period certain. 3.Life Refund - Payments are made for the lifetime of the recipient. Upon death, if a recipient has not received an amount equal to the total death benefit, the balance is refunded to the beneficiary either in a lump sum called the Cash Refund Option, or in installments as in the Installment Refund Option.

policy settlements options

how do you want your money - direction on how to pay benefits to beneficiary upon insured's death - policy owner right to select while living - if none chosen prior to insured death beneficiary may choose - By default , paid in lump sum unless option chosen - death benefit is income tax free , but interest earned after insured's death is taxable

free look (right to examine)

insured may return policy for a full refund in 10 days

cash loans

outstanding loans will be deducted from the face amount plus interest if the insured deads interested added to the loan will not void the policy until it equals the cash value

Partial Withdrawals or Partial Surrenders

permitted in universal or variable universal life policies - surrender charge maybe applied - partial or full surrender

options

provisions that provide choice which must be specified by the policyowener

Nonforfeiture Options (Guaranteed Values) These options are found in policies that accumulate cash values and protect the policyowner against total loss of benefits if the policy should lapse due to nonpayment of premium or is intentionally cancelled.

reduced paid up extended term cash surrender

assignment

transfer ownership collateral - temporal (partial ) absolute - forever (all)

standard provisions

1. entire contract policy, riders, copy of application must be in writting and attached, statements in application, in absence of fraud are representations not warranties 2. incontestability - insurer cannot contest a claim based on material misstatement after 2 yrs 3. Insuring clause this provision identifies the parties and perils and promises of the contdract 4. consideration caluse payment mode, frequency mode of premium 5. changes or modifications apprive and sign and 6. suicide 2 years limit from suicide

settlement option modes interest is taxable but benefit is not

1. interest only paid interest(taxed as oridinary income), capital conservation, owner or beneficiary must direct the insurer as to when the principal will be paid as benefit 2. fixed amount - specified dollar amount until benefit and interest is done 3. fixed period payments are guarantee for a specified period of time and interest will increase the amount of each payment 4. life income only !allows the insurer to use the death benefit to purchase an annuity on behalf of the beneficiary! 5. life income period certain - Payments are guaranteed for the lifetime of the recipient or a specified period of time, whichever is longer. - If the recipient dies prior to the end of the period certain, the payments continue to another person until the end of the period certain 6. life income joint and survivor Payments Upon the death of the first recipient, payment continues to the survivor(s) until death of the survivor. The survivor's payment may be full (100%), 2/3, or 1/2 of the original payments. This payout option may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor, depending on which option is selected. 7.joint life Payments are guaranteed to 2 or more recipients until the first recipient dies, then all payments cease.