Life Insurance Exam: Chapter 4 | Life Insurance Policy Provisions, Options, & Riders

Minor ( Individual Beneficiary Type and Notes)

Benefits to a minor will be paid to their guardian or trustee for the minor. Generally not advisable

Settlement

Decisions made at time of insured's death

Waiver of Cost of Insurance Rider

Found in Universal Life Insurance. If disability occurs, cost of insurance and expenses waived, but premiums necessary to accumulate cash value must still be paid.

Options

Offers insurers and insureds ways to invest or distribute money available in a life policy.

Policy Loan Option

Only found in policies with cash value. Policyowner entitled to borrow an amount equal to available cash value. Not subject to tax.

Living Needs Rider Effect on Death Benefit

Payable Death Benefit = Face Amount - Amount Withdrawn - Earnings Lost by Insurer in Interest

Spendthrift Clause

Protects beneficiaries from the claims of their creditors (of either the beneficiary of the policyowner)

Dividends

Returns of excess premiums, not taxable, and insurance companies can't guarantee dividends.

Life Insurance Policies can't be delivered in this state if they contain ANY of the following provisions

-Forfeiture of the policy for failure to pay any policy loan or interest while debt on policy is < Cash Value -Legal action may begin only less than 5 years after the cause of action occurs

What must occur for a policy to be reinstated in the instance that a policy has lapsed?

-Proof of insurability -Payment of all premiums plus interest -Outstanding loans and interest

Representation

A written response to questions or statements made on an application for insurance which the applicant indicates are correct to the best of his or her knowledge.

Cost of Living Rider

Addresses the inflation factor by automatically increasing amount of insurance without evidence of insurability.

Children's Term Rider

Allows children of the insured to be added to coverage for a limited period of time for a specified amount.

Guaranteed Insurability Rider

Allows insured to purchase additional coverage at specified future dates or events, without proof of insurability

Reinstatement Provision

Allows lapsed policy to be put back in force. Must be within 3 years after the policy initially lapsed.

Free Look Provision

From the time the receipt for the first premium is issued, to the time that the actual policy is received, the policyowner can look over the policy and if dissatisfied, return the policy for a full premium refund.

Primary Beneficiary

Has first claim to proceeds following the death of the insured.

Contingent Beneficiary

Has the second claim to proceeds in the event that the primary beneficiary dies before the insured

Misstatement of Age Provision

If an applicant misstates his/her age, in the event of a claim, the insurer can adjust the benefit based on his/her real age at the time of the policy's inception.

Common Disaster Clause

If both the policyowner and the beneficiary die at apprx. the same time in a common accident, the Uniform Simultaneous Death Law comes into play.

Estate

If no beneficiaries are alive at the time of the insured's death, the insured's estate will receive the proceeds of a life insurance policy.

Uniform Simultaneous Death Law

In a common accident involving the beneficiary and the policyowner, the primary beneficiary is assumed to have died first. Proceeds paid to contingent beneficiary or the insured's estate. 14 - 30 days the death of the beneficiary must occur in order for the provision to apply.

Disability Income Benefit Rider

In the event of a disability, insurer waives policy premium and pays a monthly income to the insured. Amount paid based on % of policy face value.

Loan Value

Loan Value = Cash Value - (Unpaid Loans + Interest)

Automatic Premium Loan

Loan that prevents unintentional lapse of a policy due to nonpayment of a premium.

Per Stirpes (Designation for Beneficiary)

Means "by the bloodline", distributes benefits of a beneficiary who died BEFORE the insured to that beneficiary's heirs.

Per Capita (Designation for Beneficiary)

Means "by the head", evenly distributes benefits among living beneficiaries

Accidental Death Rider

Pays some multiple of the face amount if death is result of accident defined in policy. Benefit normally 2 times face amount (DOUBLE INDEMNITY)

Grace Period Provision

Period of time after the premium due date that the policy owner must pay the premium before the policy lapses

Beneficiary

Person or interest to which the policy proceeds will be paid upon death of insured

Reduced Paid-Up Insurace

Policy cash value used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a REDUCED face amount.

Cash Surrender Value

Policyowner surrenders policy for current cash value at a time when coverage is no longer needed or affordable. Surrender charge must be paid.

Incontestability Clause

Prevents an insurer from denying a claim due to statements in the application has been in force for 2 years even if there has been misinformation on the application.

Suicide Provision

Protects insurers from individuals who purchase life insurance with the intention of committing suicide

Long Term Care Coverage

Provide for payment of part of death benefit to take care of the insured's health care expenses, which are incurred in a nursing or convalescent home.

Other Insured Rider

Provides coverage for one or more family members other than the insured. For a limited time.

Accelerated Benefit Rider / Living Needs Rider

Provides early payment for policy death benefit if insured is diagnosed w/terminal illness resulting in death within 2 years.

If the insured dies during a period of time for which a premium has been paid, the insurer must...

Refund any unearned premium along with the policy proceeds.

Disability Rider

Riders can provide benefits in the event of the insured's disability, while other riders provide for partial payment of the death benefit prior to the insured's death.

Family Term Rider

Spouse (other insured) Term + Children's Term

Warranty

Statement guaranteed to be true.

Provisions

Stipulate the rights and obligations of an insurance contract, fairly universal by policy.

Payment of Premiums Provision

The policy stipulates when the premiums are due, how often they are to be paid, and to whom.

Irrevocable Designation

The policyowner, CANNOT, without the consent or knowledge of the beneficiary can change at any time.

Revocable Designation

The policyowner, can, without the consent or knowledge of the beneficiary can change at any time.

Payor Benefit Rider

Used with juvenile policies. If payor becomes disabled for at least 6 months of dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21.

Class of Beneficiary

Using a designation such as "my children". Can be vague.

Waiver of Premium rider

Waives premium if insured becomes totally disabled. Coverage remains in force until the insured is able to return to work. 6 month waiting period from time of injury until suspension of premiums. Refund of waiting period's premium payments is issued.

Most common exclusions:

-Aviation -Hazardous Occupation -War & Military Service

Settlement Options;

-Cash Payment: Lump sum of proceeds -Life Income: Provides recipient with income he/she cannot outlive -Single Life Option: Provide single beneficiary income for the rest of his/her life -Life Income Joint & Survivor: Guarantees an income for two or more recipients as long as they live. -Life with Period Certain: Payments guaranteed for life, but a specified period is guaranteed. -Joint Life w/Term Certainty: 2 or more people paid, stops paying at death of the first -Cash Refund Option: If annuitant dies before annuity fund is depleted, a lump-sum settlement of the remainder would be made to the beneficiary -Installment Refund Option: Beneficiary would receive the remaining funds in the form of continued annuity payments -Fixed-Period Installments Option: Spec. period of years is selected and equal installments paid to recipient.

Dividends can be paid as:

-Check -Reduction of premium payments -Dividend kept in account to accumulate interest. Policyowner can withdraw at any time. (interest taxable) -Paid-Up additions: Upgrades in policy that will increase the death benefit by dividend amount -One-Year Term Option: increases overall death benefit

Aviation Exclusions (Who non-coverage is applicable to)

-Non-commercial pilots

Hazardous Occupations or Hobbies (Who non-coverage is applicable to)

-Skydiving, auto-racing -Can get insurance, but will likely exclude the activities

Divorced Spouse (Beneficiary Type and Notes)

If one dies following a divorce from his or her beneficiary, the benefit will NOT go to him/her.

Riders

Modify provisions that already exist and are used to increase or decrease policy benefits and premiums

War/Military Service

Most policies today DONT exclude military service. -Status Clause = Active Military -Results Clause = Only if killed by act of war

Exclusions

The types of risks the policy will not cover.

Payment of Claims

Upon receipt of written proof of loss, the insurer must pay death benefit claims immediately (aka within 30 days)

Return of Premium Rider

When added to whole life policy, provides that at death prior to given age, face value + amount equal to all premiums previously paid is payable to beneficiary

Entire Contract Provision

The policy and copy of the application, with riders and amendments, constitute the ENTIRE contract.

Trusts

-Used commonly for minors -Expensive to administer -Keeps life insurance death benefits from the taxable estate

Nonforfeiture Options

Certain guarantees built into the policy that cannot be forfeited

Difference Between Warranty and Representation

If warranty is untrue, the insurer has the right to void the contract.

Extended Term

Insurer uses policy cash value to convert to term insurance for the same face amount as former permanent policy.