Life Insurance Policies, Provisions, Options & Riders

S buys a $50,000 whole life policy with a $50,000 Accidental Death and Dismemberment rider. S dies 1 year later of natural causes. How much will the insurer pay the beneficiary?

$50,000

The purpose of ___ period clause is to avoid an unintentional lapse of a life insurance policy.

Grace

Three Basic Types of Term Coverage

Level Term Insurance Increasing Term Insurance Decreasing Term Insurance

The most common exclusions in life insurance policies are:

War Aviation: Non-Commercial Pilot Hazardous Occupation of Hobbies Commission of a Felony Suicide

Single Premium Whole Life

a one time lump sum payment is made, which will provide a level death benefit to the insured at age 100. the policy is completely paid up and will generate cash value immediately.

Variable Whole Life Insurance can be described as

both insurance and securities products.

Under an interest sensitive whole life policy

cash values are determined by interest rates

Dividends paid from a life insurance policy are

issued by the insurer

Term Policies

provides for the greatest amount of coverage for the lowest premium.

Two Type of Policy Assignments

Absolute Assignment Collateral Assignment

A policyowner may generate taxable income from which of the following Dividend Options?

Accumulation at Interest

Rights of Ownership

The assignment provision specifies the policy owner's right to transfer ownership of the policy.

Cost of Living Rider

addresses the inflation factor by automatically increasing the amount of insurance without evidence of insurability. the face value of the policy may increase by the cost of living factor tied to an inflation index such as "The Consumer Price Index".

Convertible

allows policy owner the right to convert the coverage to a permanent whole life insurance policy without evidence of insurability. premium for the new whole life permanent policy will be based only on insured's current attained age.

Guarenteed Insurability Rider

allows the insured to purchase additional coverage at specific future dates, without the evidence of insurability, the new premiums will be calculated only on the person's attained age.

Under a Graded Premium policy, the premiums

are lower during the policy's early years

How do life insurance companies handle cases where the insured commits suicide within the contract's stated Contestable period?

claims are denied under the suicide clause of the policy.

Cash Value

created by the accumulation of premiums is scheduled to equal the face amount of the policy when the insured reaches the age of 100. also known as "Nonforfeiture Values"

Endowment at Age 70 Policy Example

P owns a $25,000 Life Policy that pays a face amount to him if he lives to the age of 70; or to his beneficiary if he dies before age 70.

P is the insured on a participating life policy. Which statement is true if P's premiums are waived due to a disability?

P will still receive declared dividends

The provision that can be used to put an insurance policy back in force after it has lapsed due to nonpayment is called

Reinstatement

T has a term policy that allows him to continue coverage after expiration?

Renewable Coverage

3 Basic Terms of Whole Life Insurance

Straight Whole Life Limited Pay Whole Life Single Premium Whole Life

Cash Surrender Option

Take the cash.

Level Death Benefit

The death benefit is guarenteed and remains level for the entire lifetime of the policy

The Combination of Whole Life and _____ Term insurance is referred to as a Family Income Policy

decreasing

Credit life insurance is typically issued with which of the following types of coverage?

decreasing term

Typically a life insurance death benefit is paid by a lump-sum payment. A(n) __________ option is a method of distributing a Life Insurance policy's death benefit OTHER than by a lump sum payment.

settlement

Entire Contract Provision

stipulates that the policy and a copy of the application along with any riders or amendments makeup the entire contract

Which of the following statements about accumulated interest earned and dividends from an insurance policy is TRUE?

taxed as an ordinary income

An insurer may normally delay the payment of a cash value loan or surrender value for up to

6 months

Grace Period Provision

-period of time after the premium payment is due (usually 30 days) -purpose is to protect the policyholder against an unintentional lapse of the policy. -If insured dies during this period the benefit is payable, however any past due premiums will be deducted from the death benefit.

Reinstatement Provision

Allows a lapsed policy to be put back in force. If policy owner elects to reinstate the policy, they will have to provide evidence of insurability, pay all back premiums with interest and may be required to repay any outstanding loans.

Non-Forfeiture Options

Because permanent whole life insurance policies have cash values, certain guarentees are built into the policy that cannot be forfeited by the policy owner. if a whole life policy has cash value and the policy owner wants to surrender the policy, because he doesn't want it anymore, he must make a decision on what he would like to do with his cash value. 3 options: surrender, reduced paid-up, & extended term.

Misstatement of age or sex provision

Because the age and sex are important factors in figuring the premiums that will be charged for a life insurance policy, this provision allows the insurance company to adjust the policy at any time due to a misstatement of age or gender. In the event of a claim the insurance company is allowed to adjust the death benefit or the premium to the correct age or gender.

Automatic Premium Loan Provision

Commonly added to contracts with cash value at no additional charge, This is a special type of loan that prevents the unintentional lapse of a policy due to the nonpayments of premiums. Example: if a policy owner misses a premium payment the payment is automatically paid using the policies cash value.

D owns a Whole Life policy that was purchased 10 years ago. If the premium payments suddenly stop and D takes no additional action, which Nonforfeiture Option will the insurer likely proceed with?

Extended Term

K's whole life insurance policy lapsed two months ago due to nonpayment. She would now like to reinstate the policy. All of these statements are correct about the policy's reinstatement EXCEPT

K will forfeit the right to use the automatic loan provision upon reinstatement

D needs life insurance that provides coverage for only a limited amount of time while also paying the lowest possible premium. What kind of policy is needed?

Level Term

Level Premiums

The level premiums for whole life policies are based on the age of the individual, when originally purchased. Therefore the premiums remain the same throughout the entire life of the policy.

Standard Policy Provisions

While there is not a set standard of policy provision in life insurance, the standard policy provisions adopted by the (NAIC) National Association of Insurance Commissioners does create uniformity amongst life insurance policies.

Dividends

are paid only participating policies. when the policy owner purchases the policy from a participating insurance company, they are eligible to receive dividends. when receiving, they have the following 5 options: -take dividends in cash -apply dividends against premium payments -allow dividends to accumulate interest -buy paid up additions: which is whole life policy -purchase one year term insurances

What action can a policyowner take if an application for a bank loan requires collateral?

assign policy ownership to the bank

Which of these types of policies may NOT have the Automatic Premium Loan provision attached to it?

decreasing term

What provision in a life insurance policy states that the application is considered part of the contract

entire contract provision

Decreasing Term Policies

feature a level premium and a death benefit that decreases each year primarily used when the amount of protection needs to decrease over a period of time most common use for decreasing term is to insure the payment of an mortgage policy amount decreases as outstanding mortgage loan balance decreases each year the death benefit will be $0 at the end of policy term

Policy Loan Provision

found only in policies that contain cash value allowed to borrow an amount equal to the available cash value if there are any outstanding loans, at the time of the insured"s death, the death benefit will be reduced by the amount of outstanding loan.

The agreement in a life insurance contract that states a specific sum of money will be paid to a designated person upon an insured's death is called a(n)

insuring agreement

B receives yearly dividends and interest from a participating life insurance policy. Which of these should B include as gross income for federal income tax purposes?

interest only

An insured's inability to perform two or more activities of daily living may trigger which type of policy rider?

long term care

Suicide Provision

of an insurance policy protects insurance companies against people using suicide for a quick payment of the death benefit. if the insured commits suicide within the first 2 years, the insurance company will not pay for death benefit. They will only return the premiums that have been paid.

Consideration Clause

policy owners promise to make premium payments

What benefit does the Payor clause on a Juvenile Life policy provide?

premiums are waived if the payor becomes disabled.

Term Life Insurance

temporary life insurance provided for a specific period of time. also known as "Pure Life Insurance" "Death Protection" temporary protection only provides coverage for a specific period of time. if insurer dies during policy term, the policy pays a death benefit to beneficiary. if cancelled or expired prior to the insured death nothing is payable. there's no cash value or any living benefits available

Level Term Insurance

the most common type of temporary protection. the word "level" refers to death benefit that doesn't change throughout the life of policy

How does a typical Variable Life Policy investment account grow?

through mutual funds, stocks & bonds.

Exclusions

types of risks that an insurance policy will not cover

Waiver of Premium Rider

waives the premium for the policy if the insured becomes totally disabled. most insurance companies imposes a 6 month waiting period from the time of disability. the coverage remains in force until the insured is able to return to work. if never being able to return to work, the premiums will continue to be waived by the insurance company. the waiver of premium rider usually expires when insured is 65 years old.

A Policy that becomes a Modified Endowment Contract (MEC):

will lose many of its tax advantages.

Living Benefits

with a whole life policy, a policy owner can borrow against the cash value while the policy is in effect, or receive cash value when the policy is surrendered.

Limited Pay Whole Life

Unlike Straight Life, is designed so the premiums for the coverage will be completely paid up well before age 100. most versions of Limited Pay Life are 20 year pay. Whereby coverage is completely paid in 20 years. or paid up to 65 years; wereby the coverage is completely paid up by the insured at age 65.

Reduced Paid-Up Option

Under this option, the cash value is used to purchase a paid up whole life policy. The new whole life policy will have a smaller or reduced face amount from the original policy. there will not be anymore premium payments due and it will continue to gain cash value

Free Look Provision

allows the policy owner, a free look at the policy for a specific number of days. The period starts when the policy owner receives the policy from the insurance company in the mail or delivered by an insurance agent.

Whole Life

also known as "permanent life insurance" these are policies that remain in effect to age 100 as long as premium is paid. provides lifetime protection and includes a saving element known as "cash value" endows at the age 100 which mean cash values created by the payments of premiums is scheduled to equal the face amount of policy at age 100. Premiums for whole life policies usually are higher than those for term insurance.

Key Person Insurance Example

an architecture firm would stand to lose alot of money in the event of death of its project manager.. which type of policy should the firm purchase as project manager?

Increasing Term Policies

feature level premiums and a death benefit that increase each year amount of increase is usually set at a specific amount of percentage.

Incontestable Clause

prevents the insurance company from denying a claim because of incorrect information or a concealment of facts after the policy has been forced in for 2 years.

Most term policies are

renewable convertible renewable & convertible

What is the Suicide provision designed to do?

safeguard the insurer from an applicant who is contemplating suicide

What type of life insurance are credit policies issued as?

term

Extended Term Option

the cash value is used to purchase a term policy the new term policy will have the same face value amount as the original Whole Life Policy and will last for a set period of time based on amount the cash value available used. there will not be any additional premium payments due.

Insuring Clause

the insurance company's agreement and promise to pay the death benefit

Straight Whole Life

also known as "Continuous Premium Whole Life" is a basic whole life policy, where the policy owner pays a fixed premium for the time the policy is issued until the insured's death or age 100.

Which of these statements describe a Modified Endowment Contract? (MEC)

Exceeds the maximum amount of a premium that can be paid into a policy and still have it recognized as a life insurance contract.

Collateral Assignment

involves a transfer of partial rights to another person; usually done in order to secure a loan. a temporary assignment once the debt or loan is repaid the rights are returned to the policy owner

Absolute Assignment

involves transferring all rights of ownership to another person or entity it is an permanent and total transfer of all policy rights the new policy owner doesn't need to have an insurable interests in the insured.

Term Life Policies that have the ability to be converted to permanent coverage may do so during a specific time period. This conversion period

varies according to the contract

Renewable

allows the policy owner the right to renew the coverage at the expiration date without evidence of insurability. premiums for the new term policy will be based only on the insured's current attained age

Policy Riders

added to a policy and ride along, on the basic life insurance. riders only have value when attached to a policy. they have no independent value. also added to help people customize their insurance policies for their individual needs. unlike policy provisions, policy riders are not free; their cost is added to the life insurance policy premium

Universal Life Policy Example

K Purchased a Life Insurance Policy in 1986 which paid 10% interest. 20 years after purchase she received a notice from insurer that the policy will soon terminate unless a much-higher premium is paid because of falling interest rates.. This policy is known as "Universal"

Which of these life insurance riders allows the applicant to have excess coverage?

Term rider