Life Insurance Policy provisions, exclusions, and phrohibitions

Assignment

A policyowner can pledge or transfer ownership of a life insurance policy. The method used to pledge or transfer ownership is known as an assignment. A policy may be assigned only if the beneficiary designation is revocable. Irrevocable beneficiary designations can never be changed (or assigned) without the beneficiary's permission. Assignees also assume full responsibility for the policy, including premium payments. The two types of assignments are: 1. absolute assignment 2. collateral assignment

Incontestability

The incontestability clause states that after a policy has been in force for a set period (usually two years) the insurer cannot contest a claim for any reason except for nonpayment of premiums. In other words, the policy becomes incontestable after it has been in effect for two years. Answers made by the applicant on the application are considered representations and not warranties. Most policies actually contain language to this effect. If a misrepresentation occurs, it must be material for it to affect the policy. In the case of life insurance, a representation (statement made at the time a contract is formed) is material if it affects the decision the insurer takes in approving or rejecting a risk. Had the underwriter known the truth, he or she might have made a different decision. Material misrepresentations must be discovered within the two-year contestable period. If they are not, the insurer cannot later void the policy or contest the claim.

Misstatement of Age or Sex

Misstating the age or sex of the insured on a life insurance application is not considered a material misrepresentation. It is not grounds for voiding the policy, even if the misstatement is discovered during the contestable period. On the other hand, if such a misstatement occurs, the insurer has the right to adjust the policy's benefits. This adjustment reflects the death benefits the insured would have bought with the premiums he or she paid, based on the insured's correct age and/or gender. The insurer can adjust the benefits up or down, depending on which way the age or gender was misstated.

Overview

A life insurance policy is a legal contract. As such, it has all of the legal obligations, ownership rights, and exclusions or limitations that attend to any contract. The features and function of any particular policy are described in the contract's provisions, options, and related riders. Certain provisions are required or standard in any policy. Others are options or riders that a policyowner can choose to add. This unit introduces the common provisions included in all life insurance contracts.

Standard Life Policy Provisions

Though the required provisions for a life insurance policy vary slightly among the states, the provisions reviewed in this lesson are standard across all states.

quiz

Question 1 Which of the following statements most correctly describes the relationship, if any, between the application and the insurance contract? The application is completed under oath, so it may be voided. Technically, the application is not a part of the contract, and the agent or the insured can change it. The application is the contract. *The application is part of the entire contract. The entire contract provision states that the insurance policy and the application for it make up the entire contract. The application is normally attached to and made a part of the policy. Question 2 What is the typical life insurance contract's reinstatement provision period? one year six months five years *three years, but may be longer depending on the case and the laws of the state that control the policy The reinstatement provision lets policyowners put a lapsed policy back in force within a certain period. This period is typically three years but may be longer depending on the case and the laws of the state that control the policy. Question 3 To reinstate his lapsed life insurance policy under a reinstatement agreement, Peter must provide all of the following, EXCEPT: a written request or application for reinstatement *a valid reason for the unpaid premiums payment of all back premiums, plus interest proof of insurability To reinstate his lapsed policy, Peter must provide proof of insurability. Question 4 If an insured, Nan, dies during her life insurance policy's grace period without having paid her premium, what is the insurance company's obligation? The beneficiary gets the policy's cash surrender value, if any. The company has no financial obligation. In most cases, the insurer will pay the full death benefit. *The insurer pays the death benefit after first deducting the unpaid premium. That is not so. If the insured dies during the grace period without having paid the premium, the insurer deducts the unpaid premium from the death benefit before paying the balance to the beneficiary. Question 1 Karen transfers all rights in her life insurance policy to her brother, David, in an absolute assignment. Who is typically responsible for paying the policy's premiums from that point forward? Karen must pay the premiums. The insurer suspends the premiums. *David must pay the premiums. Karen and David can decide between them who should pay the premiums. Insurers are not in business of suspending premium payments. Question 2 How long is the standard incontestability period? one year from the application date *two years from the date of issue five years from the date of issue 31 days from the date of issue Under most policies, the incontestability period is two years from the issue date. Question 3 How long is the typical permanent life insurance policy's free-look period? 30 days *10 days 5 days 15 days The free-look provision gives the new policyowner a set period, usually ten days, in which to review the policy and to decide whether to keep it. Question 4 All of the following statements regarding the practice of backdating a life insurance application are correct EXCEPT: Most states do allow a policy to be backdated up to six months. The policyowner must pay all premiums owed from the backdated issue date to the present. The policy premium is based on the insured's age on the policy issue date. *It effectively extends the incontestability period by adding the backdated period to the two-year incontestability period provided in the contract. The premium amount agreed to in a policy is based on the insureds age at the time the insurance is written. If the insurer backdates the policy to a date before the insured's last birthday, the premium will be lower. Question 1 In a collateral assignment, policyowners may (or must) do all the following, EXCEPT borrow against any cash value that exceeds the loan security amount change beneficiaries. pay the premiums. *surrender the policy. Under a collateral assignment, the policyowner keeps most of the rights in the policy, including the right to borrow against the rest of the cash value above the amount provided as security. Question 2 The entire contract provision specifies that all statements the policyowner makes in the application are considered which of the following? *representations warranties claims declarations Statements the policyowner makes in the application are representations. Question 3 Mary pays for her life insurance with an annual premium. However, she is thinking of switching to a monthly premium plan. Which of the following best describes the consequence that will result if she changes her mode of premium in this manner? There is no way of determining how much more or less Mary will be paying by increasing the frequency of her premium payments. Mary will end up paying less over time than if she continued paying annual premiums. *Mary will end up paying more over time than if she continued paying annual premiums. Mary will end up paying the same amount as if she had continued paying annual premiums. Insurers have to add lost interest, plus a processing expense factor, to any premium payable more frequently than annual. Question 4 As a legal contract, a life insurance requires all of the following elements, EXCEPT offer -basis consideration acceptance Basis has different meanings in different contexts. In options trading, for example, "basis" is a term used to evaluate the value differential between a call option and a put option. Also referred to as the reversal/conversion rate, it is calculated by determining the costs and benefits of being long or short the underlying security.

Payment of Premiums

The manner in which policyowners may pay their policy premiums is outlined in the payment of premiums provision. This provision defines available modes of payment (the payment schedule), grace period, automatic premium loan (optional life insurance benefit whose purpose is to prevent a policy from lapsing if the policyowner fais to pay the premiun), and whether the premium is level or flexible.

For the test

-How the policy works? -Beneficiary --named in application, can be changed from time to time, ben. has no power in the policy until insurer dies, --Beneficiary Designation ---Revocable vs Irrevocable -Revocable= Owner has the right to change the ben. designation without the beneficiary's permission -Irrevocable= takes away a right of owner ship which is the ability to change beneficiary.Can never change it or to get ride of you have to have beneficiary signature. -Process of backdating -- normally up to six months; purpose is to reduce the age of the issue age of the policy by 1 yr. Helps lower the premium. --must consider a need for additional premium up front to cover the backdated period.

Insuring Clause

The insuring clause, which is the basic agreement between the policyowner and the company, is found on the schedule of benefits page (typically the first full page of the policy). The insuring clause states the company's promise to pay the policy's face amount (death benefit) to the named beneficiary if the insured dies while the policy is in Contract force, making the policy unique to the individual insured. A typical insuring clause reads as follows: The Company will pay to the beneficiary, upon receipt of due proof of the death of the insured, the insurance in force at his or her death, subject to the provisions of this policy.

Contract Modifications

As contracts of adhesion, insurance policies must be accepted "as is" by the applicant. However, after the insurer issues the policy, certain changes are allowed. Depending on the type of policy, these changes can be made without having to write a new policy. Contract modifications include -beneficiary changes, if beneficiaries have not been named irrevocably; -additional coverage; -changes to the face amount (if the policy provides for this); -changes in the manner in which the policy's death benefit is paid out; and -changes in the mode of premium payment (from monthly to quarterly or annually, for example). All changes to a life insurance contract must be made in writing, and an insurance company officer must endorse the change document before it becomes effective. As a general rule, producers do not have the right to endorse a contract modification

Backdating of Policies

Backdating is the agreement to make a policy effective earlier than the application date. The premium amount agreed to in a policy is based on the insured's age at the time the policy is written. If the insurer backdates the policy to a date before the insured's last birthday, the premium charged would be less. This may be an attractive option to an applicant. Backdating does have certain restrictions, however. Most states allow a policy to be backdated only up to six months. The policyowner must agree to pay all premiums owed to the backdated date of issue. He or she also agrees to make this date the contract's official anniversary date. Some states prohibit backdating under any circumstances. The state law section of this course will explain if this is true in your state

Modes of Premium Payment

A life insurance policy's data page normally identifies the amount of the modal premium. The most common premium payment modes available are: -monthly -quarterly -semiannually -annually When premiums are paid more frequently than once a year, an additional charge is added to cover the interest the insurer lost because the full annual premium is not paid at the beginning of the policy year. It also includes costs the insurer incurs to process and administer premium payments that are made more often than annually.

Ownership Rights

A life insurance policy is property, and policyowners have certain rights regarding the policy. Although the policy's insured is normally the policyowner, the owner of the policy can be an entity other than the insured. That may include non-human entities (such as a trust or a business) as well as a natural person (individual- parent, spouse, or partner in a business relationship. The purpose of a life insurance policy's rights provision is straightforward. It establishes the rights of the policyowner and the conditions under which those rights can be exercised. Policyowner rights in life insurance contracts include the right to -transfer policy ownership to another entity (without regard for insurable interest); -assign (pledge) the policy's values as loan collateral; -select and change modes of premium payment; -select and change beneficiaries (as long as the existing designation is not irrevocable); -terminate the policy and elect settlement and nonforfeiture options; -receive cash values and/or dividends; and -borrow against cash value

Payment of Claims

All life insurance policies contain a provision that defines how and when death benefit proceeds are to be paid out. This provision also defines the requirements to initiate a death benefit claim

Surrender Charges

An insurer may impose a surrender charge on a policyowner who cancels a life insurance policy or withdraws funds from its cash value early in the term. This fee provides an incentive for the owner to avoid withdrawing or canceling the policy soon after it is issued and compensates the insurer for its business acquisition costs

Consideration

As a legal contract, a life insurance policy requires three elements: 1. offer 2. acceptance 3. consideration The applicant makes an offer when signing an application. The insurer accepts the offer when issuing a policy. The consideration the policyowner gives is the signed application (and the representations it contains) and the first premium. The insurance company's consideration is its promise to pay the policy's benefit when a stated future event occurs, such as the insured's death. The typical consideration provision in a life insurance policy reads as follows: This policy has been issued in consideration of the application and of the payment of premiums as provided herein.

Interest on Proceeds Left with the Insurer

Claim payment provisions usually state that any death benefit proceeds left with the insurer, either while the claim is being settled or as part of a settlement option, will earn interest.

Policy Lapse, Renewal, and Nonrenewal

If premiums are not paid by the end of the grace period, the policy will lapse, and insurance protection will end. (Even if a life insurance policy lapses, the owner will not lose the nonforfeiture values in the policy, such as its cash value, paid-up insurance value, and extended term insurance value.) A policyowner can renew a policy by paying the premium due before the policy lapses. Nonrenewal occurs when insurance coverage ends at the policy expiration date or on its anniversary. The insurer may refuse to renew the coverage. The owner may also decline the insurer's offer to renew the policy.

Title Page

The title page or specifications page of the policy identifies the insurance company and the policyowner. Note that unlike property and casualty insurance, there are no "standard" or "uniform" life insurance policies.

Free-Look Period and Replacement

While ten days is the shortest free-look period permitted in any state, some states require a longer free-look period when the new life policy is replacing an existing policy. Depending on the state, if canceling a replacement policy, the policyowner may be entitled to receive -a refund of the full premium paid; and/or -an amount equal to the cash surrender value transferred into the new policy; plus -all fees and other charges deducted from gross considerations or imposed under the policy or contract. Other jurisdictions increase the free-look period to 30 days for seniors. The definition of "senior" varies. In some states a senior is one who is age 60 or older. In other states a senior is someone age 65 or older. The definition that applies depends on the state in which the transaction occurs.

Entire Contract

The entire contract provision states that the insurance policy and the completed (signed) application make up the entire contract. (The application is normally attached and made a part of the policy.) It also states that any other agreement or promise not contained in the contract is invalid. It confirms that all statements the policyowner makes in the application are representations, not warranties. The entire contract provision states that the producer cannot change the policy in any way, and that an executive officer of the insurance company must document and sign all changes. Any such changes must be attached to the policy, at which point they become part of the contrac

Medical Examinations and Autopsy

Some states require that life insurance policies include a provision defining the insurer's right to -examine a deceased insured if the insurer determines it is needed when a claim is pending and -request an autopsy upon the death of the insured where it is not prohibited by law

Absolute Assignment

An absolute assignment occurs when the policyowner permanently transfers all rights in the policy to an assignee. Policyowners use this method to give or sell the full rights in the policy to another person. The policyowner making the assignment is known as the assignor. The person to whom the assignment of rights is made is known as the assignee. The assignee becomes the policyowner. He or she assumes all the rights of the previous owner when the absolute assignment is complete

Policy Reinstatement

An insurance policy will lapse if its premium is not paid by the end of the grace period. Fortunately, life insurance policies include a reinstatement provision that lets the policyowner place a lapsed policy back in force if done within a specified period of time. This period is typically three years but may be longer depending on the case and the laws of the state that control the policy. Reinstatement is not possible if the policy has already been surrendered and the cash value has been paid out to the policyowner. To reinstate a lapsed policy, the policyowner must provide -a written request or application for reinstatement; -proof of insurability; and -payment of all back premiums plus interest. The original issue age is retained in the reinstated policy. Future premiums are based on that age.

Policy Settlement Option

The policyowner has the first right to choose which payout or settlement option to use. However, he or she can defer that decision to the beneficiary when the proceeds are due. Payment of a claim requires -a policy in force at the time of death; -proof that the insured died; -no evidence that the insured died based on an activity excluded in the policy; and -a living beneficiary (or designated beneficiary).

Conversion

Term life insurance may include a conversion option giving the policyowner the right to convert or exchange it for a whole life or permanent policy without having to prove insurability. The whole life policy will be issued at a premium rate consistent with the insured's age at the time of the conversion (attained age) or at the time when the term policy was first issued (original age). Using the insured's original age, if permitted, would result in a lower premium than if the more common attained age method is used.

Grace Period

A modal premium is due on its due date. If a policyowner fails to pay the premium on time, then the insurer does not have to pay the promised death benefit. However, certain safeguards help to avoid such an outcome. One of these safeguards is known as the grace period, which is the period of time after a modal premium's due date that the insurer will accept a late payment without lapsing the policy. The grace period for paying a life insurance premium is generally 31 days. This means the policyowner has 31 days following the premium due date to pay the premium. If the policyowner does not pay the premium within the 31-day grace period, the policy lapses. The policy remains in force during the grace period. If the insured dies during the grace period, unpaid premiums are deducted from the death benefit proceeds.

Right to Examine (Free Look)

All insurance policies include a free-look provision, which gives new policyowners a period of time (usually ten days) in which to review the policy and to decide whether to keep it. The free-look period begins when the policy is delivered to the owner. If the policyowner is not satisfied for any reason, he or she can return the policy for a refund of the premium paid. In this event, the policy is voided from the beginning. Variable life insurance policies typically have a free-look period that is the later of 10 days from policy delivery or 45 days from when the application was completed and signed. As with all standard policy provisions, the required free-look period may vary by state. Most states require a 30-day free-look period for seniors (age 65 and older). This is more common with certain health insurance products but may also apply to life policies.

Collateral Assignment

A collateral assignment is a temporary assignment that uses the policy as collateral for a loan or for some other transaction between the policyowner and the collateral assignee. With a collateral assignment, the policyowner does not transfer all rights in the policy. Instead, the policyowner makes an assignment of the policy's values only to the extent necessary to secure the loan. The policyowner retains most rights in the contract. However, the policyowner cannot surrender the policy. Further, he or she cannot take any other action that jeopardizes the rights of the collateral assignee. The assignee has first claim on the policy for the amount of the collateral assignment. If the policyowner dies, the assignee is paid from the death proceeds the balance of the loan still owed. The rest of the death benefit is paid to the beneficiary. When the obligation is retired, the collateral assignee's rights in the policy end. The right of a policyowner to assign his or her life insurance policy is granted in the policy.