Life Insurance: Policy Riders, Provisions, Options and Exclusions (21 questions)

Parties Must be Competent

All parties must be fully competent and understand all the terms. if your prospect only understands a foreign language, you must provide a means to interpret the terms of the contract. Insurance can be written on a minor, but the minor cannot sign the contract.

Extended Term Insurance

A policy owner may elect to have it converted into extended term, which means term insurance in the same face amount as the current policy which will remain in effect for a reduced period of time.

Acceptance

After the insured submits the application and the initial premium is paid, it is up to the insurance company to accept the offer by issuing the policy

Exclusions

Contains any type of coverage that is specifically not covered. If an activity is NOT listed in this section then it cannot be excluded.

Parts of the Insurance Contract (DICE)

Declarations Insuring Clause Conditions Exclusions

Forms of Payment

Level Premium Single Premium Flexible Premium Graded Premium

Annuitization Settlement Options (control of income to the insurer)

Life Income Life Income with a Period Certain Joint and Survivor

Policy Exclusions (explained)

Life insurance policies contain exclusions or restrictions on benefits. The company will never, ever pay the death benefit when these events occur. It may help you to remember the most common exclusions by thinking of the acronym WASH.

Utmost Good Faith

The insurance contract requires utmost good faith between the contractual parties. all parties are entitled to rely upon the representations of the others without having to worry about one party concealing or deceiving the other.

Exceptions to the incontestability clause:

1. Lack of insurable interest 2. Misstatement of age (benefit may be adjusted) 3. Intent to murder the insured 4. Impersonated another person during required medical exams. 5. Non-payment of premiums.

Policy Owner's Rights (listed)

1. Right to name the beneficiary 2. Right to assign or transfer rights of ownership 3. Right to rename (change) the beneficiary as long as the beneficiary is not irrevocable 4. Right to receive the policy's cash value if the policy is surrendered 5. Right to convert the policy if it is convertible term 6. Right to determine how the policy proceeds are to be paid 7. Right to decide how the policy dividends are to be used 8. Right to establish and change the premiums 9. Right to cancel the policy 10. Right to borrow against the cash value

There are two types of assignments:

1. absolute assignment: assignment of all policy rights 2. collateral assignment: partial or temporary assignment of the policy rights for limited purposes such as providing collateral for a loan from a bank, etc.

What makes up the entire life insurance contract?

1. the application 2. the insurance policy 3. any additional riders what this means is that once the insurance policy is issued, the above three items make up the entire written contract between the insurance company and the owner of the insurance policy. Nothing can be introduced by either party to effect the term of the policy after it is issued.

[Free Look (how many days)]

10 days. state that the policy holder has a period of time (min 10 days after the date of delivery) in which to examine the policy and to surrender it and receive a full refund of premium if not satisfied for any reason. Usually this right must be printed on the first page of the policy.

Other parts of the insurance contract:

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Consideration Clause

Both parties to the insurance contract must give something to make the insurance contract enforceable. there must be an exchange of values... -the insured pays premium -the insurance co. promises to pay the death benefit to the beneficiary if the insured dies.

Insuring Clause

Contains the obligations of the insurance company *important for test*

Settlement Options (listed)

Lump Sum Cash Settlement {Interest Only} - the beneficiary allows the insurance company to hold on to the principal sum of the settlement and elects to receive interest only payments. If the primary beneficiary dies, the balance left will be paid to a contingent beneficiary. {Fixed Period Installments} - the beneficiary chooses a fixed period of time to receive the payments, such as once a month for 10 years. The company uses the principal and interest, and pays all out within this period of time. If the primary beneficiary dies, payment will continue to a contingent beneficiary. (picks time period, amount determined by time to distribute) {Fixed Amount Installments}: The beneficiary receives regular payments, such as 1000 a month until principal is exhausted. (picks amount time determined by the amount and time left to exhaustion) If the primary beneficiary dies, the balance of the payments will continue to a contingent beneficary.

Policy Riders

Riders add something to an insurance policy and can never stand by themselves. Riders modify coverage of a policy by increasing or decreasing a benefit. They must always "ride" on some type of an insurance policy. Favorable riders will generally increase the insured's premium

Reduced Paid-Up Insurance

Right of the policy holder to elect a smaller, fully paid up policy without any further premiums to pay. the amount of the paid up policy is determined by the insured's age and cash surrender value.

Overhead Expenses

Salaries Building upkeep, employee benefits, etc.

Policy Owner's rights (explained)

The owner of a life insurance policy, who could be someone other than the insured as long as there is an insurable interest at the time of application, has the following rights.

Annuity Settlement Options: Life Income

The recipient receives a monthly amount for life based on age, the value and actuary tables. Upon death , payments will stop and nothing will pass to any contingent or any other type of beneficiary. -Greatest risk with this is that the premature death of the beneficiary will end all benefits before they are paid out. To eliminate this possibility, a policy owner may elect a life income with period certain settlement. See next.

Dismemberment Rider (AD&D)

This rider is often included with an Accidental Death Benefit. This coverage will pay a benefit, based on the principal sum (death benefit), if there is a complete loss of certain parts of the body known as the primary parts. (DEATH) 100% (Loss of Sight) 100% (Loss of Hearing) 100% (Loss of One Arm) 66 2/3 % (Loss of One Leg) 66 2/3 %

Accidental Death Benefit (double indemnity)

This rider obligates the insurance company to pay a multiple (2, 3, or 4 times) of the face amount of the policy if the insured dies as a result of an accident. -the death must be accidental and not contributed to by any other cause and must occur within 90 days of the accident. Accidental death must occur prior to age 70 and is often defined as death resulting directly and only from: ----an accidental injury visible on the surface of the body or disclosed by an autopsy ----a disease or infection from an accidental injury. this rider specifically EXCLUDES death from medical treatment, suicide, war, committing a felony, drug and aircraft (as a non-paying passenger).

Mortality Tables

Used with life insurance. With people living longer, the costs, using current mortality tables may cause a decrease in life insurance premiums. these tables are based on the theory of probability. establish the cost of insurance for the insurance company. predict the number of individuals at a particular age that will live or die. for exam purposes if they tell you people are living longer, then in theory, premiums should be decreased, as payments will be spread out over a longer period of time. people at x age group are living longer per mortality tables. premium decrease

Additional Terms and Conditions (relate to the accuracy of the statements made by the proposed insured when applying for a policy or when filing a proof of loss)

Utmost Good Faith Concealment Waiver

Life Insurance Policy Exclusions (listed)

WASH WAR: death as a result of war AVIATION: applies only to pilots, student pilots, or occupants of military aircraft SUICIDE: insured commits suicide within two years of policy effective date HAZARDOUS OCCUPATION: includes hazardous avocations or hobbies. Also if killed while committing a felony.

Types of Riders & Provisions

Waiver of Premium Rider Guaranteed Insurability Rider Payor Benefit Rider/Clause Accidental Death Benefit (Double Indemnity) Dismemberment Rider Term Riders Other Insured Rider Long-Term Care Rider Return of Premium Rider Accelerated Death Benefits Provision Automatic Premium Loan Rider

Acceptable modes of premium payment

Weekly Monthly Quarterly Semi-Annually (twice a year) Annually

Reserves (additional expenses)

legal reserves for life insurance open -end or assessment for health insurance

Expenses

load factors include things as insurance company rent, telephone costs, secretarial costs and anything else that contributes to non-selling costs. just like the other two, if expenses go down the premium should decrease. if expenses increase then so should the premiums.

The policy owner can withdraw

most of the cash surrender value

An accidental death and dismemberment benefit can also be found

written as a stand-alone policy. more often than not found as a benefit to life insurance policies, a disability policy or in travel accident policies.

Term Riders can be used to construct a number of additional benefits:

(1) to build the benefits of a family policy we use convertible term riders (2) to construct family income a decreasing term is used

Premium Components (how premium is valued/ come up with)

(In addition to age, sex, height, weight, occupation and health) Mortality Interest Expenses

Waiver of Premium Rider

- If the insured becomes totally disabled the insurance company will waive all future premiums on the life insurance policy. - In order to qualify the insured must be under the age of 65 - The premiums will be waived for the duration of the disabling injury or illness. - The insurance company cannot cancel this rider, as long as the insured pays premiums - Common _exclusions_ for this rider include standard exclusions such as #war, #self inflicted injuries, and #injuries sustained while committing a felony.

Underwriting Expenses

MIB (medical information bureau) APS (attending physician statement) Physical Morals Investigation Commissions Lapsed Policy

Incontestability Clause

Meant to prohibit the co. (after a certain period of time usually 2 years) from denying or contesting the payment of a death claim on the basis of statements made in the original application. If the insured dies after this period of times, the company may not contest the claim on the basis of fraud (with certain exceptions) misrepresentation or concealment in the application.

Reinstatement Period

Once the grace period expires, the policy will lapse. A policy can usually be reinstated within 3 years, but for reinstatement the insured must: (1) provide satisfactory evidence of insurability (2) Pay back the premiums owed, plus interest (3) Pay any loan owed to the company plus interest

Beneficiary Designations

Primary Beneficiary Contingent Beneficiary Revocable Beneficiary Irrevocable Beneficiary

Contingent Beneficiary

Receives the proceeds if the primary beneficiary is no longer alive

Legal elements of a contract (an insurance contract is a legal contract. in order for any contract to be legal there must be certain elements present. the following are very important for any insurance contract)

The Offer Acceptance Consideration Legal Purpose Parties must be Competent

NonForfeiture Options

Under the standard nonforfeiture laws, insurance companies are not allowed to take away from the policyholder certain rights. these rights pertain to the cash accumulation account when and if for any reason the insured stops paying premiums.

Cash surrender value (non forfeiture options)

a policy owner is entitled to surrender a policy at any time and receive the cash value

Withdrawals and Surrenders

a withdrawal is the partial surrender of a policy. a policy owner will not have taxable income until withdrawals made from the cash reserves of a policy exceed the policy owner's cost

Legal purpose

all contracts must be for a legal purpose. for example, you can't buy a policy with the intent to commit a crime and then collect for the loss.

Common Disaster Provision

if beneficiary and insured die from a common disaster, but not at the same time... (insured first then beneficiary) this allows the contingent beneficiaries to get the death benefit not the beneficiary. the provision specifies a time element on the survival period of the primary beneficiary by stipulation that the primary beneficiary must survive the insured by a specific period of time (such as 30, 60 or 90 days) in order to be entitled to benefits. if not, then the proceeds are paid to the contingent beneficiary or the insured's estate if no contingent is named.

Declarations

is usually the first page of any policy and contains the following info: Named Insured/owner subject of insurance (individual life insurance...) policy period dates and premiums

Minor beneficiaries

it is not generally advisable to name minor children as beneficiaries, but rather to name a guardian for minor children and a trustee for insurance proceeds and other assets to be managed until they reach the age of majority. Likewise, if a child names as a beneficiary under your policy predeceases you and you would want the proceeds to go to their children, you must specifically state such. you must also decide how such grandchildren will share in the proceeds with your other children, whether everything will be divided equally or whether the grandchildren will split what would have been their parent's share.

All of the following are options forms in which the policyholder may choose to use the money that has accumulated in the cash accumulation account when a life insurance policy lapses.

*Note if the policy owner doesn't take one of the options, the insurance company must automatically choose the option of purchasing EXTENDED TERM INSURANCE. 1. Cash surrender value 2. Extended Term Insurance 3. Reduced Paid-Up Insurance

Other Insureds Rider

A rider can be added to any permanent insurance policy to allow the insuring of an additional family member. Such as a spouse or children. Generally , non-family members would NOT be allowed to be added to a family member's insurance policy.

Assignment of the Policy

assignment is the transfer of the policy owner's rights in its entirety or in part to another individual who also has an insurable interest in the life of the insured.

Home Health Care Rider (LTC)

means health care and other services provided by a Home Health Care Agency

Graded Premium

premium starts low and increases over time

nonforfeiture benefit rider (LTC)

state insurance regulations require that all tax-qualified long-term care insurers offer nonforfeiture benefit riders. As the name suggests, these riders assure that an insured {won't forfeit all of the benefits even if the insured stops paying premiums.}

Misstatement of Age or Sex Clause

states that if the age or sex of the insured is misstated, any amount payable at death shall be what the premium would have purchased had the age or sex of the insured been accurate on the application. if the misstatement is discovered while the insured is alive, the difference of the required premium based on the actual age and sex and the amount of premiums actually paid will have to be forwarded, plus interest, to the insurance company.

The policy owner can partially

surrender the cash surrender value of the policy

Flexible Premium

the amount and timing is varied

Waiver

the intentional and voluntary relinquishing of a known right or privilege.

Dividend Options

1. Cash- dividends can be taken in the form of cash 2. Reduce Premiums - dividends may be used to pay part or all of any premium due 3. Accumulate and get paid interest on the dividends held - dividends are allowed to accumulate and interest is paid on them. 4. Paid-Up additions - dividends are used to buy additional insurance at the net cost 5. One year term- dividends may be used to purchase one-year term insurance usually up to the amount of the cash value of the policy.

Beneficiary

A beneficiary is the recipient of the death benefit proceeds paid when an insured dies. Beneficiaries can be individuals, minors, trusts, estates, businesses and charities. (HOWEVER, insurance companies will not pay a death benefit directly to a minor. It will be held until the minor is of age or it can be paid directly to a trust or guardian).

Practical components of premium

Age: the older person is the higher premium sex: as females tend to live longer than males, mortality tables tend to favor females in that pure insurance rates are lower than for males.

Concealment

Failure to disclose a MATERIAL FACT that the underwriter, if he/she had known, would NOT have issued the policy.

Accelerated Death Benefits Provision

Allows the owner to receive all or part of the benefits of the life insurance policy when the insured is alive but living with a terminal illness. illness or diagnosis that death within two year is almost certain. Some companies permit payout of some of the face amount of the policy by way of accelerated death benefits in the event of nursing home confinement or other health conditions. circumstances vary.

Conditions

Describes what both the insured and the insurer must do in regard to their rights and duties.

Inflation Rider (LTC)

Ensure that LTC benefits keep pace with the escalating cost of health care.

Level Premium

the same payment for the entire life of the policy

Reinstated policies

Generally if a policy is reinstated after the original two year period, a company will require that a new contestable period starts again for statements made in the reinstatement application. however, statements made exclusively in the original application are still incontestable once the original time period has expired.

Primary Beneficiary

Has the first claim against the proceeds

Return Of Premium Rider (Life Insurance)

Helps overcome the objection "i probably won't die during the policy life and my money will be wasted" If policy is not used and person does not die, the life insurance company returns the entire premium paid for the insurance. the return of premium in considered income tax free because you receive what you paid in. fully guarantees premium repayment for the first 15, 20 or 30 years. pay a higher premium for this rider.

Annuity Settlement Options: Life Income with a Period Certain

Income will be paid for life but payments are guaranteed for a minimum period certain such as 5, 10, etc. years. If the holder dies within a period certain, the beneficiary of the holder will receive the same monthly payments as the holder was receiving. This is also known as the guaranteed minimum annuity.

Important point about misstatement of age or sex

THERE IS NO PROTECTION UNDER THE INCONTESTABILITY CLAUSE, even after the passage of two years. So the above rules stand no matter how many years it takes to discover the correct age and sex.

Insuring Clause (in depth)

This clause sets forth the agreement by the insurance company to pay the death benefit or face amount upon proof of death. Also includes the basic agreement between the insuring co and the insured

Suicide Clause

This clause states that if the insured commits suicide during some specified period of time, generally within a 2 year contestability period, the company's liability will be limited to return of premium.

Payor Benefit Rider/Clause

This is a rider or provision found in juvenile insurance that waives the premiums due on the insured's child's policy provided that the payor of the premiums becomes totally disabled or dies before the child reaches a stipulated age.

Annuity Settlement Options: Joint and Survivor

This provides a guaranteed lifetime income for two persons. Upon the death of the first recipient, payments would continue to the second. But upon death of the second recipient, no further money is paid out.

Automatic Premium Loan Rider

This rider allows the insurer to take cash from the cash accumulation account of the life insurance policy to pay the current premium so that the policy doesn't lapse.

Guaranteed Insurability Rider

This rider permits the purchase of additional amounts of insurance at stated times or ages without any evidence of insurability. -this rider usually requires additional premium as the face amount increases. The premium on the additional coverage is based on the insured's current age, not the original policy age. -This rider may require the insured to reach a certain age before buying additional insurance and then do so within a certain period.

Policy Loan Provisions

Typically loans can be made if the insured has permanent insurance and if there is cash in the cash accumulation account. The ability to use the contract as a source of emergency or opportunity cash is one of the most valuable attributes of permanent life insurance. *The loan value, plus interest, can be deducted by the insurer from the proceeds if unpaid BEFORE the death of the insured. **A loan policy owner may pay back at any time he wishes or not at all (will be subtracted from death proceeds at death if this is case). ***The insurance co. may charge interest for the loan. ****If the insured dies after having made the loan against the policy, the loan plus interest will be subtracted from the death benefit paid to the beneficiary

Grace Period

When a premium is due and the insurance co. doesn't receive it the policy goes into a grace period. the purpose of the grace period is to ensure that the insurance co. doesn't immediately cancel the policy for non-payment. The insured gets the benefit during the grace period until the policy goes into lapse. -The grace period can vary, but for exam purposes the usual is 30 or 31 days. -purpose is to prevent unintentional lapse of coverage by the insured. -the insurance co. must reinstate the policy if premium is paid within the grace period. -An automatic premium loan feature will prevent a termination as long as there is enough cash in the cash accumulation account. If the insured dies after having made a loan against the policy, the loan amount plus any applicable interest will be subtracted from the death benefit paid to the beneficiary.

Consideration

all parties in all contracts must provide some form of consideration (something of value) to make the contract valid. The insured pays the premium while the insurance co. makes a promise to pay a covered claim in the future.

Cash surrender value

applies to the savings element of whole life insurance policies that are payable before death (if surrenders). however, during the early years of a whole life policy, the saving portion brings very little return compared to the premiums paid.

Long Term Care (LTC riders)

can be added to life insurance to give a ltc benefit

Revocable Beneficiary

can be changed by the owner of the policy

Irrevocable Beneficiary

cannot be changed without written permission of the beneficiary .

Spousal Benefit Rider (LTC)

enables each spouse to tap the other's pool of benefits

Interest Income

the income results from insurance company investments and could cause the premium to increase or decrease depending on investment results

The offer

the insurance company, through its agents, will attempt to solicit invitations for offers (they do not make the offer) through advertisements, telephone calls and conversations. The prospect makes the offer by filling out the application and submitting it to the insurance company with the first full premium.

Single Premium

the payment of one large lump sum

Settlement Options (explained)

the policy owner or the beneficiary may select the method by which the policy proceeds will be paid.

Dividends and *Remember for the exam*

the possibility of receiving dividends, which are NOT GUARANTEED come from the reduction or lowering of mortality costs, better returns than expected from the insurance company's investments and or reduction of company expenses.

Return of premium rider (LTC)

they are not available from all companies nor in every state and are only paid upon death. they are considered a form of nonforfeiture benefit for an LTC policy. The estate or a designated beneficiary will be entitled to the return of some or all of the premiums if the policy isn't used during the insured's lifetime. The Return of Premium Rider is also designed for workers with a business. With this rider, the business can pay the premium and receive a tax deduction in the amount of the premium.

Dividends

when insurance is purchased from a mutual insurance co. the policy owner shares ownership of the company. thus the policy owners have a mutual interest in the operation of the company. they share the profits in the form of dividends (better known as "a return of overpayment of premium." The policy owner then has a choice of how those dividends are paid.