LIFE POLICY PROVISIONS, RIDERS, OPTIONS AND EXCLUSIONS

ASSIGNMENTS

-Absolute or collateral -provision specifies the policyowner's right to assign (transfer rights of ownership) the policy. The policyowner must advise the insurer in writing of the assignment.

REINSTATEMENT PROVISION

-Allows a lapsed policy to be put back in force. -the maximum time limit for reinstatement is usually 3YEARS after the policy has lapsed. -If the policyowner elects to reinstate the policy, he/she will have to provide evidence of insurability. -the policyowner is required to pay all back premiums plus interest, and maybe required to repay any outstanding loans and interest. -the advantage to reinstating a lapsed policy as opposed to purchasing a new one is that the policy will restored to its original status, and retain all the values that were established at the insured's issue age. -NOTE: policy that has been surrendered cannot be reinstated.

GUARANTEED INSURABILITY RIDER

-Allows the insured to purchase additional coverage at specified future dates (usually every 3 years) or events (such as marriage or birth of a child), without evidence of insurability, for an additional premium. When this options is exercised, the insured purchases the additional coverage at his or her attained age. This rider usually expires at the insured's age 40. -rider is not modified or defeated by the existence of other riders.

CONTINGENT BENEFICIARY

-Also referred to as secondary or tertiary beneficiary has second claim in the event that the primary beneficiary dies before the insured. -contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time of the insured's death. -if none of the beneficiaries is alive at the time of the insured's death, or if no beneficiary has been named, the insured's ESTATE will automatically receive the proceeds of a life insurance policy. The death benefit of the policy may be included in the insured's taxable estate if this occurs.

SETTLEMENT OPTIONS

-Are the methods used to pay the death benefits to a beneficiary upon the insured's death, or to pay the endowment benefit if the insured lives to the endowment date. -once selected by the policyowner, the settlement option cannot be changed by the beneficiary. -if the policyowner does not selected a settlement option, the beneficiary will be allowed to choose one at the time of the insured's death.

Settlement options available

-Cash (automatic) -life income -interest only -fixed period -fixed amount

PAID-UP OPTIONS(Dividend Option)

-Dividend is used to pay up a policy early. -uses the accumulated dividend, plus interest, and the policy cash value to pay the policy up early.

ACCELERATED DEATH BENEFIT

-Early payment of part of death benefit to the insured from the insurer for qualifying medical expenses. -maximum benefit is typically a percentage of the face amount of insurance, usually 50% but it is legal for the insurer to pay up to 100% of the death benefits before the insured dies. -there may be also be a dollar limit, such as $100,000. The face amount of insurance is reduced after the payments. The accelerated death benefit payout will not necessarily result in a reduction of the premium; however, premium may be waived.

IRREVOCABLE BENEFICIARY

-Have a vested interest in the policy, policyowner may not exercise certain rights without the consent of the beneficiary. -in addition to being unable to change the beneficiary designation, policyowner cannot borrow against the policy's cash value (as this would decrease the policy face value until repaid) or assign the policy to another person without the beneficiary's agreement.

AUTOMATIC PREMIUM LOAN

-Is not required, but is commonly added to contracts with a cash value at no additional charge. -this is special type of LOAN THAT PREVENTS THE UNINTENTIONAL LAPSE OF A POLICY due to nonpayment of the premium. For example: a loan against the policy cash value for the amount of premium due is automatically generated by the insurer when the policyowner has not paid the premium by the end of the premium-paying grace period. It is a loan for which the insurer will charge interest. If the loan and interest are not repaid and the insured dies, then it will be subtracted from the death benefit. While the insurer may defer requests for other loans for a period of up to 6 months, loan requests for payment of due premiums must be honored immediately. -usually, the policyowner must specifically elect this provision in writing to make it effective.

PAYOR BENEFIT RIDER

-Is primarily used with juvenile policies (any life insurance written on the life of a minor) otherwise, it functions like the waiver of premium rider. -if the payor ( usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premium until the minor reaches a certain age, such as 21. This rider is also used when the owner and the insured are 2 different individuals.

PREMIUM MODE

-Is the manner or frequency that the policyowner pays the policy premium. Most policies allow for annual, semi-annual, quarterly, or monthly payments. If the insured selects a PREMIUM MODE other than annual, there will be an additional charge to offset the loss of earnings since the company does not have the entire premium at once, and there are additional administrative costs associated with more frequent billing. -if the insured dies during a period of time for which the premium has been paid, the insurer must REFUND ANY UNEARNED PREMIUM along with the policy proceeds.

COLLATERAL ASSIGNMENT

-Is the partial and temporary transfer of rights. -it is usually done in order to secure a loan or some other transaction. -once the debt or loan is repaid, the assigned rights are returned to the policyowner.

OWNER'S RIGHTS

-Only the policyowner has the ownership rights under the policy, and not the insured or the beneficiary. -among the ownership rights are naming and changing the beneficiary, receiving the policy's living benefits, selecting a benefit payment options, and assigning the policy. -the policyowner and the insured may be the same person or different persons. -policyowner has the responsibility of paying the policy premiums, and is also the person who must have an insurable interest in the insured at the time of application for the insurance. When the owner and the insured are not the same person, the insurance arrangement is referred to as the third party ownership.

ACCIDENTAL DEATH AND/ACCIDENTAL DEATH DISMEMBERMENT

-Pays some multiple of the face amount if death is the result of an accident as defined in the policy. -death must usually occur within 90 days of such an accident. -the benefit is normally 2 times (double indemnity) the face amount. -some policies pay triple the face amount (triple indemnity) for accidental death. -no additional cash value is accumulated as a result of this rider.

SUICIDE

-Policies protects the insurers from individuals who purchase life insurance with the intention of committing suicide. -if insured commits suicide within 2years following the policy effective date (issue date) the insurer's liability is limited to a refund of premium. -if insured commits suicide after the 2 year period, the policy will pay the death proceeds to the designated beneficiary the same as if the insured had died of natural causes.

POLICY LOANS, WITHDRAWALS, PARTIAL SURRENDERS

-Policy loan option is found only in policies that contain cash value. -policyowner is entitled to borrow an amount equal to the available cash value. -outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured's death. -policy will not lapse with an outstanding policy loan unless the amount of the loan and accrued interest exceeds the available cash value. -insurer must provide 30 DAYS WRITTEN NOTICE to the policyowner that the policy is going to lapse. -Insurance companies may defer a policy loan request for UP TO 6 MONTHS, unless the reason for the loan is to pay the policy premium. -policy loans are not subject to income taxation.

WAIVER OF MONTHLY DEDUCTIONS

-Rider pays all monthly deductions while the insured is disabled, after 6 month waiting period. This rider only pays the monthly deductions, and not the full premium necessary to accumulate cash value. The lenght of time this rider will pay monthly deductions will vary based on the age at which the insured becomes disabled. This rider is usually found in UNIVERSAL LIFE and VARIABLE UNIVERSAL LIFE policies. -MONTHLY DEDUCTIONS include the actual cost of insurance charges, expense charges, and costs or charges for any benefits added to the policy by rider, endorsement or amendment, and which are specified in the policy to be deducted from the account value.

COMMON DISASTER CLAUSE

-Which is provided under the UNIFORM SIMULTANEOUSLY DEATH LAW, has been adopted by most states to address this problem, in order to protect the policyowner's original intent, as well as to protect the contingent beneficiary. -under the UNIFORM SIMULTANEOUS DEATH LAW, it will be assumed that the primary beneficiary died first in a common disaster. This provides that the proceeds will be paid to either the contingent beneficiary or to the insured's estate, if no contingent beneficiary is designated. The intent is to fulfill the wishes of the policyowner. Most insurers specify a certain period of time, usually 14 to 30 days in which death must occur in order for this provision apply.

NONFORFEITURE OPTIONS

-because permanent life insurance policies have cash values, certain guarantees are built into the policy that cannot be forfeited by the policyowner. these guarantees are required by state law to be included in the policy. -policyowner chooses one of the following nonforfeiture options: CASH SURRENDER VALUE, REDUCED PAID-UP INSURANCE, or EXTENDED TERM.

CONSIDERATIONS

-both parties to a contract must provide some value in order for the contract to be valid. -offered by the insured is the premium and statements made in the application. -insurer is the promise to pay in accordance with the terms of the contract. -clause is not always a separate provision, but is often included in the entire contract provision.

Dividend options available

-cash -accumulation at interest -reduction of premium -paid-up additions (automatic) -paid-up option/insurance -one-year term

Riders Affecting Amount of Death Benefit

-guaranteed insurability -accelerated death benefit -return of premium -accidental death or AD&D -term riders

ONE YEAR TERM OPTION Dividend

-insurance company uses the dividend to purchase additional insurance in the form of 1 year term insurance that increases the overall policy death benefit.

Nonforfeiture Options available

-reduced paid-up -extended term (automatic) -cash

Riders Covering Additional Insureds

-spouse -children -family -nonfamily

Disability Riders

-waiver of premium -waiver of monthly deductions -payor benefit -disability income -accelerated (living) benefit

Fixed Period installment Option(also called PERIOD CERTAIN)

A specified period of years is selected, and equal installment are paid to the recipient.

GUARANTEED INSURABILITY RIDERS EXAMPLE:

Allan's life insurance policy contains both guaranteed insurability and waiver of premium rider. Three years after the policy was issued, Allan was totally and permanently disabled. Not only are Allan's life insurance premiums waived, but at the specified times or events stated in the policy, Alan may purchase additional amount of insurance with the premiums on those increases also waived.

TERM RIDERS

Allow for an additional amount of temporary insurance to be provided on the insured, without the need to issue another policy. They are usually attached to a WHOLE LIFE POLICY to provide greater protection at a reduced cost.

Children term rider

Allows children of the (natural, adopted or stepchildren) to be added to coverage for a limited period of time for a specified amount. This coverage is also TERM INSURANCE and usually expires when the minor reaches a certain age (18 or 21)

FREE LOOK PROVISION

Allows the policyowner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. The free-look period starts when the policyowner receives the policy (policy delivery), not when the insurer issues the policy. Certain life insurance transactions, such as replacement, may require a longer free-look period.

Life Income Settlement Option

Also known as straight life, provides the recipient with an income that he or she cannot outlive. Installment payments are guaranteed

Exclusions

Aviation (noncommercial), hazardous occupation, war or military service, suicide within a specified time period

LONG TERM CARE RIDERS

Coverage, which is often purchased as a separate policy, can also be marketed as a rider to a life insurance policy. These riders provide for the payment of part of the death benefit (called accelerated benefits) in order to take care of the insured's health care expenses, which are incurred in a nursing or convalescent home. As with the living needs rider, payment of LTC benefits will reduce the amount payable to the beneficiary upon the insured's death.

MISSTATEMENT OF AGE AND GENDER

Death benefit is adjusted according to the correct age and gender at policy issue

PAID-UP ADDITIONS

Dividend is used to increase the face amount. Increase the death benefit of the original policy.

Substitute insured or change of insured rider

Does not permit an additional insured, instead allows for the change of insured, subject to insurability. It is most commonly used with KEY PERSON INSURANCE

EFFECT ON DEATH BENEFIT under accelerated benefit rider

Example: the policy's face amount is $100,000; however, due to a terminal illness, the insured had to withdraw $30,000 from the policy 3 years before his death. Since this amount was withdrawn, the insurance company lost $300 worth of interest. Upon the insured's death, the beneficiary received $69,700 in death benefit. $100,000-$30,000-$300=$69,700

PRIMARY BENEFICIARY

Has first claim to the policy proceeds following the death of the insured. The policyowner may name more than one primary beneficiary, as well as how the proceeds are to be divided.

ACCUMULATION AT INTEREST Dividend Option

Insurer keeps the dividend in an account where it accumulates interest. The policyowner is allowed to withdraw the dividend at anytime. The amount of interest is specified in the policy and compounds annually. Although the dividends themselves are not taxable, the interest on the dividends is taxable to the policyowner when credited to the policy, whether or not the policyowner receives the interest.

ABSOLUTE ASSIGNMENT

Is the complete and permanent transfer of ownership rignts. The new policyowner does not need to have an insurable interest in the insured.

GRACE PERIOD PREMIUM

Is the period of time after the premium due date that the policyowner has to pay the premium before the policy lapses, usually 30 or 31 days. The purpose of the grace period is to protect the policyholder against an unintentional lapse of the policy. If the INSURED DIES during this period, the death benefit is payable; however, any unpaid premium will be deducted from the death benefit.

RIDER EX. USED BY BUSINESSES THAT HAVE A JOINT LIFE POLICY THAT COVERS MULTIPLE KEY PERSONS.

Key employees Jack and Jake. Jake RETIRES and Jim is HIRED to replace him. Now the business would like a joint policy covering Jack and Jim, but Jack would no longer meet the underwriting requirements for a new policy because of changes in his health. If the policy covering Jack and Jake had a "Change of Insured Rider ", the same policy could be maintained preserving Jack's insurability and Jim could be substituted for Jake as an insured, with only JIM NEEDING TO PROVE INSURABILITY.

LEVEL PREMIUM OR FLEXIBLE PREMIUM

Most life insurance policies have a level premium, which means that the premium remains the same throughout the duration of the contract. However, policies such as UNIVERSAL LIFE INSURANCE POLICIES, allow the policyowner to pay more or less than the planned premium, referred to as FLEXIBLE PREMIUM.

INSURING CLAUSE PROVISION

Or insuring agreement sets forth the basic agreement between the insurer and the insured. It states the insurer's promise to pay the death benefit upon the insured's death. The insuring clause usually is located on the policy face page, and also defines who the parties to the contract are, the premium to be paid, how long coverage is in force, and the amount of the death benefit.

Nonfamily insureds

Other riders are also available to insure somebody who is not a member of the insured's family ____

Fixed-amount installment option

Pay a fixed, specified amount in installments until the proceeds (principal and interest)are exhausted.

Flexible Premium

Policies allow the policyowner to increase or decrease the premium during the policy period

PREMIUM PAYMENT

Premiums are paid in advance

INCONTESTABILITY

Prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2 years, even if there has been a material misstatement of facts or concealment of a material fact.

Children's term rider

Provide temporary life insurance coverage on all children of the family for one premium. 1 premium for ALL children.

OTHER INSURED RIDERS

Provides coverage for one or more family members other than the insured. The rider is usually LEVEL TERM insurance, attached to the base policy covering the insured. -family rider -spouse term rider-added-limited period of time-expires when reaches age 65. -children's term rider-(natural, adopted or stepchildren) to be added to coverage-limited-expires when minor reaches age 18 or 21. Also TERM INSURANCE -most riders provide the minor with the option of converting to a PERMANENT POLICY without evidence of insurability. -nonfamily insureds

Waiver of monthly deductions

Rider pays all monthly deductions while the insured is disabled, after a 6-month waiting period.

WAIVER OF PREMIUM RIDER

Riders waives the premium for the policy if the insured becomes totally disabled. Coverage remains in force until the insured is able to return to work. If the insured is never able to return to work, the premiums will continue to be waived by the insurance company. Most insurers impose a 6 month waiting period from the time of disability until the first premium is waived. If the insured is still disabled after this waiting period, the insurer will refund the premium paid by the insured from the start of the disability. This rider usually expires when the insured reaches age 65.

ENTIRE CONTRACT PROVISION

Stipulates that the policy and a copy of the application, along with any riders or amendments, constitute the entire contract. No statements made before the contract was written can be used to alter the contract. Neither the insurer nor the insured may change policy provisions once the policy is in effect without both parties agreeing to it and the change being affixed to the contract.

REDUCTION OF PREMIUM Dividend Option

The insurer uses the dividend to reduce the next year's premium Example: $1000 annual premium $100 dividend, 1000-100=$900. Policyowner would pay $900 premium that year.

EXTENDED TERM

The insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy. The duration of the new term coverage lasts for as long a period as the amount of cash value will purchase. If the policyowner has neglected to select one of these nonforfeiture options, the insurer will automatically implement the extended-term option in the event of termination of the original policy.

Universal Life and Variable Universal Life policies

The length of time this rider will pay monthly deductions will vary based on the age at which the insured becomes disabled. This rider is usually found in _______

REDUCED PAID-UP INSURANCE

The policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a REDUCED FACE AMOUNT from that of the former policy. The new reduced policy builds its own cash value and will remain in force until death or maturity.

CASH SURRENDER VALUE

The policyowner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable. Upon receipt of the cash surrender value, if the cash value exceeds premiums paid, the excess is taxable as ordinary income. Once this option is selected, the insured is no longer covered. A policy that has been surrendered for its cash value cannot be reinstated. A Surrender charge is a fee charged to the insured when a life policy or annuity is surrendered for its cash value.

REVOCABLE BENEFICIARY

The policyowner, without the consent or knowledge of the beneficiary may change a revocable designation at anytime.

Cash (lump-sum) payment

Upon the death of the insured, or at the point of endowment, the contract is designed to pay the proceeds in cash, called a LUMP SUM, unless the recipient chooses a different mode of settlement. As a rule, payments of the principal face amount after the insured's death are not taxable as income.

MINOR BENEFICIARY

Will either be paid to the minor's GUARDIAN, or paid to the TRUSTEE of the minor if the trust is the named beneficiary, or paid as directed by a COURT. The guardian and trustee can be the same person. It is generally accepted not to be a good practice to have life insurance benefits payable to a minor.

Spouse Term Rider

allows the spouse to be added to coverage for a limited period of time and for a specified amount.. the rider is usually term level insurance and usually expires when the spouse turns 65

Life Income Joint and Survivor Option

guarantees an income for two or more recipients for as long as they live

Family Term Rider

incorporates the spouse term rider along with the children's term rider in a single rider.

INCONTESTABILITY

insurer cannot contest misstatements on the application after a time period

DIVIDENDS CASH

insurer sends a check to the insured, usually annually.

RETURN OF PREMIUM RIDER

is implemented by using increasing term insurance. when added to a whole life policy, it provides that a death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary. this rider usually expires at a specified age such as age 60.

Other Insured Rider

provides coverage for one or more family members other than the insured. The rider is usually LEVEL TERM INSURANCE, attached to the base policy covering the insured. This is also known as a FAMILY RIDER.

Interest Only Option

the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient at regular intervals

Life income with period certain option

the recipient is provided with the "best of both worlds" in terms of a lifetime income and guaranteed installment period