Policy Provisions

"My sons as beneficiaries" would be a _____ designation. - class - per capita - per stirpes - reversionary

"My sons as beneficiaries" would be a _____ designation. *A B C D class per capita per stirpes reversionary A class designation is one in which the individuals are not specifically named (e.g., "all my children." This is generally used by persons who do not wish to have to change the beneficiary if the group is altered due to births, deaths or other changes in the group.

payment of claims provision

A __________________________________________ is included in the contract to clarify that the insurer must pay interest on proceeds if the payment of a claim is not promptly paid upon receipt of proof of death and surrender of the policy.

Modifications

Changes to any policy provisions or policy language may only be made by an officer of the insurer. A producer may not make any change or modifications.

Assignment

is a transfer of ownership rights to another person. A policyowner can assign his interest in the policy to any other person (an assignee) without notifying the insurer or getting its approval.

An insured paid the initial premium for his life insurance policy. Upon receiving the policy, he noticed that the policy had a 20-day free-look provision. He immediately returned the policy to his insurer. As a result: - he is entitled to a pro-rata refund of premium based on the period of time he was actually insured. - the insurer is required to refund the premium paid but is allowed to keep a service fee from the refunded amount. - the company must return 100% of the premium paid and is not allowed to keep any of the premium. - he is only entitled to a refund if he can prove the terms of the policy were misrepresented at the time of sale.

- the company must return 100% of the premium paid and is not allowed to keep any of the premium. The 20-day free-look provision states that the policyowner is entitled to an unconditional refund of the entire premium paid if he does not want to retain the policy for any reason. The insurer is not entitled to keep any of the premium paid; they must refund the entire amount. Coverage is in force, the owner is simply allowed to return the policy within the free-look period, so if the insured died, coverage would be provided.

Delay Clause

A policy's loan provisions may include a delay clause. This clause allows the insurer to delay making a policy loan for six months after a loan request. For Example Earl's insurer did not have to give Earl the loan right away. The delay clause allowed it to make him wait up to six months for the money. Arlene, his wife, would have appreciated that.

Policy Loans

A policyowner is entitled to use the policy cash value as collateral for a policy loan. Any policy with cash value must have a loan provision, giving the policyowner this right after three full policy years have elapsed. The maximum loan amount is the cash value less the interest that will accrue to the end of the policy year and any previously taken loans. Repayment A policy loan may be repaid at any time but is not required until the insured dies. However, the loan will accrue interest at a rate specified in the policy, and the unpaid interest will be added to the outstanding loan balance. This results in compound interest. If the amount of the loan plus interest ever equals the cash value of the policy, with 30 days' notice from the insurer, the policy will lapse. The loan would then be considered a total surrender for any tax that may apply. The amount of the debt may not exceed the collateral for the loan. If the insured dies before repaying the loan, the insurer will deduct the loan balance and interest from the policy proceeds. If the policyowner lapses or surrenders the policy, the insurer will deduct the loan balance and interest from the cash value. For Example Earl has $35,000 cash value in his $150,000 life insurance policy. Feeling lucky, he decides to go to Las Vegas and requests the insurer loan him $20,000, using his cash value as collateral. Once in Vegas, Earl realizes he's not quite as lucky as he thought. However, confident his luck has to turn, he requests the insurer loan him another $5,000. Sadly, with luck eluding him and knowing he was a dead man once he got home, he requests another $5,000 loan so he can leave the country. Earl will be charged interest on the money but does not have to pay either the loan or accruing interest until the policy cash value is insufficient to cover the total amount owed. If he surrenders the policy, the total amount owed will be deducted from any cash paid him. If he dies, the amount owed will be deducted from the policy proceeds. If he were to die leaving Las Vegas, the insurer would pay Earl's beneficiary $120,000 ($150,000 - $30,000 = $120,000)minus any accrued interest.

Free Look

Every individual policy must have a __________________________ provision. The free-look provision begins upon delivery of the policy, not at application or issue.

Uniform Simultaneous Death Act and Common Disaster

One would assume that a policyowner would want the primary beneficiary to enjoy the proceeds when the insured dies. If the beneficiary and the insured were to die at the same time, or about the same time, and the beneficiary could not enjoy the proceeds, they must be paid to the policyowner's second choice, the contingent beneficiary, rather than to the heirs of the primary beneficiary. The Uniform Simultaneous Death Act provides that, if the insured and beneficiary die at same time (or it is simply not known who died first): - the insured is presumed to have lived longer; therefore, the "beneficiary dies first" in this situation. - the proceeds are paid to the contingent beneficiary or, if there is no contingent beneficiary, to the insured's estate. - the primary beneficiary's heirs or estate has no claim to the proceeds.

Issuing Agreement Statement

The life insurance contract must include an ___________________________________________________ identifying insured and insurer. It states that in return for premiums paid, the insurer agrees to pay policy proceeds to insured's beneficiary if the insured dies during policy period.

Contractual Relationship Between Beneficiary and Insurer

When an insured dies, the contractual relationship between the insured and the insurer ends, and a new contractual relationship begins between the insurer and the beneficiary. Thus, the beneficiary has the right to: - be paid the funds arising from the death benefit. - sue the insurer if the death claim is not paid upon receipt of proper proof of death of the insured. The creditors of the insured have no rights to claim any part of the funds.

policy declarations

The _____________________________________ identify a beneficiary to receive policy proceeds upon death of the insured.

policy is issued.

An applicant becomes known as the policyowner when the ______________________________

Collateral Assignment

(also called a conditional or temporary assignment) is a partial assignment. It is a transfer of some, but not all, of the owner's rights on a temporary basis. For example, if the policyowner pledges the cash value of his policy to a creditor as collateral for a loan, the assignment only exists while there is a balance owed on the loan. If the insured dies during the term of the assignment, the portion of the proceeds needed to pay off the loan are paid to the lender, with the balance paid to the policy beneficiary.

F has a $50,000 life insurance policy with an accidental death benefit that will pay double the face amount to his beneficiary, G. If F commits suicide three years after purchasing the policy, G will receive - $0. - $50,000. - $100,000. - $150,000.

- $50,000. The beneficiary receives the face amount of the policy and only receives the accidental death benefit if the insured dies from an accident. As suicide is not payable as an accident, and the two-year suicide exclusion has passed, G will receive $50,000.

When Q's insurer discovers that Q was older than he had claimed when applying for a life policy, the insurer - will not have to pay any proceeds. - must still pay all the proceeds upon the death of the insured. - will deduct the amount of extra premium the insured should have paid from the proceeds. - will pay only the amount of insurance the premiums paid would have purchased at the correct age.

- will pay only the amount of insurance the premiums paid would have purchased at the correct age. The misstatement of age provision provides that if the insured's age is misstated the insurer will: request payment of the difference between the premiums which should have been paid and those actually paid and adjust future premiums if the insured is still alive. If the insured has died, the insurer may pay the death benefit based on the amount of insurance the premium would have paid using his correct age. In other words, if he had paid 3/4 of what he was supposed to pay, the insurer will pay 3/4 of the face amount. Note, this is not the same as deducting the extra premium from the proceeds.

Identification

A key right of the policyowner is the right to name the beneficiary of the policy. He is the only person who has that right or the right to change a beneficiary. The insurer may not name or change beneficiaries. The policy declarations will identify the beneficiary to receive the policy proceeds upon death of the insured. The beneficiary may be: - one or more individuals, including a minor. Note A minor cannot give a receipt for payment of the proceeds until reaching the age of majority (age 18.) Therefore, an insurer will not pay a minor directly. It will either pay the proceeds to a trustee or guardian for the minor or delay payment until the minor reaches majority. - an entity (e.g., a company or charitable organization). - a trust. If a trust is the beneficiary, the policy proceeds are paid to a trustee for the benefit of the trust. This is a useful arrangement when the intended beneficiary is a minor. If the trust is created and funded while the insured (the grantor) is alive, it is called an inter vivos trust (or living trust). If it is created through a will, it is called a testamentary trust. -the insured's estate, if no beneficiary is named or if the named beneficiary(ies) die(s) before the insured does. Because of this, the estate is sometimes called the ultimate (or last) beneficiary. Sometimes the estate will be named as the beneficiary if the funds are to be used to pay the insured's debts. However, this creates a need for probate of the funds and may result in additional estate taxation.

Primary and Contingent Beneficiaries

A policy may identify more than one beneficiary. It may name a: - primary beneficiary to receive all the proceeds if he is alive at the time the insured dies. - contingent beneficiary to receive all the proceeds if the primary beneficiary dies before the insured does. - tertiary beneficiary to receive the proceeds if the primary and secondary beneficiaries have died before the insured does. For Example Merle names his girlfriend, Sharlene, as his primary beneficiary; his other girlfriend, Marlene, as his contingent beneficiary; and his sister, Darlene, as tertiary beneficiary. If Sharlene outlives Merle, she gets all the proceeds. If she does not, Marlene will get all the proceeds if she is alive at the time of Merle's death. If Sharlene and Marlene are both gone before Merle dies, then all the proceeds go to Darlene. And if she is gone, too, the proceeds go to Merle's estate.

loan provision

A policy with cash value must have a _____________________________ as one of the rights of the policyowner.

assignment provision

An ____________________________________________ states the policyowner must notify the insurer in writing if he wants the insurer to transfer ownership rights to another person.

first premium is paid and the policy is delivered.

An insured is not covered until both the ____________________________________ and _______________________________

Incontestable Clause

An insurer may deny payment of a death claim on the basis of fraud or misrepresentation in the application during the first two years of the policy. An incontestable clause states that after two years the insurer may not contest the validity of the policy on such a basis. After the two years, the insurer may deny a claim only on the basis of nonpayment of premiums. This clause does not apply to: - riders providing disability income or waiver of premium benefits. - accidental death benefit riders. - misstatement of age or gender. - claim fraud. For Example When Rosemary applied for her insurance policy, she lied about her past use of recreational drugs and steroids and the three concussions she suffered while playing soccer. When she died in a car accident 15 months later and the insurer discovered the truth, her husband's policy claim was denied. When Heather applied for her insurance policy, she lied about her past use of recreational drugs and her present two-pack-a-day smoking habit. When she died in a car accident 25 months later and the insurer discovered the truth, it paid her husband's policy claim.

Review 2

An assignment is a transfer of ownership rights to another person. A policyowner can assign his interest in the policy to any other person (an assignee) and the policyowner must notify the insurer in writing of the assignment if he wants the insurer to honor it and pay the proceeds to the assignee. A collateral assignment (also called a conditional or temporary assignment) is a partial assignment. It is a transfer of some, but not all, of the owner's rights on a temporary basis. An absolute assignment is a complete assignment. It is a permanent transfer of all policy rights to the assignee. The policyowner cannot regain any rights that were assigned. A policyowner is entitled to use the policy cash value as collateral for a policy loan. Any policy with cash value must have a loan provision, giving the policyowner this right after three full policy years have elapsed. The maximum loan amount is the cash value less the interest that will accrue to the end of the policy year and any previously taken loans. A policy loan may be repaid at any time but is not required until the insured dies. However, the loan will accrue interest at a rate specified in the policy, and the unpaid interest will be added to the outstanding loan balance. If the insured dies before repaying the loan, the insurer will deduct the loan balance and interest from the policy proceeds. If the policyowner lapses or surrenders the policy, the insurer will deduct the loan balance and interest from the cash value. A policy's loan provisions may include a delay clause. This clause allows the insurer to delay making a policy loan for six months after a loan request. A policy with cash value, or a rider to such a policy, may provide for automatic premium loans (APL) so that the insurer can collect unpaid premiums and prevent the policy from lapsing. The APL provision states that the insurer will automatically make a policy loan, using the cash value as security, to pay the premium if it is not paid by the end of the grace period. The policy declarations will specify the mode of premium payment (i.e., the frequency of payments), which may be monthly, quarterly or some other interval.

Review

Consideration is something of value that each party to a contract gives to the other and what causes a person to agree to be bound to the contract. It could be money, property, service or a promise. The consideration clause states that the insured's consideration for the contract consists of statements in the application; and the payment of premiums as specified in the policy declarations. The insurer's consideration is the promise to pay the policy face amount upon the death of the insured, subject to the terms and conditions of the policy. Therefore, the insurer could be sued if it failed to perform as promised. The entire contract provision states that the contract is not just the policy. It includes the policy, the application for the policy and any other forms endorsed on or attached to the policy at the time of issue and made part of the policy. Changes to any policy provisions or policy language may only be made by an officer of the insurer. A producer may not make any change or modifications. The person purchasing a life insurance policy is the applicant. When the policy is issued, that person becomes the policyowner. The policyowner may or may not be the insured (i.e., the person whose life is insured). The policyowner pays the premiums and controls all rights to the policy while the insured is alive. These rights are identified in the ownership provision.

irrevocable

If the beneficiary is _____________________________, the written consent of the beneficiary is needed to change beneficiaries or do anything else which may result in a reduction of the amount the beneficiary will receive when the insured dies, such as: - take a policy loan. - withdraw cash value. - assign the policy. - surrender the policy. For Example Harry's ex-wife, Heidi, has decided to change the beneficiary of the policy insuring Harry's life from their daughter, Honey, to her personal trainer at her health club, just because she can. She must to let the insurer know, but Harry cannot stop her from making the change. When Jen and Barry went into business, Barry agreed to buy an insurance policy insuring himself and naming Jen as an irrevocable beneficiary. Barry has to pay the premiums and cannot take a policy loan, change beneficiaries or do anything else that would affect the death benefit without Jen's consent.

Identification 2

In the declarations, the beneficiary may be identified by name or by class. A beneficiary identified by name is a named beneficiary. A class designation does not name individuals but specifies a group (e.g., "my living brothers and sisters," "all my children"). The class designation is generally used by a person who does not want to have to change the beneficiaries if the group is later changed due to births, deaths or other events. It eliminates the need to update the beneficiary designation, as members in the class are automatically added or deleted. However, it can create problems if it is unclear as to who qualifies as a member of the class (e.g., stepchildren, half-brothers).

Physical Examination and Autopsy

Life insurance policies providing accidental death and dismemberment benefits may include a provision giving the insurer the right to require a physical examination, conducted at its own expense, to examine any individual whose injury or sickness is the basis of a claim. An examination may be reasonably required when and as often as the insurer believes necessary during the period in which a claim is pending. The insurer may conduct an autopsy in case of death, where it is not forbidden by law.

Revocable vs. Irrevocable

The beneficiary may be designated as revocable or irrevocable. A policyowner has the right to change a beneficiary without his consent unless he is an irrevocable beneficiary (e.g., in a divorce situation, a court may order a man to name his ex-wife as an irrevocable beneficiary so he is unable to change the beneficiary designation). The policyowner may change a revocable beneficiary whenever and as often as he wishes. He does not need the consent of the beneficiary or of the insurer, although he must notify the insurer of any change, so it will know who is to be paid the proceeds. The insurer may use a filing method or endorsement method to make the change. Under the filing method, the policyowner need only send a change of beneficiary form to the insurer. Under the endorsement method, the insurer would need to make the change on the policy itself.

Consideration

The contract must contain a statement of ___________________________________ -- something of value each party gives to the other.

Policyowner's Rights

The person purchasing a life insurance policy is the applicant. When the policy is issued, that person becomes the policyowner. The policyowner may or may not be the insured (i.e., the person whose life is insured). The policyowner pays the premiums and controls all rights to the policy while the insured is alive. These rights are identified in the ownership provision and include the right to: - designate a beneficiary (i.e., the person that will receive the death benefit). - change the beneficiary (unless irrevocable). - assign or transfer the policy ownership to another person. - use the cash value as collateral for a loan. - select or change the mode of payment. - receive policy dividends or excess interest credits. - receive policy proceeds at maturity of the policy. - lapse or terminate the policy and select a nonforfeiture option. - exercise any conversion privilege provided in the policy. - select a settlement option. For Example Heidi owns a $200,000 life insurance policy, insuring her ex-husband, Harry. Heidi is the policyowner. Harry is the insured. Heidi has named her daughter, Honey, to be the beneficiary. When she decides to go to Paris, France, Heidi borrows $8,000, using the cash value of the policy as security for a policy loan. Another benefit for Heidi is that each year the insurer sends her a check for policy dividends. Last year it was $500. If Harry lives to age 100, Heidi will get a check for $192,000 from the insurance company if she has not paid back the policy loan. She can decide to stop paying premiums and take the cash value of the policy. If Harry dies while the policy is in effect and a death benefit is paid, Heidi can specify how Honey will be paid. Honey has no say in any of this.

Absolute Assignment

is a complete assignment. It is a permanent transfer of all policy rights to the assignee. The policyowner cannot regain any rights that were assigned. The Internal Revenue Code provides that a policy owned by the insured (first-party ownership) within three years of his death becomes part of his gross estate values and is potentially subject to estate tax. If a policyowner/insured were to assign his policy absolutely to the beneficiary at least three years before his death, the estate tax would be avoided. For Example Earl's assignment of his cash value to Fast Bucks was a collateral assignment. Fast Bucks has rights to the policy's cash value only to satisfy the debt. Earl could also assign his policy to Fast Bucks. This would be an absolute assignment, making Fast Bucks the owner. They could then name themselves as beneficiary in the event of Earl's death.

Accelerated Death Benefits Option/Rider

provides that the insurer will accelerate payment of some or all of the policy death benefits during the insured's lifetime when the insured's death is anticipated soon or when a specified life-threatening or catastrophic condition occurs. This lets the policyowner (who is usually the insured) get policy benefits while still alive when his imminent death is certain or when the funds could be used to pay for needed medical assistance to prevent the death. Payment of the benefit before the death will reduce the death benefit that would be paid upon the insured's death. The accelerated benefit is payable after a qualifying event occurs. Some of these may be called living need riders. A qualifying event could be: - a medical condition that will result in a remaining life span of not more than 24 months. - a medical condition that requires extraordinary medical intervention (e.g., a major organ transplant or continuous artificial life support, without which the insured would die). - a condition that is expected to keep the insured confined to an eligible institution for the rest of his life, sometimes called a long-term care annuity. - a medical condition that without extensive or extraordinary medical treatment will result in a drastically limited life span (e.g., end-stage renal failure or acquired immune deficiency syndrome). For Example When Fred was diagnosed with terminal cancer and was told he had six months to live, he applied for accelerated death benefits from his life policy so he could afford to travel and spend the rest of his days back home, seeing the sites of his youth and visiting family.

Which of these beneficiaries is the insured's estate? - Primary - Tertiary - Contingent - Ultimate

- Ultimate The person named to receive proceeds is the primary beneficiary. A second person who is named to receive proceeds if the primary beneficiary dies before the insured does is the contingent beneficiary. A third person named to receive proceeds if the first two die is a tertiary beneficiary. In the event there are no surviving beneficiaries, the proceeds are paid to the insured's estate (the ultimate beneficiary).

Upon reinstatement of a life policy - a new contestability period goes into effect, based on the reinstatement application. - a new suicide exclusion period goes into effect. - premiums are charged based on attained age. - there is a three-year period before a policy loan may be obtained.

- a new contestability period goes into effect, based on the reinstatement application. When a policy is reinstated, the premium and suicide period of the old policy are carried forward to the reinstated policy. There is no new suicide period or new premium. Riders that had existed with the original policy may not be reinstated, and there is a new contestability period for statements made in the application for reinstatement.

When T transfers ownership of his life insurance policy to his wife, this constitutes - a collateral assignment. - an absolute assignment. - a change in beneficiary designation. - creation of an irrevocable beneficiary.

- an absolute assignment. An absolute assignment is a complete assignment. It is a permanent transfer of all policy rights to the assignee. A collateral assignment (also called a conditional or temporary assignment) is a partial assignment. It is a transfer of some, but not all, of the owner's rights temporarily, such as when the policy is assigned as collateral until a loan is repaid.

X's life insurance policy has a common disaster provision. When X and the primary beneficiary, M, die as a result of the same accident, proceeds will be paid - as if X and M had died simultaneously. - to M's estate. - as if M had died last, unless X lives beyond a specified period. - as if X had died last, unless M lives beyond a stipulated period.

- as if X had died last, unless M lives beyond a stipulated period. Under the common disaster provision, the primary beneficiary will not receive the proceeds unless he outlives the insured for a certain period of time, e.g., 10, 15, or 30 days after the common accident. If he dies within that period, the proceeds would be paid to the contingent beneficiary or to the insured's estate if there is no contingent beneficiary, just as if the insured had died after the beneficiary.

The life insurance incontestability clause - applies to all riders. - applies to a misstatement of age. - can prevent an insurer from denying a claim because of a concealed pre-existing condition once the policy has been in effect two years. - does not apply if the insured intentionally misrepresented or concealed material facts.

- can prevent an insurer from denying a claim because of a concealed pre-existing condition once the policy has been in effect two years. The incontestable clause does not apply to riders providing disability income or waiver of premium benefits, to accidental death benefit riders, or to misstatement of age. It will prevent an insurer from denying a claim because of a material misrepresentation or concealment after two years from the date of the policy even if the concealment related to a pre-existing condition.

If X owns a life insurance policy, X has the right to do all of the following EXCEPT - change policy provisions. - select a settlement option. - designate a contingent beneficiary. - select a nonforfeiture option.

- change policy provisions. Only an officer of the insurer can change policy provisions. A policyowner can select any options available for dividends, settlement, or nonforfeiture and may also select beneficiaries as he controls the policy until the insured dies.

The provision giving the insured coverage for a period of time after a premium is due is the - payor clause. - automatic premium loan clause. - grace period provision. - waiver of premium clause.

- grace period provision. The grace period provision provides that the policy will not lapse the day after a premium payment is missed. It gives the policyowner a period of time in which to pay the premium. If the insured dies during the grace period, the insurer will pay to the beneficiary the death benefit less the premium owed.

insuring agreement, or insuring clause:

- identifies the insured and insurer. - contains the insurer's agreement to provide the coverage. - states that, in return for the premiums paid, the insurer agrees to pay the policy proceeds to the insured's beneficiary if the insured dies during the policy period. Based on a settlement option selected, benefit payments may be in either: - a lump sum; or - periodic payments.

If W named X as an irrevocable beneficiary of his insurance policy, W - must have X's permission to borrow the policy's loan value. - may change the beneficiary unilaterally. - may borrow the policy's loan value without X's permission. - must allow X to borrow the policy's loan value at any time.

- must have X's permission to borrow the policy's loan value. A revocable beneficiary may be changed by the policyowner. An irrevocable beneficiary cannot be changed unilaterally; he must consent to the change, as he has guaranteed ownership of the policy proceeds. Furthermore, because of this ownership an irrevocable beneficiary's consent is also needed in order for the policyowner to borrow the policy loan value or to assign the policy, as these actions could affect the proceeds to be paid him.

All of the following are requirements for reinstatement of a lapsed policy EXCEPT - proof of insurability. - repayment of all back premiums and past due interest. - a potential medical examination of the insured. - no more than one year has passed from the date of the policy lapse.

- no more than one year has passed from the date of the policy lapse. The reinstatement provision allows the insured to reinstate the policy by repaying all back premiums and interest on the premiums, showing proof of insurability, having coverage under a paid-up nonforfeiture option (reduced paid-up insurance or extended term insurance), and not having lapsed the policy more than three years ago. If the insured chose cash surrender as the nonforfeiture option, or more than three years have passed since the policy lapsed, the insured has no right to reinstate the policy.

W owns a life policy and wants to change the primary revocable beneficiary. W must - obtain written permission from the beneficiary. - notify the insurer of the change as prescribed in the policy. - name a contingent beneficiary. - incorporate a common disaster clause.

- notify the insurer of the change as prescribed in the policy. When the policyowner changes revocable beneficiaries, he does not need the consent of the beneficiary or of the insurer. His only duty is to notify the insurer so the insurer will know who is to be paid the proceeds.

If after F died, the insurer discovered that F had understated his age at the time he purchased the policy, the insurer would - void the policy. - increase the insurance. - do nothing because of the incontestability clause. - reduce the proceeds payable to F's beneficiary.

- reduce the proceeds payable to F's beneficiary. If age is understated and the insured has died, the insurer will adjust the death proceeds to a lower amount. The incontestability clause does not apply to misstatement of age.

If an insured commits suicide within the time specified by the suicide exclusion, the insurer will - void the policy. - not pay anything. - refund the premiums paid. - pay the beneficiary only the interest earned by the premiums paid.

- refund the premiums paid. The suicide provision states that the insurer will not pay the face amount if the insured commits suicide within the suicide exclusionary period. Instead, the insurer will refund the premiums paid. If the insured commits suicide after the exclusionary period, the insurer will pay the face amount just as if the insured had died from natural or accidental causes.

Collateral for a policy loan is - the policy's cash value. - required only if the loan exceeds $3,000. - obtained by assigning items of personal property to the insurer. - only available through the insurer.

- the policy's cash value. Since cash value is the policyholder's equity in the policy, he may use this equity as collateral for a policy loan from the insurer or a loan from a bank or other person. When using the cash value as collateral, he would enter into a collateral assignment, giving the lender the right to receive the amount of cash value necessary to pay off the loan in the event he defaults on the loan.

Exclusions

A life insurance policy may exclude coverage for death resulting from suicide, war and aviation. Suicide If there is a suicide clause in the policy, the insurer will deny payment of the face amount if the insured commits suicide during the first two policy years but will refund the premiums paid, with no interest, to the beneficiary. If suicide occurs after the policy has been in force for two years, the insurer will pay the full policy benefit. In a credit life insurance policy, this exclusion period is six months. War If the policy excludes death due to war, the premiums or cash value are refunded if death does result from war. There are two versions of this exclusion: - The status clause excludes payment of benefits for any death while the insured is in the military service, regardless of the cause of death. - The results clause would only exclude death resulting from the military service or war. Aviation If the policy excludes death due to aviation, the premiums or cash value are refunded if death results from the type of aviation excluded. Generally, the death of fare-paying passengers on commercial flights is covered, but the deaths of pilots, crew members and persons in private planes or military aircraft might be excluded.

Automatic Premium Loan

A policy with cash value, or a rider to such a policy, may provide for automatic premium loans (APL) so that the insurer can collect unpaid premiums and prevent the policy from lapsing. The APL provision states that the insurer will automatically make a policy loan, using the cash value as security, to pay the premium if it is not paid by the end of the grace period. Under the automatic premium loan provision: - the policyowner is charged interest on the loan. - there is no six-month delay clause, since the loan must be made immediately. - there may be a limit to the number of times the insurer will make such loans. To maintain the maximum policy cash value and face amount, the policyowner must ensure that the loan is repaid. If it is not, the amount still owing would be deducted from: - the cash value if the policy is later surrendered. - the death benefit if the insured dies.

may not reinstate a policy if

A policyowner may not reinstate a policy if: - the cash surrender option has been chosen; or - the extended term coverage has expired. When a policy is reinstated, the premium and suicide period of the old policy are carried forward to the reinstated policy; there is no new suicide period or new premium. The insurer may or may not reinstate riders that had existed prior to the policy lapse, and there is a new contestability period for statements made in the application for reinstatement. For Example Because of his multiple trips to Vegas, Earl was having financial problems and stopped paying the premiums for his policy. When the grace period expired, Earl told the insurer to keep the cash value and use it to buy term insurance in the amount of his current coverage (the face amount less outstanding loan balance). The insurer told him the cash value would buy a policy that would keep him insured for another four years, three months and 12 days. Two and a half years later, Earl was back on his feet financially and decided to reinstate his policy. He paid the past due premiums, reinstated his loan and showed proof of insurability. As a result he got his coverage back at his original premium rate. If Earl had waited another seven months to apply for reinstatement, the insurer would not have been obligated to do so.

Misstatement of Age or Gender

An insurer may reduce claim payments based on misstatement of age or gender. A misstatement of age or gender clause prevents the insurer from canceling the policy on the basis that the insured's age or gender was misstated. However, it does allow the insurer to adjust the policy benefits to correspond with the insured's correct age or gender. Upon discovery of a misstatement, the insurer may adjust the benefits to the amount the premium paid would have purchased had the insurer known the correct age of the insured. For Example Alex had been misstating his age for so long that, when he applied for his insurance policy, without thinking, he stated he was 35. As a result, he has been paying $150 a month for $100,000 of insurance. A few years later, the insurer discovered that Alex had been 40 at the time of his application. At rates for a 40 year old, the $150 premium would only have purchased $85,000 of insurance. Alex's insurer informed him it would reduce his coverage to $85,000, reflecting what the premium paid would have purchased had his correct age been known.

Consideration

Consideration is something of value that each party to a contract gives to the other and what causes a person to agree to be bound to the contract. It could be money, property, service or a promise. The consideration clause states that the insured's consideration for the contract consists of: - statements in the application; and - the payment of premiums as specified in the policy declarations. The insured's consideration is not a promise to pay premiums, but the actual payment of premiums. Life insurance premiums are paid in advance. Therefore, if he does not pay premiums, he would not be sued but would lose his coverage. On the other hand, the insurer does make a promise. The insurer's consideration is the promise to pay the policy face amount upon the death of the insured, subject to the terms and conditions of the policy. Therefore, the insurer could be sued if it failed to perform as promised.

Free-Look (Right to Examine)

Every individual life insurance policy must include a free-look provision. This provision entitles the policyowner to a full refund of the premium paid if he returns the policy to the producer or insurer within a specified time after receiving the policy. The free-look period begins upon the delivery of the policy, not on the date of application or issue, and provides the policyowner time to carefully read the policy. If, after reviewing the policy, the policyowner decides to request a refund: - he does not need to give a reason for the refund request. - the policy is rescinded. With a policy rescission, no coverage is afforded under the policy at any time. As such, even if the insured died before the refund request reached the insurer, there would be no coverage. - the insurer must refund the premium promptly. It is not allowed to keep any of the premium for any reason. If the insured dies within the free-look period and has not requested a refund, it is presumed he would not have requested a refund and a death claim would be paid. If a refund has been requested and the paperwork completed by the policyowner in order to process the refund, coverage under the policy would be cancelled and no death benefit would be paid if the insured dies after the request. For Example When Earl received his new insurance policy in the mail, he saw that it gave him 20 days to look it over. When he also saw that he would be paying for it for the rest of his life, he decided he could not handle any more commitment in his life and, three days later, mailed the policy back, asking for a full refund of the premium paid. On the way home from mailing the policy back to the insurer, he was hit by a car and died. His wife, Arlene, submitted a claim, but it was denied.

Initial Premium

If the initial premium is not submitted with the policy application, the insured has no coverage until that premium is paid and the policy is delivered. As a result, the insured may be refused coverage if his health has changed from the time of the application to the time of policy delivery. For Example When Fred applied for his life insurance policy, he did not pay the premium. He wanted to see the policy first. When his producer received the policy, he had Fred sign a statement of continued good health and observed Fred's health to make sure it had not changed since submission of the application. Since there had been no change in Fred's health, the producer collected Fred's premium and delivered the policy. At that point, coverage became effective.

Reinstatement

If the premium for a cash value policy is not paid before the end of the grace period and the policyowner does not take a premium loan, the policy will lapse. The insurance company is not allowed to simply keep the cash value that has accumulated to that date. If the policy lapses, the policyowner may select one of three nonforfeiture options: - Cash surrender value (take the value of the policy as cash) - Reduced paid-up insurance (use the cash value to pay in full for a reduced value policy) - Extended term insurance (use the cash value to purchase paid-up term insurance) If either reduced paid-up or extended term insurance is selected and the insured is still covered by that insurance, the policyowner may reinstate the lapsed policy within three years of the lapse, by: - paying the past-due premiums and interest charged at no more than 8% annually - showing proof of insurability. - repaying or reinstating any policy loans.

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If there is a suicide clause in the policy, the insurer will deny payment of the face amount if the insured commits suicide during the first two policy years but will refund the premiums paid, with no interest, to the beneficiary. If suicide occurs after the policy has been in force for two years, the insurer will pay the full policy benefit. A key right of the policyowner is the right to name the beneficiary of the policy. He is the only person who has that right or the right to change a beneficiary. The insurer may not name or change beneficiaries. A policy may identify more than one beneficiary. It may name a primary beneficiary to receive all the proceeds if he is alive at the time the insured dies, contingent beneficiary to receive all the proceeds if the primary beneficiary dies before the insured does and a tertiary beneficiary to receive the proceeds if the primary and secondary beneficiaries have died before the insured does. The estate of the insured is the "ultimate" or "final" beneficiary. The beneficiary may be designated as revocable or irrevocable. A policyowner has the right to change a beneficiary without his consent unless he is an irrevocable beneficiary. If the beneficiary is irrevocable, the written consent of the beneficiary is needed to change beneficiaries or do anything else which may result in a reduction of the amount the beneficiary will receive when the insured dies. When an insured dies, the contractual relationship between the insured and the insurer ends, and a new contractual relationship begins between the insurer and the beneficiary. The accelerated death benefits option provides that the insurer will accelerate payment of some or all of the policy death benefits during the insured's lifetime when the insured's death is anticipated soon or when a specified life-threatening or catastrophic condition occurs.

Payment of Claims Provision

The payment of claims provision states that, when a policy becomes a claim because of the death of the insured, the insurer must settle the claim promptly upon receipt of proof of death (e.g., a death certificate), a claim form and surrender of the policy. The insurer can reduce or deny a claim for certain reasons, including: - collection of unpaid premiums. - fraud or misrepresentation. misstatement of age or gender. policy exclusions. If the insurance company specifies a particular period prior to which the settlement will be made, this period of time cannot exceed two months.

Premium Payments

The policy declarations will specify the mode of premium payment (i.e., the frequency of payments), which may be monthly, quarterly or some other interval. Some policies, for example, whole life insurance, have fixed and level required premium payments. If the premium payments for a Whole Life policy weren't made, the policy will lapse due to nonpayment of premium. Other policies, such as Universal Life insurance, have flexible premiums that allow the policyowner to vary the amount of their premium payments when they need and are structured so that the premiums for the insurance are credited to the account in a different manner compared to Whole Life. Premium rates are based on annual payments, made in advance. If a policyowner spreads the payments out during the course of the year, the insurer will incur greater expenses in processing the payments and will earn less interest. As a result, except when payments are made by preauthorized check plans (which are easy to administer and have a high persistency rate [i.e., a high percentage of policies staying in force until the end of the policy term]), a higher premium is charged if payments are made more frequently. The fewer the payments per year, the lower the total premium for the year (e.g., a single annual premium would be less than the total of 12 monthly premiums).

Which of these beneficiaries is the second in line to receive benefits from a policy? - Primary - Tertiary - Contingent - Ultimate

- Contingent The person named to receive proceeds is the primary beneficiary. A second person, who is named to receive proceeds if the primary beneficiary dies before the insured does, is the contingent beneficiary. A third person named to receive proceeds if the first two named beneficiaries die is a tertiary beneficiary. In the event there are no surviving beneficiaries, the proceeds are paid to the insured's estate (the ultimate beneficiary).

Which of these provides that the application is part of the insurance contract? - Entire contract clause - Insuring agreement - Consideration clause - Incontestable clause

- Entire contract clause The entire contract provision states that the insurance policy and application (if attached to the policy), constitute the entire contract. In other words, oral statements are not to be considered binding or relevant to the contract. If a statement is not in the policy or attached to it in writing, it has no legal effect.

Which of these provides that the insurer can use concealment, misrepresentation or fraud as a basis to void a contract only during a specified initial period? - Entire contract clause - Insuring agreement - Consideration clause - Incontestable clause

- Incontestable clause The incontestable clause provides that the insurer may contest the validity of the policy on the basis of fraud or material misrepresentation during the first two years of the policy. After that, the insurer may contest the validity only on the basis of nonpayment of premiums.

grace period

Once a policy is effective, if a premium is not paid, the policy's grace period provision allows the policyowner 30 days, or a month of not less than 30 days, to pay any premium past due. This protects the policyowner against unintentional lapse (i.e., cancellation) of the policy. If the insured dies during the grace period, the insurer will pay to the beneficiary the death benefit less the premium owed (and possibly interest). For Example Fred was injured and unable to pay his premium by the due date. Fortunately for his beneficiary, he died during the grace period, allowing the insurer to pay his beneficiary the $250,000 death benefit less the $210 premium that was unpaid. Fred's policy would have cost $2,400 per year if he had paid annually. However, because he paid monthly, his payments were $210 per month ($2,520 annually).

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Once a policy is effective, if a premium is not paid, the policy's grace period provision allows the policyowner 30 days, or a month of not less than 30 days, to pay any premium past due. This protects the policyowner against unintentional lapse (i.e., cancellation) of the policy. If the insured dies during the grace period, the insurer will pay to the beneficiary the death benefit less the premium owed (and possibly interest). The policyowner may reinstate the lapsed policy within three years of the lapse, by paying the past-due premiums, showing proof of insurability and repaying or reinstating any policy loans. When a policy is reinstated, the premium and suicide period of the old policy are carried forward to the reinstated policy; there is no new suicide period or new premium. The insurer may or may not reinstate riders that had existed prior to the policy lapse, and there is a new contestability period for statements made in the application for reinstatement. The payment of claims provision states that, when a policy becomes a claim because of the death of the insured, the insurer must settle the claim promptly upon receipt of proof of death (e.g., a death certificate) and surrender of the policy. An insurer may deny payment of a death claim on the basis of fraud or misrepresentation in the application during the first two years of the policy. An incontestable clause states that after two years the insurer may not contest the validity of the policy on such a basis. After the two years, the insurer may deny a claim only on the basis of nonpayment of premiums. An insurer may reduce claim payments based on misstatement of age or gender. A misstatement of age or gender clause prevents the insurer from canceling the policy on the basis that the insured's age or gender was misstated. Upon discovery of a misstatement, the insurer may adjust the benefits to the amount the premium paid would have purchased had the insurer known the correct age of the insured.

contract provision

The entire _______________________________________ notes that the contract is the policy, the application and any other forms endorsed or attached to the policy.

Entire Contract

The entire contract provision states that the contract is not just the policy. It includes: - the policy. - the application for the policy. - any other forms endorsed on or attached to the policy at the time of issue and made part of the policy. Note The contract does not include any oral statements made or any other papers that are not attached to the policy. For Example When Earl bought his next insurance policy, his producer assured him that, if he paid premiums for the next 10 years and then applied the dividends from the policy to his premium payments, he would never have to pay premiums again. When he got a notice from the insurer stating that his policy was about to lapse for nonpayment of premium, Earl contacted the company and told the representative that there must be a mistake. When he relayed the statement about payment made by his insurance producer, the insurer's response was "See the Entire Contract Provision."

common disaster clause

The insurance policy may have a _________________________________(or short-term survivorship clause) which carries this a step further. It provides that the beneficiary and his heirs are not entitled to the proceeds unless the beneficiary survives the insured for a certain length of time (e.g., 30, 60, 90 days). This would apply to any situation where the beneficiary is only a short-term survivor, whether the beneficiary's death was caused by the same accident causing the insured's death or another cause. For Example Dell named Lea as his primary beneficiary and Meadow the contingent beneficiary of his $200,000 insurance policy. When Dell and Lea died in an auto accident and it could not be determined who died first, Lea's children were afraid the insurer would pay the proceeds to Meadow based on the Uniform Simultaneous Death Act. They demanded that the accident be reinvestigated, the result of which determined that Lea actually outlived Dell by 40 minutes. Lea's children claimed that they should be paid the policy proceeds. However, the insurer pointed out that there was a short-term survivorship clause with a 30-day survivorship requirement. They paid the proceeds to Meadow.

Primary and Contingent Beneficiaries 2

The policyowner may name more than one beneficiary to share the proceeds if they are all alive when the insured dies. If all are not alive at that time, the proceeds will be redistributed, either per capita or per stirpes. If the designation is per capita, any deceased beneficiary's share is divided equally between the surviving beneficiaries. If the designation is per stirpes, any deceased beneficiary's share will "pass through" the deceased beneficiary and be paid to his children (the "root") equally. For Example John names Mary, Paul and Lisa as beneficiaries of his $150,000 life policy. If all of them are alive when John dies, each gets $50,000. If Paul dies before John and the designation is per capita, Mary and Lisa would each get $75,000. If the designation is per stirpes, Mary and Lisa would still receive their $50,000 and Paul's $50,000 would go to his children equally.