Chapter 3: Life Policy Provisions, Riders, and Options

What type of assignment is used to secure the payment of a debt with an existing life insurance policy?

Collateral assignment

What type of beneficiary is next in line after the primary beneficiary?

Contingent beneficiary

What life insurance policy provision states that both the policy and a copy of the application form the contract between the policyowner and the insurer?

Entire contract

Which rider, when attached to a permanent life insurance policy, provides an amount of insurance on every family member?

Family term rider

What provisions in a life insurance policy extends coverage beyond the premium due date?

Grace period

What life insurance policy provision prevents an insurer from disputing or denying a claim due to misstatements on the application after a certain period of time?

Incontestability

The sole beneficiary of a life insurance policy dies before the insured. If the policyowner does not amend the beneficiary designation, what will happen to the policy's death benefit?

It will be paid to the insured's estate

If a settlement option is not chosen by the policy owner or the beneficiary, what option will be used by the insurer?

Lump-sum payment

What is the term for how frequently a policyowner is required to pay the policy premium?

Mode

NAIC

National Association of Insurance Commissioners (an organization composed of insurance commissioners from all states and jurisdictions formed to resolve insurance regulatory issues)

Is the beneficiary required to have insurable interest in the insured?

No

What is the name for a life insurance policy rider that provides coverage on the insured's family members?

Other-insured rider

What dividend option can increase the death benefit of the existing life policy?

Paid-up additions

What dividend option is automatically selected by the company if not chosen by the policyowner?

Paid-up additions

With the interest only settlement option, what happens to the policy's death benefit?

Policy proceeds are retained by the insurance company; only the interest is paid to the beneficiary

Who controls changes in premium payments, face values, and loans in a life insurance policy?

Policyowner

Who has the right to the cash value of a life insurance policy?

Policyowner

What beneficiary designation has first claim to the death proceeds of a life insurance policy?

Primary beneficiary

What nonforfeiture option provides coverage for the longest period of time?

Reduced paid-up

What are the three nonforfeiture options in life insurance policies?

Reduced paid-up Extended term Cash surrender

What provision allows the policyowner to reactivate a lapsed life insurance policy within a specified period of time with proof of insurability?

Reinstatement

What are policy dividends?

Return of unused premiums

What type of beneficiary can be changed at any point by the policyowner?

Revocable

What term is used to describe methods of payment of the death benefit to the beneficiary upon the insured's death?

Settlement options

A policyowner borrowed a portion of cash value from his whole life policy. If the loan is not repaid, how will that affect the death benefit to the beneficiary?

The amount of the loan will be subtracted from the death benefit

What happens to a policy's cash value under an extended term nonforfeiture option?

The cash value is converted to the same face amount as in the whole life policy

An applicant for life insurance misstates her age on the policy application. How will this affect the death benefit?

The death benefit will be adjusted to the amount that the insured could obtain for her correct age

With the reduction of premium dividend option, how is the dividend used?

The dividend is applied to the next year's premium (it reduces the next year's premium)

A father owns a life insurance policy on his 15-year-old daughter. The policy contains the optional Payor Benefit rider. If the father becomes disabled, what will happen to the life insurance premiums?

The insured's premiums will be waived until she is 21

What does the term double indemnity mean?

The insurer will pay a benefit of twice the face amount

All of the following are TRUE statements regarding the accumulation at interest option EXCEPT...

The interest is not taxable since it remains inside the insurance policy

In the fixed-period settlement option, how will the number of installments for the death benefit proceeds determine the amount of the installments?

The longer the period selected, the smaller each installment will be

What happens to the proceeds of a life insurance policy if there is no named beneficiary?

The proceeds are paid to the insured's estate

What is the defining factor for irrevocable beneficiaries?

They can be changed only with the written consent of that beneficiary

What is the purpose of a free-look period?

To allow the insured to return the policy with a full refund

What is the purpose of settlement options in life insurance policies?

To determine how the death benefit will be paid to the beneficiary

What is the purpose of the Automatic Premium Loan provision?

To prevent the unintentional lapse of a policy because of nonpayment of the premium

What life policy rider allows the company to forgo collecting the premium if the insured becomes disabled?

Waiver of premium

When can an insurance company use suicide as a defense against paying a death claim?

When a suicide is committed within a specified period of time after the policy is purchased (usually 2 years)

When will a contingent beneficiary receive death benefits from a life insurance policy?

When the primary beneficiary dies before the insured

Activities of daily living (ADLs)

a person's essential activities that include bathing, dressing, eating, transferring, toileting, continence

Indemnity

a principle of reimbursement on which insurance is based; in the event of loss, an insurer reimburses the insureds or beneficiaries for the loss

Under what nonforfeiture option does the company pay the policy's surrender value and have no further obligations to the policyowner?

Cash surrender

An insured receives an annual life insurance dividend check. What term best describes this arrangement?

Cash option

An insured owns a $50,000 whole life policy. At age 47, the insured decides to cancel his policy and exercise the extended term option for the policy's cash value, which is currently $20,000. What would be the face amount of the new term policy?

$50,000 - The face of the term policy would be the same as the face amount provided under the whole life policy

What are the most common exclusions in life insurance policies?

1. Aviation 2. Hazardous occupation or hobbies 3. War & Military

Consideration

something of value that each party gives to the other (binding force in any contract)

Principal

the face value of the policy; the original amount invested before the earnings

Assignment

transfer of rights of policy ownership

What are the dividend options in life insurance policies?

1. Cash 2. Reduced premium 3. Acceleration of endowment 4. Accumulation at interest 5. Paid-up additions 6. Paid-up options 7. One-year term

What settlement options are available in life insurance policies?

1. Cash (Lump-Sum) 2. Life income 3. Interest only 4. Fixed period 5. Fixed amount

To meet the requirement of the entire contract policy provision, an insurance policy must contain what?

A copy of the original insurance application

Which of the two types of policy assignments requires transfer of all ownership rights in the policy to a third party?

Absolute assignment

What nonforfeiture option is automatically selected by the company if not chosen by the policyowner?

Extended term

What required provision protects against unintentional policy lapse?

Grace period

Which of the following is true about the premium on the children's rider in a life insurance policy?

It remains the same no matter how many children are added to the policy

The type of settlement option which pays throughout the lifetimes of two or more beneficiaries is called...

Joint and survivor

Which of the following settlement options in life insurance is known as straight life?

Life income

Which of the following riders added to a life insurance policy can pay part of the death benefit to the insured to cover expenses incurred in a nursing or convalescent home?

Long-term care

An insurer has discovered a representation on a life insurance policy application regarding the insured's age. The insured is 10 years older than he stated on the application. What will the insurer do regarding the death benefit?

Pay a reduced death benefit

Which of the following rider would NOT cause the Death Benefit to increase?

Payor Benefit Rider

What is the advantage of reinstating a life insurance policy as opposed to applying for a new one?

Policy premium in a reinstated policy will be set according to the insured's original age