Chapter 4: Life Insurance Policy Provisions, Options and Riders

What are the most common exclusions in life insurance policies?

War and military service, hazardous occupation, and aviation

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

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.

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

Settlement options

A policy owner 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.

Who does the common disaster clause protect?

The contingent beneficiary

An applicant for life insurance misstated 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 the 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).

What does the term double indemnity mean?

The insurer will pay a benefit of twice the face amount.

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

Other-insured rider

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

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

Cash surrender

What are three nonforfeiture options in life insurance policies?

Cash surrender, reduced paid-up, and extended term

What are the dividend options in life insurance policies?

Cash, reduced premium, accumulation at interest, paid-up additions, paid-up option, one-year term, and acceleration of endowment.

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 provisions state that both the policy and a copy of the application form the contract between the policyowner and the insurer?

Entire contract

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

Extended term

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

Grace period

What required provision protects against unintentional policy lapse?

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

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 nonforfeiture option provides coverage for the longest period of time?

Reduced-paid up

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 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

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.

What settlement options are available in life insurance policies?

Lump-sum/cash, fixed period, fixed amount, life income, interest only

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

No. Beneficiaries do not have insurable interest in the insured.

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

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

Policyowner