Life and Health Test Ch. 4

TEST TIP

A policyowner should not increase an outstanding loan policy, because if the outstanding loan balance, plus interest, equals or exceeds the cash value of the policy, the company could cancel the insurance.

Exclusions

Aviation - This exclusion does not apply to fare-paying passengers on regularly scheduled commercial flights. It most likely applies to student pilots or those with a newly issued pilot's license with a limited number of hours of flying experience. Status Clause - No coverage for individuals with military status. Results Clause (War Clause) - No coverage if death is the result of war declared or undeclared. If death occurs during the period of war, only the premiums are refunded. Hazardous Occupation - No coverage if death is related to a hazardous occupation as stated in the policy, such as stunt drivers or auto racers. Hazardous Hobbies or Avocation - No coverage if death is related to a hazardous hobby as stated in the policy, such as sky diving or hot air ballooning. Illegal Acts - Injuries sustained while committing a crime.

Changes (Modifications)

Changes or modifications must be in writing, signed by an executive officer of the insurer, approved by the policyowner and made part of the entire contract. A producer cannot alter, change, modify or waive any policy provisions.

Reinstatement

If a policy has lapsed unintentionally due to nonpayment, it can be reinstated by the owner. The reinstatement time period is typically 3 years from lapse (but can be as long as 5 years). In order to reinstate, the insured must provide evidence of insurability (if the policy was not surrendered for its cash value) and the owner must pay all back premiums from the date of lapse plus interest. Reinstatements are designed to put a policy back in force as if the lapse never occurred. Upon reinstatement, a new Incontestability clause takes effect, since a new application is required.

Tertiary Beneficiary

If named, the tertiary beneficiary receives policy proceeds if both the primary and the contingent beneficiaries predecease the insured.

Misstatement of Age or Gender

If the age and/or gender of the insured have been misstated in a policy, all benefits under the policy will be provided based upon the insured's correct age and/or gender according to the premium scale in effect at the time the policy was issued. An insurer can refund any overpaid premiums if the amount of premium paid was greater than should have been paid.

Insuring Clause

Specifically, the insuring clause is found on the first page of the policy and is considered the most important clause in the policy. It identifies the parties to the contract and the perils or conditions in which it will pay. The insuring clause is the insurance company's promise to pay the policy's death benefit to the named beneficiary, after receiving due proof of death of the insured, as long as the policy is in force. It states the obligation of the insurer and the risk that is considered: premature death.

TEST TIP:

TEST TIP: The Privilege of Change Clause allows an insured to change any policy to any other policy of any type as long as the new policy has a higher premium, without proof of insurability.

Consideration Clause

The consideration clause states what each party exchanges in the contract. The policyowner must pay something of value (premium) in exchange for the insurer's promise to pay the benefits. Policies are issued in consideration of the application and the payment of premium(s).

Irrevocable

The policyowner may not change an irrevocable beneficiary unless the beneficiary dies or provides written consent for the change. If an irrevocable beneficiary is named, the owner may not make changes to the policy that affect the coverage or benefits without consent of the beneficiary. These changes include assigning the policy, canceling or surrendering the policy, or taking a policy loan. An irrevocable beneficiary has a vested interest in the policy benefits. A divorced spouse with a vested interest in the policy is an example of an irrevocable beneficiary.

Trust

When a recipient is not to have direct access to the death benefits, such as in the case of minor children, and the proceeds are to be distributed as per the insured's directions set forth in a trust. A trust beneficiary may also be used in estate tax planning strategies when using an irrevocable life insurance trust.

The Uniform Simultaneous Death Act

has been adopted by all states and provides that when the insured and primary beneficiary die as the result of the same event and the order of death cannot be proved, each is considered to have predeceased the other as a protection for contingent beneficiaries (or other heirs in probate )

TEST TIP

A producer may never make a change in policy wording.

Assignment

Assignment is the transfer of ownership. There are two types of assignments. The first is an absolute assignment (the entire face amount). The original owner (the assignor) will name a new owner of the policy (the assignee). Since a new owner is named, this is considered a permanent assignment. The second type is a collateral assignment (partial), which does not cause a permanent change in ownership however the rights of the owner will be subject to the assignment. A collateral assignment is typically used when an insurance policy is used as collateral for a loan. This is a temporary assignment until the debt is paid in full.

Revocable

The policyowner may change a revocable beneficiary at any time. This beneficiary does not have a vested interest in the policy. Most named beneficiaries are revocable and have no rights.

Free Look (Right to Examine Period)

The free look allows the policyowner a specified number of days following receipt of the policy to look it over. If dissatisfied for any reason, the owner has the right to return it for a full refund of any premiums paid. The free look period is usually 10 days, unless state law specifies otherwise. If applicable, additional information about this topic is presented in the state law chapter. The free look period starts on the date when the policy is delivered to the owner of the policy. For this reason, it is important for a producer to collect a delivery receipt when delivering the policy.

Individual/Named

This designation is very specific. An individual is specified by name as the beneficiary, such as Mary Doe (wife) or John Doe (husband). This prevents probate proceedings.

Entire Contract Clause

This provision describes the parts of the life insurance contract. The entire contract consists of the policy, riders (endorsements and amendments), and a copy of the application. All statements made in the application are, in the absence of fraud, deemed to be representations and not warranties. All parts to the contract must be attached and in writing. Nothing can be incorporated by reference.

Contingent or Secondary Beneficiary

The contingent beneficiary receives the death benefit only if there is no primary beneficiary alive following the death of the insured. In other words, the benefit is payable to the contingent beneficiary only if the primary beneficiary predeceases the insured.

Partial Withdrawals or Partial Surrenders

A partial withdrawal of cash value is permitted in a Universal or a Variable Universal Life policy. A partial withdrawal is considered a partial surrender of the policy. A partial surrender is actually paid from the policy value and either reduces the amount of the death benefit or the amount of cash value in the policy. Since this is not considered a loan, annual interest is not charged. Taxation applies to any interest on the cash value paid out as a withdrawal. In other words, any amount paid in excess of the premium is subject to taxation.

Owner's Rights (Ownership Provision)

The Policyowner retains all rights in the policy. Unless the insured is also the policyowner, the insured does not have rights. The policyowner has the right to name or change revocable beneficiaries, the right to borrow against the cash values or access living values, the right to receive dividends and to select among the dividend options made available, and the right to assign the policy on a collateral basis or an absolute basis, to name a few. It is also the owner's responsibility to make the premium payments. The beneficiary does not have rights in the policy.

Policy Loan Rate Provisions

Policy loans with fixed rates can have a maximum fixed interest rate of 8% or less as stated in the policy. Policies with adjustable (variable) loan interest rates, the maximum rate is based upon Moody's corporate bond yield average, and is stated in the policy. The policy loan amount cannot exceed the available cash surrender value.

Minors

If minors are named as beneficiaries, but no trust has been established, the funds are placed in a settlement option (held with interest), with the insurer acting as trustee. The guardian or legally responsible adult may receive payments for the benefit of the child, until the child receives the lump sum at the age of majority.

Spendthrift Trust Clause

The Spendthrift Clause denies the beneficiary the right to assign his/her interest in the policy proceeds. The purpose is to prevent creditors of a beneficiary from claiming any benefits payable to the beneficiary before they are actually received. This clause does not protect the beneficiary if the benefits are payable in a lump sum, only when the proceeds are held by the insurance company under a settlement option.

Estate

The estate may be the tertiary beneficiary in case the insured outlives all other beneficiaries. By default, if the insured outlives all other beneficiaries, benefits are paid to the insured's estate. The death benefit increases the estate value and may have tax implications. NOTE: If the proceeds are paid to the estate and the insured does not have a will, the State distributes the proceeds according to State Law. This is referred to as "the insured has died intestate".

Surrenders

The owner of a cash value policy may surrender the entire policy. This action will cancel the insurance coverage. The policyowner is entitled to receive the cash surrender value in the policy. Certain policies, for example, universal life and variable universal life may have a surrender charge schedule which might last 10 - 20 years. The schedule would show what percent of the cash value is subject to a surrender charge. The surrender charge schedule typically shows the percentage charged reducing on an annual basis.

Primary Beneficiary

The primary beneficiary is the first in line to receive the death benefit upon the death of the insured.

Facility of Payment Clause

This provision allows the insurer to pay a relative or anyone it deems entitled to the benefits in the absence of a properly designated beneficiary or in cases of no living beneficiaries. This can alleviate any lawsuits and can be used to reimburse someone who may have paid expenses on the insured's behalf, such as funeral costs.

Automatic Premium Loans (APL)

This provision must be elected by the policyowner and can be cancelled at any time. It enables the insurer to automatically borrow against the cash value to cover a premium payment to prevent the contract from lapsing unintentionally. APL is available on cash value policies only and does not require an additional premium.

Incontestability Clause

Within the first 2 years of a policy, the insurer may contest a claim and void the contract upon proof of a material misstatement or fraud. A material misstatement is one in which the insurer would not have issued the policy had they known the true information. Except for nonpayment of premiums, the policy will be incontestable after it has been in force for typically 2 years from the policy issue date, even in cases of fraud.

Creditor

Designated by assignment or named at application to cover indebtedness. The creditor may either be the named beneficiary or can be the assignee under a collateral assignment. The creditor can only receive the amount of the indebtedness. The benefit may be purchased as decreasing term so the benefit will decrease by the amount of the loan automatically.

TEST TIP

If the age was understated and discovered at death, the benefits would be adjusted to be equal to that which premium paid would have purchased. If overstated and discovered prior to death, the future premiums would be reduced.

Suicide Clause

If the insured commits suicide, while sane or insane, within typically 2 years from the issue date the insurer's liability is limited to a refund of all premium(s) paid and not the death benefit or face amount. If the insured commits suicide after the suicide clause has expired, the insurer must pay out the death benefit to the named beneficiary. The intent of this clause is to discourage individuals from purchasing an insurance policy while contemplating suicide.

Common Disaster Clause

The Common Disaster Clause provides that if an insured and primary beneficiary are in the same accident, the primary beneficiary must survive the insured by a specific number of days (10,15 or 30 days) or the insurance company will assume the insured died last (the primary beneficiary died first). This provision is designed to pay the benefits to either the contingent beneficiary or the insured/policyowner's estate if no contingent beneficiary has been designated.

Class or Classification

This designation is used in instances where each beneficiary is not directly identified by name. The wording of the class designation must be specific and carefully worded to remove any doubt of the owner's intentions. For example, "any children of this marriage", or "the insured's spouse" may be classified as beneficiaries. This could cause complications if the insured has step children or has been married more than once.