Life Insurance: Chapter 3-Policy Riders, Provisions, Options and Exclusions

Long-Term Care Coverage (LTC)

Purchased as a separate policy -can be marketed as a rider to life insurance policy -pays part of death benefit in order to pay health care needs like at nursing home or convalescent home -reduces amount payable to beneficiary upon death

Policy Provisions: Beneficiary Designations: Revocable and Irrevocable

Revocable Designation: policy owner can change designation at any time without beneficiary consent or knowledge. Irrevocable Designation: cannot by changed without written consent of beneficiary. -policy owner cannot borrow against the cash value or assign policy to another person without the beneficiary's agreement.

Nonforfeiture Options: Reduced Paid-Up Insurance

Use of cash value as a single premium to purchase paid-up permanent policy -reduced face amount of former policy, builds its own cash value

Dividend Options: One-Year Term option

Use of dividend to purchase one-year term policy which increases death benefit. -Death must occur within policy year in order to receive benefit

Disability Riders: Payor benefit rider

Used with juvenile policies -functions like a waiver of premium rider -if payor (parent or guardian) becomes disable or dies, insurer waives premiums until minor reaches specific age (like 21) -also used when owner and insured are 2 different people

Riders

added to a policy to modify provisions that already exist

Term Riders

additional temporary insurance without need to issue another policy -attached to whole life, greater protection at reduced cost

Policy Provisions

adopted by NAIC to create uniformity among policies

Provisions

define characteristics of insurance contract. Fairly universal from one policy to the next

Policy Loans and Withdrawals

-Policy loan option only in policies with cash value -policy owner can borrow amount equal to cash value -outstanding loans + interest are deducted from proceeds upon death -policy won't lapse with outstanding loan unless it exceeds cash value -insurer must provide 30 days written notice to policy owner that is will lapse

Policy Provisions: Beneficiary Designations: Common Disaster Clause

-addressing death of insured and primary beneficiary in the same incident. -Uniform Simultaneous Death Law: primary beneficiary listed as dying first -Fulfills the wishes of policy owner as funds would go to the contingent beneficiary or estate -Insurers must specify as period of time for death to occur (usually 14-30 days) in order for this to apply.

Misstatement of age or gender

-age and gender determine premium to be charged -insurer can adjust policy benefits to the correct age/gender -based on date of policy issue

Reinstatement

-allows lapses policy to be put back in force -maximum time limit: usually 3 years after lapsing -requires evidence of insurability -policy owner required to pay back premiums and interest and repay outstanding loans -restores it to original status, retaining values -policy that has been surrendered cannot be reinstated.

Policy Provisions: Free Look

-allows policy owner a specified number of days to look over policy and return if dissatisfied, with full refund of premium -free look period begins when policy owner receives policy, NOT when it is issued

Other Insureds Rider: Substitute Insured or Change of Insured Rider

-allows policy owner to change insured, subject to insurability -used with key person insurance when key person/employee retires or quits -used when businesses have joint life policy and want to maintain policy

Guaranteed Insurability Rider

-allows purchase of additional coverage at specified times (usually every 3 years) or events (marriage, birth of child) -no evidence of insurability required -additional premium -additional coverage purchased at attained age -usually expires at age 40 -not modified or defeated by other riders

Policy Options

-how cash value is protected -return of excess premium (dividends) are invested -how benefit payments are made

Return of Premium Rider

-increasing term insurance -added to whole life policy -if death before certain age, face amount payable PLUS equal amounts premium previously paid payable to beneficiary. -expires at specified age (ex: age 60)

Policy Loans and Withdrawals: Automatic Policy Loans

-not required, but added to policies with cash value -prevents unintentional lapse of policy due to nonpayment of premium -policy owner must elect this provision in writing

Policy Provisions: Insuring Closure

-or insuring agreement -basic agreement between insurer and insured -state insurers promise to pay death benefit upon insured's death -located on policy face page -defines parties to the contract, premium to be paid, how long coverage is in force and amount of death benefit

Dividend and Dividend Options

-paid only on participating policies -return of excess premiums -not taxable -cannot be guaranteed by insurance companies -paid as early as 1st anniversary of policy, must occur no later than end of 3rd policy year. Paid annually thereafter. 6 Options: -Cash -Reduction of Premium -Accumulation at interest -Paid-up Additions -Paid-up Option -One Year Term Options

Policy Provisions: Owner's Rights

-parties to insurance contract: insurer, policy owner, insured and beneficiary -Policy owner has ownership right under policy, not insured (if a different person) or beneficiary. -Rights: naming and changing beneficiary, receiving policy's living benefits, selecting benefit payment options, assigning the policy -Responsibility: paying premiums, must have insurable interest *if owner and insured are two different people, referred to as the third-party ownership

Accidental Death Rider

-pays a multiple of face amount if death is accidental as defined in policy. -Death must occur 90 of accident -usually 2x base face amount: double indemnity, some 3x base face amount: triple indemnity -Accidental death is specified in the policy. Does not include death from health problem or disability, self-inflicted injuries, war, hazardous hobbies -usually expires at age 65 -no additional cash value

Accidental Death and Dismemberment Rider (AD&D)

-pays principal (face amount) for accidental death -pays percentage of principal (capital sum) for accidental dismemberment -dismemberment defined different in each company from severance of limb to loss of use.

Premium Payment: Grace Period

-period of time after due date that the policy owner has to pay premium before policy lapses (usually 30-31 days)

Policy Provisions: Entire Contract

-policy and copy of application with riders and amendments=entire contract -statements made before contract written can alter contract -once policy is in effect, policy provisions can only be changed when both parties agree and it being affixed to contract

Policy Provisions: Assignments

-policy owner has right to transfer partial or complete ownership to another person without consent of insured. Owner must advise insurer in writing of assignment. -transfer doesn't change insured or amount of coverage, only who has ownership rights. -2 Types of Assignments: Absolute assignment, Collateral assignment

Premium Payment: Modes

-policy stipulates when premiums are due, how often they're to be paid and to whom. -premium mode: manner of frequency policy owner pays the premium. Most policies: annual, semi-annual, quarterly or monthly -all modes except additional charge to offset loss of earnings and administrative costs of billing.

Policy Provisions: Beneficiary Designations

Beneficiary: person/interest to which policy proceeds are paid upon insured's death. -can be on person, a group (like children), the estate, institution or charity, etc. -Trusts used with beneficiary designation if beneficiary is a minor. -beneficiary doesn't have to have an insurable interest in the insured. -policy owner doesn't have to name a beneficiary in order for a policy to be issued

Settlement Options: Life-Income Option: Life Income with Period Certain

Best of both worlds -payment guaranteed for lifetime -specified period guaranteed: if death occurs before time is up, proceeds continue to be paid to another beneficiary

Accelerated Death Benefits Rider

Early payment of portion of death benefit with the following conditions: -terminal illness -medical condition requiring extraordinary medical intervention (like organ transplant) in order to survive -Medical condition that without treatment limits lifetime -inability to perform activities of daily living (ADLs) -any other conditions approved by Dept. of Insurance *Max benefit usually % of face amount, but legal for insurance to pay 100% -may be a $ limit -face amount reduced after payments -premium may not be lowered, but it can be waived.

Settlement Options: Life-Income Option: Life Income Joint and Survivor

Guarantees income for two or more recipients for lifetime -written as joint and 1/2 survivor or joint and 2/3 survivor -survivor receives 1/2 or 2/3 of what was received when other beneficiary was alive -commonly chosen to protect two beneficiaries like elderly parents -does not guarantee full payout of benefits -DOES guarantee income for lives of all beneficiaries

Nonforfeiture Options: Extended Term

Use of case value to convert to term coverage for same face amount as permanent policy -term insurance lasts as long as cash value will purchase -If no nonforfeiture option is chosen, insurer automatically implements extended term if original policy is terminated

Dividend Options: Reduction of Premium

Use of dividend to reduce next year's premium

Disability Riders: Waiver of Premium

Waives premium if insured becomes totally disabled -coverage continues until insured returns to work -if disable for life, premium is still waived -6-month waiting period from time of disability before premium is waived. Refund of premium for 6-month waiting period. -rider expires at age 65 -must meet requirements of total disability: inability to engage in work in current occupation. After 2 years, refers to any occupation that could be achieved through training/education -no benefits for partial disability

Other Insureds Riders

provides coverage for one or more family members other than insured -usually level term insurance -AKA family rider

Settlement Options: Interest Only

Insurance retains policy proceed and pays interest to beneficiary at regular intervals (monthly, quarterly, semi-annually, annually) -insurer guaranteed rate of interest and can pay interest in excess of rate -temporary option-other settlement option will have to be chosen at a later date

Dividend Options: Paid-up Options

Insurer accumulates dividends at interest -uses accumulated dividends plus interest with cash value to pay policy up early.

Dividend Options: Cash

Insurer sends a check to policy owner

Premium Payment: Level or Flexible

Level Premium: premium remains the same throughout contract. Flexible Premium: premium paid can be more or less than planned (as in universal life)

Settlement Options: Cash Payment

Lump Sum -payment of principal face amount -not taxable as income

Settlement Options:

Methods used to pay beneficiary upon insured's death, or endowment benefit if lives until endowment date. -Policy owner selects option at time of application, can change option during life of insured. -cannot be changed by beneficiary -if option is not chosen, beneficiary chooses upon insured's death. 5 Options: -Cash Payment -Life-Income Option -Interest Only -Fixed Period Installments -Fixed Amount Installments

Exclusions

Types of risks policy will not cover: Aviation: non-commercial pilots (commercial pilots and fare-paying passengers are covered). May require additional charge for coverage. Hazardous Occupation/Hobbies: like auto racing or skydiving, death from these activities may be excluded. May have option for charging higher premium for coverage. War or Military Service: general military service not excluded. -Status Clause: excludes all causes of death while on active duty. -Results Clause: excludes death benefit if killed as a result of an act of war (declared or undeclared) Suicide: policy stipulates a period of time where death benefit will not be paid if insured commits suicide. -beneficiary will only be entitled to refund of premiums -suicide after period in suicide clause will result in entire death benefit being paid.

Incontestability

-prevents insurer from denying a claim due to statements in application after policy is in force for 2 years -does not apply to nonpayment -does not apply to statements of age, sex, or identity

Policy Provision: Collateral Assignment

-transfer of partial rights to another person -usually done to secure a loan or other transaction -partial and temporary assignment of some policy rights -once debt/loan is paid, assigned rights retained to policy owner

Policy Provisions: Absolute assignment

-transfers all rights of ownership to another person. -Permanent and total transfer. -New policy owner does not need to have insurable interest.

Policy Provisions: Consideration

-value that must be offered by both parties -insured: premium and statements in application -Insurer: promise to pay in accordance with contract terms. *Not always a separate provision, but included in entire contract provision

Policy Riders

-written modifications attached to policy providing benefits not found in original policy -may require additional premium -tailors policy to specific need of insured

Settlement Options: Life-Income Option

AKA Straight Life -provides recipient income that cannot be outlived. -installment payments guaranteed -amount of installment based on recipients life expectancy and amount of principal -may exceed total principal if beneficiary lives longer than expected -if beneficiary dies early, balance is forfeited to insurer. -Options available to be sure proceed paid out: Life income with period certain, and Life Income joint and survivor

Settlement Options: Fixed Period Installments

AKA period certain -specified period of years -equal installments paid to recipient -payments continue even if recipient dies (to a beneficiary) -installment size determined by principal, guaranteed interest and length of period -does NOT guarantee payment for life, but does guarantee full payment of principall

Other Insureds Rider: Family Term Rider

Combines spouse and children's term rider

Dividend Options: Accumulation at Interest

Company keeps dividend in interest-bearing account -policy owner can withdraw dividends at any time -interest amount specified in policy, compounds annually -dividend not taxable, interest IS taxable when credited

Other Insureds Rider: Children's Term Rider

Covers children of the insured (natural, adopted or stepchildren) -usually expires at age 21 -provides minor with opportunity to converting to permanence and policy without evidence of insurability -premium does not change with addition of children

Other Insureds Rider: Spouse Term Rider

Covers just the spouse, usually expires when spouse is 65

Policy Provisions: Beneficiary Designations: Succession

Designation provides 3 levels of priority or choice: Primary beneficiary: first claim to policy proceed following death of insured. More than one can be named, as well as how benefit is divided. Contingent beneficiary (secondary or tertiary): second claim if primary dies before insured. They receive nothing if primary is alive at the death of insured. -if neither beneficiary is alive to receive benefits, it goes to insured's estate. May be included in taxable portion of estate.

Dividend Options: Paid-up Additions

Dividend used to purchase single premium policy in addition to face amount of permanent policy. Not a separate policy -each small single premium payment increases death benefit by whatever amount dividend will buy -each additional policy accumulates cash value and pay dividends -based on attained age at declaration of dividend -if no option is chosen for use of dividend, paid-up addition will be automatically chosen by insurance company

Policy Options: Nonforfeiture Options

Nonforfeiture values: guarantees built into policy that cannot be forfeited by policy owner. Required by state law. -table showing values for minimum period of 20 years must be included in a policy. 3 Options: Cash Surrender Value, Reduced Paid-Up Insurance, Extended Term

Effect of death benefit

Payable death benefit = Face amount - amount withdrawn - earnings lost by insurer in interest

Disability Riders: Waiver of Monthly Deduction Rider

Pays all monthly deductions while disabled, after 6 month waiting period. -doesn't pay full premium necessary for cash value -monthly deductions include actual cost of insurance charges, expense charges, costs for benefits added by riders, etc. -length rider will pay based on age of disability -found in Universal Life and Variable Universal Life policies

Settlement Options: Fixed Amount Installments

Pays fixed, specified amount in installments until proceeds (principal + interest) are exhausted.

Living Needs Rider

Pays part of death benefit if diagnosed with terminal illness that will result in death in 2 years -provides funds to take care of medical and nursing home expenses -usually no charge for this rider

Nonforfeiture Options: Cash Surrender Value

Policy owner surrenders policy at a time when coverage is no longer needed or affordable -if cash surrender value exceeds premiums paid, excess is taxable as income -insured is no longer coverd -insured is no longer covered -policy cannot be reinstated -requires a surrender charge

Options

offer insurers or insureds ways to invest or distribute money available in a life policy.