Life Insurance (Chapter 4) - AD Banker

Provision (Clause)

Benefits provided in the policy as part of the contract without an additional charge.

Settlement Options

Choices available to the insured/owner for distribution of insurance proceeds.

Premium Reduction

Dividends are applied toward the next premium due. The same could be accomplished if the policyowner received the dividends in cash and remitted the full premium. If the declared dividends equal or exceed the premium, the premium payment may be suspended.

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.

Fixed Amount

Payments are for a specified dollar amount paid monthly until the benefits along with interest are exhausted.

Fixed Period

Payments are guaranteed for a specified period of time, such as 10 or 20 years after which time payments will cease. The proceeds and interest are used to make the payments. The interest will increase the amount of each payment, and the interest is taxable.

Life Refund

Payments are made for the lifetime of the recipient. Upon death, if a recipient has not received an amount equal to the total death benefit, the balance is refunded to the beneficiary either in a lump sum called Cash Refund, or in installments as in the Installment Refund.

Single Life

Provides guaranteed lifetime income to the recipient. Once the recipient dies, payments cease. Also known as Life Income Only.

1-Year Term

Purchases a single premium, 1-year term benefit. Premiums are calculated at the insured's attained age; also referred to as the fifth dividend option.

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, borrow against the cash values or access living values, receive dividends and to select among the dividend options made available, and 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.

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.

Interest only

The death benefit proceeds may be left with the insurer while interest payments are paid at least annually.

Dividend Options

The different ways in which the insured under a participating life insurance policy may elect to receive surplus earnings: in cash, as a reduction of premium, as additional paid-up insurance, left on deposit at interest, or as additional term insurance.

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.

Primary Beneficiary

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

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.

Cash

The policyowner receives the declared dividends in the form of a check on or near each policy anniversary.

Nonforfeiture Options (Guaranteed Values)

These options are found in policies that accumulate cash values and protect the policyowner against a total loss of benefits if the policy lapses due to nonpayment of premium or is intentionally cancelled.

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/insured'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.

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.

Per Stirpes

This is a designation that will pay a deceased beneficiary's share to the heirs of that beneficiary who predecease the insured. If an insured names his/her 3 children as beneficiaries and one of the children predeceases the insured, the deceased beneficiary's share will be paid to their heirs. The surviving beneficiaries will each receive 1/3 of the benefit and the remaining 1/3 will be paid to the deceased beneficiary's heirs in this example.

Life Income Option

This option allows the insurer to use the death benefit to purchase an annuity on behalf of the beneficiary. As with other settlement options, any interest paid is taxed as ordinary income.

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. It becomes effective at the end of a grace period. The APL loan is treated as all other loans. If the APL is used to pay premiums, interest on the loan accumulates on an annual basis.

Exclusions

conditions stipulated in the contract for which the insurer will not provide coverage. The insurer cannot add or alter any of the exclusions after the policy has been issued.

Collateral Assignment (Partial/Temporary)

doesn't 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.

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 determined, it is assumed the insured died last, protecting their secondary beneficiary or heirs.

Tertiary Beneficiary

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

Suicide Clause

if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid

Policy Loans Provision (Cash Loans)

may be made in cash value policy once there is sufficient cash value to borrow against. In most policies , cash value must be made available to borrow against after 3 years.

Types of Beneficiaries

revocable and irrevocable

Insuring Clause

specifically, the insuring clause 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 ling as the policy is in force. It states the obligation of the insurer and the risk that is considered: Premature death

Accumulate at interest

the dividends are retained by the insurer and the interest rate paid the policyowner is compounded annually

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.

Assignment

the transfer of ownership.

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.

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.

Beneficiary Designation

A beneficiary designation is selected at time of application. A change of beneficiary will take effect as of the date the request was signed by the owner, whether or not the insured is alive at the time the insurer actually receives the notice.

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. When a partial withdrawal is made, the policy's cash or account value will be reduced by the amount of the withdrawal. There may be a surrender or withdrawal charge associated with the withdrawal. The insurer may limit the number of withdrawals that can be made annually or the amount of the withdrawal specifying minimums and maximums.

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.

Standard Provisions-Individual Policies Only

Contractual provisions explain what the contract consists of, what duties and responsibilities the parties to the contract have, how the policy works, and basically spells out the agreement between the policyowner and the insurance company. Provisions and clauses, unlike riders, are included in the contract for no additional charge.

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.

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. In order to reinstate, the insured must provide evidence of insurability 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.

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.

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. The insurer can reduce the face amount in cases where the amount of premium paid was less than that which should have been paid. For example, if the premium amount paid for the policy was 50% less than what should have been paid, then the death benefit will be reduced by 50%. There is no time limit for discovery, and this provision never cancels or voids a policy. The incontestability clause does not apply. Age and/or gender are not considered material to the policy issuance.

Status Clause

No coverage for individuals with military status, since these individuals are provided coverage through the government.

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.

Hazardous Occupation

No coverage if death is related to a hazardous occupation as stated in the policy, such as stunt drivers or auto racers.

Joint Life income Option

Payments are guaranteed to 2 or more recipients until the first recipient dies, then all payments cease.

Paid-up Option

Pays off the policy more quickly than scheduled. If the company's overall performance declines, premiums may have to be resumed.

Extending Term

Present cash value is used to buy a single premium term policy of the same face amount for as long a period as it will buy, expressed as a combination of years and days. This option provides the largest death benefit and is sometimes referred to as the Automatic (or Default) Option if no other option has been selected. The insured no longer has rights to the cash value under this option and the policy will expire prior to age 100. This option allows for reinstatement.

Reduced Paid-up

Present cash value is used to buy a single premium, permanent paid-up policy of a reduced face amount. This option provides the longest period of coverage provided by a nonforfeiture option. Coverage, although reduced in face value, will continue to age 100.

Options

Provisions that provide choices which must be specified by the policyowner

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.

Per Capita

This is a designation that will pay to surviving beneficiaries equally if a named beneficiary predeceases the insured. For example, if an insured names his/her 3 children as beneficiaries and one of the children predeceases the insured, the benefit will pay equally to the surviving named beneficiaries. Each beneficiary receives 50% of the death benefit in this example.

Mode of Premium

This provision addresses the frequency of premium payments (monthly, quarterly, semiannually or annually), and to whom the premiums are payable. The more frequent the payment, the greater the cost. The policyowner has the right to change the premium mode.

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.

Entire Contract Clause

This provision describes the parts of the life insurance contract. The entire contract consists of the policy, riders (or endorsements), 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.

Change of Insured

This provision is found in corporate owned life insurance when an executive moves to another company or retires, etc. This provision authorizes: 1. Changing the insured. 2. Removes new policy loading at the time of change. 3. Proof of insurability is always required.

Cash Surrender

Upon surrendering the policy back to the insurer, the policy owner will receive the cash surrender value stated in the policy less any outstanding loans and accrued interest. Any amount that exceeds the premiums paid into the policy will be taxable as ordinary income. The insured no longer has insurance coverage if this option is selected.

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.

Paid-Up Additions

purchases single premuim, additional permanent benefits at the insured's attained age. The additional insurance is added to the face amount and generates cash value and dividends as if the paid-up addition benefit was part of the orginal policy.

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 insured in the consideration of the application and the payment of premium(s).

Absolute Assignment (Permanent)

the entire face amount; The original owner (the assignor) will name a new owner of the policy (the assignee). Considered "permanent" because a new owner is named.

Beneficiary provisions

the policy owner may name and change benficiaries unless an irrevocable beneficiary has been named

Illegal Acts

Injuries sustained while committing a crime.

Policy Provisions Prohibited by Law

No provision shall limit the time for any legal action to be taken to less than one year after the act (or lack of an act) occurs. No provision shall allow backdating a policy for other than conserving the age of the applicant and then only for a maximum period of 6 months. Backdating is not a standard policy provision. In California, there is no regulation or statute to support backdating, nor any time frame. No provision shall allow the settlement to be less than the face amount at maturity or death. It is the insurer's responsibility to pay the beneficiary or policyowner the amount less any indebtedness. No provision shall designate the agent as the representative of the insured. No provision shall require contract forfeiture when an outstanding loan is less than the loan value.

Joint and Survivor Income Option

Payments are guaranteed for the lifetime of 2 or more recipients. Upon the death of the first recipient, payment continues to the survivor(s) until death of the survivor. The survivor's payment may be full (100%), 2/3, or 1/2 of the original payments. This payout option may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor, depending on which option is selected.

Life Income Period Certain

Payments are guaranteed for the lifetime of the recipient or a specified period of time, whichever is longer. If the recipient dies prior to the end of the period certain the payments continue to another person until the end of the period certain.

Straight Life (Pure or Life Income Only)

Payments are guaranteed for the lifetime of the recipient. Upon death, payments will cease. The dollar amount of each payment will depend upon the age and gender of the recipient.

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. For policy loans with an adjustable (variable) interest rate, 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.

Irrevocable Beneficiary

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.

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.

Post-Mortem Dividend

is earned, but not yet paid in the year of the insured's death, and is paid with the death claim.

Revocable Beneficiary

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

Grace Period

the time period provided after the premium due date before a policy lapses. If the insured dies during this period, the death benefit is payable minus any premiums or loans due. the typical grace period is a month (30 or 31 days) unless state law specifies otherwise.