Life Insurance: Policy Provisions

What is an incontestability clause?

Incontestability clause = After a certain period of time (e.g. 2 years), a company cannot void the policy for anything except nonpayment of premiums

What is a typical grace period for life insurance policies, re: late premium payments?

Usually a month (30-31 days)

If a policyowner can no longer pay premiums and the policy lapses, or the policyowner surrenders the policy for any other reason, what happens to the cash value?

it must be turned over to the policy owner.

What is a suicide clause?

usually stipulates a period of time during which the death benefit will not be paid if insured commits suicide. Meant to deter people who are imminently contemplating suicide from purchasing life insurance.

If a policy is owned by a third party, is the policy included in the estate of the insured? Why is this significant?

No! Can be beneficial if the insured has a large estate, but not a lot of liquidity.

Say you've taken a policy loan and not yet repaid it when you die. Does that void the policy?

No, outstanding loans don't void the policy UNLESS the loan amount + interest exceeds cash value of policy, and 30 days notice has been mailed to policyholder and assignee.

*Beneficiaries* If Zeke has 3 sons named as beneficiaries and a $150K life insurance policy. Zeke dies, and then one son dies. How would that policy be divided up if the beneficiaries are.... a) per capita b) per stirpes

a) Per Capita: remaining sons receive $75,000 b) Per Stirpes: living sons get $50K each, and the deceased son's estate/heirs receive $50K

What are the some of main rights of the policyowner? (1-6)

1. Name the beneficiary 2. Decide how proceeds are paid out 3. Right to assign the policy 4. Access cash value 5. Change premium payment schedule, it's inconvenient or disadvantageous 6. Decide how to use dividends paid by company

*Trust as beneficiary* What's the structure of a trust? (grantor/trustee/beneficiary)

A grantor designates ownership of property to a trustee, who manages it for the benefit of the beneficiary. The trustee legally must not benefit.

A policy must contain some cash value after it's been in force for a specified period, usually ___ years

A policy must contain some cash value after it's been in force for a specified period, usually *3 years*

How long may an insurer defer a loan request?

An insurer can defer a loan request for up to six months from date of application, unless the reason for the loan is to pay the premiums due.

What is a Facility of Payment provision?

Facility of payment provision: The insurer can select a new beneficiary if the original beneficiary cannot be found in a reasonable time. Usually someone else in the family immediate bloodline.

*Standard provisions* Modifications/changes must be communicated where?

Modifications/changes must be endorsed or/attached to policy in writing, over the signature of specified officer of company.

*automatic premium loans* Are these automatically included in all policies?

Nope! They must be specifically requested and written in.

What are some reasons that someone might want to reinstate a lapsed policy, vs. buying a new one?

Old one might have lower interest rates or premiums, more liberal policy provisions, or favorable suicide/incontestable clauses.

*Naming beneficiaries* If the primary beneficiary dies and there is no contingent or tertiary beneficiary, who becomes the beneficiary?

The insured's estate.

*Assignment* Why is a voluntary assignment also called an absolute or complete assignment?

Voluntary assignment is AKA absolute/complete assignment because it involves turning over all rights, including right to cash value, over to assignee.

*Assignment* If someone is a beneficiary to a (still living) insured's policy, are they more likely to receive a loan based on the collateral of the policy if they're a REVOCABLE or IRREVOCABLE beneficiary?

Irrevocable! Because the policyowner cannot re-assign to a different benficiary.

*Spendthrift clause* So if the beneficiary is being paid proceeds on a monthly basis, can the creditors claim all of the proceeds?

Only the proceeds that have actually been paid--not the ones being kept with the insurance company.

*Prohibited provisions* There are several provisions that are not permitted in most states. E.g. A provision that limits the time for bringing any lawsuit against the insurance company to [how long] after the reason the lawsuit occurs

A provision that limits the time for bringing any lawsuit against the insurance company to LESS THAN ONE YEAR after the reason the lawsuit occurs

What does "assigning the policy" mean?

Assigning the policy = transferring a portion or all of your rights to a life insurance policy. E.g. if you want to assign the policy to your kid, or to a bank as collateral after you've borrowed money.

*Assignment* What does an assignment clause in a policy say?

Assignment clause = any assignment the policyowner decides on must be filed IN WRITING with the company, or the claim will not be paid.

What is an automatic premium loan provision?

Automatic premium loan provision = the company can use $ from cash value to pay premiums to stop it from lapsing.

*Exclusions* What is an aviation exclusion?

Aviation exclusion restricts benefits from death by aviation activities EXCEPT if the insured was a fare paying passenger or commercial crew member.

*Assignment* What is a collateral assignment?

Collateral assignment = assigning death benefit as collateral for outstanding loans (e.g. a bank is the assigned as collateral for getting loan)

*Assignment* Why is a collateral assignment also called a "partial assignment"?

Collateral assignment is AKA a partial assignment because only a portion of the proceeds are paid to the assignee.

*Naming beneficiaries* What is the filing method?

Filing method (aka the recording method) = the request must be filed in writing to the insurer.

*Irrevocable beneficiaries* If a policy has an irrevocable beneficiary, and the policyowner wants to take out a loan from the cash value, what would they need to do?

Get consent from the beneficiary.

*Beneficiaries* What might an insurance company sometimes do with life insurance proceeds when the beneficiary is still a minor?

If beneficiary is a minor, the company may hold onto proceeds and pay interest until turning them over when beneficiary meets certain age. OR Company might insist that a trustee or guardian is appointed.

*Misstatement of age clause* If a discrepancy in age exists (between the age when insured applied, and their actual age discovered later), and the insured is ALIVE, what happens?

If insured is alive, the company must adjust the amount of future premiums, and request payment of any additional premium the policyowner should have paid. E.g. if a man says he's 30 and policy is issued, but he's actual 34, he would have been paying a lower rate, and therefore has to make up the difference.

*Exclusions* What is war or military service exclusion? Is it common today?

In wartime, it's been common to restrict/limit death benefits. But most do not do this today -- they'll just limit or charge higher premiums for someone who's considering military service.

What is the insuring clause?

Insuring clause = basic agreement between company and insured. It's a promise that life insurance company will pay $ to beneficiary upon insured's death.

What is an ownership clause?

Ownership clause = an applicant (usually a parent) can be controller/owner of a policy for a minor, until minor reaches a given age.

*Beneficiaries* What is a spendthrift clause intended for?

Spendthrift clause is designed to protect a beneficiary from using the policy proceeds for bad habits.

*Spendthrift clause* What are some of the features of a spendthrift clause?

Spendthrift clause: -Proceeds paid in some way besides lump sum -Payments are protected from beneficiary's creditors while being held by company Stops beneficiary from: -Transferring: Assigning proceeds to creditor -Commuting: Taking present value of future payments in lump sum -Encumbering" borrowing money against proceeds

*Beneficiaries* What are the two ways to name/change a beneficiary?

To name a beneficiary: 1. Filing method 2. Endorsement method

*Trust as beneficiary* If a trust is the beneficiary of a life insurance policy, what is the trustee's role upon death of the insured?

Trustee administers funds in accordance with instructions set forth in trust provisions/insurance policy.

*Uniform Simultaneous Death Law* What does the Uniform Simultaneous Death Law say?

Uniform Simultaneous Death Law: If insured and beneficiary die around the same time and there is no evidence about who died first, the policy is settled as though the insured died second (survived the beneficiary) --> often proceeds go to insured's estate

*Misstatement of age/sex clause* If the error is found after the period of incontestability, can the insurer still make a change?

Yes!

*Misstatement of age clause* If a discrepancy in age exists (between the age when insured applied, and their actual age discovered later), and the insured is DEAD, what happens?

If the insured has died when mistake is discovered, the company must calculate the amount of

*Assignment* Why might a collateral assignment also be called a "conditional assignment"?

Collateral assignment can be a conditional assignment because it may only result in transfer of benefits under certain conditions. E.g. if the policy is used as collateral for a bank loan, but the loan is repaid before the insured dies, the bank does NOT receive the proceeds.

*Assignment* What's the difference between a revocable vs. irrevocable beneficiary?

Revocable: the policyowner can change their mind and assign a different beneficiary at any time Irrevocable: the policyowner cannot designate another person in his stead.

*Assignment* If a beneficiary dies before the policyowner, and the beneficiary has made an assignment, what happens?

Usually that assignment is no longer valid, unless the policyowner agrees in writing that the assignment remains valid of the beneficiary dies first. Proceeds of policy are paid as if assignment never existed.

*automatic premium loans* In what ways are these similar to any other loan you'd take from the cash value? (interest, death benefit)

-Interest accrues on loan -Death benefit is payable minus outstanding loans

*Beneficiaries* What's an advantage of designating beneficiaries of life insurance policies by group or class, vs. individual name? E.g. Julio saying the proceeds should go to "all my children" vs. "my children Elizabeth and Jose"

It allows for more flexibility -- if the number of children changes (e.g. someone dies o more are born), you don't have to amend the policy every time to update the beneficiaries.

*Uniform Simultaneous Death Law* What is the "Common Disaster Provision"?

It says that the primary beneficiary must outlive the insured a specified length of time in simultaneous death, or the proceeds are paid to the contingent beneficiary. E.g. a husband takes out a policy with wife as beneficiary, and son as contingent, and wants to ensure that funds go directly to son if they both die, vs. being tied up in wife's estate.

*Exclusions* Is it common for companies to deny coverage based on occupation?

Not really -- more often people are declined because of risky hobbies, not jobs. (e.g. car racing, sky diving). But people sometimes have higher rates for more hazardous jobs.

*Estate as beneficiary* While having the estate be the beneficiary can provide some liquidity to pay for costs of death, what are some drawbacks?

-It adds to the size of the estate (aka higher taxes) -It's vulnerable to creditors -They can be tied up for a long time, esp if estate is involved in a dispute

What is an absolute assignment?

Absolute assignment = a permanent transfer of ownership rights.

If a policy lapses and the insured wants to reinstate it, what are the three conditions?

Conditions for reinstatement: 1. Policyowner pays all back premiums plus interest 2. Insured shows proof of insurability 3. Less than three years must have elapsed

What is the consideration clause?

Consideration clause = the company promises to pay policy benefits in exchange for premiums.

*Trust as beneficiary* Difference between inter vivos trust and testamentary trust?

Inter vivos trust = takes effect while grantor is alive Tesamentary trust = takes effect after grantor's death, in line with their will

*Beneficiaries* For an irrevocable beneficiary, the designation cannot be changed without _____________________.

For an irrevocable beneficiary, the designation cannot be changed without *the consent of the beneficiary*.

*Standard provisions* What is a free look?

Free look = you get 10 days (sometimes 20) to surrender policy, with written request for cancellation, from date policy is delivered. Policy will be void and premiums refunded.