Life Policy Riders, Provisions, Options, and Exclusions
What is true about a spouse term rider?
The rider is usually level term insurance
If a beneficiary wants a guarantee that benefits paid from principal and interest would be paid for a period of 10 years before being exhausted, what settlement option should the beneficiary select?
Fixed period (a specified period of years is selected, and equal installments are paid to the recipient. The payments will continue for the specified period even if the recipient dies before the end of that period)
Which is TRUE about the cash surrender nonforfeiture option?
Funds exceeding the premium paid are taxable as ordinary income
The insured under a $100,000 life insurance policy with a triple indemnity rider for accidental death was killed in a car accident. It was determined that the accident was his fault. The triple indemnity rider in the policy specifies that the death must not be contributed to by the insured in any manner. In this case. what will the policy beneficiary receive?
$100,000
One -year Term Option An insured has a life insurance policy from a participating company and receives quarterly dividends. He has instructed the company to apply the policy dividends to increase the death benefit.
Paid up additions (When this option is selected, the annual dividend acts as a single premium each year to buy additional amounts of insurance, based on the insured's currently attained age. )
Paid-Up Additions
The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy.
Which of the following statements about a suicide clause in a life insurance policy is TRUE?
Suicide is excluded for a specific period of years and covered thereafter
Which of the following information will be stated in the consideration clause of a life insurance policy?
The amount of premium payment
Which of the following allows the insurer to relieve a minor insured from premium payments if the minor's parents have died or become disabled
Payor Benefit
Consideration
something of value exchanged for something else of value [something of value that each party gives to the other (binding force in any contract)]
Suicide Provision
2 year period where if the insured commits suicide before then they will not receive the benefits they will just get their premium payments back. After 2 years they can receive the entire proceeds.
Cost of Living Rider
Allows the policy face amount to be adjusted to account for inflation based on the consumer price index.
A policyowner fails to pay the premium due on his whole life policy after the grace period passes, but the policy remains in force. This is due to what provision?
Automatic premium loan
Which would be described as a beneficiary designation by class?
Children of the insured
Regarding the free look provision, the insurance company
Must allow the policyowner to return the policy
Regarding the free-look provision, the insurance company
Must allow the policyowner to return the policy for a full refund. (usually a specificed amount of days- begins when the policypowner receives the policy)
Disability Riders: Waiver of Premium
Waives premium for the policy if the insured becomes totally disabled. Coverage remains in force until the insured is able to return to work
National Association of Insurance Commissioners (NAIC)
an organization composed of insurance Commissioners from all states and jurisdictions formed to resolve insurance regulatory issues
A waiver of premium rider allows an insured to waive premium payments if the insured is
completely and permanently disabled
Al surrenders his life insurance policy for its cash value. The total of the premiums paid into the policy minus total dividends received in cash or used to offset premiums is referred to as the
cost basis
The automatic premium loan provision is activated at the end of the
grace period
Policy loans are ONLY available
in policies that have cash value (whole life)
Total Disability
inability of the insured to perform any occupation for which he or she is reasonably suited by reason of education, training or experience
Insuring Clause (or Insuring Agreement)
is the insurer's basic promise to pay specified benefits to a designated person in the event of a covered loss. States the scope and limits of coverage "We ensure to INSURE you for..."
The Level Term Rider provides
level-premium, level-benefit term life insurance on the insured for a 10-year, 20-year or 30-year term period.
Dividends are a return of excess premiums; therefore
not taxable when paid to the policyowner.
Children's term rider:
one premium for ALL children
Long Term Care (LTC)
provide assistance and care mainly for elderly patients (take care of insureds health care expenses, which are incurred in a nursing or convalescent home)
Policy Riders Riders are written modification attached to a policy that
provide benefits not found in the original policy. (Riders sometime require an additional premium, but they also help tailor a policy to the specific needs of the insured, and can be classified according to their primary purpose.)
Nonfamily insureds
riders used to insure someone who is not a member of the family. Often used in business.
Extended term is the automatic nonforfeiture option:
same face amount, shorter term of coverage
Interest Only Option
the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient at regular intervals
Fixed Period Option
the policy proceeds are paid to a beneficiary over some fixed period of time
Exclusions and Limitations
types of risks the policy will not cover - conditions, situations, and services not covered by the insurance carrier (aviation, hazardous occupation, and war and military service)
Extended Term Option
use the policy's cash value to purchase a term insurance policy in an amount equal to the original policy's face value for as long a period as the cash value will purchase.
If there is no designated settlement option at the time of the insured's death, the beneficiaries of the life insurance policy
will receive a lump sum
Policy Loans and Withdrawals For how long is an insurance company allowed to defer policy loan requests?
6 months (Insurers writing variable life insurance policies may defer loan requests up to 6 months. This excludes loan requests used to pay policy premiums.)
According to the Entire Contract provision, a policy must contain
A copy of the original application for Insurance
Accelerated Benefit Rider
A living benefit or terminal illness rider (1-2 years) - if you have terminal illness, ( to be used for qualifying medical expenses) you can use the money before you die and it reduces the overall death benefit
Free Look Provision
A policy provision required by state law that establishes a set number of days (usually 10) for the policyowner to review a newly issued policy. The policyowner may return the policy to the insurer during this time for any reason and receive a 100% refund. Also known as refund provision, unconditional refund provision, return provision, exchange provision, or right to examine.
Which of the following best describes the fixed-period settlement option?
Both the principal and interest will be liquidated over a selected period of time (under the fixed-period option (also called period certain), a specified period of years is selected, and equal installments are paid to the recipient. Both the principal and interest are liquidated together over the selected period of time.)
Which of the following best describes fixed-period option?
Both the principal and interest will be liquidated over a selected period of time.
Owner's rights provisions
Defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy. [insurer, policyowner, the insured, and the beneficiary]
When the insured selects the extended term nonforfeiture option, the cash value will be used to purchase term insurance with what face amount?
Equal to the original policy for as long as the cash values will purchase
When the policyowner specifies a dollar amount in which installments are to be paid, he/she has chosen which settlement option?
Fixed amount (the policyowner sets the amount of each installment. The insurer will determine how long the installments are to be paid)
The policyowner wants to make sure that upon his death, the life policy will pay a portion of the proceeds annually to his spouse, but that the principal will be paid to their children when they reach a certain age. Which settlement option should the policyowner choose?
Interest only option (the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals.
Policy Loans and Withdrawals All of the following are true regarding insurance policy loans EXCEPT
Policy loans can be made on policies that do not accumulate cash value (the policy loan option is only found in policies that contain cash value)
The insured had his wife named as the beneficiary of his life insurance policy. To ensure that his wife had income for life after the insured's death, he chose the life income settlement option. The amount of payments will be determined by taking into account all of the following EXCEPT
The insured's age at death (though this will not be considered, but the longer the life expectancy of the recipient, the lower the payments will be.)
Premium Payment A 40-year old man buys a whole life policy and names his wife as his only beneficiary. His wife dies 10 years later. He never remarries and dies at age 61, leaving two grown-up children. Assuming he never changed the beneficiary, the policy proceeds will go to
The insured's estate
An insured has chosen joint and 2/3 survivor as the settlement option. What does this mean to the beneficiaries?
The surviving beneficiary will continue receiving 2/3 of the benefit paid when both recipients were alive. ("joint and 2/3 survivor" means the surviving beneficiary receives 2/3 of what was received when both beneficiaries were alive.)
Indemnity
a principle of reimbursement on which insurance is based; in the event of loss, an insurer reimburses the insureds or beneficiaries for the loss (a payment for damage or loss)
Revocable and Irrevocable If a life insurance policy has an irrevocable beneficiary designation,
The beneficiary can only be changed with written permission of the beneficiary
Which two terms are associated directly with the premium?
Level or flexible (A level premium is one in which the premium payment never changes. A flexible premium is found in Universal life policies where the insured changes their premium payment.)
Guaranteed Insurability
When an insured wants to buy additional insurance later on and doesn't want to worry about having to take physical exam; premiums will be adjusted
The family term rider incorporates the spouse term rider along with the children's term rider in
a single rider.
Incontestability The life insurance policy clause that prevents an insurance company from denying payment of a death claim after a specified period of time is known as the
Incontestability clause (if an insurer wishes to contest any statements on an application, they must do so within the first two years)
Which provision of a life insurance policy states the insurer's duty to pay benefits upon the death of the insured, and to who, the benefits will be paid?
Insuring clause (states the insurer agrees to provide life insurance for the named insurer which will be paid to a designated beneficiary when proof of loss is received by the insurer. It states the party to be covered by the policy and names the beneficiary who will receive the policy proceeds in the event of the insured's death.
All of the following are Nonforfeiture options EXCEPT
Interest only (Reduced paid-up, Cash surrender, Extended term)
The type of settlement option which pays throughout the lifetimes of two or more beneficiaries is called
Joint and survivor
The rider in a whole life policy that allows the company to forgo collecting the premium if the insured is disabled is called
Waiver of premium
What is the name of a clause that is included in a policy that limits or eliminates the death benefit if the insured dies as a result of war or while serving in the military?
War or military service (There are two types of exclusions that may be used by life insurers that limit the death benefit if the insured dies as a result of war or while serving in the military. It is an exclusion only if the insured is killed as a result of an act of war. )
Paid-up option
Pays off the policy more quickly than scheduled. I
Reduction of premium
The insurer uses the dividend to reduce the next year's premium
Automatic Premium Loan If an insured under a variable life insurance policy does, how will the insurer respond to outstanding policy loans?
The loan amounts are deducted from the death benefit.
If an insured continually uses the automatic premium loan option to pay the policy premium:
The policy will terminate when the cash value is reduced to nothing
Misstatement of Age and Gender An insured misstates her age at the time the life insurance application is taken. This misstatement may result in
Adjustment in the amount of death benefit (If the applicant has misstated his or her age or gender on the application. the insurer, in the event of a claim, is allowed under this provision to adjust the benefits to an amount that the premium at the correct age or gender would have otherwise purchased.)
Entire Contract Provision
An insurance policy provision stating that the application and policy contain all provisions, (along with any riders or amendments), constitute the entire contract.
At the time the insured purchased her life insurance policy, she added a rider that will allow her to purchase additional insurance in the future without having to prove insurability. This rider is called
Guaranteed insurability (is a rider that is included at the time of the application [or can be added at a later date] which allows the insured to increase the amount of insurance without proving evidence of insurability)
If a life policy allows the policyowner to make periodic additions to the face amount at standard rates. without proving insurability, the policy includes a
Guaranteed insurability rider
An individual purchasing a permanent life insurance policy with a face value of $25,000. While this is all the insurance that he can afford at this time, he wants to be sure that additional coverage will be available in the future. Which of the following options should be included in the policy?
Guaranteed insurability option
Revocable and Irrevocable An insured purchased a life insurance policy on his life naming his wife as primary beneficiary, and his daughter as contingent beneficiary. Under what circumstances could the daughter collect the death benefit.
If the primary beneficiary predeceased the insured (the daughter, as contingent beneficiary, would need to outlive the insured and primary beneficiary)
Fixed Period Life income joint and survivor settlement option guarantees
Income for 2 or more recipients until they die (guarantees an income for two ore more recipients for the duration of their lives. Most contracts stipulate that the surviving partner will receive a reduced payment after the other dies, although some will continue to pay the same amount. There is no guarantee that all the life insurance proceeds will be paid out.
Which of the following statements is TRUE about a policy assignment?
It transfers ownership from the owner to another person. [The policyowner may assign a part of the policy (collateral assignment) or the entire policy (absolute assignment). I
Interest Only The type of settlement option which pays throughout the lifetimes of two or more beneficiaries is called
Joint and survivor (pays while either beneficiary is still living)
Which of the following settlement options in life insurance is known as straight life?
Life income (provides the recipient with an income that he or she cannot outlive. It pays the death benefit while the beneficiary is alive; however, the payments stop at the beneficiary's death.
Nonforfeiture Options
Three options available by law to policyowners that enable them to recover a policy's cash-value upon surrender of that policy. (1) Cash (2) Reduced Paid-Up Insurance (3) Extended Term Insurance
What is the purpose of a suicide provision within a life insurance policy?
To protect the insurer from persons who purchase life insurance with the intention of committing suicide.
An insured purchased a 15-year level term life insurance term life insurance policy with a face amount of $100,000. The policy contained an accidental death rider, offering a double indemnity benefit. The insured was severely injured in an auto accident , and after 10 weeks of hospitalization, died from the injuries. How much will the beneficiary receive from the policy?
$200,000 (The beneficiary will most likely receive twice the face value of the policy, since the insured's fatal injuries were caused by an accident and he died within the 90-day benefit limit stipulated in most policies.)
Which of the following riders added to a life insurance policy can pay part of the death benefit to the insured to cover expenses incurred in a nursing or convalescent home?
Long term care (this rider provides for the payment of part of the death benefit (called accelerated benefits) in order to take care of the insured's health care expenses, which are incurred in a nursing or convalescent home.
The Ownership provision entitles the policyowner to do all of the following EXCEPT
Set premium rates (the insurer sets premium rates based upon the underwriting considerations)
Level or Flexible An insured had a $10,000 term life policy. The annual premium of $200 was due on February1; however, the insured failed to pay the premium. He died on February 28. How much would the beneficiary receive from the policy?
$9,800 (In this scenario, the death occurred within the mandatory 30-day grace period. Past due premium would be subtracted from the face amount of the policy.)
Misstatement of Age and Gender clause
-Separate from the incontestability clause -Applies indefinitely -If age misstated, benefits are adjusted -Beneficiary only receives what the premium the insured would have purchased had they told the truth -Premiums are not adjusted just benefits payable Misstating age or gender permits the insurance company, in most states, to adjust death benefits to reflect the policyholder's true status.
An insured pays an annual premium to his insurer. In return, the insurer promises to pay benefits in accordance with the terms of the contract. This is called
Consideration (is the value offered by the insured to the insurer, and vice versa. The insured makes accurate statements
Policy Provisions According to the entire contract provision, what document must be made part of the insurance policy?
Copy of the original application
A father purchases a life insurance policy on his teenage daughter and adds the Payor Benefit rider. In which of the following scenarios will the rider waive the payment of premium?
If the father is disabled for more than 6 months
Which of the following riders is often used in business life insurance policies when the policyowner needs to change the insured under the policy?
Substitute insured rider
Children's riders attached to whole life policies are usually issued as what type of insurance?
Term (provide term insurance with coverage expiring when the minor reaches a certain age)
Beneficiary Designations Which is NOT true about beneficiary designations?
The beneficiary must have insurable interest in the insured [Beneficiaries do not have to have an insurable interest in the policyholder]
All of the following are true regarding the insurability rider EXCEPT
The rider is available to all insureds with no additional premium
An insured and his wife are both involved in a head-on collision. The husband dies instantly, and the wife dies 15 days later. The company pays the death benefit to the estate of the insured. This indicates that the life insurance policy had what provision?
Common Disaster (Under the Uniform Simultaneous Death Law, Common Disaster provision, the law will assume that the primary beneficiary dies first in a common disaster as long as the beneficiary dies within this specified period of time following the death of the insured{usually 30 days}. This provides that proceeds will be paid to either the contingent beneficiary or the insured's estate, if no contingent beneficiary is designated)
Which of the following is true of a children's rider added to an insured's permanent life insurance policy?
It is term coverage that is convertible to permanent insurance at or prior to the child reaching the maximum coverage age. (Covers all the children in the family, including newly born children, and is convertible to permanent insurance upon the child reaching the maximum age without evidence of insurability)
Which of the following explains the policyowner's right to change beneficiaries, choose options, and receive proceeds of a policy?
Owner's Rights
Who can request changes in premium payments, face value, loans, and policy plans?
Policyowner (Mandatory provisions give these rights to the policyowner)
If the policyowner, the insured, and the beneficiary under a life insurance policy are three different people, who has the ownership rights?
Policyowner [Only the policyowner has the ownership rights under the policy, and not the insured or the beneficiary]
When a whole life policy lapses or is surrendered prior to maturity, the cash value can be used to
Purchase a single premium policy for a reduced face amount
An insured died by suicide one year after the life insurance policy was issued. The insurer will
Refund the premiums paid
When an insured under a life insurance policy died, the designated beneficiary received the face amount of the policy, as well as a refund of all of the premiums paid. Which rider is attached to the policy?
Return of premium
Waiver of Monthly Deduction Which of the following describes attachments made to policies that either add or modify coverage?
Riders (riders are added to a policy to add or modify coverage)
