LOMA 311 mod 4

the parties must meet four requirements to form a valid life insurance contract:

(1) the parties must mutually assent to the contract, (2) they must exchange legally adequate consideration, (3) they must have contractual capacity, and (4) the contract must be for a lawful purpose.======+=============Insurance agents typically have actual authority to accept initial premium payments on behalf of an insurer. Insurance agents, however, generally do not have actual authority to accept renewal premium payments. In addition, with the exception of binding an insurer to providing temporary coverage under a premium receipt, an agent does not have actual authority to enter into binding life insurance contracts on an insurer's behalf.++Agents typically have authorization to issue a premium receipt to an applicant who completes an application and pays the initial premium. Depending on the terms of the receipt, the insurer may be contractually bound to provide temporary insurance coverage under the receipt. With the exception of binding an insurer to providing temporary coverage under a premium receipt, an agent generally is not authorized to enter into binding life insurance contracts on an insurer's behalf.

why contest A POLICY?

-A material misrepresentation (this is the most common) - A defect in the formation of the contract - A mistake -The beneficiary wrongfully killed the insured An insurer can contest a policy: - During the insured's lifetime. All premiums paid plus interest are returned minus withdrawals. - After the death of the insured. insurer denies payment of policy proceeds and returns all premiums paid play interest minus withdrawals. once a contract ends, the parties may no longer contest the validity of that contract. For example, after policy proceeds have been paid, the policy ends and the insurer can no longer contest it. ++++When an insurer denies a claim based on a provision in the policy, the insurer is PERFORMING the contract according to its terms.

barriers to contesting validity of a policy

-An agent's knowledge of a misrepresentation is considered the principal's knowledge as well. - The insurer delays in acting on its knowledge of a misrepresentation. -The insurer fails to inquire about ambiguous answers provided on the application for insurance. - The insurer does not provide the policyowner with a copy of the insurance application. The PRIMARY barrier to contesting validity of life ins. policy is the INCONTESTABILITY Provision

individual life insurance contracts can be characterized as

-Informal contracts that require no special formalities to be valid. The legally adequate consideration for a life insurance contract consists of the applicant's submission of an application for insurance and payment of the initial premium, and the insurer's promise to pay contractual benefits. -Unilateral contracts under which only one party—the insurer—makes legally enforceable promises=========Life insurance contracts are unilateral contracts in which only the insurer makes a legally enforceable promise—that it will pay policy benefits upon the occurrence of the events insured against. Thus, the applicant must pay adequate consideration in exchange for the insurer's contractual promises. ++++Legally adequate consideration for a life insurance contract consists of the applicant's submission of an application for insurance and the payment of the initial premium. -Aleatory contracts under which one party—the policyowner—provides something of value to another party—the insurer—in exchange for a conditional promise - Contracts of adhesion that one party—the insurer—prepares and that the other party—the applicant—must accept or reject as a whole without any bargaining between the parties

Courts' Interpretations of Premium Receipts

-Some courts have found that the terms of conditional premium receipts were ambiguous. When the terms of a contract of adhesion such as an insurance contract are ambiguous, the rules of contract construction require the court to interpret the court in a way that is most favorable to the policyowner or claimant. -Other courts have based their decisions on a legal doctrine known as the doctrine of reasonable expectations, which is related to the reasonable person standard. According to this doctrine, an applicant who pays the initial premium in advance and receives a premium receipt that provides temporary insurance coverage can reasonably assume that he is covered immediately unless it is clearly brought to his attention that coverage is not immediate. -A few courts have refused to enforce the terms of conditional premium receipts because those terms are unfair to applicants who expect the receipt to provide coverage without being subject to specified conditions.

class designation

A beneficiary designation that identifies a certain group of people, rather than naming each person individually. IE " to my children", "to my brothers and sisters" The advantage to the policyowner of making a class designation is that the members of the class who will share in the policy proceeds are not determined until the policyowner dies. People who are born or adopted after the designation is made are automatically included as beneficiaries without the policyowner's execution of a new beneficiary designation. The disadvantage of a class designation is that, before any proceeds are paid, the insurer must identify and locate all members of the beneficiary class. Locating all of the class members after the insured's death may be difficult and, thus, could delay payment of the policy proceeds. Class designations can be classified as either per capita designations (per capita meaning "by the head") or per stirpes designations (per stirpes meaning "by the branch").

judgment creditor

A creditor who has sued a debtor who has failed to repay a debt and has obtained a judgment against the debtor. For example, if a debtor has money in a bank account, a judgment creditor can satisfy all or part of the judgment from the funds in the bank account. State laws provide exemptions for certain types of property that a judgment creditor cannot reach. The goal of such laws is to enable the debtor to continue to earn a living and provide for himself and his dependents. Exemption laws in some states protect life insurance policy proceeds from claims of the policyowner's creditors but do not protect proceeds from claims of the beneficiary's creditors. Laws in other states protect policy proceeds from creditors of both the policyowner and beneficiary. Exemption laws in most states to some extent protect an ins. policy's accrued dividends from creditors.=====While a life insurance policy is in force, a beneficiary's judgment creditors are not able to claim the policy death benefit. upon the insured's death, the policy proceeds are payable to the beneficiary and may be subject to the claims of the judgment beneficiary's creditors. The applicable state's exemption law determines the rights of the beneficiary's judgment creditors, and statutes vary a great deal.

Temporary Insurance Agreements

A premium receipt that provides temporary insurance coverage states (1)when that coverage becomes effective, (2) the conditions that must be met for the coverage to become effective, and (3) when the coverage will end. Premium receipts also usually state that the temporary insurance coverage is provided subject to the terms of the insurance policy for which the applicant applied. When the terms of a premium receipt conflict with the terms of the policy applied for, then the terms of the premium receipt take precedence.

revocable beneficiary

A revocable beneficiary's interest in life insurance policy proceeds vests when the insured dies. Until that time, a revocable beneficiary generally has neither a legal interest in the proceeds nor any involvement with the policy. During the insured's lifetime, - A revocable beneficiary cannot make a claim against any policy values. - A revocable beneficiary usually cannot prohibit the policyowner from exercising any policy ownership rights. during the insured's lifetime, a revocable beneficiary's interest in the life insurance policy is said to be a mere expectancy.

inter vivos trust

AKA living trust- A trust that takes effect during the settlor's lifetime No specific formalities such as signing a written document are required to create a living trust, unless the trust property includes real property. the settlor usually drafts and signs a trust agreement, which is a written document that spells out the terms of the trust, including instructions as to how the trustee is to handle the trust property. The trust agreement may name one or more trustees, and it may name a bank or trust company to serve as trustee. The trust agreement may also name a successor trustee, who will assume the position of trustee if the original trustee can no longer serve that function.

Lawful Purpose: Insurable Interest

An agreement's purpose is illegal if it violates public policy or violates a principle of common law. To be valid, an informal contract must have a lawful purpose. In the United States, for the contract to be valid, a policyowner must have an insurable interest in the insured person when the life insurance policy is issued. Generally, an insurable interest exists when a person is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies.

Life Settlement

An arrangement that allows the policyowner sell their existing life insurance policy for more than its cash surrender value but less than its face value to a third party for compensation.

Individual annuity contracts typically must include:

An entire contract provision states that the entire contract between the parties consists of the annuity contract, the application if it is attached to the contract, and any attached riders and endorsements. A free look provision gives the contract owner a specified period, usually from 10 to 30 days, within which to return the contract and receive a full refund of all consideration paid for the contract. The contract is effective throughout the free look period.

payout options provision

Annuity settlement options provision that identifies each of the payout options from which the contract owner may select. Deferred annuities typically provide a death benefit, known as a survivor benefit, that is payable to a beneficiary named by the contract owner. The survivor benefit is a determinable amount that is payable if the contract owner dies during the contract's accumulation period. Unless the beneficiary is an irrevocable beneficiary, the contract owner has the right to change the beneficiary designation at any time during the accumulation period. To satisfy federal tax law requirements, an individual retirement annuity must be nontransferable by the contract owner. Thus, the contract owner cannot assign her interest in the contract, and individual retirement annuity contracts must contain a provision that spells out this limitation. To satisfy federal tax law requirements, the contract owner of an individual retirement annuity CANNOT assign ownership to another person. Many of the property rights of a deferred annuity vest during the ACCUMULATION period.=========Generally, an annuity contract owner has the right to transfer ownership of the contract, unless the annuity qualifies as an individual retirement arrangement (IRA).

Rejecting an offer

Because a contract is a consensual relationship, the offeree can reject an offer or counteroffer from the other party. An applicant for insurance has the right to reject any offer made by an insurer and to receive a refund of the initial premium she paid, until the offer is accepted.

rescission

Contracts may be rescinded in a number of ways, such as the following: -The parties can mutually agree to rescind a contract. -One of the parties may exercise her right to rescind the contract. - A court or regulator may order that a contract be rescinded. A party who has the right to avoid a contract can do so by (1) notifying the other party of the decision to rescind the contract and (2) returning to the other party the consideration given for the contract. In some cases, a contract may be rescinded by a court order. ++++ when a contract is rescinded, EACH party must return to the other party whatever he has received until the contract.

Contractual Capacity

For an insurance contract to be valid, the parties to the contract must have contractual capacity. Insurers that are licensed to conduct business within the applicable state have the legal capacity to enter into insurance contracts in the state. limitations that state laws place on minors' purchases of life insurance: -The age at which minors may enter into valid and binding insurance contracts varies from age 14 to age 16, depending on the state. - The types of insurance that minors may purchase vary by state law. Some states permit minors to purchase life and health insurance on their own lives, and other states permit minors to purchase life and health insurance on any individual in whose life or health the minor has an insurable interest. - Laws vary as to the individuals who may be named as the beneficiary of a life insurance policy purchased by a minor on her own life. Many states, for example, require the beneficiary of such a policy to be the minor's parent or legal guardian, spouse, child, brother, or sister. Canada, Singapore and Malaysia = 16 or older Singapore and Malaysia 10-16 with written consent

policy Contest

IS a COURT ACTION to determine the validity of a life insurance policy. According to the rules of general contract law, when parties fail to enter into a valid contract, all parties must be returned as much as possible to the positions that they occupied before they attempted to enter into the contract. +++ so contest on the grounds of material misrep.

supplementary contract

If the policyowner has not selected a settlement option when the policy proceeds become payable, then the beneficiary has the right to select a settlement option. In such a case, the life insurance contract matures at the insured's death, and the beneficiary and the insurer enter into a new contract governing how the policy proceeds will be paid.

the law may place the following limits on a policyowner's right to name the beneficiary:

Minors lack contractual capacity and are limited in their right to purchase insurance. Most states permit minors of a stated age to enter into life insurance contracts if specific conditions are met, but many states limit a minor's right to name the beneficiary by requiring that the beneficiary be the minor herself or one of her close family members, such as a parent or guardian. Therefore, a minor could purchase an insurance policy on the life of the minor's parent or guardian and name herself as the beneficiary. This limitation is generally meant to ensure that the minor benefits from any life insurance policy he may own, and that the parties involved have clear insurable interest. When a person purchases insurance on her own life, she generally may name anyone as beneficiary. when a person purchases insurance on another person's life, the beneficiary generally must have an insurable interest in the insured's life when the contract is formed.

misrepresentation three elements

Most jurisdictions require that an insurer prove these three elements: - The applicant or proposed insured misrepresented or failed to disclose a fact. - The fact was known by the applicant or proposed insured at the time of the misrepresentation or failure to disclose. - The fact was material—or relevant—to the insurer's acceptance of the risk.============In the United States and many other countries, life insurance policies typically include a misstatement of age or sex provision that describes the action an insurer will take in the event that the age or sex of the insured is incorrectly stated. Note that when an insurer takes action because of a misstatement of age or sex, the insurer is enforcing the policy's misstatement of age or sex provision. In most jurisdictions, a misrepresentation regarding an insured's age or sex affects the premium rate that an insurer charges for life insurance. Thus, a misstatement of the insured's age or sex is a significant issue. Such an action by the insurer is not considered a contest to the validity of the contract and is not prohibited by the incontestability provision.++++An insurer's adjustment of a policy's face amount because of a misrepresentation of the insured's age typically is not considered a contest to the validity of the contract.

Consent Requirements

Most states permit a parent to insure the life of a minor child without the child's consent. A few states permit one spouse to insure the life of the other spouse without the insured's consent. A few states permit employers to purchase insurance on the lives of their employees without the employees' consent.

4 requirements for an informal contract

Mutual assent. Typically, the process of offer and acceptance is uncomplicated. The applicant completes an application for the type of annuity he wants and the insurer generally issues the contract as applied for. Adequate consideration. The applicant for an annuity usually pays all or a part of the consideration required to pay for the annuity when he submits the application. Amounts paid for an annuity often are referred to as annuity considerations as well as premiums. Contractual capacity. Both parties must have contractual capacity. This requirement helps prevent financial elder abuse—for example, pressuring an older person with impaired judgment to purchase an annuity that is unlikely to repay the initial investment in the person's lifetime. Lawful purpose. Unlike life insurance, an annuity usually does not present the opportunity for the applicant to wager on someone's life or for someone to benefit from another's death. A customer usually purchases an annuity for the purpose of managing a need for asset accumulation during the annuity's accumulation period and for income distribution during retirement or another period of similar financial need. Thus, insurable interest requirements are not imposed. As long as no illegal purposes are involved, the creation of an annuity contract meets the lawful purpose requirement. Money laundering is one example of an illegal purpose for an annuity contract.

reformation

Reformation is an equitable remedy in which a written contract is rewritten to express the original agreement of the contracting parties. Reformation is available when parties reach an agreement and put it in writing, but the written document does not adequately reflect the parties' intent. If the parties cannot mutually agree to correct such a mistake, one party may ask the court to correct the mistake in the written contract. Clear and convincing evidence means a degree of proof in which evidence shows that the truth of the facts asserted is highly probable and leaves no reasonable doubt as to the truth of those facts. Clear and convincing evidence is a higher degree of proof than a preponderance of the evidence, which is the degree of proof generally required in civil court actions. preponderance of the evidence means that the decision as to an issue of fact must be supported by the greater weight of the evidence.

net cash surrender value

The amount of a life insurance policy's cash value that the policy will receive upon surrendering the policy. calculated by adjusting the cash surrender value for amounts such as dividend additions, advance premium payments, policy loans (including unpaid interest), and policy withdrawals.=======================Because Ashley died during the grace period but before the premium was paid, Kennesaw is obligated to pay the policy proceeds to Paul, the policy beneficiary. Kennesaw, however, is entitled to deduct the amount of the unpaid premium from the policy proceeds before paying those proceeds.

contestable period start date

The date of issue is the date the application is approved and the policy is issued by the insurer. The effective date is the date insurance coverage starts. Life insurance policies typically specify that the contestable period starts on the date of issue.

Offer and Acceptance

The insurer can accept an applicant's offer by (1) issuing a policy that contains the same terms as those stated in the applicant's offer and (2) delivering the policy to the applicant. When a valid contract is created, the applicant becomes the policyowner. If an applicant does not pay the initial premium when she submits an application for insurance, then she has not made an offer. Rather, she has invited the insurer to make an offer. The insurer can make an offer to contract by issuing a policy and delivering it to the applicant. Note that the policy the insurer issues and delivers need not be the same policy the applicant applied for. The applicant can accept the insurer's offer by accepting the policy and paying the initial premium.

Contract Owner

The parties to an individual annuity contract are the insurer that issued the annuity and the person who purchased the annuity

Endorsement Method

This method requires that the beneficiary change be typed or affixed directly to the policy. The insured must make a written request and mail the request along with the policy to the insurance company. An endorsement is a document that is attached to a life insurance policy and that becomes part of the insurance contract. The insurer adds the endorsement specifying the name of the new beneficiary and returns the policy to the policyowner.

Creditor as Policyowner or Beneficiary

When a creditor purchases such a policy and pays the policy premiums, the creditor is entitled to receive the full policy proceeds after the insured's death even if those proceeds are more than the amount of the unpaid debt. A debtor may also purchase a policy on his own life and name the creditor as the policy beneficiary, or change an existing policy's revocable beneficiary and make the creditor the new beneficiary. In most states, when a debtor names a creditor as the policy beneficiary, the creditor can recover only the amount of the unpaid debt.===If the creditor paid any premiums for the policy, he can recover those premiums plus interest. Any policy proceeds remaining after the creditor is paid are payable to the policyowner-insured's estate.

Policyowner Insures Another Person's Life

When a person applies for insurance on another person's life, the applicant generally must provide the insurer with evidence that she has an insurable interest in the insured's life. business relationships that create an insurable interest: -Partners are each considered to have an insurable interest in the lives of the other partners. - An employer has an insurable interest in the lives of its key employees. - A creditor has an insurable interest in the lives of its debtors.

Counteroffers

When an insurer issues a policy on terms other than those applied for, the insurer has rejected the initial offer and has made a counteroffer. An insurer often makes a counteroffer when it classifies the prospective insured as a higher risk than the prospective insured has applied for.

Designation of the Policyowner's Estate

When policy proceeds are payable to an estate, the decedent's personal representative is responsible for distributing the proceeds in accordance with: -The terms of the decedent's will, or -The provisions of the applicable intestate succession laws,

per capita beneficiary designation

a class designation in which the class members all stand in the same relationship to the policyowner, and the class members who survive the insured share the policy proceeds equally.=====No descendants or heirs of a deceased class member share in the distribution. Adopted children share in policy proceeds on the same basis as biological children in a class designation; however, stepchildren whom an insured did not legally adopt are not entitled to share in the policy proceeds under such a class designation.

per stirpes beneficiary designation

a class designation in which the descendants of a deceased class member take the decedent's share of the policy proceeds by representation. a method of dividing policy proceeds by family branches. stated as "to my children in equal shares with the share of any deceased child to the children of such child per stirpes."

condition precedent

a condition that must occur in order to give rise to one party's duty to perform a promise. For example, an insurer's promise to pay a life insurance policy death benefit is subject to a condition precedent—the contract must be in force when the event insured against occurs, which in this case is the death of the insured. If the contract is not in force at the time of the insured's death, then the condition precedent is not met, and the insurer is not liable to pay the policy death benefit.

Condition Subsequent

a condition that, if it occurs, cancels one party's duty to perform a promise. For example, some insurance policies provide that, unless a claimant furnishes the insurer with proof of a covered loss within a stated time after the occurrence of the loss, the insurer has no liability to pay for the loss. The claimant's failure to provide the insurer with proof of a covered loss within the required period, when the claimant could have done so, is a condition subsequent that relieves the insurer of its duty to pay for the loss.

settlement agreement

a contractual agreement between a life insurance policyowner and an insurer governing the rights and obligations of the parties after the insured's death. The settlement agreement then becomes part of the life insurance contract. A policyowner who selects a settlement option for the beneficiary may choose to make the settlement mode irrevocable.

interpleader

a court proceeding under which an insurer that cannot determine the proper recipient of policy proceeds pays the proceeds to a court and asks the court to decide the proper recipient. A party who seeks the remedy of interpleader must be a disinterested stakeholder. Interpleader is an important remedy for an insurer that is uncertain about who should receive policy proceeds.======After paying the money to the court, the insurer usually is released from any further liability under the policy.

Declaratory Judgment

a judicial statement that declares or denies the parties' legal rights but does not include specific relief or any means to enforce those rights. A declaratory judgment is available at the discretion of the court and typically is not granted if any other appropriate remedy is available.

Incontestability Provision

a life insurance policy provision that denies the insurer the right to avoid the contract on the grounds of a material misrepresentation in the application after the contract has been in force for a specified period of time. The contestable period is the time period within which the insurer has the right to avoid a policy on the grounds of a material misrepresentation in the application. IE: We will not contest the validity of this policy after it has been in force during the lifetime of the insured for two years from the date of issue. A two-year contestable period is the maximum period allowed by most states. Some insurers include a one-year contestable period in their policies. The states permit this shorter period because it is more favorable to policyowners. The phrase during the lifetime of the insured is an important part of an incontestability provision. The phrase ensures that the policy never becomes incontestable if the person whose life is insured dies during the contestable period. The incontestability provision gives policyowners and beneficiaries the knowledge that if (1) all required premiums are paid and (2) the policy has been in force during the insured's lifetime for at least the stated contestable period, then the insurer cannot contest the policy's validity and usually must pay policy proceeds after the insured's death.=====The phrase "during the lifetime of the insured" is an important part of an incontestability provision because this phrase ensures that the policy never becomes incontestable if the person whose life is insured dies during the stated contestable period, as Mr. Shen did. If this phrase were not included in the incontestability provision and the insured died during the contestable period, a claimant could delay making a death claim until after the contestable period ended

unilateral Mistake

a mistake made by only one of the parties to a contract. The effect of a unilateral mistake of fact depends on the type of mistake and the circumstances.

Viatical Settlement

a policyowner, typically a terminally ill individual with a life expectancy of 24 months or less, sells an insurance policy to a third party for more than its cash value but less than its face value. The purchaser becomes both policyowner and beneficiary. Viatical settlements, like the accelerated death benefits are useful for policyowners who need cash to address immediate medical concerns. ** in most states, the viator, or seller of an ins policy must be both policyowner and insured========Most states have passed laws to regulate life and viatical settlements.

warranty

a promise or guarantee recognized by law that a statement of fact is true. A warranty that is not literally true gives an injured party grounds to avoid the contract. In the past, the doctrine of warranties sometimes resulted in unjust results when applied to life insurance.

Restitution

a remedy under which a party is ordered to return property to its owner or to the person entitled to it. Restitution sometimes is granted as a legal remedy and other times as an equitable remedy.

vested right

a right that cannot be altered or changed without the consent of the person who owns the right.

automatic nonforfeiture benefit

a specified nonforfeiture benefit that becomes effective automatically when a renewal premium is not paid by the end of the grace period and the policyowner has not elected another nonforfeiture option. Note that the automatic benefit becomes effective only if the policyowner has not elected another nonforfeiture option.

representation

a statement made by a contracting party that is influential in inducing the other party to enter into the contract. A representation can be used to invalidate the contract if the statement is not substantially true and the statement induced the other party to enter into the contract. a misrepresentation is material if the insurer with knowledge of the true facts would have taken any of the following actions with regard to the policy: (1) declined to issue, (2) increased the premium rate, or (3) excluded coverage for certain risks.

trust, trustee, settlor or grantor

a trust is an arrangement in which one person, the trustee, holds title to property for the benefit of another, the trust beneficiary. The settlor or grantor is the person who creates a trust and transfers ownership of property to the trustee, who has a duty to manage the property for the trust beneficiary's benefit. The settlor can deposit both real and personal property into a trust. Ownership of trust property is split between the trustee and the trust beneficiary. The trustee has formal legal title to the property and, thus, is the legal owner of the property. A trustee is a fiduciary and, therefore, is obligated to act solely for the benefit of the trust beneficiary. A trustee's fiduciary duties include: - The duty to manage the trust property by exercising the degree of care that a reasonably prudent person would exercise in managing his own affairs. - A duty of loyalty to the trust beneficiary. The trustee must not allow his own personal interests to conflict with the interests of the beneficiary. Today, most states permit the settlor to be both the trustee and the trust beneficiary of a trust as long as specific requirements are met.=======In this situation, Ms. Orlov, as the trustee, has formal legal title to the property and, thus, is the legal owner of the property. Madge has equitable title to the trust property, which means that she has ownership rights based on considerations of fairness and equity.

Spendthrift Trust

a trust that is designed to keep trust property out of the hands of creditors of the trust beneficiary, by prohibiting the beneficiary from assigning or otherwise transferring her interest in the trust. This prohibition is the primary difference between a spendthrift trust and other trusts; most states permit the beneficiaries of other types of trusts to assign their interest in the trust. To effectively protect the trust beneficiary, a spendthrift trust typically must be established as an irrevocable trust. In most states, the settlor of a spendthrift trust cannot also be a trust beneficiary.

Testamentary Trust

a trust that takes effect at the settlor's death. A testamentary trust must comply with the state's applicable wills statute to be valid. Typically, the terms of a testamentary trust are included in the settlor's will. A settlor may establish a trust as a revocable trust or an irrevocable trust. When a trust is revocable, the settlor retains the right to change the terms of the trust or to dissolve the trust. When a trust is irrevocable, the settlor may not change or revoke the trust.

agency agreement or agency contract

a written contract that insurers enter into with each of their financial professionals . Terms included in an agency agreement: -A statement that the financial professional is either an independent contractor or an employee of the insurance company, whichever the case may be - A description of the financial professional's authority to represent the company, solicit and take applications, arrange medical examinations, collect initial premiums, and issue premium receipts - Limitations on the financial professional's authority, specifying that the financial professional cannot change premium rates, alter contracts, incur debts on behalf of the company, or otherwise act outside the scope of granted authority - Performance requirements, particularly with respect to adherence to company rules and the prompt remittance of premiums to the company - A compensation schedule, stating the rate of commissions, service fees, bonuses, and other compensation - Termination provisions, stating (1) justifiable causes for termination, (2) the length of time required for notice of termination by either the financial professional or the company, and (3) the obligations of each party after the agency agreement is terminated

Revocable Beneficiary

absolutely assigned, courts' decisions concerning the beneficiary designation vary. Some courts hold that the absolute assignment of a policy revokes the beneficiary designation. Other courts have found that the designation remains in effect, but the absolute assignee has the right to change the designation. collateral assignee's rights in the policy are superior to the beneficiary's rights. Thus, the collateral assignee is entitled to be repaid from the policy proceeds even if the revocable beneficiary did not consent to the arrangement.=============When a life insurance policy that has an irrevocable beneficiary is absolutely assigned, the beneficiary remains the irrevocable beneficiary unless he consents to a change of beneficiary. In addition, the assignee cannot take out a policy loan or surrender the policy for cash without the irrevocable beneficiary's consent.

dividend additions

also known as paid-up additions, are additional amounts of insurance purchased using policy dividends. Because dividend additions represent paid-up insurance, they also have cash values that the policyowner can collect upon surrender of the policy.=++====================The insurer must apply policy dividends to pay a renewal premium only if (1) the amount of dividends the insurer has is large enough to cover the full amount of the renewal premium that is due, and (2) the policyowner has not chosen another policy dividend option.

collusion

an agreement between two or more people to defraud another person or entity of certain rights. When an agent and an applicant engage in collusion, the agent's knowledge is not considered to be the knowledge of the insurer.

Estoppel

an equitable doctrine by which someone is restrained—or estopped—from acting in a manner that contradicts her previous conduct. Estoppel is invoked when (1) one party's conduct has misled an innocent party and (2) inconsistent actions by the first party would harm the innocent party. The following elements typically are necessary to create an estoppel: -The first party has knowledge of the facts but communicates something in a misleading way, either by words, conduct, or silence. -The second party does not have knowledge of the facts and reasonably relies on the first party's words, conduct, or silence. - The second party would be harmed if the first party were allowed to assert a claim that is inconsistent with his early words, conduct, or silence.

insurance trust

an irrevocable trust for which the trust property consists of insurance policies on the life of the settlor or the proceeds of such policies. Upon the insured's death, life insurance policy proceeds held in trust are not included in the insured's taxable estate. Thus, the insured can both reduce the amount of estate taxes owed and provide funds to pay estate taxes.

Withdrawing an offer

an offeror usually can withdraw an offer at any time before the offeree has accepted the offer. Thus, an applicant who has applied for an insurance policy and paid the initial premium has the right to withdraw that offer at any time before the insurer accepts the offer. If an applicant withdraws an offer, then the insurer generally must return the premium the applicant paid.

viatical settlement company

an organization that exists to buy life insurance policies from policyowners at a discount. The organization assumes a policy's premium payments and collects the death benefit of the policy upon the policyowner's death. An organization must meet state licensing requirements in order to legally purchase viatical or life settlements. Viatical settlement companies are part of the secondary market for life insurance policies, which is the market in which policies are traded after the initial sale. advisors typically propose viatical or life settlements in certain specific situations, such as: - The insured has outlived the need for the policy. - The policyowner can no longer afford to pay premiums. - A policy is not performing as desired or needed. - The policy beneficiary is deceased. -The insured could benefit from a different type of coverage, such as long-term care insurance. -The insured or owner has experienced changes in personal circumstances, such as divorce or retirement. Viat. sttlemnts carry some risk to both the seller and purchaser

Condition

an uncertain event, the occurrence or nonoccurrence of which either creates or extinguishes a party's duty to perform a contractual promise. Thus, a condition is a contractual term that limits a party's promise.

equitable remedies

are based on moral rights and concepts of justice. include rescission, reformation, interpleader, declaratory judgment, and restitution.

Irrevocable Beneficiary

beneficiary whose rights to policy proceeds are vested when the beneficiary designation is made. An irrevocable beneficiary's vested interest in the policy proceeds usually continues as long as the policy remains in force or until the beneficiary (1) consents in writing to a change of beneficiary or (2) predeceases the insured. A minor does not have the legal capacity to consent to a policyowner's exercising her rights under a life insurance policy. As a result, if an irrevocable beneficiary has not attained the age of majority, the policyowner cannot obtain the beneficiary's consent to any policy transaction. Furthermore, a minor's guardian typically cannot consent on the minor's behalf. in the Canadian province of Quebec, = The designation of a policyowner's spouse is presumed to be an irrevocable designation unless the policyowner specifically makes the designation revocable. = The divorce or annulment of a marriage extinguishes the designation of the former spouse as irrevocable beneficiary. ======When a life insurance policy that has an irrevocable beneficiary is absolutely assigned, the beneficiary remains the irrevocable beneficiary unless he consents to a change of beneficiary.=======the assignee cannot take out a policy loan or surrender the policy for cash without the irrevocable beneficiary's consent.

Entire Contract

defines the documents that constitute the contract between the insurer and the policyowner. With the exception of fraternal insurers, U.S. insurers issue individual life insurance policies that are CLOSED contracts. A closed contract is a contract for which only those terms and conditions that are printed in—or attached to—the contract are considered to be part of the contract. In a closed life insurance contract, the entire contract provision states that the contract consists of the policy, any attached riders and endorsements, and the attached copy of the application. Fraternal insurers issue life insurance coverage in the form of an OPEN contract, which is a contract that identifies the documents that constitute the contract between the parties, but the enumerated documents are not all attached to the contract. Policies issued by fraternal insurers state that the entire contract between the parties consists of the following documents: -The policy and any attached riders and endorsements - The fraternal society's charter, constitution, and bylaws - The application for membership in the fraternal society - The declaration of insurability, if any, signed by the applicant

Assignment Provision

describes the roles of the insurer and the policyowner when the policy is assigned. Policies typically state that an assignment is not binding on the insurer unless the insurer is notified in writing of the assignment. The typical assignment provision in individual life insurance policies states that the insurer is not responsible for verifying the validity of an assignment of the policy. Assignment provisions also usually state that the rights of the insurer take precedence over the rights of an assignee with regard to the policy proceeds.======an insurer is never obligated to pay an assignee an amount greater than the net policy proceeds regardless of whether this fact is explained in the policy

Accelerated Benefits Model Regulation

designed to regulate accelerated death benefit provisions and to impose disclosure standards on insurers that provide such benefits. These laws require certain actions on the insurer's part, such as: -Avoid confusion with long-term care products. -Explain how the benefit payment affects policy values. -Disclose tax implications. -Disclose effect on Medicaid eligibility. -Obtain consent from any assignee or irrevocable beneficiary. -Not restrict how the recipient receives or uses proceeds.

accelerated death benefit provision

gives the policyowner the right to receive a portion—usually between 50 and 80 percent—of the policy benefit during the insured's lifetime when the insured is terminally ill, typically defined as having a medical condition that results in any of the following characteristics: -Drastically limits the insured's life span as specified in the policy—for example, if the insured is expected to live 24 months or less -Requires extraordinary medical attention, without which the insured would die—for example, a major organ transplant or continuous artificial life support -Requires continuous, lifetime confinement in an eligible institution as defined in the contract -In the absence of extensive or extraordinary medical treatment, would result in a drastically reduced lifespan—for example, coronary artery disease requiring surgery====When the policyowner requests the accelerated death benefit payment, the insurer must inform her that receiving the benefits may adversely affect her eligibility for Medicaid and other governmental benefits. The insurer must give the policyowner the right to take the accelerated benefit as a lump sum and may not restrict how the recipient uses the money.

Effect of Reinstatement

if a life insurance policy is reinstated, a new contestable period typically starts on the date the policy is reinstated. The length of the new contestable period is the same as the length of the policy's original contestable period. During the new contestable period, the insurer may contest the policy based on misrepresentations in the reinstatement application. In addition, the insurer may contest the policy based on misrepresentations in the original application as long as the original contestable period has not expired.

common settlement options

interest option- proceeds are temp. left on deposit with the insurer. Interest earned is paid annually, semi annually, qrterly or monthly. Fixed Period Option- insurer pays proceeds & interest in a series of annual or more frequent installments for a preselected period Fixed Amount option- insurer uses proceeds and interest to pay a preselected sum in a series of annual or more frequent installments for as long as the proceeds and interest last. Life Income Option- insurer uses proceeds and interest to pay a series of annual or more often installments over the entire lifetime of the person designated to receive the policy benefits.

defect in the formation of the contract

involves four requirements: mutual assent, adequate consideration, contractual capacity, and lawful purpose. If any one of these requirements is missing, the parties never entered into a valid contract. A party has the right to contest a contract's validity at any time if any requirement was not met. insurable interest reqm't guards against policies being purchased as wagering contracts.

Equitable Title

means that the beneficiary has ownership rights based on considerations of fairness and equity rather than on legal ownership rights. Ownership of trust property is divided into two components: equitable title and legal title.

bilateral mistake

occurs when both parties are mistaken when they enter into a contract. Bilateral mistakes can be either common mistakes or mutual mistakes COMMON Mistake= when both parties make the same mistake. When the parties make a common mistake as to the identity or existence of the subject matter of the contract, the contract is VOID. When the parties to a contract make a common mistake about a general characteristic concerning the subject matter of the contract, the contract usually is VALID. MUTUAL Mistake= occurs when both parties to a contract make a mistake, but they make DIFFERENT mistakes. If the parties are unaware of a mutual mistake as to the subject matter of the contract and are at cross-purposes when entering the contract, then the contract usually is void. This type of mutual mistake involves a misunderstanding between the parties.

mistake of fact

occurs when one or both parties is mistaken as to the existence of something or as to the identity of something or someone. The incontestability provision does not prohibit a contest of the policy on the grounds of a mistake of fact. Either party can contest a contract's validity on the grounds of a mistake of fact at any time, even after the contestable period has expired.

mistake of law

occurs when, with full knowledge of the facts, the parties make a mistake as to the legal effect of those facts. A mistake of law has no effect on the validity of the contract.

payee vs. contingent payee

payee= The person who, if still living, will receive policy proceeds under a settlement agreement contingent payee= or successor payee, who will receive any policy proceeds payable following the payee's death; the contingent payee may or may not have been assigned as the contingent beneficiary of the policy. Although neither contingent payees nor contingent beneficiaries have any vested rights to policy proceeds during the insured's lifetime, the rights of a contingent payee and of a contingent beneficiary differ after the death of the insured. If a primary beneficiary survives the insured, then the expectancy of the contingent beneficiary is extinguished. By contrast, a contingent payee's expectancy continues beyond the death of the insured.

cash surrender value nonforfeiture option

permits a policyowner to discontinue premium payments, surrender the policy and receive the policy's cash surrender value in a lump-sum payment. When the policyowner surrenders a policy, the life insurance contract and all coverage under the contract terminate.

change of ownership provision

permits a policyowner to transfer all operating rights by notifying the insurer in writing of the change, without having to enter into a separate assignment agreement. When the insurer records the ownership change in its files, the change generally becomes effective as of the date the policyowner signed the written notification.

policy withdrawal provision or partial surrender provision

permits the policyowner to make withdrawals from the cash value. Because the amount of benefit payments to be made under such policies depends on the amount of the cash value, some policies specify that a withdrawal also reduces the benefit payment amounts. For example, universal life policies sometimes provide that a withdrawal reduces both the cash value and the face amount (death benefit) of the policy by the amount of the withdrawal.==================Both a policy loan and a policy withdrawal are advance payments of the amount that the insurer eventually must pay out under the policy. A policy loan provision gives the policyowner the right to take out a loan for an amount that does not exceed the policy's net cash value less one year's interest on the loan, using the cash value of the policy as security for the loan. A policy withdrawal provision permits the policyowner to reduce the amount in the policy's cash value by withdrawing up to the amount of that value in cash. One big difference between the two is that a policy loan can be repaid, but most policies do not allow a policyowner to repay a withdrawal. The reduction in the amount of the death benefit payable as a result of a withdrawal is permanent.===========gives Ms. Shin the right to take out a loan from Plateau for an amount that does not exceed the policy's cash value, less one year's interest on the loan+++policy loan allows the policyowner to borrow money from the insurer by using the cash value of the policy as security for the loan

legal remedies

primarily involve the payment of money damages to injured parties. Most litigation involving life insurance policies begins after an insurer denies a claim for life insurance policy proceeds. Civil damage awards generally provide a plaintiff with compensatory damages. Punitive damages are awarded in addition to compensatory damages when a defendant's conduct was malicious or willful. +++ Restitution is sometimes granted as a legal remedy and sometimes as equitable remedy

conditional premium receipt

provides temporary insurance coverage only if specified conditions are met. One kind of conditional premium receipt is an insurability premium receipt, which provides temporary insurance coverage on condition that the insurer finds the proposed insured to be insurable as a standard or preferred risk. premium receipt states the date on which the insurer will make a decision on the insured's insurability: -The date of the premium receipt - The date of the application - The date of a required medical examination

Approval Premium Receipt

provides temporary insurance coverage only when the insurer approves the proposed insured as a standard or better-than-average risk. U.S. insurers rarely issue approval premium receipts.

Binding Premium Receipt

provides temporary insurance coverage that becomes effective on the date specified in the receipts. Unlike conditional premium receipts, binding premium receipts provide temporary insurance coverage without requiring that specified conditions be met. Temporary coverage under a binding premium receipt typically remains effective until the earliest of the following occurrences: - The insurer issues the applicant a policy. - The insurer declines the application. - The insurer terminates or suspends coverage under the receipt. - A specified time—usually 45 to 60 days—expires.

duty to disclose

requires applicants and proposed insureds to disclose to the insurer any fact that is within their knowledge and that is material to the insurance. duty to disclose is breached if an applicant or proposed insured (1) provides false information or (2) conceals a material fact.

survivorship clause or time clause

requires the beneficiary to survive the insured for a stated number of days to be entitled to the policy proceeds. A policyowner also has the right to require that the beneficiary survive the insured by a specified amount of time in order to receive the policy proceeds.

Contingent Beneficiary

sometimes called a secondary or successor beneficiary, is entitled to the policy proceeds only if all designated primary beneficiaries have predeceased the insured. A second-level contingent beneficiary may also be called a tertiary beneficiary or a final beneficiary The named beneficiary may disclaim the proceeds, in which case the proceeds become payable as if the disclaiming beneficiary predeceased the policyholder. A beneficiary may disclaim policy proceeds for several reasons.

spendthrift clause

spendthrift trust clause is a provision that may be included in a life insurance policy or settlement agreement to protect the policy proceeds from being seized by the beneficiary's creditors. A policyowner can ask the insurer to add such a clause to a policy by adding a rider or endorsement to the policy or can enter into a settlement agreement that includes a spendthrift clause.====The beneficiary's creditors cannot reach any money that is held by the insurer. However, after the insurer pays money to a beneficiary, those funds can be reached by the beneficiary's creditors.=======When a life insurance policy includes a spendthrift clause, the policy beneficiary is prohibited from assigning or otherwise transferring her interest in the policy proceeds and from changing the terms on which the policy proceeds are payable.

net policy proceeds

the amount of the proceeds remaining after any overdue premiums and any outstanding policy loans and interest have been deducted. An insurer is never obligated to pay any claimant an amount greater than the net policy proceeds, regardless of whether this fact is explained in the policy.

English Rule

the first assignee to notify the insurer of its assignment has priority over other assignees.

americaN RULE

the first assignment has priority over a later assignment.

copy of the application

the insurance policy and the attached application usually constitute the entire contract. an insurer has the right to use a material misrepresentation in the life insurance application as a basis for avoiding a life insurance policy ONLY if a copy of the application is attached to the policy when the policy is delivered to the applicant. The application for insurance is not considered a part of the contract unless it is attached to the policy when the policy is issued. The only exception to this rule is when a policy is issued electronically. In such a case, the insurer must provide the policyowner with a copy of the application, but the application does not have to be physically attached to the policy.

automatic premium loan (APL) benefit

the insurer automatically pays an overdue premium by making a loan against the policy's cash value if the cash value equals or exceeds the amount of the premium due. The use of the automatic premium loan keeps the policy in force for the full amount of coverage. Once the APL benefit becomes effective, the policy remains in force until all funds held by the insurer in connection with the policy have been used. An automatic premium loan is one form of policy loan, though not the most common.

Absolute assignment

the irrevocable transfer to another of all of a policyowner's ownership rights in a life insurance policy. the assignee obtains all of the policyowner's rights and interests in the policy; the absolute assignee thereby becomes the policyowner. The assignor has no further interest in the policy, and the assignee becomes responsible for premium payments. Also, the assignee is entitled to receive policy dividends (if applicable), as well as to surrender the policy or handle the policy as she wishes.

reduced paid-up insurance nonforfeiture option

the net cash value of the policy is used as a net single premium to purchase paid-up life insurance of the same plan as the original policy. The insurer bases the premium charged for the paid-up insurance on the age the insured has attained when the option is exercised. The amount of paid-up insurance that the policyowner can purchase under this option is smaller than the face amount of the policy.

policy delivery

the policy does not become effective until (1) it is delivered to the policyowner and (2) the initial premium is paid. Both requirements must be met during the continued good health of the insured in order for the contract to be effective. constructive delivery, which is a legally adequate delivery of a life insurance policy that occurs when the insurer parts with control of the policy and intends to be bound to the terms of the contract. free look provision gives the policyowner a specified period—usually 10 days—following delivery of the policy within which to cancel the policy and receive a refund of the premium paid.

extended term insurance nonforfeiture option

the policy's net cash value is used as a net single premium to purchase term insurance for the full face amount provided under the original policy—less the amount of any outstanding policy loans and unpaid interest—for as long a term as that net cash value can provide. The length of the term for which coverage is provided depends on the amount of the coverage, the amount of the net cash surrender value, and the insured's attained age when the option is exercised.

recording method

the policyowner must provide the insurer with a written and signed notification of the beneficiary change.

Reinstatement

the process by which an insurer puts back into force a life insurance policy that has either been (1) terminated for nonpayment of premium or (2) continued under the extended term or reduced paid-up insurance nonforfeiture option. Most insurers do not permit reinstatement if the owner has surrendered the policy for its cash value. Reinstatement provisions typically require the policyowner to -Complete a reinstatement application within the time frame stated in the reinstatement provision -Provide the insurer with satisfactory evidence of the insured's continued insurability. Insurers will sometimes waive this requirement under certain conditions. For example, if a policy lapsed less than six months prior to the insurer receiving the reinstatement application, the insurer may waive this requirement. -Pay a specified amount of money; the amount required depends on the type of policy being reinstated. For a fixed-premium policy, the policyowner must pay all unpaid back premiums plus interest on those premiums. For a flexible-premium policy, the policyowner must pay an amount sufficient to cover the policy's mortality and expense charges for at least two months. Some flexible-premium policies also require the policyowner to pay mortality and expense charges for the period between the date of lapse and the date of reinstatement. -Pay any outstanding policy loan or have the policy loan reinstated when the policy is reinstated.

Collateral Assignment

the transfer of some of a policyowner's ownership rights in a life insurance policy, usually to provide security for a debt. A collateral assignment gives the assignee the right to share in the policy proceeds to the extent of the policyowner's outstanding debt at the insured's death. Collateral assignment agreements usually transfer to the assignee the right to: -Obtain a policy loan - Surrender the policy for its cash surrender value - Exercise nonforfeiture options - Receive policy dividends Collateral assignments usually state that the policyowner retains the right to designate and change the policy beneficiary and the right to select a settlement option. typically does not require the collateral assignee to pay the policy's renewal premiums. If the assignee does pay such premiums, however, the assignee has the right to recover the amount paid from the policy proceeds. Thus, the amount of premiums the assignee pays is in effect added to the debt the policyowner owes the assignee.

Annuitized Payout Options

tie annuity payments to the life expectancy of a named person Payout options also known as settlement options Straight life annuity: Payments continue for the lifetime of the annuitant and cease at the annuitant's death. Joint and survivor life annuity: Payments are made to two or more annuitants; the payments continue for the lifetime of the last surviving annuitant and cease at the death of the last surviving annuitant. The annuity amount may change upon the death of an annuitant other than the last surviving annuitant. Life annuity with period certain: Payments continue for the lifetime of the annuitant or for a certain period specified in the contract, whichever is longer. If the annuitant dies before the end of the period certain, the insurer makes payments to a beneficiary for the remainder of the period certain. Life with refund annuity: Payments continue for the lifetime of the annuitant; if the annuitant dies before the payee receives payments that total at least the purchase price of the annuity, the insurer refunds to the payee or a beneficiary named by the contract owner the difference between the purchase price and the amount that has been paid out.

doctrine of substantial compliance

when a policyowner has done everything possible to comply with the beneficiary change procedure set forth in the policy, but has failed because of circumstances beyond his control, the change will be considered effective. A court applies the doctrine of substantial compliance only if it is clear that the policyowner intended to change the beneficiary, and the court considers all of the surrounding circumstances to determine the policyowner's intent.

estate taxes

when someone dies owning a probate estate valued at more than a specified dollar amount, the decedent's estate is required to pay federal taxes Settlors often establish life insurance trusts to provide funds to pay estate taxes.