Chapter 3: Life Policy Provisions, Riders, and Option

Waiver of Premium

* The insured must be totally and permanently disabled * A specific time period of disability must pass before the waiver is applied (usually 6 months) * The benefit remains is full effect until recovery from the disability * The insurer will continue to pay dividends on the policy

Waiver of Monthly Deduction

* Usually found in universal life and variable universal life policies. * Pays all monthly deduction while the insured is disabled, after a 6-month waiting period. This rider only pays the monthly deduction, and not the full premium necessary to accumulate cash values.

Irrevocable

A beneficiary designation in which the policyowner may not change the beneficiary-nor surrender the policy, take out a policy loan or exercise other policy features without the consent of this beneficiary.

Revocable

A beneficiary designation that may be changed-without the consent of the beneficiary.

Cash (SO)

A lump sum payment; default option on most policies.

Grace Period Clause

A period of time (usually 30 or 31 days) after the premium is due during which a policy remains in force; if death occurs during the grace period, the death benefit will be paid minus the overdue premium and any interest due.

Suicide

Insurance policies usually stipulate a period of time during which the death benefit will not be paid if the insured commits suicide. The insureds beneficiary will only be entitled a refund of premiums. However, if a suicide is committed after the period of time stipulated in the suicide clause, the entire death benefit will be paid.

Misstatement of Age and Sex (or Gender) Clause

States the procedure to be followed by an insurance company when an insured misstates his/her age on the application and the policy has been issued at the misstated age. The face amount is adjusted to the amount the premium would have paid at the correct age or gender.

Payment of Premium Clause

Stipulates that all premiums paid after the initial premium are paid in advance (monthly, quarterly, semi-annually, or annually) and to whom the premiums are paid.

Fixed Amount (Annuity Certain)

The amount to be paid out each period is specified by the beneficiary, and it is paid out until the interest and principal are gone.

Fixed Period (Annuity Certain)

The beneficiary will be paid a regular income consisting of principal and interest for the time period specified. The amount is specified by the company.

Assignment Clause

an authorized transfer of ownership of a policy or its benefits from the policyholder to another person; this can be temporary as in a collateral assignment or permanent as in an absolute assignment.

Paid-up life

using the dividend to pay the premiums on a limited pay policy so that in endows more quickly.

Policy Loans

* Found only in policies that contain cash value. * The policyowner is entitled to burrow an amount equal to the available cash value. * Any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured's death. * Insurers may defer a policy loan request for up to 6 months, unless the reason for the loan is to pay the policy premium. * Policy loans are not subject to income taxation.

Reinstatement Clause

* States that a lapsed policy can be reinstated within a specified period of time (usually 3 years) * The policyowner must pay the overdue premiums plus interest, repay any outstanding policy loans, and provide proof of insurability * A policy which has been surrendered for its cash value cannot be reinstated

Riders Covering Additional Insureds:

Spouse/ Other-Insured Ter, Children's Term, Nonfamily Term.

Free Look Provision

Gives a policyowner the right to return a policy to the insurance company within a stated period of time, usually 10 days, for a full refund.

Estate

If no beneficiary is named, the death benefit is paid to the insured's estate.

Common Disaster Clause

If the beneficiary dies within a stated period of time (30 to 90 days) after the insured, the insurance company will act as if the insured outlived the beneficiary.

Uniform Simultaneous Death Act

If the insured and the sole beneficiary die at the same time, the benefits will be paid as if the insured outlived the beneficiary.

Minor (children) as beneficiaries

In order for children to receive death benefits, a guardian must be named, or the court will appoint one.

Accelerated (Living) Benefit Rider and Long-Term Care Riders

Accelerated death benefits allow the early payment of a portion of the death benefit is the insured has any of the following conditions: * A terminal illness * A medical condition that requires an extraordinary medical intervention (such as an organ transplant) for the insured to survive * A medical condition that without extensive treatment drastically limits the insured's lifetime * Inability to perform activities of daily living (ADLs) * Permanent institutionalization or confinement to a ling-term care facility * Any other conditions approved by the Department of Insurance

Riders Affecting the Death Benefit Amount

Accidental Death Benefit Amount: Pays a stated amount (usually 2 or 3 times the death benefit) in the event of an accidental death or dismemberment. Death must occur within 90 days of the accident. This rider often expires at the insured's age 65 Note: This is accident-only coverage-and it does not pay a benefit for losses due to illness or disease.

Term Riders

Allow for an additional amount of temporary insurance to be provided on the insured, without the need to issue another policy. They are usually attached to a whole life policy to provide greater protection at a reduced cost.

Children's Term

Allows children of the insured (natural, adopted or stepchildren) to be added to coverage for a limited period of time for a specified amount. This coverage is also term insurance and usually expires when the minor reaches a certain age (18 or 21). The family term rider incorporates the spouse term rider along with the children's term rider in a single rider.

Cash Surrender Value

Any outstanding loans and interest would be subtracted from the cash value, a policy surrendered for cash cannot be reinstated.

Dividend Options

Are a refund of overcharged premiums. Ther are not taxable since they are a return of premium. The options are: Cash, Reduction of premium, Paid-up addition, Accumulate at interest, One-year term, Paid-up life

Settlement Options:

Are the option available at the maturity of the policy, either to the policyowner or to the beneficiary upon the death of the policyowner. The types are similar to the annuity payment options. (Cash, Interest Only, Fixed Period (Annuity Certain), Fixed Amount (Annuity Certain), Life Income (Life Annuity)

Nonforfeiture Options (for Whole Life policies):

Are the options the policy owner is given when the policy is surrendered for the cash value. These are three options Cash surrender value, Reduced paid-up insurance, Extended term.

Exlusions

Are the types of risks the policy will not cover. Certain exclusions are standard for all policies, while others are attached to the policy as an exclusion rider. The most common exclusion found in life insurance policies are aviation, hazardous hobbies and occupations, and war and military service.

Consideration

Both parties to a contract must provide something of value; the consideration given by the insured is the premium and statements made in the application, the consideration given by the insurer is the promise to pay the benefits.

Reduced Paid-Up Insurance

Cash value is used to purchase a paid-up policy of the same type as the original policy at the insured's attained age.

Ownership Clause

Defines the person who may make changes, name and change beneficiaries, select option available under the policy and receive any financial benefits from the policy.

Accumulate at interest

Dividend left with insurer as savings; may result in current income tax liability on interest earned.

One-year term

Dividend used to purchase enough one year term to cover any outstanding loan amount.

Guaranteed Insurability Rider

Enables a policyholder to purchase additional insurance at specific ages (every 3 years), dates, or specific events (such as usually expires at the insured's age 40.

Return of Premium Rider

Is implemented by using increasing term insurance. When added to a whole life policy, it provides that a death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary. The return of premium rider usually expires at a specified age such as age 60.

Life Income (Life Annuity)

Pays a specified amount to the annuitant with no residual value payable to a beneficiary. The life income option also provides the largest monthly income payment.

Accidental Death and Dismemberment (AD&D)

Pays the principal sum (face amount) for accidental death, and pays a percentage of that amount, or a capital sum, for accidental dismemberment.

Interest Only

Policy proceeds remain with the company and the interest earned is paid to the beneficiary. This is the most flexible of the settlement options because the beneficiary can also take part of the benefits as well as the interest or take the lump sum at any time.

Incontestability

Prohibits the insurance company from denying or contesting the payment a death claim based on statements made on the application after a specified period of time, usually two years (as long as premiums are kept current)

Insuring Clause

Promise by the insurer to pay (consideration) the beneficiary upon the proof of the death of the insured.

Payor Benefit Rider

Specifies when premiums can be waived for a life insurance policy on a child in the event that the policyowner dies or becomes disabled. Waiver in effect until the child reaches age 21.

Primary

The first person to whom the proceeds of a policy are payable upon the death of the insured.

Spouse/ Other-Insured Term

The other insured rider provides coverage for one or more family members other than the insured. The rider is usually level term insurance, attached to the base policy covering the insured. This is also known as a family rider. If the rider covers just the spouse of the insured. This is also known as a family rider. If the rider covers just the spouse of the insured, it can be specified as a spouse term rider.

Entire Contract/Changes Clause

The policy and the application comprise the entire agreement.

Nonfamily Term

The rider permits the policyowner, owner or employer, to change the insured to another key employee, subject to insurability.

Contingent

The secondary person to whom proceeds of a policy are payable if the primary beneficiary dies before the insured.

Loan Value and Automatic Premium Loan (APL) Provision

This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium. * The company can also use cash value to pay the outstanding premiums on a policy and function much the same way as a policy loan.

Paid-up additions

Use dividend to buy paid up coverage at attained age: default option for most policies.

Reduction of premium

Use dividend to reduce cost of insurance.

Extended Term

Used to purchase pre-paid term for the same amount as the original policy for as long as the amount will pay; policy may be reinstated; not available on rated policies.

Disability Riders:

Waiver of Premium, Waiver of Monthly Deduction, Payor Benefit Rider