Chapter 3- Policy Riders, Provisions, Options and Exclusions

Level or Flexible

*LEVEL* *Most insurance policies have LEVEL PREMIUM* : premium remains the same throughout the duration of the contract. *FLEXIBLE* Universal Life Insurance allow the policy owner to pay more or less than the planned premium

Misstatement of Age and Gender

Allows the insurer to adjust the policy at any time due to a misstatement of age or gender The insurer is allowed to adjust the benefits due to such corrections The proceeds calculations should be based on the insurer's rate at the date of the policy issue

Common Disaster

Uniform Simultaneous Death Law: protect the policyowner original interest and contingent beneficiary eg: insured and the primary beneficiary died at the same time. Which party receives the death benefit? -* It will be assumed that the primary beneficiary died first in a common disaster* -the proceeds will be paid to either the contingent beneficiary or the insured's estate

One-Year term Option

Uses the dividend to purchase additional insurance in the form of one year term insurance that increases the overall policy death benefit -Choose to either use 1) Dividend as a single premium on as much one year term insurance as it will buy 2) Purchase term insurance equal to the policy's cash value for as long as it will last If the insured dies during the one year term, the beneficiary will receive both *death benefit of original policy* and *death benefit of the 1-year term insurance*

Living Needs Rider

provides for the payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years -provide the insured with the necessary funds to take care of necessary medical and nursing home expenses that incur as a result The remainder of the policy proceeds are payable to the beneficiary at the time of the insured death

Revocable and Irrevocable of (beneficiary designations)

*Revocable*: without consent of beneficiary may change the designation at any time *Irrevocable*: may not be changed without the written consent of the beneficiary -vested interest in the policy, the policy owner may not exercise certain rights without the consent of the beneficiary -cannot borrow against the policy cash value or assign policy to another person without the beneficiary agreement *borrowing against the policy cash value decrease the policy face value until repaid.*

Accelerated aka Living Benefit Riders

- provide partial payment of the death benefit prior to the insured's death

Dividends and Dividend Options

Dividends:- return of excess premium, they are *not taxable* to the policyowner THEY ARE *NOT GUARANTEED* *Dividend Options:-* you can receive your dividend in 1) *cash* 2)* reductions premiums* 3) Accumulation at Interest- insurer keeps it in an account that (accumulates interest- which is taxable)

Premium Payment

Modes: when premiums are paid, how often they are paid and to whom Premium Mode: frequency that the policyowner pays the policy premium -if the insured selects a premium mode other than annual there will be an additional charge to offset the loss of earning since the company does not have the entire premium at once. *If the insured dies during the a period of time which premium has been paid, the insurer must REFUND ANY UNEARNED PREMIUM along with the policy proceeds.*

Automatic Premium Loans

NOT REQUIRED - added to contracts with a cash value at no additional charge, *loan that prevents the unintentional lapse of a policy * due to non payment of premium

Owners Right

Parties to the insurance contract: 1) Insurer 2)Policyowner : *may be the same as the insured or diff *have the ownership rights under the policy *receive the policy living benefits *selecting payment option and assigning the policy *must have insurable interest in the insured 3)Insured: 4)Beneficiary *The owner and the insured are not the same person *insurance arrangement is referred to as the third party ownership*

Extended Term Option

The insurer uses the policy cash value to convert to term insurance for the *same face amount* as the former permanent policy. Duration of the new term coverage lasts for as long a period as the amount cash value will purchase If the policyowner has neglected to select one of these nonforfeiture options, the insurer will automatically implement the extended term option in the event of termination of the original policy

Payor Benefit

primary used with juvenile policies *insurance written on the life a minor* Otherwise it functions as *waiver of premium rider* -If the parent *(payor)* becomes disabled for 6 months or dies the insurer waives the premiums until minor reaches age 21 -Rider is also used when the owner and the insured are 2 different individuals.

Suicide

protects the insurer from persons who buy life insurance with the intention of committing suicide. Insurance require a period of time during which the death benefit will not be paid, if the insured commits suicide. --If the insured *commits suicide within the first 2 years* from the policy effective date,beneficiary receives *refund or the premium* --insured *commits suicide after the first 2 years * the beneficiary will *receive the proceeds * as if they died of natural causes.

Insuring Clause aka Insuring Agreement

the basic agreement between insurer and insured which states: -Insurer: promises to pay the death benefit upon the insured's death -Located on the policy face page 1)who the parties to the contract are 2)the premium to be paid 3)how long coverage is in force 4)amount of death benefit

Interest Only Option

Insurer retains the policy proceeds and pay interest on the proceeds to the recipient (beneficiary) at regular intervals -guarantees a certain rate of interest and will often pay interest in excess of the guaranteed rate. -*temporary option* since the proceeds are retained by the insurer until some later point when the proceeds are paid out or paid under one of the other settlement options. -When the beneficiary is allowed to select a settlement option, this option is used as a temporary if the beneficiary needs time to decide settlement option

Disability Riders

-provide benefits in the event of the insured' disability

Rider's Affecting the Death Benefit Amount

either increase it through multiple indemnity or refunds premiums Or decrease it if a portion of the death benefit was paid out to the insured while still living.

Types of Assignment of Policy

*Absolute Assignment*- transferring all rights of ownership to another person -permanent and total transfer of all the policy rights -new policyowner does not need to have an insurable interest in the insured *Collateral Assignment*- transfer partial rights -*Example*: done to secure a loan / transaction ---once the debt is repaid the assigned rights are returned to the policyowner.

Assignments

*specifies the policyowner's right to assign the policy (transfer rights of ownership)* Policyowner has the right to transfer partial or complete ownership of the policy to another person without the consent of the insurer - must advise the insurer in writing of the assignment - life insurance policy does not change the insured or amount of coverage, only changes the policy ownership rights.

Waiver of Premium

-waives the premium for the policy if the insured becomes totally disabled. coverage remains in course until the insured is able to return to work -if the insured is never able to return to work, the premiums will continue to be waived by the insurance company -after a 6 month period the insurer will refund the premium paid by the inured from start to disability, this rider expires at age 65. MUST MEET THE POLICY DEFINITION OF TOTAL DISABILITY *No Benefits are payable for partial disability*

Nonforfeiture Options

Because permanent life insurance policies have cash values, certain guarantees (nonforfeiture values) are built into the policy that cannot be forfeited by the policyowner. -required by state law to be included in the policy -it is a table showing the nonforfeiture values for a minimum of 20 year period and is included in the policy. options are: *cash surrender value*,*reduced paid-up insurance* or *extended term*

Effect on Death Benefit

If an insured withdraws a portion of the face amount by the use of the accelerated benefits rider, the benefit payable at death will be reduced by that amount + amount of earnings lost by insurance company in interest income.

Policy Options

Policyowners have decisions to make about how the cash value in the policy should be protected How the return of excess premium (dividends) should be invested How benefit payment will be made CHOICE AVAILABLE (Nonforfeiture, Dividend, Settlement Options)

Reduced Paid-Up Insurance Option

The policy cash value is used by the insurer as a single premium to purchase a completely paid up permanent policy that has *reduced face amount* from that of the former policy. The new reduced policy builds it own cash value and will remain in force until death or maturity

Accidental Death

*Accidental Death Rider* pays multiple of the face amount if the death is the result of an accident as defined in the policy. Must occur within 90 days of the accident Benefit---(*double Indemnity*) or twice face amount sometime triple DOES NOT INCLUDE DEATH THAT RESULTED FROM *HEALTH PROBLEM* OR *DISABILITY, SELF INFLICTED INJURIES, WAR, HAZARDOUS HOBBIES* or *AVOCATION* *expires* at the insured's age 65 *No additional cash value is accumulated as a result* *The accidental death benefits apply only to the policy's base face amount*, not to any additional benefits that may be purchased from policy dividends

Fixed Period aka *Period Certain*

*Fixed Period Installment Option* a specified period of years and equal installments paid to the recipient. - Payments will continue for the specified period even if the recipient dies before the end of that period now to a beneficiary -Installment depends on 1)amount of principal 2) guaranteed interest 3)length of period selected *longer the period the smaller the installment* *DOES NOT GUARANTEE INCOME FOR THE LIFE OF THE BENEFICIARY* *GUARANTEE THE ENTIRE PRINCIPAL WILL BE DISTRIBUTED

Succession: order of beneficiary

*Primary Beneficiary*: first claim to the policy proceeds following the death of the INSURED -may be more than one primary in which the proceeds are divided as dictated by the policy owner *Contingent Beneficiary*: if the primary beneficiary dies before the insured Secondary and Tertiary Beneficiary receive nothing if the primary is still alive IF NONE OF THE BENEFICIARIES ARE ALIVE/ or none listed on the policy: -Insured ESTATE will receive the proceeds for a life insurance policy - Death Benefit of the policy may be included in the insured's taxable estate if this occurs

Settlement Options

*methods used:-* to pay the death benefits to a beneficiary upon the insured's death to pay the endowment benefit if the insured lives to the endowment date *can be changed throughout the life of the insured by the policyowner* not the beneficiary *if the policyowner did not select a settlement option, the *beneficiary will be allowed to choose* at the time of the insured death 1) Cash Lump SUM Payment: upon death of the insured or at the point of endowment, the con *payment of the principal face amount after insured death are NOT TAXABLE as income*

Beneficiary Designation

Trusts- are used in conjunction with beneficiary designations to manage life insurance proceeds for a minor or estate tax purposes *BUT* naming a trust as beneficiary does not avoid estate tax * Beneficiary does not need to have an insurable interest in the insured* *POLICY OWNER DOES NOT HAVE TO LIST BENEFICIARY FOR THE POLICY TO BE VALID* -benefits designated to a minor is given to: the guardian the trustee of the minor *if the trust is the name beneficiary* as directed by a court

Term Riders

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

Guaranteed Insurability

allows the insured to purchase additional coverage at the specified future dates (usually every 3 years) or events (marriage or birth of child)*without evidence of insurability* for an ADDITIONAL PREMIUM and purchased at the attained age *expires* at insured age 40 *NOT MODIFIED OR DEFEATED BY THE EXISTENCE OF OTHER RIDERS*

Accelerated (Living) Benefits and Long-Term Care Rider

early payment of a portion of the death benefit if the insured has any of the conditions 1) Terminal Illness 2) Medical Condition that requires an extraordinary medical intervention (organ transplant) inorder to survive 3) Medical condition that without extensive treatment drastically limits the insured's life time 4) Inability to perform activities of daily living (ADLs) 5) Permanent institutionalization or confinement to a long term care facility 6) Any other conditions approved by the Department of Insurance The face amount of insurance is reduced after the payments. The accelerated death benefit payout will not necessarily result in a reduction of the premium, premium may be waived.

Policy Loans

found only in policies that contain cash value Policyowner is allowed to borrow an amount equal to the available cash value Any outstanding loans, accrued interest will be deducted from the policy proceeds upon the insured's death. The policy will not lapse with an outstanding policy loan, unless the amount of the loan and interest exceeds the available cash value. Insurer must provide 30 days written notice to the policyowner that the policy will lapse Insurance companies may defer a policy loan request for up to 6 months, unless the reason for the loan is to pay policy premium Policy loans are not subject to income taxation

Return of Premium Rider

implemented by using increasing term insurance - When added to a whole life policy, provides that at death prior to a given age 1) original face amount payable 2) amount equal to all premium previously paid is also payable to the beneficiary. *expires* at age 60 of the insured

Fixed Amount Option

pays a FIXED, specified amount in installment until the proceeds (principal and interest) are exhausted - *Recipient selects* a fixed dollar amount to be paid until proceeds are gone -*If beneficiary dies during the time of payment, the proceeds will go to a contingent beneficiary until all proceeds have been paid out *shorter the period of payment the larger each installment* *DOES NOT Guarantee payments for the life of the beneficiary * *Guarantee that proceeds will be paid out.

Paid-Up Option

policyowner is able to pay up the policy early. insurer first accumulates the dividends at interest and then uses the accumulated dividends plus interest and the policy cash value.

Incontestability

prevents an insurer from denying a claim due to statements in the application after the policy has been in for 2 years During the first 2 years the insurer may contest a claim if the insurer feels that inaccurate or misleading information was provided in the application Incontestability period does not apply in the event of nonpayment of premium, statements relating to age, sex or identity.

*Other Insured Rider* aka Family Rider

provides coverage for one or more family members other than the insured -level term insurance -attached to the base policy covering the insured - *Spouse Term Rider*can also just cover the spouse of the insured (spouse added for a limited period of time and for a specified amount, expires when the spouse reaches 65) -*Children Term rider* can be added to the coverage for a limited period of time for a specified amount, *term insurance* expires when the child reaches 18 or 21 also provides the minor with the option of converting to a permanent policy without evidence of insurability. Based on the avg number of children -*Family term rider*- Level term life insurance benefits -*Nonfamily Insureds* The substitute insured or change of insured rider does not permit an additional insured but instead allows for the change of insureds, subject to insurability. (key person employee retires, can be changed to another person employed)

Exclusions

types of risks the policy will not cover. Common one found in the policy: *Aviation:-* COVERS fare-paying passenger or pilot on a regular scheduled airline DOESN'T COVER non commercial pilots, or additional premium for the coverage *Hazardous Occupation:-* death from hazardous occupation or hobby may be excluded from coverage Underwriter has the option of charging a higher premium for the risks *War and Military Service:-*Limits the death benefit if the insured dies as a result of war 1)Status Clause: excludes all causes of death while the insured is on active duty in the military. 2)Results Clause: excludes the death benefit if the insured is killed as a result of an act of war (declared or undeclared)

Waiver of Monthly Deduction

pays all monthly deduction while the insured is disabled, after 6 month wait period. Only pays the monthly deductions, not the full premium necessary to accumulate cash values. -*Length of time this rider will pay monthly deductions* will* vary based on the age* the insured became disabled. *FOUND IN UNIVERSAL LIFE and VARIABLE UNIVERSAL LIFE* policies. -monthly deductions include the actual cost of insurance charges, expense charges and costs or charges for any benefits added to the policy by rider, endorsement or amendment, which are specified in the policy to be deducted from the account value.

Policy Riders

*Riders:* written modification attached to a policy that provide benefits *not found in the original policy*. -*Help to tailor a policy to the specific needs of the insured*

Entire Contract

*policy and a copy of the application* any riders or amendments, establishes the entire contract -No Statements written *BEFORE* the contract can be used to alter it -Both insurer and insured have to agree to change any policy once the policy is in effect.

Paid- Up Additions

Dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. No new separate policies are issued *Each small single premium payment will increase the death benefit of the original policy* by whatever the amount the dividend will buy. -each paid-up policy will *accumulate cash value and pay dividends* -additional coverage that can be purchased with the dividend is based based on the insured's attained age

Grace Period

Period of time after the premium due date that the policyowner has to pay the premium before the policy lapses. - used to protect the policyholder against an unintentional lapse of policy -if the insured dies during this period, the death benefit is payable; however any unpaid premium will be deducted from the death benefit.

Cash Option

Policyowner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable. Upon receipt, if the cash value exceeds premiums paid, the excess is taxable as ordinary income *Once this option is selected, the insured is no longer covered* *A policy that has been surrendered for its cash value cannot be reinstated * -*surrender charge* is a fee charged to the insured when a life policy or annuity is surrendered for its cash value

Reinstatement

*allows a lapsed policy to be put back in force. *maximum time limit for the reinstatement is usually 3 years after the policy has lapsed *if policyowner elects to reinstate the policy, they will have to provide evidence of insurability. * required to pay all back premiums and interest *THE POLICY WILL BE RESTORED TO ITS ORIGINAL STATUS, and RETAIN ALL THE VALUES THAT WERE ESTABLISHED AT THE INSURED's ISSUE AGE!* -A policy that have be *surrendered cannot be reinstated*

Accidental Death and Dismemberment

*pays the principal* (face amount) for accidental death and pays a percentage of that amount, or *a capital sum* for accident dismemberment *SAME AS ACCIDENTAL DEATH RIDER* dismemberment portion of the rider will usually determine the amount of the benefit according to the severity of the injury -*full principal amount*: usually paid for loss of 2 hands, 2 arms, 2 legs or the loss of vision in both eyes. -*capital amount*: limited to half the face value and is payable in the event of the loss of 1 hand, 1 arm, 1 leg or 1 eye

Life Income aka (straight life)

*provides the recipient with an income *that they *cannot outlive. * *Installment payments *are guaranteed for as long as the recipient lives, irrespective of the date of death. -amount of each installment is based on the recipient's* life expectancy* and the *amount of principal* *if beneficiary lives for a long time*- payments may exceed the total principal. *if beneficiary dies shortly afterwards*- begins receiving installment the balance of the principal is forfeited to the INSURER *INSTALLMENTS FOR THE LIFE INCOME WITH PERIOD will be SMALLER THAN THE LIFE ONLY OPTION* *Life income with period certain option* payments are guaranteed for the lifetime of the recipient and also a specified period that is guaranteed if the insured died during this time, the payment will be issued to the beneficiary until the remain of the period. *Life income Joint and Survivor* guarantees an income for 2 or more recipients for as long as they live -surviving recipient will receive a reduced payment after the first recipient dies. -commonly used to protect two beneficiaries (elderly parents) - unless a period certain option is chosen, there is no guarantee that all life insurance proceeds will be paid out if all beneficiaries die shortly after the installment begin.

Free Look

Allows the policyowner 10 days from the receipt to look over the policy- If unsatisfied, return for a full refund of the premium -Period starts when the policyowner received the policy (delivery), not when the insurer issues the policy **Replacement Policy- may require a longer look period

Consideration

Both parties must provide some value for the contract to be valid Premium: The consideration provided by the insured and statements made in the application Promise to Pay: provided by the insurer with terms of the contract

Long Term Care

often purchased as a separate policy can also be marketed as a rider to a life insurance policy. - payment of part of the death benefit (accelerated benefits) take care of health expenses - as with living needs rider, payment of LTC benefits will reduce the amount payable to the beneficiary upon the insured's death.