Chapter 4: Life Insurance Policy Provisions, Options and Riders

What is the waiting period on a Waiver of Premium rider in life insurance policies?

6 months

When a policy owner designates a group of individuals as the beneficiary of a life insurance death benefit without specifically naming the individuals, this is called

Class designation

Which is TRUE about the cash surrender nonforfeiture option?

Funds exceeding the premium paid are taxable as ordinary income

Which of the following statements is TRUE concerning the Accidental Death Rider

It will pay double or triple the face amount

Which option is being utilized when the insurer accumulates dividends at interest and then uses the accumulated dividends, plus interest, to pay the policy up early?

Paid-up option

An insured has had a life insurance policy that he purchased 3 years ago when he was 40 years old. He is killed in an automobile accident and it is discovered that he is actually 45 years old, and not 43,as stated on the application. What will the company do?

Pay a reduced death benefit

The policy owner pays for her life insurance annually. Until now, she has collected a nontaxable dividend check each year. She has decided that she would rather use dividends to help pay for her next premium. What option would allow her to do this?

Reduction of premium

Who has the legal title of the property in a trust?

Trustee

cost of living rider

addresses the inflation factor by automatically increasing the amount of insurance without evidence of insurability from the insured

accelerated (living) benefit

allow the early payment of a portion of the death benefit if the insured has: a terminal illness, a medical condition that requires an extraordinary medical intervention for the insured to survive, a medical condition that without extensive treatment drastically limits the insured's life time, inability to perform activities of daily living, permanent institutionalization or confinement to a long-term facility, or any other conditions approved by the department of insurance.

What limits the amount that a policy owner may borrow from a while life insurance policy?

cash value

modifications

changes in the policy must be endorsed on, or attached to, the policy in writing over the signature of an executive officer of the insurer. only an executive officer can make the changes to the contract.

family term rider

combines spouse term rider and children's term rider in a single rider

waiver of stipulated premium rider

designed to waive a specific amount of premium, and may be added to a universal life policy at an additional cost.

paid-up additions

dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy

The provision which states that both the policy and a copy of the application form the contract between the policy owner and the insurer is called the

entire contract

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 y that amount, plus the amount of earnings lost by the insurance company in interest income.

interest

if an insurer does not pay a first party claim within 30 days after receipt of acceptable proof of loss, the insurer will be required to pay interest (12% in Michigan) at the legal rate from the date the claim is received by the insurer.

estates

if none of the beneficiaries is alive at the time of the insured's death, or if no beneficiary has been named, the insured's estate will automatically receive the proceeds of a life insurance policy.

common disaster clause

if the insured and the primary beneficiary die at approximately the same time from a common accident with no clear evidence as to who died first, then the proceeds will be paid to the contingent beneficiary or the insured's estate.

reduction of premium

insurer uses the dividend to reduce the next year's premium

policy owner

pays premium to insurance company and are the only party that has ownership rights

accidental death rider

pays some multiple of the face amount if death is the result of a accident as defined in the policy. death must usually occur within 90 days of the accident.

payor benefit rider

primarily used with juvenile polices; functions like the waiver of premium rider.

reduced paid-up insurance

the policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a reduced face amount from that of the former policy

Waiver of Premium rider

waives the premium for the policy if the insured becomes totally disabled. most insurers impose a 6 mont waiting period from the time of disability until the first premium is waived.

cash loans

whenever a policy has cash value, it has loan value. the amount available to the policy owner for a loan equals the cash value minus any outstanding and unpaid policy loans including interest.

Which of the following would be deducted from the death benefit paid to a beneficiary, if a partial accelerated death benefit had been paid while the insured was still alive?

Amount paid with the accelerated benefit, plus the earnings lost by the insurance company in interest income from the accelerated benefit

reinstatement

allows a lapsed policy to be put back in force. the maximum time limit for reinstatement is usually 3 years after the policy has been lapsed.

children's term rider

allows children of the insured to be added to coverage for a limited period of time for a specified amount.

guaranteed insurability rider

allows the insured to purchase additional coverage at specified future dates or events, without evidence or insurability, for an additional premium.

facility of payment clause

allows the insurer to pay a portion of the proceeds to any relative or person who has possession of the policy and appears equitably entitled to the payment. this provision is designed to facilitate payment when some doubt may exist as to who the beneficiary is and save legal expenses.

right to examine (free look)

allows the policy owner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. the free look period starts when the policy owner receives the policy, not when the insurer issues the policy

return or premium rider

implemented by using increasing term insurance. provides that at death prior to a given age, non only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary.

waiver of cost of insurance rider

in the event of disability of the insured, this rider waives the cost of the insurance and other expenses, nut does not waive the cost of premiums necessary to accumulate cash values

disability income rider

in the event of disability, the insurer will waive the policy premiums and pay a monthly income to the insured

accumulation at interest

insurance company keeps the dividend in an account where it accumulates interest. the policy owner is allowed to withdraw the dividends at any time

collateral assignment

involves a transfer of partial rights to another person it is usually done in order to secure a loan or some other transaction. it is a partial and temporary assignment of some of the policy rights. once the debt or loan is repaid, the assigned rights are returned to the policy owner

absolute assignment

involves transferring all rights of ownership to another person or entity. this is a permanent and total transfer of all the policy rights. the new policy owner does not need to have an insurable interest in the insured.

When a reduced-paid up nonforfeiture option is chosen, what happens to the face amount of the policy?

it is reduced to the amount of what the cash value would buy as a single premium

irrevocable beneficiary

may not be changed without the written consent of the beneficiary. irrevocable beneficiaries have a vested interest in the policy, therefore, the policy owner may not exercise certain rights without the consent of the beneficiary.

Riders

modify provisions that already exist and are used to increase or decrease policy benefits and premiums

options

offer insurers and insureds ways to invest or distribute a sum of money available in a life policy

A rider attached to a life insurance policy that provides coverage on the insured's family members is called the

other-insured rider

incontestability

prevents an insurer from denying a claim die to statements in the application after the policy has been in force for 2 years, even if there has been a material misstatement of facts or concealment of a material fact.

spouse and other insured term rider

provides coverage for one or more family members other than the insured

dividends

return of excess premiums and are not taxable

automatic premium loans

special type of loan that prevents the unintentional lapse of a policy die to nonpayment of the premium.

Provisions

stipulate the rights and obligations of an insurance contract and are fairly universal from one policy to the next

succession

the beneficiary designation provides for levels of priority or choice. in the event that the primary beneficiary predeceases the insured, the contingent level in the succession of will be entitled to the death proceeds.

one-year term

the insurance company uses the dividend to purchase additional insurance in the form of one-year term insurance that increases the overall policy death benefit.

paid-up insurance

the insurer first accumulates the dividends at interest and then uses the accumulated dividends, plus interest, and the policy cash value to pay the policy up early

extended term

the insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy

grace period

the period of time after the premium due date that the policy owner has to pay the premium before the policy lapses (usually 30-31 days). the purpose of this is to protect thee policy holder against an unintentional lapse of the policy.

beneficiary

the person or interest to which the policy proceeds will be paid upon the death of the insured. the beneficiary may be a person, class of persons, the insured's estate, or an institution or other entity such as a foundation, charity, corporation, or trustee of a trust.

entire contract provision

the policy and a copy of the application, along with any riders or amendments, constitute the entire contract. no statements made before the contract was written can be used to alter the contract.

cash surrender value

the policy owner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable.

revocable beneficiary

the policy owner, without consent or knowledge of the beneficiary, may change a revocable designation at any time

exclusions

the types of risks the policy will not cover. ex: aviation, hazardous occupation, and war and military service

An absolute assignment is a

transfer of all ownership rights in a policy

withdrawal (partial surrender)

universal life polices allow the partial withdrawal of the policy cash value. however, there may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made