Chapter 4- Life Policy Provisions and Options

If overdue premiums are not paid by the end of the grace period, a traditional Whole Life policy will automatically:

Become extended term.

What happens if a premium due is not paid before the end of the grace period?

the policy lapses

What is the primary advantage to the policyowner in the reinstatement of a life insurance policy?

The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium Reinstatement restores the policy to its original condition as if it were never lapsed. Even though the policy is reinstated at a later age, the original issue premium is all that the insurer will require.

what is a revocable beneficiary?

may change at any time. -no vested interest in policy -no rights

K has a $100,000 traditional whole life policy with $30,000 of cash values and a $10,000 loan outstanding. What is the maximum additional amount she could borrow from the policy at this time?

$20,000

what is a collateral assignment?

-does not cause a permanent change in ownership. -temporary assingment used as collateral for a loan until the debt is paid in full.

what are 7 settlemet options?

1. Interest only 2. Life income only 3. fixed period 4.life income period certain 5. Life income Joint and survivor 6. Joint Life 7. Fixed amount

The nonforfeiture option that provides protection to age 100 is: A Reduced Paid-Up B Paid-up Additions C Cash Surrender D Extended Term

A. Reduced Paid-up

what is the accelerated death benefits?

Accelerated Death Benefits provide for an early payment of a portion of the face amount prior to death. This provides tax free access to policy benefits based on an insured qualifying as terminally ill or chronically ill. -24 months

Life Income: Settlement option?

Allows the insurer to use death benefit to purchase an annuity on behalf of beneficiary. -interest is taxed as ordinary income.

what is the mode of premium?

frequency of premium payments (monthly, quarterly, semiannually, or annually), and to whom the premiums are payable. -more frequent payment, greater the cost.

Life Income only settlement option?

guaranteed for lifetime of recipient paid as an annuity

A policyowner who wishes to maintain all rights in the policy should designate a(n):

Revocable beneficiary In order to maintain all rights in the policy, a policyowner should name a revocable beneficiary. An irrevocable beneficiary would have to provide consent for certain changes to a policy. Primary, contingent, and tertiary beneficiaries can be named as either revocable or irrevocable.

Life Income Joint and Survivor settlement option?

Guaranteed for lifetime of both recipients.

Who retains all of the rights in a life insurance policy?

The policyowner

What is the intent of the suicide clause?

To discourage individuals from purchasing an insurance policy while contemplating suicide

Frank purchases a life insurance policy and names his wife Jean as his beneficiary. They divorce several years later. If Frank dies before making any changes to his policy, can Jean still collect as his beneficiary?

Yes, she is the beneficiary. **Insurable interest must be present at the time of a life insurance application, but not necessary at the time of the loss. So, if Frank never changed his listed beneficiary, Jean will still collect his life insurance proceeds.

what do the 3 nonforfeiture options add to the cash value?

flexibility

B's policy had a $1,000 annual premium. B has not paid it for 2 years and wants to put the policy back in force. The insurer charges 10% interest on overdue premiums. What does B have to pay in order to reinstate their policy?

2 years of premiums, plus interest due on overdue premiums amounts

what is reinstatement?

If a policy has lapsed unintentionally due to nonpayment, it can be reinstated by the owner. The reinstatement time period is typically 3 years from lapse, but can be as long as 5 years. In order to reinstate, the insured must provide evidence of insurability and the owner must pay all back premiums from the date of lapse plus interest. Reinstatements are designed to put a policy back in force as if the lapse never occurred. Upon reinstatement, a new incontestability period takes effect.

what is the status clause exclusion?

No coverage for individuals with military status since these individuals are provided coverage through the government.

Joint Life settlement option?

guaranteed to 2 or more recipients, payments cease when first one dies

what is an irrevocable beneficiary?

cant change unless beneficiary dies or provides written consent of change. -If an irrevocable beneficiary is named, the owner gives up the right to make changes to the policy that affect the coverage or benefits without consent of the beneficiary. These changes include assigning the policy, canceling or surrendering the policy, or taking a policy loan. An irrevocable beneficiary has a vested interest in the policy benefits. A divorced spouse with a vested interest in the policy is an example of an irrevocable beneficiary.

What is the suicide clause?

if Insured commits suicide within 2 years from issue date, wont receive premium.

The incontestability clause states that after 2 years the:

Insurer will not refuse to pay a death claim based on misinformation in the original application for insurance.

what are 6 dividend options?

Premium Reduction Cash Accumulate with Interest One-Year Term Paid-up Additions Paid-up Option

If the insured outlives all of the beneficiaries named in the policy and then dies, by default who receives the death benefit?

The insured's estate

Frank, the owner of a life insurance policy, chooses a Settlement Option whereby the proceeds of his policy will be paid out over 20 years. Frank has chosen:

fixed period

what is the insuring clause (proof of death)?

found on first page. most important clause. It identifies the parties to the contract and the perils or conditions in which it will pay. The insuring clause is the insurance company's promise to pay the policy's death benefit to the named beneficiary, after receiving due proof of death of the insured, as long as the insured died while the policy was in force.

what is assignment?

the transfer of ownership. There are two types of assignments: absolute and collateral

what is absolute assignment?

The original owner, the assignor, will name a new owner, the assignee, of the policy. -Permanent assignment. -full amount of the policy is assigned, and this is referred to as a transfer of ownership.

Entire Contract Clause

Describes the parts of the life insurance contract. Consists of the policy, riders (endorsements), amendments, and a copy of the application. All must be attached in writing. Any change in contract will not be effective until approved by a company officer; the producer may not change the policy or waive any of its provisions.

The insuring agreement in a life insurance policy states the:

Insurance company is obligated to pay the policy proceeds upon presentation of valid proof of the death of the insured which occurred while the policy is in force

What is the hazardous hobbies or avocation exclusion?

No coverage if death is related to a hazardous hobby as stated in the policy, such as sky diving or hot air ballooning.

Interest only, life income with period certain, lump sum, and life income only are all forms of which of these life insurance policy options?

Settlement Options

Policy loan provisions include all of the following, EXCEPT: A Interest is charged annually B Unpaid interest is added to the value of the loan C Outstanding loans will be deducted from the face amount at time of claim D The death benefit of a policy is automatically reduced when a loan is requested

The death benefit of a policy is automatically reduced when a loan is requested.

Dividend options do not include which of the following choices?

Lifetime income

Contractual provisions explain all of the following, except: A How the policy works B The duties and responsibilities of the parties to the contract C Where the premium is going to come from D What the contract consists of

C. Where the premium is going to come from **Contractual provisions explain what the contract consists of, what duties and responsibilities the parties to the contract have, how the policy works, and basically spell out the agreement between the policyowner and the insurance company.

If an applicant for life insurance misstates his age on the application, what would be the consequence if/when it is discovered?

Death benefit will be what the premium paid would have purchased at issuance at the correct age.

Interest only settlement option:

proceeds left with insurer while interest payments are paid at least annually or more frequently. -known as capital conservation bc initial benefit is left untouched with insurer. -owner must direct the insurer as to when the principal will be paid as a benefit.

what is the common disaster clause?

The Common Disaster Clause provides that if an insured and primary beneficiary die as a result of the same event, the primary beneficiary must survive the insured by a specific period of time (usually 90 days) or the insurance company will assume the insured died last (the primary beneficiary died first). This provision is designed to pay the benefits to either the contingent beneficiary or the insured/policyowner's estate if no contingent beneficiary has been designated.

What is the grace period?

The grace period is the time period provided after the premium due date before a policy lapses. If the insured dies during this period, the death benefit is payable minus any premiums or loans due. The typical grace period is a month (30 or 31 days) unless state law specifies otherwise. If applicable, additional information about this topic is presented in the state law chapter. Coverage continues during the grace period, but if the premium is not paid, the policy lapses at the end of the grace period.

Misstatement of age and gender

All benefits under the policy will be provided based upon the insured's correct age and/or gender according to the premium scale in effect at the time the policy was issued. Insurer fixes differeces in payment and premiums. -there is no time limit for discovery, and this provision never cancels or voids a policy.

All of the following must be included in a whole life policy, except: Cash value accumulation B Extended term provision C Surrender value D Guaranteed dividend table

D. Guaranteed dividend table **Dividends represent a 'refund of unused premiums' when mutual insurers have a surplus (profit). Dividends are not guaranteed. Cash value accumulates as the policyowner pays premium over the years. The cash surrender value must be stated in the contract if the owner wishes to cancel the policy, and Extended Term is a Nonforfeiture option that must be offered. flag question end exam

Life income period certain settlement option?

Guaranteed for life of recipient or specified period of time, whichever is longer

What is the hazardous occupation exclusion?

No coverage if death is related to a hazardous occupation as stated in the policy, such as stunt drivers or auto racers.

What is the results clause (war clause) exclusion?

No coverage if death is the result of war declared or undeclared. If death occurs during the period of war, only the premiums are refunded.

The grace period in a life insurance policy is typically 31 days and provides for the:

Payment of the premium to be received after its due date without a penalty or lapse in coverage

The insuring clause is found:

on the first page of the policy

How long, typically, is the grace period on a $500,000 level term life insurance policy?

one month

what is the Incontestability clause?

within the first 2 years, insurer may contest a claim and void the contract upon proof of a material misstatement of fraud. This is one where they didnt know it was fraud until recent.

The policy loan amount cannot exceed the ____________.

Available cash surrender value.

What is the primary purpose of the free look period?

To allow the applicant time to reconsider their purchase decision and to see if the policy was issued as applied for

How long, typically, is the reinstatement period from policy lapse? A Indefinitely

3 years

what is the policy loan rate provision?

Policy loans with fixed rates can have a maximum fixed interest rate of 8% or less, as stated in the policy. For policy loans with an adjustable (variable) interest rate, the maximum rate is based upon Moody's corporate bond yield average and is stated in the policy. The policy loan amount cannot exceed the available cash surrender value.

Assignment is _______________.

The transfer of all or part of the ownership in a life insurance policy

Mona let her permanent policy lapse. She discovered there was $2,498 in cash value remaining in the policy and decided to pay off some of her credit card debt. She exercised which Nonforfeiture Option?

Cash Surrender

Which individual policy standard provision stipulates the conditions under which the insurer will not pay a claim while the policy was in force at the time of death of the insured? A Misstatement of Age or Gender B Consideration Clause C Free Look D Exclusions

D. Exclusions

An insured has a $175,000 permanent life insurance policy and is having difficulty keeping up with the premium payments. Which Nonforfeiture Option would allow him to forego the premiums and retain the same face amount until the cash surrender value is exhausted? A Cash Surrender B Reduced Paid-Up C Premium Reduction D Extended Term

D. Extended Term

Which of the following identifies the parties to the contract and the perils it covers and the circumstances under which the insurer will pay a life insurance policy claim?

Insuring Clause

Nonforfeiture options (guaranteed values)?

required in policies that accumulate cash values and protect the policyowner against total loss of beneftis if the policy should lapse due to nonpayment or cancelled.

what are dividends?

Essesntially are a return of excess premiums paid. They represent the favorable experience of the insurer and result from excess investment earnings, favorable mortality, and expense savings. -Not taxable and not guaranteed, however any interest generated will be taxable as ordinary income

All of the following are situations in which a life insurance company can legally get out of paying a death claim after the insured has died, except: A The insured died by suicide 9 months after the policy was issued B The insured dies when he crashes his plane into the ground 2 hours after receiving his pilot's license C Five years after the policy was issued, the insurer discovered that the insured was actually older than was stated on the application D Within 6 months after the policy issue date, the insurer discovers material misrepresentations made on the application which, had they been known, the policy would not have been issued

Five years after the policy was issued, the insurer discovered that the insured was actually older than was stated on the application. **There is no time limit when it comes to misstatement of age or gender. The insurer must pay the claim but can reduce the amount of the payout based on a ratio of what was paid to what should have been paid.

What is the aviation exclusion?

The exclusion does not apply to fare-paying passengers on regularly scheduled commercial flights. This exclusion applies most specifically to student pilots or those with a newly issued pilot's license with a limited number of hours of flying experience.

A contingent beneficiary has the right to:

Receive the policy proceeds if the primary beneficiary predeceases the insured

The insurer's consideration is __________ while the applicant's consideration is ________. A Issuing the policy / Submitting the application B Their promise to pay the claim / The application and premium payment C Providing claim forms / Submitting proof of death D Hiring and training a producer / Listening to the sales presentation

Their promise to pay the claim / The application and premium payment

what are 3 nonforfeiture options?

1. extended term 2. cash surrender 3. reduce paid up

A policy is applied for on September 2, accepted as an insurable risk on September 20, mailed to the producer on September 22, and delivered by the producer in-person to the policyowner on September 25. The free look begins September ___.

25 The free look period begins on the date the policyowner takes possession of the policy.

In a whole life policy, cash value must be made available to borrow against after _____ years.

3

When a policy lapses due to nonpayment of premium, which nonforfeiture option is the automatic option?

Extended Term

fixed amount- settlement option?

Payments are for a specified dollar amount paid monthly until the benefits, along with interest, are exhausted. In this example, the interest will extend the time period in which the benefits are paid. Only the interest portion of the benefit is taxable.

what is the cash surrender nonforfieture option?

Upon surrendering the policy back to the insurer, the policy owner will receive the cash surrender value stated in the policy less any outstanding loans and accrued interest. Any amount that exceeds the premiums paid into the policy will be taxable as ordinary income. The insured no longer has insurance coverage if this option is selected.

What is the suicide exclusion?

Within the first 2 years, death due to suicide is excluded from coverage as stated in the suicide clause.

Z is the beneficiary of a life insurance policy. Rather than take a lump sum, Z wanted a lifetime payout. However, Z would feel bad if after he died, residual values were retained by the insurer rather than being paid out. Z should consider which of the following settlement options?

Life refund **With Life Refund, payments are made for the lifetime of the recipient. Upon death, if a recipient has not received an amount equal to the total death benefit, the balance is refunded to the beneficiary, either in a lump sum (cash refund), or in installments (installment refund).

what is the automatic premium loans (APL)?

elected by policyowner -insurer to automatically borrow against cash value to cover a premium payment to prevent the contract from lapsing. -APL only available on cash value policies -effective at end of grace period

what are all the dividend options availabled?

-Cash- recieves in form of check -Premium Reduction- dividends are applied toward the next premium due. -Accumulate at Interest- dividends retained and interest rate paid by policyowner is compounded annually. -paid up additions- Purchases single premium, additional permanent benefits at the insured's attained age. The additional insurance is paid out in addition to the face amount if the insured dies. While the insured is living, it generates cash value and dividends as if the paid-up additional benefit was part of the original policy. 1 year term- Purchases a single premium, 1 year term benefit. Premiums are calculated at the insured's attained age; also referred to as the fifth dividend option. Paid-Up Option: Pays off the policy more quickly than scheduled. If the company's overall performance declines, premiums may have to be resumed.

Owner's rights?

The policyowner retains all rights in the policy. -Has the right to name or change revocable beneficiaries, borrow against the cash values or access living values, receive dividends and select amoung the dividend options made available, and assign the policy on an absolute or a collateral basis, to name a few. -Must make the premium payments.

Provisions and clauses, unlike riders, are included in the contract for:

No additional charge

fixed period- settlement option?

Payments are guaranteed for a specified period of time, such as 10 or 20 years, after which time payments will cease. The proceeds and interest are used to make the payments. The interest will increase the amount of each payment, and the interest is taxable.

Reduced Paid-up nonforfeiture option?

Present cash value is used to buy a single premium, permanent paid-up policy of a reduced face amount. This option provides the longest period of coverage provided by a nonforfeiture option. Coverage, although reduced in face value, will continue to age 100.

what is the consideration clause?

Specifies the amount and frequency of premium paid by the owner as something of value provided in exchange for the company's promise to pay.

What is the free look (right to exaime period)?

The free look allows the policyowner a specified number of days following receipt of the policy to look it over. If dissatisfied for any reason, the owner has the right to return it for a full refund of any premiums paid. The free look period is usually 10 days, unless state law specifies otherwise. The free look period starts on the date when the policy is delivered to the policyowner. For this reason, it is important for a producer to collect a delivery receipt when delivering the policy.

How life insurance benefits are paid?

in a lump sum unless another settlement has been selected. -Any interest received from a settlement option distribution is taxed as ordinary income. -lump sum are income tax free.

what is a partial withdrawal or partial surrender?

only permitted in a Universal or a variable universal life policy. -paid directly from the cash value and reduces both the amount of the death benefit and amount of cash value in policy. -first in first out

what are surrenders?

owner may cancel entire policy. Policyowner entitled to the cash surrender value in policy. -Surrender charge schedule typically shows percentage charged, reducing on annual basis. -Permitted in Universal or Variable universal life polices

what is extended term nonforefiture option?

present value is used to buy a single premium term policy of the same face amount for as long a period as it will buy, expressed as a combination of years and days. This option provides the largest death benefit and is sometimes referred to as the Automatic (or Default) Option if no other option has been selected. The insured no longer has rights to the cash value under this option, and the policy will expire prior to age 100.