Chapter 5 (Exam Prep)

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Term Rider

A term rider adds term coverage to an existing life insurance policy. There are several varieties of term riders, including: Spouse/other insured, Children, Family, Return of premium and Return of cash value.

Modifications

Modifications are policy changes and must be made by an authorized officer of the insurer and attached to the policy. Only the policyowner has the right to request changes. Insurance producers cannot make any policy change. Changes to the policy can only be implemented by an executive officer of the insurer.

Dividend Options ; Policy Dividends = Not Taxable

Mutual companies issue participating policies, meaning that policyholders participate in the profits of the insurer through the receipt of dividends. This is contrary to most stock insurers who issue nonparticipating policies and do not issue dividends to policyholders. Though not guaranteed, participating policies pay dividends to policyowners at the end of each year when the company experiences a surplus. Dividends become payable at the end of the first or second policy year. Remember that dividends are a return of overcharged premium, and are not taxable.

The insuring clause:

Names the individuals covered by the policy States the policy effective date States the period of coverage Is usually included on the policy face Includes the face amount of the policy Includes the names of the insurer The insured.

Contingent Beneficiary - NOT INCLUDED IN THE INSURING CLAUSE

Naming beneficiaries by succession. If the primary beneficiary predeceases the insured, then the contingent beneficiary will receive the policy proceeds. Synonymous with secondary beneficiary.

Succession

Naming beneficiaries in succession allows the policyowner to name up to three levels of prioritized beneficiaries: Primary Secondary Tertiary Secondary and tertiary beneficiaries are called contingent because they only receive policy proceeds if the primary beneficiary predeceases the insured. The primary beneficiary is the first person to receive policy proceeds upon the insured's death. If the primary beneficiary predeceases the insured, the secondary or successor beneficiary will receive the policy proceeds. If both the primary and secondary beneficiaries predecease the insured, the tertiary beneficiary will receive the policy proceeds.

Accelerated Living Benefit Rider

The accelerated benefit rider, also referred to as a living benefit rider, allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness. Depending on the policy, life insurance premiums may be waived upon payment of the accelerated benefit. This accelerated benefit rider is intended to provide a terminally ill insured with necessary funds to pay medical expenses and nursing home costs during a terminal illness while the insured is living, and relieves financial burdens associated with terminal illness.

Accidental Death Benefit Rider or Multiple Indemnity

The accidental death benefit (ADB) rider, also referred to as a multiple indemnity rider, pays an additional sum, termed the principal sum, to the beneficiary if the insured dies due to an accident. The amount paid is a multiple of the policy face amount such as double or triple. Each policy stipulates how an accidental death is defined. Furthermore, the insured must die within a certain time period of the accident, usually 90 days. The rider usually excludes death from accidents occurring while the insured is at war, committing a crime, or is in an aviation incident, other than in a regularly scheduled commercial flight. The ADB typically expires when the insured reaches a certain age, such as 65. The ADB does not build cash value and only multiplies the policy's face amount. If a policy's face amount is increased by dividend options, then the ADB only applies to the original policy face amount.

primary = first in line contingent = second in line

The beneficiaries at lower levels of priority (secondary and tertiary) do not receive policy proceeds unless the higher level(s) beneficiaries predecease the insured. Multiple primary, secondary and tertiary beneficiaries may be named. Example: Bill could name Jason and Judy as primary beneficiaries and Mary and Blain as contingent beneficiaries. In this case, Bill would need to specify how the policy proceeds would be divided (i.e., Jason ¼; Judy ¾). The insured's estate becomes the beneficiary if all named beneficiaries predecease the insured.

Children's Term Rider

The children's term rider permits children to be insured under term rider protection on a life insurance policy for a certain length of time. Children's term riders usually expire when children reach the age of 18 or 21. When children reach the limiting age, they are usually given the option to convert their term coverage to whole life. Biological, step and legally adopted children can be insured under term riders.

Grace Period

The grace period is the stipulated period of time policyowners are allotted to pay an overdue premium, during which the policy remains in force. The grace period protects the policyowner from an unintentional policy lapse.

Guaranteed Insurability Rider (GIR)

The guaranteed insurability rider (GIR), sometimes referred to as the future increase option, permits the policyowner to buy additional permanent life insurance coverage at specific points in time in the future (i.e., marriage, births, etc.) without requiring the insured to provide proof of insurability. If the future increase option is not exercised within a specified time period, such as 90 days, of each option age, then the option is forgone. The added coverage is rated at the insured's attained age. Each policy specifies how much additional coverage can be purchased. The GIR is not exclusive of other riders, so if the policyowner has the waiver of premium rider and the GIR, it is possible for both riders to be exercised simultaneously. The guaranteed insurability rider usually drops off when the insured reaches the age of 40.

Insuring Clause

The insuring clause contains the insurer's basic promise to pay a sum of money in the event of a covered loss to the beneficiary.

One-year Term Option

The one-year term option or fifth dividend option allows the policyowner to use the dividend as a single premium to purchase one-year term protection. The amount of the term coverage is based on the insured's attained age, and the face amount can be no more than the amount of the policy's cash value. Example: Suppose Tom receives a $200 dividend, and he has $70,000 in cash values. If $125 of the dividend suffices to buy $70,000 worth of one-year term coverage, then Tom can use the remaining $75 of the dividend on other dividend options. If the insured dies while the one-year term coverage is in effect, the insurer will pay the face amount on both the permanent policy and the one-year term coverage.

With the interest only option, the insurer retains the policy proceeds, which become the principal, and pays out only the growth on the principal to the beneficiary on a scheduled basis, such as monthly or annually.

The principal is paid out in cash or via another settlement option at some point in the future. A minimum guaranteed interest rate is quoted to the beneficiary. In many cases, the interest only option is used in tandem with other settlement options, especially in situations where more than one person is receiving payments from the policy proceeds. Sometimes the policyowner will specify the beneficiary's right of withdrawal of the principal, such as after a certain number of years or upon a certain age. If the beneficiary dies before the funds are depleted, then a contingent beneficiary will receive payments.

Reduction of Premium Payments

The reduction of premium payments option allows the policyowner to use the dividend to offset the cost of a future premium payment. Example: If the next year's annual premium is $1,500 and the dividend received is $300, then the next year's premium would be reduced to $1,200.

All of the following is true regarding lump-sum payment of life insurance policy proceeds, EXCEPT: Select one: a. Distribution is taxed. b. Distribution is not taxed. c. The policyowner has the right to select the settlement option. d. Cash payment, or lump-sum payment, is still a common way of receiving life insurance policy proceeds.

This dividend option provides additional permanent coverage: Select one: a. Paid-up additions b. One-year term c. Accumulate at interest d. Cash payment

What would an insurance company do if an insured commits suicide within the contracts contestable period? Select one: a. Deny the claim due to the suicide clause b. Pay the claim in full c. Pay half the claim d. Return half the premiums

Which life insurance rider affecting the policy's death benefit protects against the chance of depleting income during prolonged life? Select one: a. Annuity rider b. Cost of living rider c. Term rider d. Guaranteed insurability

Which of the following is a beneficiary designation based on a group of people with shared characteristics? Select one: a. Class designation b. Individual c. Trust d. Blanket group

A settlement option that would leave the proceeds of the insurance policy with the insurer and the insurer would pay interest to the beneficiary on an installment basis is called: Select one: a. Fixed period option b. Interest only option c. Life income option d. Withdrawal provision

All of the following options are available if the only logical beneficiary is a minor, EXCEPT: Select one: a. A guardian can be appointed. b. The benefits can go directly to the estate of the insured. c. A trust can be established. d. The insurance company can hold the proceeds until the minor comes of age.

How long is the suicide clause typically in effect? Select one: a. The entire policy term b. Two years from the policy effective date c. Two years prior to the insured's death d. Four years

In most states, the period of contestability for material misrepresentations made on a life insurance application is: Select one: a. 10 days b. 90 days c. 2 years d. 3 years

Some riders can affect the death benefit of a life insurance policy. Which of the following riders can decrease the death benefit? Select one: a. Payor rider b. Waiver of premium rider c. Long-term care rider d. Family term rider

What is the term for a policy element that adds or takes away coverage? Select one: a. Policy b. Contract c. Rider d. Clause

What nonforfeiture option allows the policyowner to purchase paid-up whole life coverage at a reduced face amount based on the policy's existing cash value? Select one: a. Extended term b. Cash surrender value c. Reduced paid-up insurance d. None

All of the following are true regarding the fixed-amount installment life insurance settlement option, EXCEPT: Select one: a. Payments consist of principal and interest. b. Payments are made until the principal and interest reach zero. c. The length of time installments are paid depends on the amount of the policy proceeds. d. The larger the payment amount, the longer time period payments will be received.

Which beneficiary designation is most appropriate for a person who wants to name his spouse as a beneficiary of his life insurance policy, and simultaneously retain full policy ownership rights? Select one: a. Full beneficiary b. Partial beneficiary c. Irrevocable beneficiary d. Revocable beneficiary

Which of the following explanations best describes the purpose of the waiver of premium provision of a life insurance policy? Select one: a. It decreases the monthly amount of an insured's premium payments. b. It decreases the frequency of an insured's premium payments. c. It waives the insured's premiums if the insured becomes disabled. d. It waives the insured's premiums if the insured is totally disabled before a specified age.

Paid-up Additions

he paid-up additions option allows the policyowner to use the dividend as a single premium to purchase an additional amount of whole life coverage. The amount of coverage that can be purchased is based on the insured's attained age when the paid-up addition is purchased. A new policy is not issued with paid-up additions. Instead, the paid-up addition coverage is added onto the policy's face amount. Insurers usually require that the type of coverage purchased with paid-up additions is the same type as the original policy. If the policyowner does not select a dividend option, the insurer will automatically use the paid-up additions option.

Free Look = Starts on Delivery-10 Days

Right to Examine

Depending on the state, the insurance company may be permitted to delay payment of cash surrender for up to 6 months from the request. This is called the delayed payment provision and provides insurance companies a buffer if they encounter a financial crisis.

6 months = How long payment can be delayed.

Excess interest provision

A provision stating that when a life insurance policy's interest rate becomes greater than the assumed interest rate, the policy will build excess cash value. The insurer will provide options for paying the excess cash to the insured via cash dividends or paid-up additions.

Accidental Death and Dismemberment ; AD&D = Die From Accident

Accidental death and dismemberment (AD&D) policies pay a lump sum payment if the insured dies in an accident, or loses major body parts in an accident.

Annuity Rider

An annuity rider can be added onto a life insurance policy. Annuities, which protect against the chance of depleting income for prolonged life, are discussed in detail in a later chapter.

Disability Riders

As stated earlier, riders "ride on" existing policies. Riders add to or take away from policy benefits. The rider, synonymous with "endorsement," is attached to the policy. Riders customize policies to meet policyowners' unique needs.

Lump Sum ; no tax

Cash payment, or lump sum payment, of the policy proceeds is still prevalent today. If the policyowner does not choose a settlement option for the beneficiary, the policy proceeds default to payment in lump sum. In this case, the beneficiary is permitted to choose a settlement option upon the insured's death. If the policyowner does select a settlement option, it cannot be changed. Lump sum distribution is not taxed.

Cash Value = Year 3

During the first two policy years, premiums are used to pay acquisition and administrative expenses. Once the cash surrender value is exercised: No death benefit will be paid, The policy cannot be reinstated, Any outstanding policy loans plus interest would be deducted from the cash surrender value, and A surrender fee is charged at the time of cash surrender.

Unlike the one-year term option, paid-up additions do not expire - they are added onto the policy's face amount. Unlike the accumulation at interest option, the dividend used to purchase the paid-up additions contributes to the policy's cash value. The paid-up additions dividend option is appropriate for policyowners who wish to maximize policy death benefits for the policy beneficiary or who are concerned with long-term benefits. By purchasing more life insurance, the policyowner who selects the paid-up addition is maximizing the death benefits for the intended beneficiary.

Example: Tom has $100,000 of whole life insurance. He receives a $500 dividend and decides to use the paid-up additions option to purchase $1,000 of whole life coverage. Tom's whole life policy now has a face amount of $101,000.

Accelerated benefits allow policyowners to use their policy's death benefits tax-free while they are still alive, or if they are terminally or chronically ill. A terminally ill person must be expected to die within two years.

Examples of terminal and chronic illnesses are cancer and AIDS. Is unable to perform at least two activities of daily living without assistance, Has a disability, or Is cognitively impaired and requires supervision to ensure health and safety. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 requires that proceeds from accelerated benefits are exempt from federal income tax.

Accidental Death and Dismemberment Rider (AD&D)

The accidental death and dismemberment rider may be added to a life insurance policy to pay benefits for dismemberment. The loss must occur within a certain time period of the accident, such as 90 days. The accidental death and dismemberment rider pays a principal sum if the insured loses any of the following due to an accident: Both hands Both arms Both legs Vision in both eyes

Accumulation at Interest

The accumulation at interest option allows the insurer to retain the dividend to be invested and grow in value. The dividend earns a rate specified in the policy. The policyowner can withdraw the dividend at will tax-free, but any interest earned on the dividend is taxable. Dividends left to accumulate at interest are separate from the policy's cash value.

Cost of Living Adjustment (COLA) Rider

The cost of living adjustment (COLA) rider allows the policy face amount to be adjusted to account for inflation based on the consumer price index (CPI). If the face amount is increased, the premium will be increased. If the face amount is decreased, the premium will be decreased. If the face amount cannot be adjusted, then an increasing term rider is added to the coverage.

Effect on Death Benefit

The death benefit is the face amount reduced by the amount of accelerated benefit paid to the insured. Example: If Linda has a $100,000 life insurance policy and receives $40,000 accelerated benefits for her terminal illness and the insurer loses $200 of interest, then Linda's beneficiary will receive $59,800 in death benefits when she dies.

Execution Clause

The execution clause states that the policy is executed (established) when all parties to the contract have met the policy's conditions.

Extended Term Option

The extended term option permits the policyowner to use the policy's cash values to buy paid-up term insurance. The cash values act as a single premium to purchase the extended term coverage, and the amount of the paid-up coverage is equivalent to the original policy's face value. The length of the term protection is based on the amount of cash value in the original policy and the insured's age at the time the extended term is purchased. Any outstanding policy loans plus interest would be deducted from the cash surrender value prior to purchasing extended term coverage.

Life Income

The life income settlement option uses an annuity to pay the policy proceeds. The beneficiary is provided with income that cannot be outlived: income is guaranteed for the beneficiary's entire life. The amount of each payment depends on: The beneficiary's life expectancy (age and gender), The amount of the policy proceeds, The interest rate, and Any payout guarantees.

How long is the loan period on STOLI arrangements? Select one: a. 1 year b. 2 years c. 3 years d. 4 years

Rights of Ownership

wnership rights include naming beneficiaries, choosing the settlement option (how the policy proceeds will be paid), right to select nonforfeiture options, right of assignment, right to policy cash value, if any, right of policy loan if there is policy cash value, choice of premium payment mode, dividend options, if any, and the right of conversion if the policy is a convertible term policy.

Viatical Settlements

A terminally or chronically ill insured can sell their life insurance policy to a third party in exchange for payment of a large portion of the death benefit. The insured may receive anywhere from 50% - 80% of the death benefit. This may be a feasible option for insureds that need a large sum of money to pay medical bills prior to death. Viatical settlements are completely separate from life insurance contracts. HIPAA requires that proceeds from a viatical settlement are exempt from federal income tax.

Policyowner = Right to request changes to policy

Authorized Officer = Can make changes to policy

Transfer for Value Rule

If a life insurance policy is assigned for valuable consideration and the insured under the life insurance policy dies, the new owner of the policy will be responsible for paying taxes on the amount of proceeds paid (including premiums that were paid by the original owner) that exceed the valuable consideration. The exceptions to this rule are: Transfers to the insured, Transfers to a business partner of the insured, or Transfers to a corporation in which the insured is a stockholder or officer.

Disability Income Rider

If the policyowner becomes totally and permanently disabled, the insurer will pay the insured a periodic income, and in some policies, it also waives the policy premiums. The periodic income is based on the policy's face amount and is paid weekly or monthly during the insured's disability. There is usually a waiting period of 3 or 6 months once the policyowner becomes disabled to establish that the disability is permanent.

Fixed-period Installments use Annuities

Longer payment periods result in lower payments. Income is guaranteed for the entire period specified, so if the recipient dies before the period ends, then a contingent beneficiary would continue to receive payments until the period lapses.

Policy Proceeds Paid Upon the Insured's Death

Lump sum proceeds paid to a beneficiary are exempt from federal income tax. If the policy contains a double indemnity rider or paid-up additions, those policy proceeds are also exempt. Policy proceeds that are reinvested and paid out to the beneficiary as an installment are subject to federal income tax, only up to the amount of each benefit that is interest (annuity rule - the portion of proceeds that formed the principal are not taxable, but the portion of proceeds that form interest are taxable). With the interest-only life insurance settlement option, installment payments are taxable because they are 100% interest earned on the principal, but the principal when paid out in a lump sum is not taxable.

Consideration Clause

The consideration clause states that a policyowner must pay a premium in exchange for the insurer's promise to pay benefits. The consideration clause states how frequent premium payments must be made in order to keep the policy in force.

Family Term Rider

The family term rider combines the spouse and children's term rider in one rider. When a family term rider is added to permanent coverage, then the family term rider is level term.

Riders Covering Additional Insured

The following riders can be attached to life insurance policies, and cover additional individuals.

Settlement options are the ways, other than lump sum, that life insurance policy proceeds are paid out to beneficiaries upon the insured's death or when the policy endows. Before life insurance settlement options were introduced, the only payout method available was one lump sum cash payment. While still available, the lump sum payout may not be the best way to distribute policy proceeds, especially if the beneficiary does not manage money well.

The introduction of settlement options made additional methods available for disbursing policy proceeds other than lump sum. Settlement options allow the policy proceeds to be retained by the insurer and paid out gradually. Because the policy proceeds are reinvested, they earn interest, and the interest portion of payments is taxable. There are five settlement options: Lump sum Interest only Fixed-period installments Fixed-amount installments Life income

Return of Cash Value Rider

The return of cash value rider allows a whole life policy's cash value to be included in the death benefit. Similar to the return of premium rider, this rider doesn't actually return the policyowner's cash value; instead, the rider provides the additional benefit through an increasing term rider that always equals the policy's cash value. The return of cash value rider was created as a response to policyowners who misunderstood how cash value in permanent life insurance accrues interest to equal the policy face amount.

Insured's Estate

Upon the insured's death, life insurance and any accumulated dividends are includable in the insured's gross estate for federal estate tax purposes.

Policy Proceeds Paid While the Insured is Alive

When a life insurance policy is surrendered for its cash value, taxes apply to any portion of the proceeds that exceed the cost basis. Policy proceeds received as an accelerated death benefit or viatical settlement for chronically or terminally ill insureds are not subject to federal income tax. However, for chronically ill insureds there is a maximum amount, indexed annually, that may be tax-sheltered for an accelerated benefit.

There is some risk inherent in the life income option. If the beneficiary lives well beyond their expected lifespan, the insurer must pay out-of-pocket after the principal has been depleted. However, if the beneficiary dies earlier than expected, the balance of the principal is forfeited to the insurer. Because of the risk involved with the life income option, insurers provide additional options to ensure that part or all of the policy proceeds are disbursed. These additional guarantees lower the amount of the payments.

There are several versions of the life income option including the following. These will be discussed in greater depth in the annuities chapter. Cash refund Installment refund Straight life Life with period certain Period certain Joint and survivor

The long-term care rider is a type of accelerated benefit, which is used to pay long-term care costs. The long-term care rider may be separate from the life policy, in which case the accelerated benefit does not reduce the death benefit, or may be incorporated into the life insurance policy, thereby reducing the death benefit or policy cash value.

An example of the integrated accelerated benefit is the living needs rider that pays the accelerated benefit as long as the insured is expected to die within one to two years. A living needs rider may pay up to 80% of the death benefit. Prior hospitalization is often required for the rider to kick in.

Cash Surrender Option

As the name implies, the cash surrender option allows the policyowner to receive the policy's cash value. In most states, policies that build cash value must begin to accrue cash value by the end of the third policy year. For industrial life policies, cash value must be available after five years.

Tax Treatment of Proceeds

Generally, life insurance benefits paid to a beneficiary are tax-free. However, interest earned on reinvested policy proceeds is subject to tax, because installment payments contain interest, which is taxable. Likewise, dividends are not taxable because they are a return of overcharged premium; however, if the dividend is reinvested with the insurer, any growth earned on the dividend (interest) is taxable.

Conditions for Payment

In order for an insured to receive the accelerated benefit, the insured must have a terminal illness, or in some policies confinement to a nursing home suffices for payment. The amount of the accelerated benefit varies by policy, but is usually anywhere from 25% - 80%. Insurers are permitted to pay out the entire death benefit. The accelerated benefit is not subject to tax, since the funds are used to pay for medical care.

Annual Premius = Monthly premiums =

Least Expensive Most Expensive

Life Settlement

Life settlements work the same way as viatical settlements, in that a life insurance policy is sold to a third party in exchange for a large portion of the death benefit, except that the insured is not terminally or chronically ill.

Nonforfeiture Options

Nonforfeiture options/values are guarantees that are required by law to be part of life insurance policies that build cash value. Insurers are required to make nonforfeiture values available when policyowners discontinue premium payments for any reason. Insurers are required to provide a table of guaranteed nonforfeiture values to policyowners for at least a 20-year period with the policy. This table is specific to the coverage purchased and shows each of the nonforfeiture options after a certain number of years. There are three nonforfeiture options: Cash surrender Extended term insurance Reduced paid-up insurance

Aviation Clause

The aviation exclusion states that the insurer will not pay the claim if the insured dies due to involvement with aviation, such as a military pilot flying a jet aircraft. Individuals flying in commercial aircraft as fare-paying passengers would not be excluded from coverage. Each policy's aviation clause is different. Some policies specify that flights must be regularly scheduled, whereas, other policies cover nonscheduled flights as well. Most insurers today will not deny coverage to people involved in aviation; instead, insurers will charge higher premiums to compensate for the added risk.

Facility-of-payment Provision

The facility-of-payment provision allows the insurer to choose a beneficiary if the insurer cannot get in contact with the named beneficiaries after a certain amount of time. Usually this provision is used in policies with face amounts of $1,000 or less (group life policies and industrial policies). The insurer typically chooses a blood relative of the Insured. Even though the person chosen is not a named beneficiary in the policy, that person has a valid right to the policy proceeds. The facility-of-payment provision is used when the named beneficiary is a minor, the named beneficiary has predeceased the insured, a claim has not been submitted, or it is known to the insurer that another party has paid the deceased insured's final expenses and burial costs.

Fixed-amount Installments

The fixed-amount installment option uses an annuity to pay the policy proceeds, but the payment amount is specified instead of the period of time. Payments consist of principal and interest and are paid until the principal and interest reach zero. The length of time installments will be paid is based on: The amount of the policy proceeds, The amount of each payment, and The interest rate.

Fixed-period Installments or Period Certain

The fixed-period or period certain, installment option use an annuity to pay the policy proceeds to the beneficiary for a certain number of years. Payments consist of principal and interest, and the principal reduces to zero by the end of the period. The amount of each installment is based on: The length of the period, The amount of the policy proceeds, and The interest rate.

Riders covering additional insureds can be added to life policies. A popular rider is the children's term rider. All of the following can be covered by the children's term rider, EXCEPT: Select one: a. Younger siblings of the policyholder b. Step children c. Legally adopted children d. Biological children

1035 Policy Exchanges

The gains on exchanges of life insurance policies, endowments, or annuities are, in most cases, subject to taxation. Section 1035 of the Internal Revenue Code allows for certain exchanges without recognizing a gain or loss for tax purposes. The following exchanges may occur without tax consequences: Life insurance policies may be exchanged for another life insurance policy or endowment. Endowments may be exchanged for another endowment. Annuities may be exchanged for another annuity.

Payor Rider

The payor rider is used for juvenile life insurance. The payor rider states that if the individual paying the premiums becomes disabled or dies before the child reaches a certain age, such as 21 or 25, the policy premiums will be waived until the child reaches the specified age. The policy will stay in force while the premiums are waived. This rider protects parents or guardians who purchase life insurance on their children from lapsing coverage if they become disabled or die before the child is of age to assume policy ownership.

Reduced Paid-up Option

The reduced paid-up insurance option allows the policyowner to purchase paid-up whole life coverage at a reduced face amount based on the amount of the policy cash value. The cash value acts as a single premium to purchase reduced paid-up insurance. Any outstanding policy loans plus interest would be deducted from the cash surrender value prior to purchasing reduced paid-up insurance. In other words, the reduced paid-up nonforfeiture option provides continuing cash value build up, even though the policyholder is no longer contributing any money into the policy. With the reduced paid-up insurance option, the policy may be reinstated to the original face amount within the terms of the reinstatement provision. Key points about the reduced paid-up option: The policy is paid-up with the cash value used as a single premium to purchase the reduced face amount coverage. No more premium payments are made. The insured's attained age is used to determine the amount of reduced paid-up coverage. Reduced paid-up insurance is the same type of whole life coverage as the original policy, except all policy riders are eliminated.

Return of Premium Rider

The return of premium rider pays the total amount of premiums paid into the policy as long as the insured dies within a certain time period specified in the policy. The death benefit is comprised of the face amount plus the total premiums paid into the policy. Most policies drop the return of premium rider when the insured reaches age 60. The return of premium rider is simply an increasing term rider that matches the total premium input. This rider can be costly because as the insured ages, the cost of term protection increases.

Spouse & Other-insured Term Rider

The spouse other-insured term rider gives term protection for a specific period of time and amount. The rider typically expires when the spouse/other-insured reaches a certain age, such as 65.

Substitute Insured Rider or Exchange Privilege Rider ; Substitute Insured Rider = Used In Business Life

The substitute insured rider, also known as the exchange privilege rider, allows the insured under a life insurance policy to be changed. The substitute insured rider is useful for business life insurance contracts where key employees change employers or retire. Rather than go through the policy replacement process, the substitute insured rider allows the policy to continue with the same face amount; however, the policy premiums will be refigured based on the new insured's age, health, sex, and insurability.

Waiver of Cost of Insurance

The waiver of cost of insurance, or waiver of monthly deductions rider, allows a universal life policyowner who becomes disabled to waive the cost of death protection, but does not waive the cost of premium required to build cash value. Example: If the minimum premium is $900 and the target premium is $1100, the waiver of cost of insurance rider will only cover the $900 to keep the death protection in force.

Waiver of Premium = Waives Premium for Total Disability

The waiver of premium rider allows the policyowner to waive premium payments during a disability, and keeps the policy in force. Waiver of premium rider coverage requires an additional premium charge. The waiver of premium rider is an option that may be rated or denied by the insurer. The disability must be total and permanent

After a certain age (usually 60 or 65), the waiver of premium rider is void. If the policyowner becomes disabled right before the rider expiration date, the rider will still apply. There is usually a waiting period of 3 or 6 months once the policyowner becomes disabled before the first premium will be waived. The policyowner is not required to pay back the waived premiums if they recover from the disability.

The waiver of premium rider can only be added to a term policy because there is no cash value. Example: Becky becomes disabled 10 months before she turns 65 and her disability lasts for 36 months. Under the waiver of premium clause, the company will waive her premiums for 30 months (36 months - 6 months waiting period).

Policyowners may not use dividends to buy stock in the insurance company. Dividend options are the choices available to policyowners for settling dividend payment.

There are five dividend options: Cash Payment Reduction of Premium Payments Accumulation at Interest One-year Term Option Paid-up Additions

This provision identifies the named insured, type, and amount of coverage provided by the policy: Select one: a. Insuring clause b. Execution clause c. Consideration clause d. Policy face

All of the following statements are true about the accidental death benefit (ADB), EXCEPT: Select one: a. The amount paid is one half of the face amount of the life insurance policy. b. The policy pays an additional sum if the insured dies due to an accident. c. The insured must die within a certain time period after the accident (usually 90 days). d. The accidental death benefit does not build cash value.

Which of the following best describes the return of premium rider Select one: a. The return of premium rider pays the total amount of premiums paid into the policy as long as the insured dies within a certain time period specified in the policy. b. The return of premium rider allows a whole life policy's cash value to be included in the death benefit. c. The return of premium rider allows a universal life policyowner who becomes disabled to waive the cost of death protection. d. The return of premium rider allows the policyowner to waive premium payments during a disability, and keeps the policy in force.

a The return of premium rider pays the total amount of premiums paid into the policy as long as the insured dies within a certain time period specified in the policy

Which life insurance dividend option does not increase a policy's cash value? Select one: a. Cash payment b. Paid-up insurance c. Paid-up additions d. All the above

a With the cash payment dividend option, the policyholder is sent a check for the amount of the dividend, which does not increase the policy's cash value.

Jon's life insurance policy contains a disability income benefit that will pay him a periodic income in the event he becomes disabled. What factor determines the amount of the benefit? Select one: a. If it is paid weekly b. The face amount of the policy c. If it is paid monthly d. The nature of the disability

The Common Disaster Clause: Select one: a. Assumes that in a common accident involving the insured and primary beneficiary, the primary beneficiary is assumed to have died first b. Requires the primary beneficiary to outlive the insured by a certain number of days in order to receive the death benefit in a common disaster between the insured and the primary beneficiary c. Pays double the death benefit d. Cancels and voids a life insurance policy

The Guaranteed Insurability Rider, or GIR, allows the insured to buy: Select one: a. More insurance coverage at any time b. More insurance coverage at specified points in the future, without proof of insurability c. More insurance coverage when the insured retires, upon request by the insured d. More insurance coverage when the insured loses their job, with proof of insurability

The insured and the primary beneficiary are killed in a car accident. Which of the following is true according to the Uniform Simultaneous Death Act? Select one: a. Policy proceeds are paid as if the insured died first. b. Policy proceeds are paid as if the primary beneficiary died first. c. Policy proceeds are always paid to the primary beneficiary's estate. d. Even if the insured dies first, the primary beneficiary must outlive the insured by a certain number of days in order for the policy proceeds to be paid to the primary beneficiary's estate

The principal sum of a AD&D rider attached to a life insurance policy pays: Select one: a. A principal sum if the insured loses one leg b. A principal sum if the insured loses both arms c. A principal sum if the insured loses one hand d. A principal sum if the insured loses vision in one eye

Which life insurance rider pays an amount equal to the total premiums paid as long as the insured dies during a certain time period, as stated in the policy? Select one: a. Return of cash value b. Return of premium c. Waiver of premium d. Payor ride

Which nonforfeiture option is the "automatic" option? Select one: a. None b. Extended term option c. Reduced paid-up d. Cash surrender

Eddie wants to use a nonforfeiture option. Which of the following may Eddie not use? Select one: a. Cash surrender value b. Accumulation at interest c. Extended term d. None of the above

b Accumulation at interest is a dividend option.

A fixed period option pays policy proceeds in equal installments over a period of months or years. Which of the following is NOT considered when determining the amount of the installment? Select one: a. The amount of the proceeds b. The frequency of the payments c. The relationship of the beneficiary to the insured d. The rate of interest on the proceeds

All of the following are life insurance settlement options, EXCEPT: Select one: a. Interest only b. Fixed-period installments c. Automatic premium loan d. Life income

The appropriate rider allows premium payments to be waived in the event of disability. What is the normal waiting period for premiums to be waived? Select one: a. 30 days b. 60 days c. 3 or 6 months d. 1 year

There are different kinds of beneficiaries in a life policy. When Alice dies, the death benefit will be paid to Walter. If Walter dies before Alice, the benefit would go to Alexander. Which of the following statements is true? Select one: a. The tertiary beneficiary is Walter and Alexander is the secondary beneficiary. b. Alexander is the tertiary beneficiary. c. The primary beneficiary is Walter and Alexander is the contingent beneficiary. d. Alice is the tertiary, as the policyholder, and Walter is the contingent beneficiary.

What nonforfeiture option permits the policyowner to use the cash values to purchase paid-up term life insurance coverage? Select one: a. None b. Cash surrender value c. Extended term d. Reduced paid-up insurance

Which of the following is a guarantee that is required by law to be a part of life insurance polices that build cash value? Select one: a. Insuring clause b. Settlement option c. Nonforfeiture option d. Dividend option

Which of the following is not a dividend option? Select one: a. Reduction of premium payments b. Paid-up additions c. Reduced paid-up insurance d. Cash payments

Which of the following settlements of a life insurance policy is taxable? Select one: a. Lump sum b. Paid up additions c. Interest-only d. Double indemnity

All of the following are true regarding the period certain life insurance settlement option, EXCEPT: Select one: a. Payments consist of principal and interest. b. The principal reduces to zero by the end of the period. c. The amount of each installment is based on the length of the period, the amount of the policy proceeds and the interest rate. d. Shorter payment periods result in lower payments.

If an irrevocable beneficiary is named on a life insurance policy, all of the following statements are true, EXCEPT: Select one: a. The policy owner pays the premium. b. Irrevocable beneficiaries must consent to the policy owner canceling the policy. c. Policy owners need consent to assign the policy. d. Policy owners can borrow from cash value without consent.

Mary and Philip are married. Philip named Mary as the primary beneficiary of his life insurance policy. His children from a prior marriage are contingent beneficiaries. Under the Uniform Simultaneous Death Act, who will receive the death benefit if Mary and Philip are in a car accident and there is no evidence of who died first? Select one: a. Mary's estate b. Philip's estate c. Mary's children from her prior marriage d. Philip's children from his prior marriage

Of the following life insurance policy riders, which does not alter the amount of the death benefit? Select one: a. Cost of living b. Return of premium c. Term d. Payor

Of the following life insurance settlement options, which pays only the interest earned on the principal in periodic payments? Select one: a. Life income b. Fixed-amount installment c. Joint and survivor d. Interest-only

Rick is planning on getting married next month. He currently has a $100,000 whole life participating policy. Because he is planning a family, he wants to increase his life insurance while keeping his costs down. Which of the following options would best suit his needs? Select one: a. Rick could use his dividends to purchase one-year term insurance. b. Dividends could be applied against Rick's future premium payments. c. He could allow the dividends to accumulate at interest. d. Rick could use the dividends to purchase paid-up additions.

Under what conditions will the waiver of premium rider pay benefits? Select one: a. If the insured is disabled b. If the insured is partially disabled c. If the insured is totally disabled d. If the insured is totally and permanently disabled

When a juvenile covered by a payor rider reaches the specified age, what happens to the ownership of the policy? Select one: a. It stays with the original policyholder. b. The policy expires. c. The premium is reduced. d. The juvenile can assume ownership of the policy.

Which of the following nonforfeiture options does not allow the insured to reinstate the policy: Select one: a. None b. Extended term option c. Reduced paid-up d. Cash surrender

Which of the following prevents creditors from seizing life insurance policy proceeds as long as there is at least one living named beneficiary, excluding the insured's estate? Select one: a. Common disaster clause b. Facility of payment provision c. Uniform Simultaneous Death Act d. Spendthrift clause

Who are the named individuals or entities the policyowner designates to receive life insurance policy proceeds upon the insured's death? Select one: a. Insureds b. Policyowners c. Insurers d. Beneficiaries

Who may choose the settlement option for a life insurance policy? Select one: a. The insurer b. The policyowner c. The beneficiary d. The policyowner and the beneficiary

Of the following settlement options for life insurance, which can result in the insurer paying more in benefits than the principal plus interest? Select one: a. Interest only b. Fixed-installment c. Fixed-period d. Life income

d If the beneficiary outlives their life expectancy, the insurer may pay benefits out-of-pocket.

Advantages of a reinstated policy versus purchasing a new policy:

The new policy's provisions may be stricter. The reinstated policy's premium may be lower. The reinstated policy uses the insured's original age; whereas, a new policy uses the insured's attained age. The interest rates may be more favorable.

Payment of Premiums

The payment of premiums provision stipulates: When premium payments are due, How they must be paid, and To whom they must be paid. The premium mode is stipulated. Premium modes include: Monthly, Quarterly, Semiannually or Annually.

Spendthrift Trust Clause

The spendthrift clause is used to prevent creditors from seizing life insurance policy proceeds, provided there is at least one named beneficiary, excluding the insured's estate. The spendthrift clause protects the policy proceeds from the claims of the policyowner's or beneficiary's creditors.

An insured commits suicide while the suicide clause is in effect. What will the insurer do? Select one: a. Pay the death benefit b. Pay half the death benefit c. Return all premiums to the beneficiary d. Return all premiums plus interest to the beneficiary

c If the insured commits suicide while the suicide clause is in effect, the insurer will not pay the death benefit. Instead, the insurer will return the premiums to the beneficiary.

Chuck is in the military. How does this affect payment of the death benefit on his life policy? Select one: a. His military service does not affect the death benefit. b. His policy excludes death while on active military service. c. Death due to an act of war is not excluded. d. He will not be able to purchase life insurance.

In addition to being a commercial pilot, Michael also flies his own private small plane. What will most likely happen when he applies for life insurance? Select one: a. The policy will exclude coverage for private aviation activities. b. He will be charged a higher premium to compensate for the added risk. c. He will not be able to buy life insurance. d. He will need to quit flying.

Of the following individuals, who has the right to change the beneficiary designations in a life insurance policy? Select one: a. The insured b. The policyowner c. The revocable beneficiary d. The insurance company

Randy drives racecars and scuba dives in his spare time. Will he be able to purchase life insurance with these types of hobbies? Select one: a. He will not be able to purchase life insurance. b. He will be able to purchase life insurance but his premiums will be higher. c. The insurance company will make him carry extra insurance because of his hobbies. d. Yes, his hobbies will not impact the death benefit or premiums.

The insuring clause of a policy includes all of the following, EXCEPT: Select one: a. The names of covered individuals b. The amount of the policy premium c. The effective date of the policy d. The period of coverage of the policy

The stipulated period of time, allotted by the insurance company, to allow a policyholder to make an overdue payment while the policy remains in force and coverage is provided is called the _____________. Select one: a. Reinstatement clause b. Grace period c. Loan provision d. Consideration clause

What happens if an insured commits suicide 3 years after the policy inception? Select one: a. No benefit is paid. b. The death benefit is paid. c. The premiums are refunded. d. Nothing

Which clause states that the policy owner must pay something of value for the insurer's promise to pay benefits? Select one: a. Insuring clause b. Consideration clause c. Entire Contract clause d. Reinstatement clause

What is the primary purpose of the entire contract provision in a life insurance policy? Select one: a. Provide specifics on when the premium are due b. Provide specifics on how premiums are paid c. Provide assurance that the policyholder has all necessary policy documents in their possession d. Provide details of policy loan provision

Julie applies for a life insurance policy. Her consideration consists of: Select one: a. Application b. Initial premium c. Completed application and initial premium d. Statements made on the application and promise to pay premiums

c The applicant's consideration consists of the completed application, and the applicant's initial premium

Charities

A charity may be named beneficiary of a life insurance policy.

Absolute

An absolute or complete assignment occurs when the policyowner assigns all rights - including cash values - to another person or entity permanently. Absolute assignment means the policyowner has surrendered all rights, and the assignee, in essence, becomes the new policyowner. The original policyowner typically cannot reclaim any rights, and the assignment is permanent. The assignee does not need to have insurable interest in the life of the insured. Usually the only right that the original policyowner retains is the right to continue to pay premiums. Absolute assignments are made willingly, so they are also called voluntary assignments. An example of absolute assignment is making a gift of life insurance to a charitable organization.

Beneficiaries

Beneficiaries are the named individuals or entities designated by the policyowner to receive the policy proceeds upon the insured's death. The policyowner may name any person or legal entity as beneficiary. More than one beneficiary may be named. An estate, trust, charitable organization, institution or other legal entity may be named as a beneficiary. The policyowner is not required to name a beneficiary. The beneficiary does not need to have an insurable interest in the life of the insured.

Types of Beneficiary Designations

Beneficiary designations are the ways beneficiaries are classified. This establishes how beneficiaries receive policy proceeds, such as in what order, and how benefits are paid when one beneficiary predeceases another beneficiary.

Classes

Classes of individuals may be named as beneficiaries. Naming a class of beneficiaries allows the policyowner to name a group of individuals generally, without naming each individual member of the group. This saves the policyowner the hassle of changing beneficiaries when births and deaths occur. Examples of class designations are: "All my children," "All of my living siblings," or "All living and active players of the Wildcats team."

Felony

Death that occurs as a result of the insured committing a felony may be excluded. For example, if an insured is shot and killed by police during the commission of an armed robbery, their death may result in the insurer's refusal to pay out death benefits.

Hazardous Occupation or Hobby Clause

If the insured dies as a result of a hazardous occupation or hobby, the insurer will not pay the claim. Examples of hazardous occupations or hobbies include: acrobatic pilots, auto racers, and skydiving. Examples of hazardous occupations include: crop-dusting pilots, professional auto racers, and oil field scuba diver. Instead of excluding coverage all together, sometimes insurers will charge a higher premium for those involved in hazardous occupations or hobbies.

Exclusions

Policy exclusions are optional, and may be included in life insurance policies at the discretion of the insurer. These provisions exclude or limit coverage and are intended to protect the insurer from adverse selection and misuse of policies.

Consideration Clause

Policyowner's Premium Responsibility

Provisions

Provisions are the characteristics, privileges, duties of all parties, and rights of a policy

Changes

The policyowner can change beneficiaries at any time without their consent as long as they are named as revocable. The policyowner must receive the irrevocable beneficiary's written consent to change a beneficiary. The policyowner may request a change to the named beneficiary either: By filing (contacting the insurer via phone or in writing and requesting the change - the recording method), or By an endorsement (changing the policy itself to indicate the change in beneficiary). It is important to note that the changing of a designated beneficiary cannot be done through a will. In addition to a change in revocable beneficiary, the owner of a life insurance policy also has the power to make a policy loan or surrender the policy for its cash value, without the beneficiary's consent. However, the policyowner may not increase the amount of the insurance without the beneficiary's consent.

Withdrawals or Partial Surrenders

Withdrawals or partial surrenders of policy cash value can be made from life insurance policies. The policy specifies how much can be withdrawn, at what frequency, and the service charge. The insurer has up to 6 months to pay, but usually they pay the cash value quickly. The interest portion of a cash withdrawal may be taxed. Any outstanding loans will be deducted from the amount of the cash surrender.

All of the following are ownership rights, EXCEPT: Select one: a. Right to name a beneficiary b. Right to take out a policy loan c. Right to make changes to the policy d. Right of assignment

When Dakota's life insurance policy was written, it stated on the policy that Dakota was male. However, Dakota is female. On average, women tend to live several years longer than men. When Dakota died this misstatement was discovered. How did this impact the policy? Select one: a. The death benefit was lowered. b. The premium was lowered. c. The death benefit was increased. d. The premium was increased.

Withdrawals or partial surrenders can be made on the cash value of a universal life policy. Which of the following is specified in the policy? Select one: a. Timing on repaying the withdrawal b. The amount of tax on the withdrawal, if it is over basis c. How much can be withdrawn d. How to convert the withdrawal to a loan

George bought a $300,000 whole life policy when he was employed as a bank teller. Four years later, he changes jobs and begins working in a coal mine. If he is killed while working in the mine, what will the insurer do? Select one: a. Deny the claim because the insured's occupation listed in the application did not match the insured's actual occupation b. Void the policy c. Void the policy and return all premiums with interest to the insured's beneficiary d. Pay the claim

Mr. Brown committed suicide during the suicide clause of his insurance policy. The insurance company will: Select one: a. Cancel and void the policy b. Keep the entire death benefit c. Pay only the death benefit d. Return all premiums to the beneficiary

Remember, the misstatement of age or sex provision is not subject to the incontestable clause.

incontestable clause ---- A required provision in a life insurance policy which prevents the insurer from denying a claim or voiding a life insurance policy, except for nonpayment of premiums, after the policy has been in force for a certain number of years, usually 2.

Which of the following best describes the automatic premium loan provision of a life insurance policy? Select one: a. The insurer will automatically use the policy cash value to pay an overdue premium. b. Withdrawals or partial surrenders of policy cash value can be made; the policy specifies how much can be withdrawn and at what frequency. c. A policy loan in an amount up to the current cash value, less any existing indebtedness may be made. d. Modifications to the policy must be made by an authorized officer of the insurer and attached to the policy.

Options

Options involve how policy funds are utilized.

Reinstatement

f the premium is unpaid and there is insufficient cash value in the policy to pay the premium, or the policy is term life, the policy will lapse or expire. A policy that has been surrendered for it's cash value can't be reinstated. The reinstatement provision permits the policyowner to reinstate a policy that has lapsed, as long as the policyowner can provide proof of insurability. In most states, the reinstatement provision allows policyowners to reinstate a policy up to three years after the lapse date. The policyowner's statements on the reinstatement application will be subject to a new contestability period. he policyowner must pay back all due premiums with interest. The insurer may require the policyowner to repay any policy loans with interest and provide proof of insurability. After all these conditions are met, the policyowner will have the original policy restored.

Collateral

A collateral or partial assignment is the partial and temporary transfer of rights to another person or entity. Collateral assignments are usually intended for securing a loan. Once the policyowner pays off the loan, the policyowner resumes the partially assigned rights. Instead of purchasing a credit life policy, policyowners may make a collateral assignment of their existing life insurance coverage to secure a loan. Collateral assignments are also called conditional, because in order for the assignee to receive the portion of policy proceeds assigned, there must be a balance on the loan at the time of the insured's death.

Minors

A minor can be named as a beneficiary, but because a minor cannot legally receive policy proceeds, a guardian or trustee must be appointed who can legally receive the policy proceeds and manage them until the minor reaches the legal age. A trust can be established if a guardian cannot be relied upon to manage the funds. In most cases, minors should not be named as beneficiaries. Insurance companies may make restricted life payments to an adult guardian on behalf of the minor beneficiary. The insurer may also keep the policy proceeds to accrue interest until they may be paid to the minor when he or she reaches the age of majority or when an adult guardian has been appointed. Finally, the insurer may put the policy proceeds in a trust on behalf of the minor.

Trusts

A trust can be named as the beneficiary. In this scenario, the policyowner gives the legal title of the insurance policy to another person, the trustee, for the benefit of the trust beneficiary. Legally, the trustee cannot benefit from the trust, but is paid to manage the property on behalf of the trust beneficiary. The advantage of naming a trust is that it is a secure way to establish a scholarship fund, give money to an institution, or to assure that policy proceeds are disbursed exactly as the policyowner intends. Drawbacks include the high costs of administering a trust and the trust beneficiary's inability to intercede if the trustee is not managing the trust correctly.

Revocable Versus Irrevocable

Beneficiaries may be named as revocable or irrevocable. The policyowner can change revocable beneficiaries without their consent. With irrevocable beneficiaries, the policyowner must receive their written consent to exercise any ownership rights, except for the right to pay premiums. In this case, the policyowner must receive the irrevocable beneficiary's written consent to change the beneficiary, take out policy loans, assign the policy, or any other policy change. Irrevocable beneficiaries can be thought of as both policyowner and beneficiary of a policy. Irrevocable beneficiaries are either absolute or reversionary. Absolute- For absolute, the beneficiary has a vested interest in the policy, even if he/she predeceases the policyowner. Reversionary- With reversionary, if an irrevocable beneficiary predeceases the insured, the policyowner no longer requires that beneficiary's written consent to exercise policy ownership rights. Revocable beneficiaries typically cannot assign a portion of the policy proceeds because the policyowner can remove them at any time. However, an irrevocable beneficiary has a good chance of assigning a portion of the policy proceeds. If an irrevocable beneficiary makes an assignment, but predeceases the insured, the assignment is cancelled unless it was made in writing or the policyowner agrees to the assignment in writing.

Policies that permit cash value have policy loan and withdrawal provisions. These policies must begin to build cash value after a certain number of years. In most states, this is three years. The policyowner has the right to the policy's cash value. Policy loans are not taxable, but loans are subject to interest.

Cash Loan Policyowners can make a policy loan in an amount up to the current cash value, less any existing indebtedness (prior loans with interest). Policy loans need not be repaid, in which case the amount of the outstanding loan with interest would be deducted from the policy proceeds upon the insured's death. Outstanding policy loans do not cause the policy to lapse unless the cash value in the policy is less than the total amount of indebtedness against the policy. If this happens, the insurer is required to provide the policyowner and any assignees with written notice and a 30-day grace period. Insurers may postpone a policy loan request for a maximum of six months from the date requested, unless the policy loan is requested to pay a premium.

Misstatement of Age = Correct Premium or Death Benefit

If the misstatement is discovered while the insured is alive, the insurer may adjust the amount of future premiums and/or the face amount. If the age was understated, the insurer will lower the death benefit or increase the premium. If the age was overstated, the insurer will increase the death benefit or refund overpaid premiums. If the misstatement is discovered upon the insured's death, the death benefit will be adjusted.

STOLI = Third-Party Ownership

In Stranger-originated Life Insurance, or STOLI, a consumer purchases a life insurance policy with the agreement that a third party agent/broker or investor will purchase the consumer's policy and receive the proceeds as a profit upon the consumer's death. The stranger may purchase the policy, naming himself or herself as beneficiary, or use it for resale to an investor. Upon the insured's death, the stranger or investor receives the policy proceeds. The insured receives some sort of small financial benefit in this arrangement.

Third-party Ownership

In most cases, the policyowner, applicant and insured are the same person; however, when the policyowner and the insured are different people, the life insurance policy is owned by a third party. In third-party ownership the three parties to the contract are: Policyowner, Insured, and Insurer. The policyowner must have an insurable interest in the life of the insured.

Interest on Proceeds

In the event an action to recover the proceeds due under a life insurance policy or annuity contract is commenced and results in a judgment against the insurer, interest must be paid from the date of the death of an insured or annuitant in connection with a death claim on a life insurance policy or annuity contract and from the date of maturity of an endowment contract to the date the verdict is rendered or the report or decision is made.

Medical Examination and Autopsy ; Autopsy or Examination = Insurer Pays

Insurers may require the proposed insured undergo a medical examination at the insurer's expense prior to issuing coverage, if necessary, such as for large amounts of coverage. The insurer may also request a deceased insured to undergo autopsy for good cause, if not prohibited by state law, while a claim is pending.

IOLI = Third-Party Ownership

Investor-originated life insurance (IOLI) is a type of STOLI. With IOLI, investors solicit elderly people to purchase life insurance, and an agent or broker agrees to loan insureds money to pay the premiums for a period of time, with the agreement that after two years of paying premiums the investors become the policyowners, and receive the policy death benefits upon the insured's death.

Part II

Investors supply funds to a "pool" of STOLI-type policies with the expectation that the insureds die very soon, so that they earn a profit on the death benefit. In most cases, the lender is the investor, who uses the STOLI policy as collateral on the loan. If the insured dies during the 2-year loan period, the investor/stranger repays the loan and then receives the death benefit. If the insured is alive after the 2-year loan period, the policy is sold to investors in an amount that is greater than the policy's cash value, but less than its death benefit. In exchange, the insured receives a nominal lump sum payment for essentially facilitating a third party's profit upon their upcoming death. STOLI and IOLI are ethical dilemmas because the investor or stranger does not have insurable interest in the continued life and wellbeing of the insured. They want the insured to die very soon, so that they will receive the policy death benefits. Often times, once the policy has been sold to a stranger/investor, the insured will be contacted several times a year to see if he/she has died.

LIFE POLICY GRACE PERIOD 30-31 DAYS

Most life policies have grace periods of 30 or 31 days. If an insured dies during the grace period, the premium plus interest is deducted from the death benefits.

60 Days = Payment of Claims

Once the insurer receives notice of the insured's death and receives the death certificate, the insurer must pay the claim within a certain number of days, usually 60. The death benefit is paid to the beneficiary. If there is no beneficiary, the death benefit is paid to the insured's estate.

Per Capita

Per Capita is defined as "by the head". Under this class designation, only the living heirs receive a portion of the policy proceeds. Example: Bill names his four children - Jason, Judy, Mary and Peter - as per capita beneficiaries. Jason has two children of his own. Judy, Mary and Peter are single and do not have any children. If Jason and Peter were predeceased upon Bill's death, then Judy and Mary each would receive ½ of the policy proceeds. The per capita stipulation would not allow Jason's beneficiary designation to be passed on to his children.

Per Stirpes

Per Stirpes is defined as "by the root". Under this class designation, deceased beneficiaries would have their portion of the policy proceeds distributed to their children. This means that the insured's grandchildren are eligible to receive policy proceeds if the insured's child predeceases the insured. For example, suppose Bill names his four children as per stirpes beneficiaries instead. Now, if Jason and Peter are predeceased upon Bill's death, then the policy proceeds would be divided as follows: Jason's two children would each receive 1/6 of the policy proceeds accounting for a total of 1/3, Judy receives 1/3, and Mary receives 1/3.

60 Days from Proof of Loss = Legal Action

The legal action provision places a limit on the period in which a claimant can file suit against an insurer. In most states, legal action against an insurer cannot be taken until 60 days have passed since the insurer received proof of loss and within two years from the date proof of loss was submitted to the insurer.

In some cases, a single premium is paid for the entire policy. In most cases, premiums are paid in advance and to the producer or the insurer's home office.

The less frequently premiums are made, the lower they will be. More frequent premium payments incur additional administrative costs; on top of that, the insurer loses earnings since it does not have the premium for the entire year. Paying annual premiums is the least expensive premium payment mode.

Riders

Riders are policy elements that "ride on" or add to the existing coverage by modifying provisions or coverage.

Statements of the Insured

The applicant's statements in the application are considered representations and not warranties, unless fraudulent. Representations are statements made to the applicant's best knowledge. If the insured's statements are fraudulent and material to the contract, the insurer can void the policy.

Common Disaster Clause and Short Term Survivorship

The common disaster clause protects the contingent beneficiaries' rights by stipulating a certain number of days the primary beneficiary must outlive the insured after a common accident causing near-simultaneous death in order for the primary beneficiary to receive the policy proceeds; otherwise, the contingent beneficiaries receive the policy proceeds. Short-term survivorship requires that the insured and primary beneficiary's deaths be from unrelated causes. If the primary beneficiary dies before the insured, then the policy proceeds are paid to the contingent beneficiaries, or if none, to the insured's estate. If the insured dies before the primary beneficiary, then the policy proceeds are paid to the primary beneficiary only if the primary beneficiary outlives the insured by a specified number of days. The stipulated period is usually 15 or 30 days.

Incontestability Clause

The incontestability clause prevents the insurer from denying a claim or voiding a life insurance policy, except for nonpayment of premiums, after the policy has been in force for a certain number of years. In most states, the incontestability clause is two years. The two-year period for a policy to be contestable starts at the date of issue. The incontestability clause will not protect the insured from misstatements of age, which will simply be adjusted by the insurer, as necessary, upon discovery of the misstatement. During the contestable period (usually the first two years of the policy), the insurer has the right to contest a claim or void a policy for inaccurate information in the application. Misstatements of age or sex are not subject to the contestability period. If the insurer discovers the applicant made a misstatement of age or sex, the mistake will be corrected and the policy face amount will be adjusted accordingly. fter the contestability period, the insurer cannot deny payment of death benefits based on the statements in the application, any material misstatement, concealment or fraud. The incontestability clause applies to the policy's face amount and any additional riders that pay an additional death benefit. For accidental death benefits, the insurer has the right to investigate a claim because the circumstances for accidental death may not be straightforward There are three situations where the insurance company has the right to contest or void a policy: Lack of insurable interest - if there was not an insurable interest at policy outset, the insurer may contest the policy at any time. Impersonation - if the applicant for a life policy is not the person who signs the application or undergoes the medical exam, the insurer may contest the policy and the death claim. Murder - if the applicant is shown to have applied for a life insurance policy with the intent on murdering the insured, the insurer may contest the policy and the death claim.

Estates = Must Go Through Probate

The insured's estate is defined as all of the insured's assets and liabilities. The advantages of naming the insured's estate as beneficiary are to provide liquid capital to pay for estate taxes, the insured's final expenses and the insured's outstanding debts. Disadvantages are that policy proceeds must go through probate court because they are considered part of the insured's gross estate for tax purposes. This can be costly, time-consuming and subject the policy proceeds to creditors.

Only the policyowner has the right to request permitted changes to the policy. Only an authorized officer of the insurer can make changes to a policy. All changes must be made in writing, attached to the policy, and signed by the authorized officer of the insurer. Insurance producers cannot make any changes to a policy.

The insurer and insured cannot make any changes to the policy once it is in effect unless all parties to the contract agree to the change and the change is attached to the policy.

Suicide Clause = 1 0r 2 year

The suicide clause is one of the most common exclusions. The suicide clause is intended to prevent individuals, whether sane or insane, who are considering suicide from purchasing life insurance. It states that the policy will be voided and no death benefit will be paid if the insured commits suicide within a stipulated time period. In most states, the suicide clause is in effect for one or two years from the policy effective date. After the stipulated period passes, the insurer will pay the death benefit even if the insured commits suicide. If the insured commits suicide while the suicide clause is in effect, the insurer will refund the premiums paid without interest.

Uniform Simultaneous Death Act

The uniform simultaneous death act solves the problem of determining the beneficiary who will receive the policy proceeds if the insured and the primary beneficiary are killed at the same time, due to a common accident. If there is no conclusive evidence of who died first, then the Uniform Simultaneous Death Act states that the policy proceeds will be paid as if the primary beneficiary died first and the insured died last, in which case the policy proceeds are paid to the contingent beneficiaries or to the insured's estate.

War or Military Service Clause

There are two kinds of war or military service exclusions: Status clause - the insurer will not pay the claim if the insured dies while in active military service. Results clause - the insurer will not pay the claim if the insured dies due to an act of war. The war or military service clause is only in effect during wartime.

Automatic Premium Loan (APL)

This provision allows the insurer to automatically use the policy cash value to pay an overdue premium. The APL provision prevents policies from unintended lapse because of nonpayment of premium. Only policies that build cash value can have the APL provision. If the policy runs out of cash value, then the APL provision has no effect. An APL is like any other policy loan, and if not repaid will reduce the death benefits by the amount of the premium loan with interest.

Assignment Clause

Unique to life insurance, policyowners have the right to transfer policy rights to another person or entity. Assignment does not change the named insured or the face amount of the policy. Assignment merely transfers or changes the ownership rights to the policy. The policyowner must make the assignment in writing and submit it to the insurer. The assignment clause must coordinate with the beneficiary's rights.

Designation Options

When naming a policy beneficiary, the policyowner has several designation options to choose from, such as: Individuals, Businesses, Estates, Minors, Trusts, Charities, or Classes of individuals.

James is past due on his life insurance premium by 5 days. His policy has a 30 day grace period. If James dies on day 15 of his grace period, what would the beneficiary receive? Select one: a. The full face amount, minus any past due premium b. A refund of past premiums c. The full face amount d. Nothing since James' premiums are past due

Which provision prevents the insurer from making changes to a contract by citing documents not included in the policy itself? Select one: a. Entire Contract provision b. Free Look provision c. Reinstatment provision d. Incontestability clause / provision

a Which provision prevents the insurer from making changes to a contract by citing documents not included in the policy itself?

All of the following statements are false regarding who may make modifications to a life insurance policy, EXCEPT: Select one: a. Modifications can be made by any employee of the insurer. b. Insurance producers can make any policy change. c. Only the insurer has the right to request changes to a policy. d. Changes to the policy can only be implemented by an executive officer of the insurer.

Gail has no children and has decided to make a gift of her life insurance to her alma mater. This type of assignment is voluntary and also usually absolute and complete. Specifics of this type of assignment include: Select one: a. All the rights of the policy are assigned. b. The assignee has the right to use the cash value of the policy. c. The policyowner cannot recover surrendered rights. d. All of the above

Gerry forgets to pay his life insurance premium, and the policy lapses. If he is within the reinstatement period and decides to reinstate his policy, he will be required to take all of the following actions, EXCEPT: Select one: a. Pay all past-due premiums b. Pay any back-due interest on an outstanding policy loan c. Provide proof of evidence of insurability d. Surrender or cancel the policy within 10 years of the reinstatement date

If a policy loan is unpaid, the automatic premium loan provision has the effect of deducting the amount of the loan with interest from the death benefit. What should the policyowner do to avoid this reduction in the death benefit? Select one: a. Nothing b. Supply the insurance company with proof of insurability c. Repay the loan d. Repay the loan with interest

Jennifer is trying to add her insurance premium payments to her budget. All of the following are accepted payment mode options, EXCEPT: Select one: a. Monthly b. Quarterly c. Annually d. When she feels like it

Marcella purchases a modified life insurance policy at the age of 31. Thinking she could get a slightly better rate on her policy, she lists her age as 21. If the insurance company discovers the error upon Marcella's death, what action will the insurance company take? Select one: a. Pay the full death benefit b. Refund the premiums paid without interest c. Void the policy for misrepresentation and fraud d. Pay the death benefit based on Marcella's actual age

Chapter 5 (Exam Prep)

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