Chapter 9: Life Insurance Policy Provisions

Facility of Payment Provision

Allows insurer to select beneficiary if the beneficiary is a minor, dead, or cannot be found (after a reasonable time)

Common Exclusions

Aviation, war or military service, hazardous occupation or hobby exclusion

Payment of Premium

Usually premiums are to be paid in advance either at the company's home office or to the agent/producer. (Modes can be monthly, quarterly, quarterly, and annually)

Policy Loan Provisions

Whole life and variable life only policies (aka cash value) - maximum 90% loan from the general account life insurance policies - maximum 75% from the separate account (variable account) there is a maximum 8% interest rate against fixed rate loans and 18% in an adjustable rate loan and loans must be made available after 3 years or when the cash values begin.

Entire Contract Clause

The provision states that the policy and a copy of the application constitutes the entire contract between the insurer and the insured. This contract also provides that all the statements made by the insured in the application will be considered as representations and not warranties. - this provides the basic purpose that provides assurance to the policyowner that they have in their possession all necessary documents with regard to their life insurance coverage. -the clause also prevents the policyowner and producer from unilaterally amending the policy.

Uniforms Simultaneous Death Benefit

If insured and beneficiary die simultaneously then it is assumed insured died last and the amount goes to secondary or contingent beneficiaries or then estate if no one named; Common Disaster Clause - works the same way as above; has to be same accident and death of beneficiary generally must come within 14 to 30 days of incident.

Reinstatement

Must be reinstated within a certain time frame - whole life = 3 years - variable life = 2 years - must prove insurability - PAY BACK all past premiums in full - may have to pay back loans against the policy - no new suicide clause but there is a new incontestable period placed on policy - incontestable period: the insurer can contest a claim within two years for fraud, material misrepresentation, and concealment

Naming Beneficiaries

Recording method where the request must be filed in writing to the insurer and is made effective by the insurance company recording the change in its records. Endorsement method require that the beneficiary change be typed or affixed directly to the policy. Primary then contingent beneficiary then tertiary Minor as beneficiary: Problems are that minor is not legally competent; insurance company may hold onto proceeds or a trustee may be appointed and receive policy proceeeds Trust: the owner (grantor) give power to trustee (the trust) to be used to the benefit of the third individual (beneficiary) Trust operators must set the funds in according to the grantor's wishes; Inter vivos trust is one that takes place effect during the grantor's lifetime; testamentary trust trust created after the grantor's death Insured's Estate: subject to estate costs and taxes and generally is not advisable Per Stirpes: means by the root or by way of the branches - passed down directly to the living children and then to their descendants if all the children have died (if 3 named but two alive its still 33% and remaining third goes to dead descendants) Per Capita - means per person or by the head and goes only to the living beneficiaries (if 3 named but two alive 50/50 split)

Revocable vs. Irrevocable Beneficiary

Revocable beneficiaries are those that may be changed by the policy owner. The policy owner may change revocable beneficiaries without their knowledge. - Irrevocable beneficiaries are those that cannot be changed without the consent and signature of the named beneficiary. The policy owner cannot take out a loan against the cash value of the policy without the consent and signature of the beneficiary.

Beneficiary Assignment Rights

The beneficiary needs to be irrevocable on the policy and generally the beneficiary can only assign a portion of the death benefit or proceeds

Beneficiaries

The decision rests solely with the owner of the policy. Can be: - individuals, businesses, trusts, estates, charities, and minors - can designate classes "to all of my children"

Ownership Provision

The owner of the policy can: - change beneficiary - cancel contract - receive dividends paid (5 ways) - borrow against cash value - assign rights of contract to a third party - settlement options (5 options)

Policy Change (Conversion) Options

The policy may contain a provision that permits the insured to exchange a policy for another type of insurance permitted by the company. If higher premium is required then a higher premium must be paid but no proof of insurability needed.

Misstatement of Age and or Sex

The policy provides for adjustment of benefits payable if it is discovered that, after an insured's death, or at the time of claim, the insured's age was misstated on an insurance policy application. If discovered during the policy period there may be an adjustment of the face amount or a refund of excess premiums paid.

Collateral/Partial/Conditional

- A temporary pledge of policy therefore a lender may wish that the life contract be collaterally assigned so that it may draw upon cash savings if loan payments are not paid promptly

Absolute, Voluntary, Complete Assignment

- This is a permanent transfer and the assignee = the new owner - this involves turning all rights - including the right to use the cash value - over to the assignee - usually permanent

Withdrawals and Partial Surrenders

A withdrawal has generally the same impact on policy benefits but there is no presumption the amount will be repaid. -generally only allowed under universal and variable life policies - interest withdrawals are taxed because they grew tax deferred

Incontestability

After two years the insurance company cannot dispute or contest the validity of the contract or the statements made on the application. This runs contrary to fraud laws.

Modifications

Changes in the policy, or any agreement in connection with the policy, such as changes in the beneficiary, face amount, or additional coverage, must be endorsed on or attached to the policy in writing over the signature of a specified officer of the company.

Grace Period

Grace Period is the period of time following the due date of each premium due. Fixed policy = 31 days Flexible = 61 days If death during grace period then it's DB - premium due at time of death.

Prohibited

These cannot be included: - a provision that limits the time for bringing a lawsuit against the insurance company to less than one year after the reason - a provision that allows a settlement at maturity of less than the face amount plus any dividend options, less any indebtedness to the company, and any premium deductible under the policy - provision that allows forfeiture of policy because of the failure to repay any policy loan or interest on the loan if the total is less than the value of the policy

Policy Provisions

These identify and designate the rights and obligations of the policyowner and the insurer under the insurance contract.

Insuring Clause

This clause states that the insurer agrees to provide life insurance protection for the named insured which will be paid to the designated beneficiary when proof of death is received. The clause states that the party to be covered by the life contract and names the bene of the policy as the person/entity receiving the death benefit proceeds. - include policy face that has the name of the company, insured, amount of insurance carried, the mode, and amount of premium and when coverage is effective.

Assignment

This involves the transfer of some or all of the policyowner's legal rights under the contract to another party. The policy provisions concerning assignment do not usually grant the owner/insured any rights to assign but do set out the procedures by which assignment may be made.

Automatic Loan Provision

This may be added to a plan (cash value only) and this helps protect against the lapsing of the contract. Essentially if there is enough cash value in the policy then the ALP will take out loans to continue to make premium payments so policy does not cancel.

Consideration Clause

This provides that the insurance coverage is granted in consideration of the application and the payment of the initial premium. The payment of the initial premium is required to place the insurance coverage in effect. Consideration = premium paid plus the representations.

Free Look Period

Usually a 10-20 day period. The period begins when the policyowner receives the policy. A premium refund will only be given if cancelling/switching within the 10-20 day period.

Suicide Clause

Within first two years of the policy then the insurance company will not pay any death benefits to the beneficiary. After two years then full death benefits paid out.