Life Insurance: Benefit riders, provisions, Policy options

Life Insurance Policy Exclusions

Another reason why a life insurance policy is a unique contract is due to the fact that it pays a death benefit whenever a covered insured dies. Other forms of insurance include many causes of loss that are not covered by the policy. However, a life insurance policy includes only a few causes of death that will not be covered by a standard policy. There are two basic exclusions found in most life insurance policies. If death is caused by either of these causes, an insurer may deny the death claim: 1) War 2) Aviation

Suicide Clause

For many years insurers did not cover death as a result of suicide. Today, an insurer continues to desire to protect itself against those who may be contemplating taking their own lives. Therefore, a suicide provision is inserted in most life insurance policies so that the insurer is protected against this contingency. However, death caused by suicide is excluded during the initial two years after the policy becomes effective. If the insured dies as a result of suicide during the first two years of the policy's existence, the insurer will deny the death claim but will pay to the beneficiary a refund of premiums. In other words, if an insured commits suicide during the first two years after the policy is in effect, no death benefit is paid. However, a return of the premium will be paid to the beneficiary of the deceased. What happens to the money I made from the contract?

Juvenile Insurance

Life insurance may be purchased on the life of a juvenile as long as insurable interest is present and as long as unusually large amounts are not purchased. Generally, most juvenile policies are written on children anywhere from birth until age 15. Life insurance purchased to cover juveniles is usually purchased for funeral expenses, education expenses or to protect the child's future insurability. JUMPING JUVENILE = policy is a whole life policy covering a child but owned and paid for by the parent or guardian. When the child reaches age 21, and the parent no longer wishes to pay the premium, the death benefit "jumps" up to five times its original coverage amount. In addition, the insurer does not increase the premium. This increase in coverage, at no additional cost, provides an incentive to the child, who is now a 21 year old "adult," to keep the policy. These policies are sold in small face amounts such as one, two or three thousand dollars. Some insurers market these policies as junior estate builders.

Contingent Beneficiary

The contingent or secondary beneficiary is the individual or individuals who are "second in line" to receive the death benefit when the insured dies. However, in order for the contingent beneficiary to receive policy proceeds, the primary beneficiary must die before the insured. In other words, the death benefit is payable to the contingent beneficiary upon the insured's death only if the primary beneficiary has predeceased the insured. In other words, this "secondary beneficiary" will receive the death benefit of the contract if the primary beneficiary is not alive at the time of the insured's death. Again, anyone may be designated as the contingent beneficiary. However, the most common designations are the spouse, adult children or relatives of the insured person, trusts and charitable organizations.

Provisions Associated with the Cash Value

There are several provision found in a whole life policy that are associated with the cash value. more common ones involve the automatic premium loan provision policy loan provision non-forfeiture provisions. The first two will be reviewed at this point. Non-forfeiture options will be reviewed later in this chapter.

Payor Benefit Rider

This benefit rider may be added to a life insurance policy and allows a policy covering a juvenile to remain in force even if the parent accountable for paying the premium dies or becomes totally disabled. The accountable or responsible party could be the parent, guardian or other individual raising the child. The adult purchasing the coverage on the child must possess an insurable interest in the child's life or they will not be allowed to make such a purchase. AKA = payor clause. It also provides that premiums will be waived until the insured juvenile attains a specified age (i.e., age of majority or age 21). In addition, if the parent wanted to make sure that his or her child could buy more life insurance in the future, a GIB rider could also be added to the child's policy as well.

Modification Provision

This provision states that any changes made to the contract must be in writing and endorsed or attached to the policy. It also states that only an officer of the insurer or authorized home office personnel possess the authority to make any changes or modifications, or waive a policy provision. A producer or agent need not countersign any such modification.

Cost of Living Rider

When added to a life insurance policy, this rider increases the face amount of the policy when exercised, at specified intervals based upon increases in the Consumer Price Index (CPI). The CPI measures the inflation rate each year. If there were a 2% rise in this index, the life insurance contract's face amount would increase by 2% for the next policy year. No evidence of insurability is required for these annual increases as long as the rider is in force and it is exercised each year. Therefore, the possibility of adverse selection is minimized.

Other Designations

A per capita beneficiary means that distributions of equal amounts are paid to the surviving children of the insured "per head" or "per person". A per stirpes beneficiary designation = means that distributions are made according to family line, branch or root (i.e., children and grandchildren).

Accidental Death Rider

AKA = multiple indemnity rider provides an additional face amount of insurance if the insured dies as a result of an accident. Death must occur within 90 days of the accident in order to be covered. --Accident MUST BE the predominant or primary cause of death. This rider provides an insured with the least expensive type of life insurance protection. Do not confuse this rider with a decreasing term life insurance policy which provides the least expensive life insurance of any "individual" policy. Certain causes of death are not covered by this rider (1) death resulting from war (2) death from non-commercial aviation activities (3) death where an accident was involved but where illness, disease, or mental infirmity was also involved and it cannot be distinguished with certainty that an accidental cause was primary (4) death resulting from illegal activities (i.e., participation in a felony). coverage may be paid for covered death up to an insured's age 70. --Policies that pay two times the policy face amount are called double indemnity --three times the death benefit for death due to accidents are called triple indemnity.

Waiver of Premium Rider

Added to term life or whole life insurance policies and DISABILITY PROTECTION = Premiums will be waived if an insured becomes "totally disabled and under the care of a physician." for six consecutive months, the insurer must receives proof from a doctor that the policyholder / insured is totally disabled.

Settlement Options

All life insurance policies include a variety of settlement options that are available to a beneficiary when the insured dies. One of the important things policy owners should consider at the time they purchase life insurance is the manner in which death proceeds will be paid. Failure to arrange for the proper payment of proceeds may defeat the very purpose for which the insurance was intended. A settlement option may be selected by the policy owner at the time of application. In most cases, however, the selection is made by the beneficiary at the time of the insured's death. The settlement options available provide the beneficiary with more flexibility with which to receive proceeds. The most common method of death claim payment involves a lump sum or cash payment. This is the principal method used especially if no other option has been selected. The proceeds are then paid to the beneficiary income tax free. Other available options include:

Introduction: riders, provisions, options

BENEFIT RIDERS = Added benefits, which increase the cost of the insurance. PROVISIONS = identify the responsibilities and rights of the policy owner and insurer. POLICY OPTIONS = What options are available to policyholders in regard to the surrender of a policy, dividends and death benefits. Several benefit riders are available today which may be added to a life insurance policy for an additional premium. The following pages list of some of the more common riders available.

Dividend Options (cont.)

Cash — Dividends payable to the owner are simply sent to him or her. Again, these life insurance dividends are income tax free or tax-exempt. Reduce Premium Payments — A policy owner may simply reduce his or her annual premium payment by applying the dividend to it. For example, if the annual premium is $250 and the dividend payable is $50, the owner informs the insurer to keep the dividend and sends in payment of $200. Accumulation at Interest — Under this option the owner will leave the dividend with the insurer which will be placed in an account that will be attached to the policy and will accrue interest at a rate stipulated in the policy. Interest earned on dividends left to accumulate at interest with the insurer is taxable as ordinary income. - If death occurs, the face amount is paid plus any dividend accumulations. In the event of a policy surrender, the cash value plus any dividend accumulations will be paid to the owner. Paid-up Additions — Dividends may be applied to purchase additional amounts of permanent paid-up insurance. These paid-up additions are single premium purchases of life insurance at the insured's attained or current age. These additions are used to purchase as much permanent paid-up life insurance as possible that will be paid-up for life. One-year Term Life — The owner of the policy under this option may simply use the dividend to purchase as much term life insurance as possible for the subsequent policy year. This option offers the policy owner the opportunity to purchase a different type of insurance than that provided by the primary (i.e., whole life) policy.

Aviation

The aviation exclusion restricts coverage in the event of death from high risk aviation activities except when the insured is a pilot, crew member or fee paying passenger on a commercial airliner. This exclusion generally restricts coverage for pilots and the crew of military aircraft. Aviation related deaths of test pilots, student pilots, flight instructors, crop dusting pilots, sports or stunt pilots are not generally covered on a standard basis. Insurers will provide coverage for these risks if an aviation exclusion benefit rider is added for an additional premium.

Policy Options

The following section identifies and describes the options available to policy owners who possess whole life and term life insurance policies. The initial two options that will be reviewed are available in whole life policies. These are the 1) non-forfeiture 2) dividend options. The final option to be reviewed describes settlement options which are available to the beneficiary in any type of life insurance policy when an insured dies.

Tertiary Beneficiary

This is the person who is "third in line" to receive death proceeds. However, the designated beneficiary is only entitled to the death benefit amount if both the primary and contingent beneficiaries die prior to the death of the insured.

Interest Only

Under this option the proceeds of the policy remain with the insurer and only the interest is paid to the beneficiary. This option also provides the beneficiary with flexibility since the -proceeds may be left with the insurer which frees him or her of any investment worry while guaranteeing both principal and a minimum rate of return (i.e., interest). The beneficiary always has the right to withdraw proceeds at any time in the future. Therefore, this is the settlement option that will provide income (i.e. interest payments) but conserve the death benefit.

POLICY PROVISIONS (CLAUSE) EXPLAIN AND DESCRIBE

A policy provision is also known as a "clause." A PROVISION OR CLAUSE = **spells out or identifies various aspects of the insurance contract. It may also **inform the policy owner of the responsibilities of the insurer in specific situations or of his or her own obligations. The following provisions will be reviewed in the same order or listing as that which appears on the testing outline. Some provisions are required by individual States. However, there are numerous provisions which appear in most or all life insurance policies issued, including but not limited to: Entire Contract This provision is always found in a life insurance contract. It states that the "entire contract" consists of the life insurance policy itself and any attached riders, endorsements or amendments PLUS a copy of the original application which includes all the applicant's responses to the questions regarding his or her health history. This provision assures the policy owner that the policy includes every document affecting the privileges and benefits of the contract. It also prevents the policy owner from contending that he or she was not aware of statements made on the application. This provision protects the policy owner and the beneficiary since it states that now in his or her possession is the entire contract. The following is an example of an actual "entire contract" clause appearing in a life insurance policy. "This insurer has issued the policy in consideration of the application and payment of the premium. A copy of the application is attached and is a part of this policy. The policy with the application makes up the entire contract. All statements made by or for the insured will be considered representations and not warranties. This insurer will not use any statements in defense of a claim unless it is made in the application and a copy of the application is attached to the policy when issued." The reference in the aforementioned policy provision identifying representations and warranties will be reviewed shortly. This provision also prevents or limits any entity (i.e., insurer or producer) in its authority to waive any provisions of an insurance contract once the entire contract has been delivered to the owner.

Trusts and Classes

A trust may be named as beneficiary of a life insurance policy and manage the proceeds upon the insured's death. This is the most advantageous designation to use when a policy owner wishes to leave policy proceeds to a "minor"child. While any entity can be named as a beneficiary, many States do not permit proceeds to be paid to a minor since he or she lacks "legal capacity." In this case, a trustee will manage the trust for the benefit of the child or children. Testamentary trusts are created at the insured's death according to a will. Inter vivos trusts or living trusts are created during the life of the insured. Class designations may also be included in a life insurance contract. For example, "all children born into the marriage of the insured to receive an equal share" is a common class designation to include all children in the policy. Therefore, class designations allow the policyholder to leave proceeds to children without identifying them individually. In our previous example concerning Mr. Jones, his daughter and four sons, this designation description would have included all of his children and thus the proceeds would have been paid to the surviving sons rather than to his estate, thereby avoiding possible death taxes and probate fees on life insurance proceeds.

Accelerated Benefits Rider

AKA = a living benefits or terminal illness rider. Certain conditions for payment must be satisfied in order for a benefit to be paid. This rider allows an insured to "accelerate" the death benefit of a life insurance policy while still living if a physician diagnoses and verifies that the insured is suffering from a terminal illness and is likely to die within six to twelve months, or in some cases, twenty-four months. The insured may receive up to a specific percentage (i.e., 25%) of the death benefit. For example, if the insured is covered for $40,000 and has added an accelerated benefits rider with a 25% living benefits limit and he is diagnosed with a terminal illness, up to $10,000 may be paid to the insured prior to death as long as medical corroboration is provided. Therefore, when the insured dies, $30,000 is paid to the beneficiary. This demonstrates the effect on the death benefit. Another type of accelerated benefit is provided by catastrophic illness coverage (i.e., dread disease coverage). The terms of this coverage are similar to the terminal illness rider except that the covered disease must be identified or listed in the policy (i.e., cancer, heart disease, renal failure, stroke, etc.). Some insurers include in a life insurance policy an accelerated death benefit provision automatically.

Life Income

ANOTHER SETTLEMENT OPTION which liquidates policy proceeds (i.e., principal) and interest with regard to life contingencies. This option is actually a form of straight life annuity. The beneficiary, when choosing a life income option, is actually buying a "single premium immediate annuity." When monthly payments commence, The amount of each installment paid depends upon the type of life income selected the amount of proceeds the rate of interest assumed the age and sex of the beneficiary when the income begins. There are several life income options from which the beneficiary may select including: (1) the pure or straight life income option (2) the refund life income option (3) the life income option with a period certain. Life income option, like the straight life annuity, monthly installments are paid to the beneficiary for as long as he or she lives. No refund or any other payments are made once the beneficiary dies. This option provides the greatest amount of income per $1,000 of proceeds. But, as mentioned, it also possesses the greatest amount of risk since it provides no refund or survivorship. * In addition, a drawback of this option is that the amount of income to be received by the beneficiary is not predetermined as in the other available settlement options. In other words, the amount of income to be paid to the beneficiary under this option cannot be determined or ascertained prior to the death of the insured since it (i.e. the income) will depend on the age of the beneficiary. MY OWN WORDS: Greatest amount per 1K, however, monthly installment to the beneficiary is not known. Because, monthly installment is based age of beneficiary at time of policy owners death. I suppose estimates and projections could be made, or no? The refund option guarantees the return of an amount equal to the principal less any payments already made. In other words, it provides a minimum guaranteed return. Once the primary beneficiary dies, his or her survivors may receive the refund on an installment basis or in a lump sum which is referred to as a cash refund. The former is known as the installment refund. The life income option with a period certain pays monthly payments for as long as the beneficiary lives, but should he or she die before a predetermined number of years have elapsed, the insurer will continue monthly payments to a second beneficiary for the remainder of the designated or "period" certain. These options are the same as those in an annuity.

Term and Other Insured Riders

Additional riders may be added to a life insurance policy which provide term insurance coverage for the spouse, children or entire family. The family (term) rider provides whole life on the primary insured (i.e., breadwinner) and level term insurance on the spouse and children (i.e., the rest of the family). The family rider when added to an insured's individual policy covers the rest of the family but not the primary insured who is protected by the individual policy. --Dependent riders may be added to a primary policy to cover a spouse or "another insured", children or adopted children. Therefore, several types of dependent riders available include but are not limited to a spousal rider, a child rider or a family rider. For example, assume you are an agent or producer. Your potential client wishes to purchase a life insurance policy covering her life. She also wishes to cover her husband by adding a rider to her policy in case he dies in an accident. What type of rider would you suggest she add to the policy to meet her needs? The reference to "in case he dies in an accident" gives one the impression that the accidental death rider would be added to the policy to satisfy this need. If breadwinner wanted to add a rider to cover spouse in case they die, it would not be an accidental rider (that is only for policy owner. INSTEAD **A dependent rider would be added to cover the spouse. (the rider is covering the policy owner). The accidental death rider is added to the primary insured's policy to cover him or her. It does not cover his or her spouse. Riders are also available to provide coverage for dependent parents or non-family members.

Non-Forfeiture Options

Also known as non-forfeiture values or non-forfeiture benefits, these options are available to the whole life policy owner. These are the options available when the owner of the whole life insurance wishes to surrender the policy or return it to the insurer. The non-forfeiture provision is only found in cash value policies and provides the policy owner who chooses to terminate the contract the "option" of utilizing the surrender value in any of three ways. When a policy is surrendered voluntarily by the policy owner, the non-forfeiture "values" available prevent the loss of cash values in the life insurance policy. These options may go into effect automatically or may be selected by the policy owner. None of these options can be effected unless a cash value is present. Again, once a policy is surrendered, it cannot be reinstated. As long as cash value is present in a whole life policy, the contract cannot be terminated. Therefore, these non-forfeiture options prevent the policy from lapsing (again, as long as there is cash value present). There are generally three non-forfeiture options provided by whole life policies:

Owner's Rights Provision (EVEN 3RD PARTY)

An owner of any contract possesses certain rights of ownership. This is no different when one owns a life insurance contract. In most cases, the policy owner of a life insurance contract is also the insured party. If one party purchases life insurance on the life of another, the policy owner and the insured are different entities. This is known as third party ownership. A bank purchasing life insurance equal to the amount of a loan on the life of a borrower; spouses buying life insurance on one another; a business which owns life insurance covering a key-employee; or any other situation where the policy owner and the insured are different parties is an example of third party ownership. In any event, this provision provides the owner of the policy with complete control of the contract. The owner of a life insurance policy is generally the insured as well. The policy owner of a life insurance contract possesses the right to name a beneficiary, change the beneficiary, select the frequency of premium payments or the mode of premium and transfer all or any of the policy rights to another party. This last policy right is also known as assignment and will be reviewed in more detail later. If the policy is a whole life contract, the owner possesses a few more rights in regards to the cash values of the policy. The additional policy rights that a whole life insurance policy owner possesses include (1) the right to borrow or take a loan against the cash value or equity portion of the whole life policy (2) the right to receive any dividends payable (3) the right to assign to another access to the cash value. OWNER'S RIGHTS PROVISION = permits the policy owner to borrow from the cash value or receive dividends.

Assignment Provision (cont.)

Another form of transfer involves a collateral or conditional assignment. This is a partial and temporary transfer of policy rights to another. Some, but not all, of the rights in the policy are transferred to another and they are temporary in nature. The most common form of conditional assignment involves a policy owner of a whole life policy assigning to a bank or other financial institution access to the contract's cash value as a "condition" of securing a loan. If the policy owner does not repay the loan, the bank will draw the owed funds from the cash value of the life insurance contract. The following is the verbiage from the assignment provision of an actual policy: "The policy owner may assign this policy. The insurer will not be responsible for the validity of an assignment. The insurer will not be liable for any payments it makes or any actions it takes before notice of assignment is provided to it from the policy owner." In addition, when a conditional or collateral assignment is effected and the cash value is "assigned" to another party (i.e. the lender) When the insured dies before the bank loan is repaid? If this scenario occurs, the death benefit would be divided between the assignee (i.e., bank) and the primary beneficiary according to their interest in the policy. In this case, the lender becomes the primary beneficiary for its interest.

Reinstatement Provision

Another standard provision appearing in life insurance policies, whether term or whole life, is the reinstatement provision. This provision allows the policy owner to reactivate or "reinstate" coverage following a policy lapse. If the premium is not paid within the grace period coverage will lapse. After the lapse the insurer allows the owner to reinstate the policy if a request for such action is made within three years of the date of the lapse (in some policies it is 5 years). However, the insurer places two conditions on reinstatement. First, the insured party must furnish proof of insurability. The insurer wishes to protect itself against individuals in poor health attempting to once again secure coverage. This requirement protects the insurer against adverse selection. The insured simply completes a small reinstatement application or form and submits it to the insurer. The responses recorded on the reinstatement application are now contestable for another two years. Second, all past due premiums must be paid to the insurer. This will "bring the policy up-to-date." Once the reinstatement application is sent to the insurer, coverage will automatically be reinstated within 45 days unless the insurer states otherwise. Whenever a policy is surrendered (i.e., canceled by the policy owner), it cannot be reinstated.

Insuring Clause (AKA = insuring agreement)

Appears on the first page of the policy. The initial page of the policy is AKA "face page" of the contract. This provision provides a summarization of the agreement between the policy owner and the insurer. it is a summary of the entire contract between the parties involved in the contract. It also describes the obligation of and the promise of the insurer in exchange for a premium. It will identify several important pieces of information in addition to the parties involved in the contract. identifies the scope and limits of coverage provided by the policy. In other words, it specifies the death benefit amount. The amount of the annual premium frequency with which the premium is paid. The frequency of premium payment means the "mode" of premium payment. This provision also identifies the name of the primary beneficiary in many cases. The fact that the amount of coverage is identified in the insuring provision means that this is where the insurer's promise or consideration is mentioned. For example, the following is an illustration of an actual insuring provision which appears in a life insurance policy: "This agreement has been made between the insurer and the policy owner. It provides a coverage limit of $100,000 payable to the primary or other beneficiary upon the death of the insured. The annual premium is $400 to be paid in the method or mode as desired by the policy owner."

War

Death caused by war, whether declared or undeclared, is generally excluded by all forms of life insurance due to its catastrophic nature. Some policies define "war" as declared or undeclared armed conflict including invasion, insurrection, rebellion or terrorism (domestic or foreign). The primary purpose of a war clause or exclusion is to reduce or control adverse selection. This exclusion generally provides for the return of premium with interest in the event death occurs under conditions excluded in the policy. It is usually included in a life insurance policy which is issued during wartime or at the time of impending military action. There are two types of war clauses found in life insurance contracts including: (1) the status clause (2) the results clause. If the status clause is included in a life insurance contract, the policy will not pay in the event of death while the insured is in the military regardless of the cause of death. For example, even if the insured was home mowing his or her lawn and died as a result of a bee sting, there would be no coverage. Therefore, the status type of war clause is very stringent and restrictive. The results clause is more liberal than the status clause and excludes death only if the insured dies in a war or during military activities or action.

Common Disaster Clause

How a policy responds to common disaster deaths is governed by the Uniform Simultaneous Death Act. The common disaster clause or provision states that if the insured and primary beneficiary die in a common disaster (i.e., plane crash) and it cannot be determined who died first, the insured will be considered to have survived the primary beneficiary (or died last). In other words, the primary beneficiary will be considered to have pre-deceased the insured. Therefore, when the insured dies, the face amount is paid to the contingent beneficiary. Otherwise, if the insured died first, the death benefit is payable (i.e., due) to the primary beneficiary. If the primary beneficiary then died, the face amount will be paid to the estate of the primary beneficiary and not directly to a contingent beneficiary. Again, possible death taxes and probate charges may be assessed before the heirs receive what remains. Therefore, this provision protects a contingent beneficiary. Some life insurance policies include a survivorship clause which states that if the beneficiary dies simultaneously with the insured or during the fourteen days (i.e., 14 days) immediately following the date of death of the insured, the policy will pay the death benefit as if the beneficiary had died before the insured. My own Words If the insured and PB die in a plane crash. We must assume the PB died first, so that in the end the face value will go to the contingent beneficiary. Because in a normal circumstance, if the insured died first, then the money went to PB, and then the PB died, the money would go to the PB estate and not the contingent.

No Beneficiary

If no beneficiary is designated, the death proceeds are payable to the insured's estate when the insured dies. The death benefit is added in with all the other assets of the insured including but not limited to real property (i.e., a home), liquid assets such as savings accounts, mutual funds or other like investments, rental property, antiques and collectibles. The estate may then be federally estate taxable if it exceeds a specific limit each year. It may also be State Death taxable as well. In addition, whenever the last spouse in a family dies, the estate must go through the probate process which means that attorney fees for "settling" the estate will also be payable. All of these costs associated with death must be paid before the estate is transferred to heirs identified in the will of the deceased. This is why it is important to name an adequate number of beneficiaries so that the policy proceeds are paid to survivors and not included in the deceased's estate. In order to receive any part of the death benefit, a person's name must be listed as a beneficiary. Insurers will recognize designations such as "any children of the insured born into the marriage" or something similar.

Surrender for Cash

If the owner wishes to surrender the policy, he or she will not "forfeit" the cash values that have accumulated. This option is exercised by the policy owner in the majority of instances. The owner of the whole life policy simply sends the contract back to the insurer stating that he or she wishes to surrender it. The insurer then sends the policy owner a check equal to the amount of cash value at the time of surrender. Therefore, life insurance protection ceases and the policy owner has received whatever amount of cash value was present. Since everything in a whole life policy is predetermined, the insurer and the policy- owner know exactly how much cash value is present at any point in the future after it has been purchased, assuming of course that all premiums have been paid in a timely fashion and there are no outstanding policy loans. Surrender charges are applicable and are generally incorporated in the contract. The surrender value returned to the owner under this option includes interest paid on the cash value. The interest is not taxable as long as the amount received at surrender is not greater than the amount paid in premiums.

Consideration Clause

In order for a life insurance contract to be legal and valid both parties must exchange something of value. In other words, the policy owner must give something of value to the insurer and the insurer must provide something of value to the policy owner. This exchange of "value" is known as a consideration. What does the policy owner give to the insurer that is valuable? He or she provides the insurer with two items of value: (1) the premium that is due and payable (2) the statements recorded on the application by the applicant regarding the proposed insured's health. These statements regarding the proposed insured's health are referred to as "representations." A representation is a statement made by the applicant in response to the application questions posed about health history that is true to the best knowledge of the applicant. "warranty" which is a statement made by an applicant or insured that is guaranteed to be absolutely true. In addition, a "waiver"involves the voluntary abandonment of a right by an insurer. This means that if an insurer receives an incomplete life insurance application and issues the policy anyway, the insurer has "waived" its right to decline the application (and therefore must pay a legitimate claim). The insurer provides something of value to the policy owner and that, as mentioned in the insuring clause as well, is the promise to pay the death benefit amount to the primary beneficiary when the death claim is filed along with the death certificate. Therefore, the insurer's consideration is its promise. If for some reason the consideration is not complete on the part of the policy owner, the contract will be void. This means that there was never any coverage in effect. For example, if the policy owner's check bounces, there is no coverage because there is no consideration. If the check clears the bank but the insurer later determines that the applicant lied about his or her health, there will be no coverage since there is no complete consideration.

Grace Period Provision

Insurers wish to keep "business on the books." Therefore, they do not want life insurance policies to lapse. This provision will protect an insured against an unintentional lapse of the policy if the premium is not paid by the due date. That is why all life insurance contracts include a grace period. This is the 31-day period (some States are 30 days) of time following the premium due date that the policy owner has in which to pay the premium. If the premium is not paid by the end of the grace period coverage will lapse. If the insured dies during the grace period even if the premium has not yet been paid, the insurer will still pay the death claim less the owed premium. Therefore, remember that grace periods appearing in life insurance policies are generally thirty-one days and coverage remains in effect even though premium is still owed.

Dividend Options

Life insurers which pay dividends to policy owners are known as mutual insurers. These insurers issue participating life insurance policies. Therefore, insurers that are incorporated as mutual companies, may pay dividends to policy owners in a particular year. Insurers that do not pay dividends to policyholders are called stock companies. A stock company issues non-participating policies. A participating policy may refund a portion of the premium to the insured in the form of an annual dividend. This refund (i.e., a dividend) is considered to be a return of overpaid premium. Therefore, dividends paid by a life insurance policy are not taxable as income. In other words, dividends paid by participating policies are tax-exempt. Dividends may not be guaranteed by an insurer. However, a producer or insurer may provide illustrations to a policy owner describing dividends paid in previous years. When paid, they are based on the actual (profit) experience of the insurer. Dividends provide the policy owner with more flexibility since they can be utilized in any of five ways. An easy way in which to remember these five dividend options is to use the common acronym CRAPO.

Free-Look Provision

Most States require that insurers include at least a ten-day free-look provision in their life insurance policies. Once a policy is delivered to the policy owner, he or she has ten days to examine it. If the owner decides to return the policy to the insurer or the agent within the free-look period, the insurer must provide a full premium refund. Therefore, the free look period begins when the policy is delivered. In other words, this period commences when the policy owner receives the policy from the agent or the insurer. This provision is also referred to as the "right to examine" provision. If the policy owner takes advantage of this provision and returns the contract within the limited period, he or she is not required to provide a reason for such action other than "I changed my mind." Free look periods are generally required in all forms of life insurance policies except flight or aviation type coverage. Since the flight only lasts for a few hours, these types of policies do not need to include a "10-day" free look! What happens to the money I made?

Revocable Beneficiary

Most beneficiary designations are described as "revocable." This means that the owner of the contract, who possesses all rights under the agreement, has the ability to alter, modify or change the beneficiary designation at his or her discretion. To accomplish this alteration, the owner simply contacts the insurer and requests a "change of beneficiary" form. This form is then completed by the owner and returned to the insurer listing the new beneficiary. The insurer will then make the change as requested and send the policy owner written notification of the change. The owner then attaches this notification to the policy. The policy owner is not legally required to inform anyone but the insurer when such a change has occurred.

Automatic Premium Loan Provision (APL)

NOT AUTOMATICALLY INCLUDED AVAILABLE TO OWNERS APL'S functions only if there is cash value present in the policy. HOW THIS PROVISION OPERATES Once included, in the future when cash value begins to accumulate, this provision will protect the policy owner in the event of an unintentional lapse where a premium payment is simply overlooked AND as long as there is sufficient cash value present to pay the premium. HOW IT WORKS If a premium is unpaid at the end of the grace period, and if the policy has sufficient cash value, the amount of the premium due will be advanced automatically as a loan against the policy's cash value. This is another tool used by the insurer to "keep business on the books." In addition, it is a method available to the whole life policy owner where the policy will pay for itself if he or she forgets to pay the premium inadvertently as long as enough cash value is available. Therefore, this provision prevents a policy from lapsing due to non-payment of premium as long as there is cash value present. This provision, if included in a whole life policy, will make sure that coverage continues (beyond the grace period) in the event of a policy lapse.

Long-Term Care Rider

Some accelerated benefits are available by adding a long-term care rider to a life insurance policy. For example, if an insured is permanently confined to a nursing home and requires long term care, the policy rider will pay a benefit. These riders may be added to individual or group policies. To qualify for an accelerated benefit under a long-term care rider, the (long term) confinement must be covered by the rider or additional requirements must be satisfied. For example, the long-term care rider, like an individual LTC policy, will generally pay benefits when the insured is unable to perform at least two activities of daily living (ADLs) such as eating, dressing, bathing, toileting / continence, walking / ambulation, transferring or taking medication. Like the accelerated benefits rider, the long-term care benefits received will reduce the total death benefit payable upon the death of the insured. For instance, if the life insurance policy has a death benefit of $100,000 and the long-term care rider pays out $20,000 prior to the death of the insured, the final death benefit paid will be $80,000. Therefore, accelerated benefits may be paid in appropriate situations by a terminal illness rider, catastrophic illness coverage or a long-term care rider.

Policy Loan Provision What is the policy owner borrowing from? How to keep policy in force? Is there interest? is it tax deductible? When is a policy loan due? What happens if policy owner dies before repayment?

The ability to take a loan or an advance against the contract's cash value if any is present. **This is not "borrowing from your own money" The accumulations in a cash (being borrowed) is not the same as a savings account. As premiums are paid over time, a cash value builds in the policy. The amount of cash value that is building is EQUITY in the contract. similar to a homeowner building equity by monthly mortgage payments. To keep the policy in force and use the equity a policy owner must borrow against that equity. If the homeowner wishes to use some of his or her equity and continue to own and live in the home, he or she would borrow against the equity in the home by securing a second mortgage. Therefore, interest is charged by the insurer on the loaned funds and maximum interest rates are determined by each State. Most life insurers are permitted to charge a maximum fixed interest of 8% and in others, an adjustable interest rate may be assessed if permitted by State law. Interest paid on a policy loan is generally due on the anniversary date of the policy (i.e., this is also the premium due date). Interest not paid by the owner when due shall be added to the amount of the indebtedness. If the indebtedness ever equals or exceeds the current cash value in the policy, the policy will TERMINATE subject to notice by the insurer. A policy loan is not actually due and repayable until: (1) the policy matures (i.e., age 100) OR (2) the total indebtedness, including unpaid interest, equals the cash value. A policyowner may borrow up to the amount of the cash value less any projected interest due that policy year. Policy owners may make partial withdrawals in any amounts as long as they (collectively) do not exceed the amount of the cash value (less interest). IF A POLICY OWNER DIES BEFORE REPAYING, --the amount of the loan plus any interest that has accrued will be deducted from the face amount of the policy and the amount left will be payable to the beneficiary. In addition, interest paid to the insurer on a policy loan is not tax-deductible.

Assignment Provision

The assignment provision basically reiterates one of the policy owner's rights as stated in the contract. As mentioned previously, the owner may transfer or "assign" any or all of his or her policy rights to another. Since a life insurance policy is a piece of property, like any type of property, may be assigned to another. When an assignment of a policy right is made to another person or entity, the policy owner is known as the assignor or transferor. The entity accepting the right will be referred to as the assignee. If the owner transfers all rights under the policy to another, this is known as absolute assignment. This is generally a permanent and irrevocable transfer of policy rights. It involves a change of ownership. For example, a parent purchases life insurance on the life of a child. Once the child reaches age 21, the parent does not wish to continue paying premiums. Therefore, if the child/adult wishes to continue the policy, the parent may effect an absolute assignment and transfer the entire contract and all its rights to the child/adult.

Beneficiary Designations

The policy owner is permitted to name anyone as a beneficiary to receive the proceeds of the policy upon the death of the insured party. The owner may name a spouse, child, other relative, business partner, college alma mater or beloved pet as the beneficiary. The beneficiary does not necessarily have to possess an insurable interest in the life of the insured in order to be named beneficiary. The policy owner, however, must possess an insurable interest in the person being covered by the life insurance contract. Again, the owner of the policy may designate any succession of beneficiaries to receive policy proceeds upon the death of the insured. The more commonly used beneficiary designations include but are not limited to:

Irrevocable Beneficiary

The policy owner or a court of law may also designate an individual to be an irrevocable beneficiary. In this case, the beneficiary designation cannot be changed or modified without the consent or permission of the named beneficiary. The policy owner retains all other ownership rights but may not be able to exercise them unless he or she receives permission from the irrevocable beneficiary. In other words, the irrevocable beneficiary must approve any revision of the beneficiary designation and any other policy right that the owner wishes to exercise. In addition, the irrevocable beneficiary has the right to receive a copy of the policy if he or she desires. Therefore, the irrevocable beneficiary has a vested right in the policy. This entity is, in effect, a joint owner with regard to policy rights (i.e. until they become revocable, if at all, at a later time).

Waiver of Premium Rider (cont.)

This benefit rider, which requires an additional premium, prevents the policy from lapsing if the policy owner / insured becomes disabled. Once the policy owner / insured is totally disabled for six consecutive months, the insurer will waive premiums retroactively from the first day of disability. This means that whatever premium is paid by the policy owner / insured during the first six months of disability will be returned to him or her, retroactively, by the insurer. Therefore, the insurer will waive the first premium in the seventh month of the policy owner / insured's disability. The fact that the insurer is actually paying premiums on behalf of the disabled insured in no way affects the death benefit of any type of life insurance policy nor the cash value accumulations of a whole life policy. For example, if the insured is covered by a $50,000 death benefit and becomes disabled at age 38 for life, the insurer will waive premiums until age 65. If the insured dies at age 53, the $50,000 death benefit will be paid to the beneficiary. There will be no deduction because the insurer waived premiums for fifteen years. The coverage provided by this rider generally terminates at age 65, the traditional age of retirement. This is due to the fact that most individuals are retired at that age. Therefore, this type of disability protection is not available. Many insurers offer a waiver of premium rider that also includes a disability income benefit. Most riders provide a benefit of one-percent of the face amount of the policy which is payable if the insured is totally disabled. For example, if Jim owns a $20,000 life insurance policy with this rider included and he becomes totally disabled, he would be paid $200 per month (1% of $20,000). The monthly income paid is generally limited to no more than $1,000 per month. Income benefits begin after the six month waiting period as previously described. Waiver of Monthly Deduction Rider — This rider, for an additional premium, allows the continuation of the life insurance policy by waiving the monthly deductions, such as the cost of insurance, monthly loads or administrative fees of the base policy, or any rider charges, after the insured has been totally disabled for six consecutive months (this period may vary by insurer). It does not waive premiums. The waiver continues throughout the duration of the disability. The rider and policy must be in force before the disability begins. It may be added after the policy is issued but insurability must be provided. In addition, this rider does not add anything to the cash value if the policy providing coverage is a whole life plan.

Fixed Period

This is one of the two options based on the concept of 1) Systematically liquidating principal and 2) Interest over a period of years, without reference to life events. Under this option, the beneficiary leaves the death proceeds with the insurer. Interest is paid on the proceeds (i.e., principal) by the insurer and monthly income is then paid to the beneficiary for a specified period of time as selected by the beneficiary (i.e., ten years). This option provides for the payment of proceeds in installments over a definite number of years. FURTHER: The amount of each installment is determined by: (1) the amount of proceeds (2) the period of time selected (3) the guaranteed rate of interest (4) the frequency of payments. The fixed period option is valuable where the most important consideration is to provide income for a definite period of time. Many insurers allow the beneficiary, at any time, the right to discontinue all remaining installments and receive a lump-sum of the remaining balance.

Primary Beneficiary

This is the person or persons who are designated by the policy owner to receive the policy proceeds when the insured party dies. As soon as the insured dies, the death benefit is payable to the primary beneficiary. This is the first person in line to receive the policy proceeds. Generally, spouses will designate one another as the primary beneficiary. If a policyholder designates two (or more) primary beneficiaries who are to receive equal shares of the death benefit, but one of them dies prior to the insured's death, the face amount is paid to the surviving primary beneficiary upon the death of the insured. The estate of the deceased beneficiary who predeceased the insured does not receive any payment (unless the owner stipulated in the contract that he or she wanted proceeds paid to the beneficiaries "or their estate"). In addition, in order for a person to receive proceeds from a life insurance policy, they must be named as a beneficiary (unless they are designated as any "children born into the marriage"). For example, assume that Tom is the insured, his spouse is the primary beneficiary and his only son is the contingent beneficiary. However, he has three daughters who are not named as beneficiaries nor referred to in the policy. If Tom's spouse and son are killed and later Tom dies, the proceeds of the policy are paid to his estate. The proceeds are not paid to the daughters since there was no reference to them in the life insurance contract. A minor may be "named" as a beneficiary but proceeds usually cannot be paid to a child since he or she does not possess legal capacity. Therefore, the proceeds may be held in trust to be managed by an individual(s) named as a guardian. In addition, a primary beneficiary has no vested rights in a policy or in its proceeds. A beneficiary is simply the entity to whom proceeds will be paid upon the death of the insured. Consider that an insured and the primary beneficiary die in the same accident. Also assume that the insured dies first and the beneficiary expires a few hours later. Once the insured dies, policy proceeds are payable to the beneficiary. When the beneficiary dies, the life insurance policy proceeds will be included in the primary beneficiary's estate. Proceeds do not pass directly to any named contingent beneficiary. However, if the primary beneficiary dies first and later the insured dies, proceeds will be payable to a contingent beneficiary if one is identified in the policy.

Fixed Amount

This option permits the death proceeds to be left at interest with the insurer and to be paid out in installments of specified amounts until all funds are exhausted. Under this type of option the amount of income is the primary consideration rather than the period of time over which the proceeds and interest are to be liquidated. Here the beneficiary designates an amount of income to be paid, such as $1,200 per month, and these payments continue until the principal and interest are exhausted. This settlement option is more advantageous than the fixed-period option, since it is much more flexible. Insurers may permit the beneficiary to receive varying amounts of income at various times. The beneficiary possesses the right to withdraw proceeds at any time.

Extended Term Insurance

This option permits the policy owner to surrender the policy and exchange the cash value for a paid-up level term insurance policy. The coverage amount of the new paid-up term life policy will be identical to the face amount of the surrendered whole life policy. Again, since everything in a traditional whole life policy is predetermined, we will know exactly what the cash value will be in subsequent years. When this option is exercised, the non-forfeiture table will inform the policy owner the extended period of time for which coverage is provided (i.e., 11 years and 165 days). Generally, when a policy lapse occurs with cash value present and the insurer is unable to contact the policy owner, this non-forfeiture option is activated automatically. This is also stated in the policy. When selected, the extended term insurance option provides the insured with the greatest amount of life insurance protection (although for a temporary period) in the event of a voluntary policy surrender. It would also provide an insured with the greatest amount of coverage in the event of non-payment of premium (i.e., as long as cash value is present).

Incontestable Clause

This policy provision states that the insurer may not void a contract, following the passage of a specified period, for any material misrepresentation on the part of the policy owner/insured as recorded in the application. The specified period referred to is generally two years. If the insurer is going to contest any representations made by the policy owner (i.e., applicant), it must do so within the first two years that the policy is in force. If the insurer finds, for example, that the applicant lied about his health, it can cancel the policy and return any premiums paid. Therefore, this provision allows an insurer to deny a claim or void a policy if the insured conceals material information or lies about health history on an application and the insurer discovers the material misrepresentation during the first two years. The incontestable period acts like a short statute of limitations. It actually protects a beneficiary if an insurer attempts to deny a claim due to any material misrepresentation on the part of the applicant. Therefore, it limits the period of time the insurer can use the defense of fraud, concealment or material misrepresentation to void the contract or deny a claim.

Premium Payment Provision

This provision states that the policy owner is responsible for paying the annual policy premium. It also provides the policy owner with the right to select the frequency with which to pay the premiums or the method of premium payment. As mentioned previously, this is also known as the mode of premium. It is one of the policyholder's rights as stipulated by the insurance contract. Available modes of premium include annual, semi-annual, quarterly, or monthly. When a policy owner pays the premium in any other mode but annual, more administrative costs are incurred by the insurer. This results in additional charges which will be passed along to the consumer or policy owner. This means that there are more administrative or maintenance charges associated with modes other than annual. Annual premiums are the least expensive of any mode, while monthly payments, which result in greater maintenance charges, are the most expensive. Monthly premiums may be paid to the insurer or withdrawn from the policy owner's checking account by way of some sort of pre-authorized checking account deduction procedure. The premium payment provision allows the insurer to charge a bit extra if the policy owner pays premiums quarterly, semi-annually or monthly. In addition, most life insurance policies also state that if an owner makes an additional premium payment on a life insurance policy, the future or next premium owed will be reduced. The policyholder will also determine whether to pay a level or flexible premium which will be contingent upon the type of policy purchased.

Misstatement of Age or Gender/Sex

This provision states that if the age of the insured is "misstated" on the application, the policy will not be void or canceled. Most policies state that, "the amount of insurance shall be adjusted to be that which would have purchased by the premium had the correct age been known." A death benefit adjustment is involved whether the age was misstated higher or lower. This means that even if the applicant lied intentionally about or understated his age, the insurer will not cancel or void the contract nor deny a claim when it discovers the incorrect age. It will simply adjust the death benefit or the death claim amount. Therefore, if the age of the insured is understated on the application, the insurer will pay a lower death benefit amount at death. If the age of the insured is overstated, the insurer will pay a higher or an additional face amount at death. If the gender or sex of the insured is misstated, the insurer will take the same action. Again, the insurer will not cancel the policy due to these inaccuracies but will adjust the benefit.

Reduced Paid-up Insurance

Under this option, the policy owner / insured again surrenders the whole life policy. Rather than receive the cash value as in the initial option described, the owner will use the cash value to purchase a "reduced" face amount of permanent whole life protection. This reduced amount of coverage is paid for or funded with a single premium (i.e., the cash value amount is the premium). In other words, the policy owner is using the cash value to make a single premium purchase of paid-up life insurance. No further premiums are required. Whenever the insured dies in the future the insurer will pay the death benefit to the beneficiary. In addition, the reduced face amount that is purchased by the policy owner is based upon: (1) the amount of the cash value since this is the premium paid (2) the attained or current age of the insured. This non-forfeiture option provides life insurance for the greatest length of time (i.e. permanent paid-up life insurance).

Policy Loan Provision (cont.)

With regard to policy loans, if a contract owner borrows against the cash value in the contract, there are no tax consequences in most situations. However, if a policy becomes a modified endowment contract (MEC), distributions are subject to the interest first rule which states that they are taxable as income if the cash value of the contract immediately prior to the payment exceeds the cost basis in the contract. Borrowing against the cash value is sometimes referred to as a partial surrender or a withdrawal and such action on the part of the owner, while not resulting in a taxable event, does lower the owner's equity in the policy. If a total surrender occurs, again, the cash value received is not taxable as long as it does not exceed what the owner paid in premium. What the owner paid into the contract is sometimes referred to as the "cost basis."

Guaranteed Insurability Rider

permits the insured to purchase more life insurance protection in the future without taking a medical exam. AKA guaranteed insurability option (GIO) guaranteed insurability benefit (GIB). It allows the insured to purchase additional amounts of life insurance without proving insurability at specified option dates in the future (i.e., birthdays). New insurance coverage is provided at standard rates based upon the policy owner / insured's attained or current age on the option date. If an option is exercised, more insurance is purchased. If the option is not exercised, that particular option is lost. The policyholder or insured must wait until the next option arises, if any, to buy more coverage. Therefore, this benefit rider protects an insured's future insurability or the individual's ability to acquire more coverage in the future. All insurers function differently regarding this rider. Some make these option dates available every year from the date of purchase up to a specified age such as 40 or 45. Others provide these option dates every two or three years until a specified age. Insurers do not allow guaranteed purchases between option dates. However, exceptions do exist if the insured has recently married, given birth or adopted a child. Insurers will then permit the insured to "move up" to the next available option date. Therefore, if an individual wishes to purchase more insurance in the future without proving insurability, he or she would purchase the guaranteed insurability rider.