Policy Riders and Provisions
Assignment
the transfer of some or all of the owners' rights in a policy.
Policy Exclusions
In general life insurance policies excludes death caused by the following: -Suicide (limited to the first two years) -War (War Exclusions cannot be added after the policy is issued) -Aviation (usually limited to regular duties aboard scheduled airlines) -Private pilot exclusions
Per Stirpes
"by the bloodline," distributes the benefits in order of the descendants of the family. This means that although there may be four living children, the oldest will receive all of the benefits.
Disability Income Rider
An Insured may request that a monthly income benefit be provided in addition to the Waiver of Premium. This would involve substantial additional cost.
Collater Assignment
Assigns only a portion of the ownership. Confers the right to some of the death benefit to a secured party such as a bank or other creditor. In some jurisdictions, a bank may be able to draw on the cash value of the policy if the insured misses a monthly installment
Payor Benefit Rider
Provided to the owner of a Juvenile Insurance Policy. If the adult premium payor becomes disabled or dies, all future premiums are waived.
Per Capita
"by the head," and it evenly distributes benefits among the living beneficiaries. For example, if there were four living children, the proceeds would be split evenly amongst them.
Dividend Payment Options
-Applied to reduce premium payments -Used to buy additional permanent insurance known as paid up additions -Accumulate interest (the interest earned on dividends is taxable) -Cash -One Year Term option added at attained age
Accidental Death and Dismemberment Rider
-If the death of an insured a separate amount of insurance is paid in addition to the policy death benefit. This is not Multiple Indemnity, but a separate amount of insurance. -There is also a schedule of amounts payable in the event of a bodily dismemberment under the same conditions listed above (finger, arms, legs, toes, etc). -Caution: Loss of use of a bodily member is not considered dismemberment with the exception of Loss of Use of Eyesight (and/or hearing in some jurisdictions
Dividends
Are refunds of premium and usually paid to policyholders of participating companies. so when a company has a profit (surplus) due to overestimating costs and expenses, the company will pay its owners a dividend, or refund of premium. Since a dividend is a refund of premium, it is not taxable under most conditions.
Automatic Premium Loans
Automatically uses the cash value of the policy to pay premiums when the insured has not. (sometime during the Grace Period). The premium payment is treated as a policy loan. If there is no cash value left in the policy, it will lapse. This provision must be selected when the policy is first purchased and carries no premium charge
Contingent Beneficiary
Or Secondary beneficiary, is next in line to receive the policy proceeds. If the primary beneficiary dies before the insured, more than one Contingent beneficiary may be listed together.
Family Maintenance Policy
Same as the Family Income Policy but substitutes a Level Term Income Rider in place of the Decreasing Term Income Rider. -$50k Whole Life on the Breadwinner -$25K Term Life Rider on the Spouse (Convertible) -$500 per month Level term income rider on the breadwinner for 20 years
Absolute Assignment
Transfers all of the owner's rights to the policy to someone else (the assignee). The assignee becomes a third party owner. Has all of the rights the original owner once had, with the exception of one: the right to exercise coverage increases. The cash value, dividends, settlement options and other rights, including the right to select and change a revocable beneficiary now belong to the assignee.
The Common Disaster Clause
Used to do just that. It states that in the event of a simultaneous death of the insured and the primary beneficiary, the beneficiary is assumed to have died first.
Term Rider
Added to an existing Term Insurance policy to increase or decrease benefits. It may also be used to add an amount of Term Insurance to a Whole Life policy.
Withdrawals
The insured is exercising the right to extract available funds from the policy.
Viatical Settlements
Allow someone living with a life threatening condition to sell their existing Life Insurance policy and use the proceeds when they are needed before their death. Viators usually receive a percentage of the policy's face value from the person who purchases the policy. The new owner continues to maintain premium payments and will eventually collect the entire death benefit.
Accelerated Death Benefit
When the insured is also the owner of a policy, and has been declared to be terminally ill and expected to die within the next 12 months, as verified by a physician,. The insured may ask for an advance of up to 50% of the Death Benefit. If death does not occur, the benefit is treated as a policy loan
3rd Party Ownership
When the insured and the owner are not the same person.
Incontestability
Once a policy is in effect for two years the company cannot claim that a statement made in the application was meant to defraud the insurance company. As a result, after two years the company cannot deny payment of a claim or cancel the policy due to concealment or fraud.
Multiple Indemnity Rider
Some multiple of the face amount, (double or triple) is paid if the death of insured results from all of the following: -A purely accidental event -The death occurs within 90 days of the accident -The accident occurs before the age of 70 Can also be known as a Accidental Death Provision or Extended Death Benefit Rider
Policy Loans
After premiums have been paid for a sufficient number of years, policy loans may be made to the insured. When a policy loan is requested, most companies limit the amount to 80% of the cash value, less interest.
Estates
If no beneficiaries are alive at the time of the insured's death, the insured's estate will automatically receive the proceeds of the Life Insurance policy. In this case, the death benefit of the policy may be subjected to estate taxes.
Tertiary Beneficiary
If the Primary beneficiary and the Contingent beneficiary die prior to the insured, the Tertiary beneficiary will receive the policy proceeds. Tertiary means third in line.
Suicide Clause
If the insured commits suicide during the contestable period, the insurance company will only be obligated to return premiums paid. When suicide is committed after the first two years, the company is obligated to pay the death benefit. Suicide of the insured voids any multiple indemnity clauses. This clause helps to protect the insurance company against adverse selection.
Survivorship (Second to Die)
Pays its face amount to the beneficiary upon death of the last surviving insured. The primary purpose of Survivorship life is to provide funds to pay Federal Estate Taxes. Note: Life Insurance proceeds are always paid to the beneficiary Income tax-free. If the insured had any incidence of ownership in the policy, the value of the insurance will be added to the insured's estate, along with other assets, for federal estate tax purposes.
Joint Life (First to Die)
One policy insures the lives of both. As might be expected, when one party dies, the other receives the benefit and coverage terminates. The surviving individual may then purchase another policy for as much as the original policy without evidence of insurability (charged at the attained age). Joint Life policies are generally less expensive for two people to buy than two separate policies.
Misstatement of age
Falls outside of the incontestability clause and allows the insurance company to adjust the benefit due on a policy if a misstatement of age was committed. The company will adjust the amount of insurance to the amount of insurance the premium could have purchased at the correct age
Settlement Options
-Lump sum: the proceeds are paid all at once. -Interest only: the insurance company retains the proceeds for a period (usually one year at a time), during which interest is paid to the beneficiary monthly. The principal is paid at the end of the negotiated time period. -Fixed period installments: the proceeds are paid out over a period of time selected by the beneficiary. -Fixed amount installments: The proceeds are paid out in amounts selected by the beneficiary, the length of the installments is determined by the amount desired monthly.
Taxation of Dividends
In every proposal it must be stated that dividends are not guaranteed. Dividends paid in excess of premiums paid are taxable as ordinary income at the time of receipt. Interest on dividends is taxable as it accrues evidenced by a 1099 form sent by the company at the end of each year.
Ownership Provisions
The Right to Assign the policy to someone else, • The Right to Select and change payments modes and settlement options • The Right to Choose and subsequently change a Beneficiary • The Right to Receive any cash value and dividends accumulated • The Right to Select dividend and settlement options • The Right to Cancel the policy • The Right to Receive the policy proceeds upon maturity or endowment • The Right to pay Premium
Surrender
The fact that the insured extracts only a portion of the available cash value and may result in a reduction of face value in some types of policies.
Non Forfeiture Options
When a policy containing a cash value has lapsed There are three Non Forfeiture Options: -The insured may take the Cash Value of the policy. The company may exercise its right to withhold the cash for a period of six months. -The insured may elect to use the cash value to purchase a Reduced Paid Up policy (of the same type). -The insured may opt for Extended Term insurance in the same amount of the original policy for as long as the remaining cash value allows. The insured will be given a certain number of days to elect one of the above options, and if no election has been made, the Extended Term option is automatically applied.
Grace Period
When the premium has not been received by the company or the agent representing the company by the premium due date. The insured will be granted a Grace Period of 30 days, during which coverage continues. If the insured dies, the company must pay the claim with a deduction for any earned premium due. If premium isn't paid then the policy lapses.
Revocable Beneficiary
beneficiary is usually named as a revocable beneficiary. This means that the insured can change the beneficiary at any time, and the insured retains all of the rights.
Premium Payment Modes
• Annually • Semiannually • Quarterly • Monthly • Weekly (usually reserved for Industrial Life)
Guaranteed Insurability Rider
-Permits the insured to purchase additional amounts of insurance at stated intervals with no evidence of insurability. -The company usually limits the amount of increases to the original face amount of the policy. The policy will state the intervals, or events, which will trigger the right to increase.
Family Income Policy
Combines Whole Life & Term, and income rider. -$50k Whole Life on the Breadwinner -$25K Term Life Rider on the Spouse (Convertible) -$500 per month "decreasing" term income rider on the breadwinner for 20 years The term of the Income Rider will be reduced by the number of years the policy is in effect at the time of the death of the insured. The face amount will be paid at time of death.
Entire Contract Provision
The Life Insurance policy and the application attached are the only agreements between the client and the company. No statements made by an agent can alter the agreement. An Agent or Broker cannot change a Life Insurance contract. Only an officer of the company may make changes.
Irrevocable Beneficiary
The beneficiary may not be changed without permission of the beneficiary or upon death of or mental incompetence of the beneficiary. -the insured cannot borrow against the policy without permission of the irrevocable beneficiary. This designation extends a limited right of ownership to the beneficiary with regard to policy cash values and is used very often in divorce matters.
Primary Beneficiary
The beneficiary of a policy is a person or interest to which payment of Life Insurance policy proceeds are made upon death of the insured. The first in line to receive the proceeds.
Disability Waiver of Premium Rider
The company agrees to waive its right to future premium payments under certain circumstances. -Totally and permanently disabled -The disability continues for at least six months -The disability occurs prior to the age of 60 -The insured must continue to pay premiums during the first 6 months of disability. If the disability continues, the insured is reimbursed and all future premiums are waived
Free Look Period
The insured has ten days to review the policy and return it to the company for a full refund of premium during the Free Look Period. The insured may return the policy for any reason. The Free Look Provision is effective when the policy is delivered and the first premium is paid.
The Family Policy (Family Combination or Term Rider)
Provides insurance for several members of the family. -$50k Whole Life on the Breadwinner -$25K Term Life Rider on the Spouse (Convertible) -$5K Term Life Rider on each child (currently living or yet to be born, automatically) The Family Term Rider incorporates the Spouse Term Rider and the Children's Term Rider, in a single Rider. -The term insurance on the children will automatically jump 5 to 10 times the original amount when the child reaches a certain age, usually 18 or 21, and become permanent insurance.
Spendthrift Clause
Require the policy proceeds to be paid to the beneficiary in installments of a set amount over set intervals. The beneficiary cannot change this arrangement nor can a beneficiary borrow against the policy proceeds or assign them. Both the insured's and the beneficiary's creditors are barred from recovery from proceeds unless the creditor can establish that the Life Insurance was purchased to avoid payment of debt to the beneficiary's creditors.
Minors
When a minor is named a beneficiary and has not reached the age of majority at the time of the insured's death, the death benefit can be either held in trust, or a guardian can be appointed to receive the proceeds until the minor beneficiary reaches majority.
Reinstatement
restoration of a lapsed policy as originally purchased. A person would want to reinstate policy in order to enjoy the lower rates on the policy when it was originally issued versus purchasing a new one at higher rates due to attained age. Policies may be reinstated within 3 years of the premium due date, not the lapse date, only if the insured: • Provides satisfactory evidence of insurability • Pays back premiums owed, plus interest • Pays any outstanding loans on the policy, plus interest
Uniform Simultaneous Death Act
the insured and Primary beneficiary die the same accident The law allows for the death of the beneficiary to occur before the death of the insured regardless of the actual order the deaths occurred. This allows the proceeds of the policy to be paid to the Contingent beneficiary rather than to the estate of the Primary beneficiary. Death of the beneficiary within 90 days (caused by the same incident) is also considered a simultaneous death.
