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Flashcards in chapter 4 Life Policy Provisions and Options Deck (64)
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entire contract clause

This provision describes the parts of the life insurance contract. Policy, riders (endorsements), amendments, and a copy of the application. all statements are absents of fraud, deemed to be representations and not warranties. All parts of the contracts must be attached in writing. Nothing can be incorporated in reference.


Incontestability clause

Within the first 2 years of a policy, the insurer may contest a claim and void the contract upon proof of a material misstatement or fraud. A material misstatement is one in which the insurer would not have issued the policy had they known the true info. Incontestable after 2 years even if there is fraud


Insuring clause

Found on the first page of the policy and is considered the most important clause in the policy. It identifies the parties to the contract and the perils or conditions in which it will pay. Its the insurance company's promise to pay the policy's death benefit.


Consideration clause

The consideration clause specifies the amount and frequency of premium paid by the owner as something of value provided in exchange for the company's promise to pay (the insuring clause)


Changes (modifications)

Changes or modifications must be in writing, signed by an executive officer of the insurer, approved by the policyowner and made part of the entire contract. A producer cannot alter, change, modify, or waive any policy provisions.


Suicide Clause

If the insured commits suicided, while sane or insane, within 2 years from the issue date the insurer's liability is limited to a refund all premiums paid and not the death benefit or face amount. If the insured commits suicided after this clause runs out, the insurer pays death benefit


Owner's right (ownership provision)

The policyowner retains all right in the policy. Unless the insured is also the policyowner, the insured does not have rights. The beneficiary does not have rights in the policy.



is the transfer of ownership, 2 types
Absolute: The original owner, assignor, will name a new owner, assignee, of the policy permanently.
Collateral: Temporary assignment until the debt is paid in full. The assignee has priority claim against the policy and must be paid before the beneficiary.


Misstatement of Age or Gender

does not void contract, DOB on death certificate takes precedent. Change benefits received according to the premium scale if effect at the time the policy was issued. Overpaid premiums will be returned


Free look

Allows the policyowner 10 days following receipt of the policy to look it over. The owner can return it for a full refund of any premiums paid. Producer needs to collect a delivery receipt.



conditions stipulated in the contract for which the insurer will not provide coverage. The insurer cannot add or alter any of the exclusions after the policy has been issued.



the exclusion doesn't apply to commercial air flight. to student pilots or those with newly issued pilot's license with a limited number of hours of flying experience.


status clause

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


Results cause (war cause)

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


Hazardous occupation

No coverage if death is related to a hazardous occupation as stated in the policy.


Hazardous hobbies or avocation

no coverage if death is related to a hazardous hobby as sated in the policy.


Payment of premium provisions
Mode of premium

This provision addresses the frequency of premium payments (monthly, quarterly, semiannually or annually) and to whom the premiums are payable. The more frequent the payment the greater the cost. The policyowner has the right to change the premium mode.


Grace period

is the time period provided after the premium due dates before a policy lapses. If the insured dies during this period, the death benefit is payable minus any premiums or lans due. 30 days or 1 month. policy lapses at end of grace period.


Automatic premium loans

must be elected by the policyowner and can be cancelled at any time. insurer can automatically borrow against the cash value to cover a premium payment to prevent the contract from lapsing. Interest on the loan accumulates on an annual basis.



if a policy has lapsed unintentionally due to nonpayment, it can be reinstated by the owner. The reinstatement time period is usually 3 years from the lapse. In order to reinstate, the insured must provide evidence of insurability and the owner must pay back all premiums from the date of lapse plus interest. new incontestability clause takes effect.


Provisions specific to cash value policies
Policy Loans provisions

A policy loan may be made in a cash value policy once there is sufficient cash value to borrow against. In most policies, cash value must be made available to borrow against after 3 years. does not immediately reduce the cash value in policy. cash value is used as collateral against the loan. if unpaid the interest, charged annually, will be added to the balance of the unpaid loan.
Failing to pay a loan or interest will not void the policy until the total amount outstanding loan and unpaid interest equals or exceeds the policy's total cash surrender value. Any outstanding loan will be deducted from the face amount at time of claim or from the cash values upon surrender along with any interest due.


Policy loan rate provisions

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


Partial withdrawals or partial surrenders

A partial withdrawal of cash value is permitted in a universal or a variable universal life policy. A partial withdrawal is considered a partial surrender of the policy. A partial surrender is actually paid from the policy value and either reduces the amount of death benefit or the amount of cash value in the policy. interest is not charged, taxation applies to any interest on the cash value paid out as a withdrawal. any amount paid in excess of the premium is subject to taxation. Death benefit will decrease by amount taken out.



The owner of a cash value policy may surrender the entire policy. This action will cancel the insurance coverage. The policy owner is entitled to receive the cash surrender value in the policy. Certain policies like universal life and variable universal life may have a surrender charge schedule 10-20 years. The schedule would show what percent of the cash value is subject to a surrender charge. The difference between the cash value and cash surrender is the surrender charge. insurer can recapture their upfront expenses involved in issuing the policy.


Type of beneficiaries

Revocable: the policyowner may change a revocable beneficiary at any time. This beneficiary does not have a vested interest in the policy. Most named beneficiaries are revocable and have no rights
Irrevocable: The policyowner may not change an irrevocable beneficiary unless the beneficiary dies or provides written consent for the change. owner may not make changes to the policy that affect the coverage or benefits without consent of the beneficiary. irrevocable beneficiary has a vested interest in the policy benefits.


Beneficiary succession
primary beneficiary

is the first in line to receive the death benefit upon the death of the insured


contingent or secondary benefit

receives the death benefit only if there is no primary beneficiary alive following the death of the insured.


tertiary beneficiary

receives policy proceeds if both the primary and the contingent beneficiaries predecease the insured.


If there is no living name beneficiary

the proceeds are payable to the policyowner if living or to the insured's estate.


Beneficiary designations
a change of beneficiary will take effect as of the date the

request was signed by the owner, whether the insured is alive at the time the insurer actually receives the notice.