chapter 4 Life Policy Provisions and Options

Question 1

entire contract clause

Answer 1

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.

Question 2

Incontestability clause

Answer 2

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

Question 3

Insuring clause

Answer 3

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.

Question 4

Consideration clause

Answer 4

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)

Question 5

Changes (modifications)

Answer 5

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.

Question 6

Suicide Clause

Answer 6

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

Question 7

Owner’s right (ownership provision)

Answer 7

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.

Question 8

Assignment

Answer 8

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.

Question 9

Misstatement of Age or Gender

Answer 9

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

Question 10

Free look

Answer 10

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.

Question 11

Exclusions

Answer 11

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.

Question 12

Aviation

Answer 12

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.

Question 13

status clause

Answer 13

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

Question 14

Results cause (war cause)

Answer 14

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

Question 15

Hazardous occupation

Answer 15

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

Question 16

Hazardous hobbies or avocation

Answer 16

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

Question 17

Payment of premium provisions

Mode of premium

Answer 17

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.

Question 18

Grace period

Answer 18

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.

Question 19

Automatic premium loans

Answer 19

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.

Question 20

reinstatement

Answer 20

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.

Question 21

Provisions specific to cash value policies

Policy Loans provisions

Answer 21

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.

Question 22

Policy loan rate provisions

Answer 22

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.

Question 23

Partial withdrawals or partial surrenders

Answer 23

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.

Question 24

Surrenders

Answer 24

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.

Question 25

Type of beneficiaries

Answer 25

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.

Question 26

Beneficiary succession | primary beneficiary

Answer 26

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

Question 27

contingent or secondary benefit

Answer 27

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

Question 28

tertiary beneficiary

Answer 28

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

Question 29

If there is no living name beneficiary

Answer 29

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

Question 30

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

Answer 30

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

Question 31

individual/named

Answer 31

this designation is very specific. An individual is specified by name as the beneficiary. This prevents probate proceedings.

Question 32

class or classification

Answer 32

This designation is used in instances where each beneficiary is not directly identified by name. wording must be specific and carefully worded to remove any doubt of the owners intentions.

Question 33

per capita

Answer 33

will pay to surviving beneficiaries equally if a named beneficiary predeceases the insured.

Question 34

per stripes

Answer 34

will pay a deceased beneficiaries share to the heirs of that beneficiary who predecease the insured. If an insured names 3 children and one child dies. the child's beneficiaries will receive their 1/3.

Question 35

estate

Answer 35

may be the tertiary beneficiary in case the insured outlives all other beneficiaries. Benefits are paid to the insured's estate. the death benefit increases the estate value and may have tax implications

Question 36

Trust

Answer 36

When a recipient is not to have direct access to the death benefits, such as in the case of minor children and the proceeds are to be distributes as per the insured's directions set forth in a trust. Trust never dies

Question 37

Minors

Answer 37

no trust has been established, the funds are placed in a settlement option (held with interest) with the insurer acting as trustee. The guardian may receive payments for the benefit of the child until the child receives the lump sum at the age of majority.

Question 38

creditor

Answer 38

Designated by assignment or named at application to cover indebtedness. The creditor may either be the named beneficiary or can be the assignee under a collateral assignment. The creditor can only receive the amount of the indebtedness.

Question 39

Common Disaster clause

Answer 39

if an insured and primary beneficiary are in the same accident, the primary beneficiary must survive the insured by a specific number of days or the insurance company will assume the insured dies last.

Question 40

The uniform simultaneous death act

Answer 40

has been adopted by all states and provides that when the insured and primary beneficiary die as the result of the same event and the order of death cannot be determined, it is assumed the insured died last, so second beneficiary.

Question 41

Spendthrift trust clause

Answer 41

denies the beneficiary the right to assign his/her interest in the policy proceeds. The purpose is to prevent creditors of a beneficiary from claiming any benefits payable to the beneficiary before they are actually received. does not protect beneficiary when lump sum, only when the proceeds are held by the insurance company in a settlement .

Question 42

facility of payment clause

Answer 42

the insurer to pay a relative or anyone it deems entitled to the benefits in the absence of a properly designated beneficiary or in cases of no living beneficiaries. This can alleviate any lawsuits and can be used to reimburse someone who paid funeral costs

Question 43

Life policy settlement options | Characteristics

Answer 43

paid in lump sum unless another mode of settlement has been selected. A settlement option directs the insurance company how to pay out death benefits. beneficiary cannot change the option. Principal payment of the death benefit are not taxable as income but interest received from a settlement option is taxed as ordinary income. Benefits paid in lump sum are tax free

Question 44

settlement options include | interest only

Answer 44

the death benefit proceeds may be left with the insurer while interest payments are paid at least annually or more frequently. The principal amount does not decrease and the interest generated is taxed as ordinary income when paid to the beneficiary. capital conservation, the principal is left with the insurer at interest. the owner or beneficiary must direct the insurer as to when the principal will be paid as a benefit.

Question 45

Fixed amount

Answer 45

payments are for a specified dollar amount paid monthly until the benefits along with interest are exhausted.

Question 46

Fixed period

Answer 46

Payments are guaranteed for a specified portion of time after which time payments will cease. The proceeds and interest are used to make the payments. the interest will increase the amount for each payment and the interest is taxable.

Question 47

Life income option

Answer 47

This option allows the insurer to use the death benefit to purchase an annuity on behalf of the beneficiary. Any interest paid is taxed as ordinary income. several options

Question 48

Straight life (pure or life income only)

Answer 48

payments are guaranteed for the lifetime of the recipient. upon death the payments will cease. The $ amount of each payment will depend upon the age and gender of the recipient. can donate money to insurance company

Question 49

Life income period certain

Answer 49

Payments are guaranteed for the lifetime of the recipient of a specified period of time, whichever is longer. If the recipient dies prior to the end of the period certain the payments continue to another person until the end of the period certain.

Question 50

Life refund

Answer 50

less per month in payment. Payments are made for the lifetime of the recipient. Upon death, if a recipient has not received an amount equal to the total death benefit, the balance is refunded to the beneficiary either in a lump sum or in installments.

Question 51

Single life

Answer 51

only over a single life. Provides guaranteed lifetime income to the recipient, one the recipient dies payments cease.

Question 52

joint and survivor income

Answer 52

greatest amount of capital. Payments are guaranteed for the lifetime of 2 or more recipients. Upon the death of the first recipient, payment continues to the survivors until the death of the survivor. The survivor's payment may be full, or percentages of the original payments. The payout option may be referred to as Joint and Full survivor, Joint and 2/3 survivor, or joint and 1/2 survivor.

Question 53

joint life income option

Answer 53

payments are guaranteed to 2 or more recipients until the first recipient dies, then all payment cease.

Question 54

Nonforfeiture options (guaranteed values) whole life

Answer 54

these options are found in policies that accumulate cash values and protect the policyowner against total loss of benefits if the policy should lapse due to nonpayment of premium or is intentionally canceled. three options are ash surrender, reduced paid-up, and extended term

Question 55

cash surrender

Answer 55

upon surrendering the policy back to the insurer, the policyowner will receive the cash surrender value stated in the policy less any outstanding loans and accrued interest. any amount that exceeds premium is taxable. insured n longer has coverage if this option is selected

Question 56

Reduced paid-up

Answer 56

present cash value is used to buy a single premium, permanent paid up policy of a reduced face amount. This option provides the longest period of coverage provided by a nonforfeiture option. coverage, reduced face value, will continue

Question 57

extended term

Answer 57

present cash value is to buy a single premium term policy of the same face amount for as long a period as it will buy, expressed as a combo of years and days. This option provides the largest death benefit and is sometimes referred to as the Automatic option if no other option has been selected. The insured no longer has rights to the cash value under this option and the policy will expire prior to age 100.

Question 58

dividend options

Answer 58

represent the favorable experience of the insurer and result from excess investment earnings, favorable mortality and expense savings. Dividends are available on participating policies issued by mutual insurers. paid annually if declared. not taxable as income until all of the premiums paid in have been recovered. interest earned on dividends left to accumulate is taxable as ordinary income. The policyowner elects dividend option and can change at any time.

Question 59

cash

Answer 59

policyowner receives the declared dividends in the form of a check on or near each policy anniversary

Question 60

premium reduction

Answer 60

dividends are applied toward the next premium due. The same could be accomplished if the policyowner received the dividends in cash and remitted the full premium. if the declared dividends equal or exceed the premium, the premium payment may be suspended

Question 61

Accumulate at interest

Answer 61

the dividends are retained by the insurer and the interest rate paid the policyowner is compounded annually.

Question 62

Paid-up additions

Answer 62

purchases single premium, additional permanent benefits at the insured's attained age. The additional insurance is paid out in addition to the face amount if the insured dies. While the insured is living, it generates cash value and dividends as if the paid-up additional benefit was part of the original policy.

Question 63

1 year term

Answer 63

purchases a single premium, 1 year term benefit. Premiums are calculated at the insured's attained age, also referred to as the fifth dividend option. equal to cash value

Question 64

paid up option

Answer 64

pays off the policy more quickly than scheduled. If the company's overall performance declines, premiums may have to be resumed.