AD Banker Life & Health Chapter 4
Terms in this set (59)
Entire Contract Clause
This provision describes the parts of the life insurance contract. The entire contract consists of the policy, riders (endorsements), amendments, and a copy of the application. All statements made in the application are, in the absence of fraud, deemed to be representations and not warranties. All parts to the contract must be attached and in writing. Nothing can be incorporated by reference
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 information. Except for nonpayment of premiums, the policy will be incontestable after it has been in force for typically 2 years from the policy issue date, even in cases of fraud.
The insuring clause is found on the first page, or declaration 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. The insuring clause is the insurance company's promise to pay the policy's death benefit to the named beneficiary, after receiving due proof of death of the insured, as long as the insured died while the policy was in force. The declaration page is the title or first page of the policy. It provides all the basic information the policyowner needs to know:
The insuring clause
The name and address of the insurance company
Information about the issuing agent
The named insured
Amount of insurance
Amount and frequency (mode) of premium payment
Effective date of coverage
What is meant when a life insurance policy becomes incontestable?
After 2 years, the insurer will not refuse to pay a death claim based on misinformation in the original application for insurance.
The insuring agreement in a life insurance policy states which of the following?
The obligation of the insurance company to pay the policy proceeds upon presentation of valid proof of the death of the insured which occurred while the policy is in force.
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 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 provision.
If the insured commits suicide within 2 years from the issue date, the insurer's liability is limited to a refund of premium. If the insured commits suicide after the suicide clause has expired, the insurer must pay out the death benefit to the named beneficiary. The intent of this clause is to discourage individuals from purchasing an insurance policy while contemplating suicide.
Owner's Rights (Ownership Provision)
The Policyowner retains all rights in the policy. Unless the insured is also the policyowner, the insured does not have rights. The policyowner has the right to name or change revocable beneficiaries, borrow against the cash values or access living values, surrender the policy, receive dividends and select among the dividend options made available, assign the policy on a collateral basis or an absolute basis, or convert term insurance to permanent insurance. It is also the owner's responsibility to make the premium payments.
There are two types of assignments:
The first is an absolute assignment. The original owner, the assignor, will name a new owner, the assignee, of the policy. Since a new owner is named, this is considered a permanent assignment. The full amount of the policy is assigned and this is referred to as a transfer of ownership. STOLI arrangements and Life Settlements are both effected through absolute assignments.
The second type is a collateral assignment which does not cause a permanent change in ownership. However, the rights of the owner will be subject to the assignment. A collateral assignment is typically used when an insurance policy is used as collateral for a loan. This is a temporary assignment until the debt is paid in full. In this case, the assignor is the original owner and the assignee is the creditor. This assignment takes precedence over any beneficiary designation. It can reduce the dollar amount of the beneficiary's claim at the time of the insured's death because the assignee has a priority claim against the policy and must be paid first. No assignment of the policy will be binding on the insurer unless it is in writing and received at the insurer's home office. The insurer is not responsible for determining the validity of the assignment.
Misstatement of Age or Gender
If the age and/or gender of the insured have been misstated in a policy, all benefits under the policy will be provided based upon the insured's correct age and/or gender according to the premium scale in effect at the time the policy was issued. An insurer can refund any overpaid premiums if the amount of premium paid was greater than should have been paid. The insurer can reduce the face amount in cases where the amount of premium paid was less than that which should have been paid. For example, if the premium amount paid for the policy was 50% less than what should have been paid, then the death benefit will be reduced by 50%.
There is no time limit for discovery, and this provision never cancels or voids a policy. The incontestability clause does not apply. Age and/or gender are not considered material to the policy issuance.
Free Look and Cancellation (Right of Rescission)
Every policy of individual life insurance and annuities (other than variable contracts) that is issued for delivery in California must contain a notice regarding return of the policy for cancellation of 10-30 days after its receipt by the owner. By delivering or mailing the policy during the cancellation period, the owner voids the policy from the beginning, and the parties will be in the same position as if no policy had been issued. All premiums and any policy fee paid for the policy must be refunded to the owner within 30 days from the date that the insurer is notified of the cancellation. This section does not apply to policies issued in connection with a credit transaction, contractual policy change, or conversion privilege.
The return of variable life insurance contracts and modified guaranteed contracts during the cancellation period entitles the owner to a refund of account value and policy fee paid for the policy within 30 days from the date the insurer is notified of cancellation.
The minimum free look period is 10 days for persons under age 60. The free look period begins when the policyowner signs an Acknowledgement of Delivery Receipt. If a replacement policy is involved, the free look period must be increased to at least 20 days.
California Senior Citizen Requirements
In this section, a senior citizen is defined as an individual who is 60 years of age or older on the date of purchase of the policy. Persons who are 60 years of age or older must be given a 30-day free look period. This allows additional time to seek the counsel of others to assist in the decision to keep or cancel the new policy.
Every individual life insurance and annuity contract delivered or issued for delivery to a senior citizen in California must include a notice in 12-point bold print that the policy may be returned within 30 days after receipt of the policy by the owner for a full refund by returning it to the insurance company or agent who sold the policy. The notice must include a statement that if returned after 30 days, cancellation may result in a substantial penalty (surrender charge) if applicable.
Exclusions are 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. Such exclusions are normally limited to the following:
Aviation - The exclusion does not apply to fare-paying passengers on regularly scheduled commercial flights. This exclusion applies most specifically to student pilots or those with a 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 Clause (War Clause) - 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, such as stunt drivers or auto racers.
Hazardous Hobbies or Avocation - No coverage if death is related to a hazardous hobby as stated in the policy, such as sky diving or hot air ballooning.
Suicide - If suicide is committed within the first 2 years the policy is in force, the insurer's liability is limited to a refund of premium. If the insured's death is a result of suicide after the first 2 years, then the insurer pays the full face amount (death benefit) of the policy.
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.
The grace period is the time period provided after the premium due date before a policy lapses. If the insured dies during this period, the death benefit is payable minus any premiums or loans due. The grace period in California is 60 days. Coverage continues during the grace period, but if the premium is not paid, the policy lapses at the end of the grace period.
Automatic Premium Loans (APL)
This provision must be elected by the policyowner and can be cancelled at any time. It enables the insurer to automatically borrow against the cash value to cover a premium payment to prevent the contract from lapsing unintentionally. APL is available on cash value policies only and does not require an additional premium.
It becomes effective at the end of a grace period. The APL loan is treated the same as all other loans. If the APL is used to pay premiums, 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 typically 3 years from lapse. In order to reinstate, the insured must provide evidence of insurability and the owner must pay all back premiums from the date of lapse plus interest. Reinstatements are designed to put a policy back in force as if the lapse never occurred.Upon reinstatement, a new incontestability period takes effect.
Match the policy provisions with the correct description
This provision identifies the parties, perils, and promises of the contract
Specifies the amount and frequency of premium paid by the owner
Time period after the premium due date before the policy lapses
Mode of Premium Payment
The frequency of premium payments
Allows the owner to bring the policy up to date if it has lapsed due to nonpayment
2 -year time limit from policy issue before death due to suicide is covered
Match the policy provisions with the correct description
Party who has all rights to cash, loan values, dividends and other benefits
Policy, riders, copy of application must be in writing and attached
Transfer of ownership rights
Misstatement of Age
Benefits will be adjusted according to what premiums paid would have purchased at correct age or sex
Insurer cannot question statements (errors, misstatements, fraud) in application after 2 years
Insured may return policy for a full refund typically within 10 days of receipt of policy
The grace period in a life insurance policy is typically 60 days, which allows:
The payment of the premium after the due date without a penalty or lapse in coverage.
What is the primary advantage to the policyowner in the reinstatement of a life insurance policy?
The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium
Policy Loans Provision
A policy loan may be made in a cash value policy once there is sufficient cash value to borrow against. A cash value policy must have some cash value not later than the end of the third policy year.
A loan against the cash value does not necessarily reduce the cash value in a policy. The cash value is used as collateral against a loan. Interest will be charged annually, and if unpaid will be added to the balance of the unpaid loan. Interest charged may be fixed or variable.
The insurer may defer granting a loan for up to 6 months unless the loan is intended to repay any premium, such as an automatic premium loan. Failing to repay a loan or interest will not void the policy until the total amount of the outstanding loan and unpaid interest equals or exceeds the policy's total cash surrender value.
Any outstanding loans along with any interest due will be deducted from the face amount at time of claim or from the cash values upon surrender.
Policy Loan Rate Provisions
Policy loans with fixed rates can have a maximum fixed interest rate of 8%. For policy loans with adjustable (variable) interest rates, the maximum 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.
Policy loan provisions include all of the following, EXCEPT:
The death benefit of a policy is automatically reduced when a loan is requested
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 reduces both the amount of the death benefit and the amount of cash value in the policy. Any amount withdrawn in excess of the premium is subject to taxation.
There may be a surrender or withdrawal charge associated with the withdrawal. The insurer may limit the number of withdrawals that can be made annually or the amount of the withdrawal by specifying minimums and maximums.
The owner of a cash value policy may surrender the entire policy. This action will cancel the insurance coverage. The policyowner is entitled to receive the cash surrender value in the policy. Surrender periods must be disclosed in the policy and can last up to 10-20 years. A surrender charge schedule describes in dollar amounts or percentages the amount of the surrender charge in any year. The surrender period is the time the owner must wait before funds can be withdrawn without a penalty.
The difference between the cash value and the cash surrender value is the surrender charge. This provides a means for the insurer to recapture the upfront expenses involved in issuing the policy.
The beneficiary succession, or order of payout, is as follows:
Primary Beneficiary - The primary beneficiary is the first in line to receive the death benefit upon the death of the insured.
Contingent or Secondary Beneficiary - The contingent beneficiary receives the death benefit only if there is no primary beneficiary alive following the death of the insured. In other words, the benefit is payable to the contingent beneficiary only if the primary beneficiary predeceases the insured.
Tertiary Beneficiary - The tertiary beneficiary receives policy proceeds if both the primary and the contingent beneficiaries predecease the insured.
A contingent beneficiary has the right to which of the following?
The policy proceeds only when there is no primary beneficiary
Types 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. If an irrevocable beneficiary is named, the owner may not make changes to the policy that affect the coverage or benefits without consent of the beneficiary. These changes include assigning the policy, canceling or surrendering the policy, or taking a policy loan. An irrevocable beneficiary has a vested interest in the policy benefits.
A beneficiary designation may be selected at the time of application. A change of beneficiary will take effect on the date the request was signed by the owner, whether or not the insured is alive at the time the insurer actually receives the notice.
Individual/Named - This designation is very specific. An individual is specified by name as the beneficiary, such as Mary Doe (wife) or John Doe (husband). This prevents probate proceedings.
Class or Classification - This designation is used in instances where each beneficiary is not directly identified by name. The wording of the class designation must be specific and carefully worded to remove any doubt of the owner's intentions. For example, "any children of this marriage" or "the insured's spouse" may be classified as beneficiaries. This could cause complications if the insured has step children or has been married more than once.
Per Capita - This is a method of distribution that will pay to surviving beneficiaries equally if a named beneficiary predeceases the insured. For example, if an insured names his/her 3 children as beneficiaries and one of the children predeceases the insured, the benefit will pay equally to the surviving named beneficiaries. Each beneficiary receives 50% of the death benefit in this example.
Per Stirpes - This is a method of distribution that will pay a deceased beneficiary's share to the heirs of any beneficiary who predeceases the insured. If an insured names his/her 3 children as beneficiaries and one of the children predeceases the insured, the deceased beneficiary's share will be paid to their heirs. The surviving beneficiaries will each receive 1/3 of the benefit and the remaining 1/3 will be paid to the deceased beneficiary's heirs in this example.
Beneficiary designations are distributed per capita unless stated differently.
Estate - By default, if the insured outlives all other beneficiaries, benefits are paid to the insured's estate. The death benefit increases the estate value and may have adverse tax implications.
Trust - 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 distributed as per the insured's directions set forth in a trust. A trust beneficiary may also be used in estate tax planning strategies when using an irrevocable life insurance trust.
Minors - If minors are named as beneficiaries but no trust has been established, the funds are placed in a settlement option (held with interest), with the insurer acting as trustee. The guardian or legally responsible adult may receive payments for the benefit of the child until the child is eligible to receive the lump sum at the age of majority.
Creditor - 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. The benefit may be purchased as decreasing term insurance so the benefit will decrease by the amount of the loan automatically.
Which of the following is a reason why "class" designations of beneficiaries may be a problem?
They are vague descriptions of beneficiaries that could result in a court having to decide which person(s) will or will not receive the policy proceeds
Common Disaster Clause
The Common Disaster Clause provides that if an insured and primary beneficiary die as a result of the same event, the primary beneficiary must survive the insured by a specific period of time (usually 90 days) or the insurance company will assume the insured died last (the primary beneficiary died first). This provision is designed to pay the benefits to either the contingent beneficiary or the insured/policyowner's estate if no contingent beneficiary has been designated.
Uniform Simultaneous Death Act
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, protecting their secondary beneficiary or heirs.
Spendthrift Trust Clause
The Spendthrift Clause denies the beneficiary the right to assign his/her interest in the policy proceeds. The purpose is to prevent creditors of the insured and/or the beneficiary from claiming any benefits payable to the beneficiary before they are actually received. This clause does not protect the beneficiary if the benefits are payable in a lump sum, only when the proceeds are held by the insurance company under a settlement option.
The spendthrift laws of each state protect life insurance proceeds against the claims of which of the following?
Creditors of the insured and/or the beneficiary
Settlement options include:
Interest Only - The death benefit proceeds may be left with the insurer while interest payments are paid at least annually. The principal amount does not decrease, and the interest generated is taxed as ordinary income when paid to the beneficiary. This method of providing income is known as capital conservation. The principal (capital) is left with the insurer at interest, conserving the capital. When this option is selected, the owner or beneficiary must direct the insurer as to when the principal will be paid as a benefit.
Fixed Amount - Payments are for a specified dollar amount paid monthly until the benefits, along with interest, are exhausted. In this example, the interest will extend the time period in which the benefits are paid. Only the interest portion of the benefit is taxable.
Fixed Period - Payments are guaranteed for a specified period of time (such as 10 or 20 years) after which payments will cease. The proceeds and interest are used to make the payments. The interest will increase the amount of each payment, and the interest is taxable.
Life Income Option - This option allows the insurer to use the death benefit to purchase an annuity on behalf of the beneficiary. As with other settlement options, any interest paid is taxed as ordinary income.
Interest only, life income, fixed amount and fixed premium are all forms of which of these life insurance policy options?
Nonforfeiture Options (Guaranteed Values)
Cash Surrender - Upon surrendering the policy back to the insurer, the policy owner will receive the cash surrender value stated in the policy less any outstanding loans and accrued interest. Any amount that exceeds the premiums paid into the policy will be taxable as ordinary income. The insured no longer has insurance coverage if this option is selected.
Reduced Paid-Up - 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, although reduced in face value, will continue to age 100.
Extended Term - Present cash value is used to buy a single premium term policy of the same face amount for as long a period as it will buy, expressed as a combination of years and days. This option provides the largest death benefit and is sometimes referred to as the Automatic (or Default) Option if no other option has been selected. The policy will expire prior to age 100.
Dividends 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. They are paid annually, if declared, and cannot be guaranteed. Since dividends essentially are a return of excess premiums paid, they are not taxable as income until all of the premiums paid in have been recovered. Should the total accumulation of dividends exceed the total premiums paid, the excess amount is taxable as ordinary income. Interest earned on dividends left to accumulate is taxable as ordinary income.
The policyowner decides which dividend option is in effect and can change the election at any time. If dividends are designated for any option other than cash and all current accumulations are withdrawn, the option will begin again at the next declared dividend.
Dividend Options Available
Cash - The policyowner receives the declared dividends in the form of a check on or after each policy anniversary.
Premium Reduction - 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 policyowner will not have to pay premiums for the next year.
Accumulate at Interest - The dividends are retained by the insurer and the interest rate paid the policyowner is compounded annually.
Paid-up Additions - 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.
1-Year Term - 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.
Paid-up Option - Pays off the policy more quickly than scheduled. If the company's overall performance declines, premiums may have to be resumed.
Dividend options do not include which of the following choices?
Organize the following terms under the correct heading below:
Life Income Only
Accumulate at Interest
Which of the following is TRUE regarding payment of premium?
The more frequent the payment, the greater the overall cost
Frank purchased his life insurance policy 5 years ago and named his wife, Jean, as his beneficiary, but two years later Jean divorced Frank and married Pete. Can Jean collect from Frank's life policy since he had a fatal heart attack last week?
Yes, she is the beneficiary
The ______________ clause is the insurance company's promise to pay the policy's death benefit to the named beneficiary, after receiving due proof of death of the insured, as long as the policy is in force.
If overdue premiums are not paid by the end of the grace period, a traditional whole life policy will automatically:
Become extended term
Linda wants her husband to be the beneficiary of her life policy but also wants to retain all rights of ownership. Which of the following types of beneficiary designations should she use?
Albert owned a $100,000 policy that had accumulated a cash value of $20,000, against which he had borrowed $10,000. If he dies with this loan outstanding, his beneficiary will receive which of the following amounts?
Lyle owns a $50,000 20-Pay Life Policy that he lets lapse at the end of the fourth year. The Nonforfeiture Option providing the longest period of coverage would be:
K has a $100,000 traditional whole life policy with $30,000 of cash values and a $10,000 loan outstanding. What is the maximum additional amount she could borrow from the policy at this time?
When does a change in beneficiary take effect?
The date the policyowner signs the request to change the beneficiary.
What happens if a senior citizen fails to exercise the free look in time?
Subsequent cancellation may result in a substantial penalty (surrender charge), if applicable.
Alice is the insured, Bill is the primary beneficiary, and Claire is the contingent beneficiary. Bill dies, then Alice dies, so who receives the policy proceeds?
Paul is the insured and policyowner. Paul named Danny and Kayla as co-primary beneficiaries per stirpes of Paul's $400,000 policy. Danny and Kayla each have 3 children. Danny dies, then Paul dies, so Kayla is entitled to receive $____________.
With per stirpes designations, the children of the deceased primary beneficiary step into the deceased's shoes and claim their share. Here, the $400,000 is first split between Danny and Kayla. Then Danny's children split their 1/2 of the total equally amongst themselves.
An insured has paid premiums annually on her life insurance policy. She would now like to change to a monthly premium payment. What must occur to effect this change?
The insured simply needs to contact the insurance company and request a change in premium mode
The minimum free look period for individual life insurance and annuities (other than variable contracts) is how many days for persons under age 60?
Which statement is FALSE regarding Nonforfeiture Options?
They are used when the insured lives to the endowment date of the policy or at the insured's death
YOU MIGHT ALSO LIKE...
Principles of Economics
Chapter 4 - Life Policy Provisions and Options
Chapter 4 Quiz
Chapter 6: Life Insurance Policy, Provisions, Options, and Riders
OTHER SETS BY THIS CREATOR
AD Banker Life & Health Chapter 2
AD Banker Life & Health Chapter 1
AD Life & Health Chapter 11
AD Banker Life & Health Chapter 6
THIS SET IS OFTEN IN FOLDERS WITH...
AD Banker Life & Health Chapter 1
AD Banker Life & Health Chapter 5
Life and Health A.D. Banker Chapter 7
AD Banker Life and Health Chap 14