Maryland Life Chapter 4

Provisions

stipulate the rights and obligations of an insurance contract and are fairly universal from one policy to the next

Riders

modify provisions that already exist and are used to increase or decrease policy benefits and premiums

Options

offer insurers and insureds ways to invest or distribute a sum of money available in a life policy

Activities of daily living (ADLs) 

a person's essential activities that include bathing, dressing, eating, transferring, toileting, continence

Assignment 

transfer of rights of policy ownership

Contingent beneficiary

a beneficiary who has second claim to the policy proceeds after the death of the insured (usually after the death of the primary beneficiary)

NAIC 

National Association of Insurance Commissioners, an organization composed of insurance commissioners from all 50 states, the District of Columbia and the 5 U.S. territories, formed to resolve insurance regulatory issues

Primary beneficiary

a beneficiary who has the first claim to the policy proceeds after the death of the insured

Principal amount

the face value of the policy; the original amount invested before the earnings

Trust (trust beneficiary)

an arrangement in which funds or property are held by a person or corporation for the benefits of another person

ownership

only the policyowner has the _______ rights under the policy, and not the insured or the beneficiary. Among the _______ rights are naming and changing the beneficiary, receiving the policy's living benefits, selecting a benefit payment options, and assigning the policy.

Transfer of the life insurance policy

does not change the insured or amount of coverage; it only changes who has the policy ownership rights.

Absolute Assignment

involves transferring all rights of ownership to another person or entity. This is a permanent and total transfer of all the policy rights. The new policyowner does not need to have an insurable interest in the insured.

Collateral Assignment

involves a transfer of partial rights to another person. It is usually done in order to secure a loan or some other transaction. A collateral assignment is a partial and temporary assignment of some of the policy rights. Once the debt or loan is repaid, the assigned rights are returned to the policyowner

Know This

Absolute assignment is the complete and permanent transfer of ownership rights; collateral assignment is the partial and temporary transfer of rights

Entire contract

policy and a copy of the application, along with any riders or amendments, constitute the entire contract

Entire contract

policy + copy of application + any riders or amendments

Right to Examine (Free Look)

allows the policyowner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium

free-look period starts

when the policyowner receives the policy (policy delivery), not when the insurer issues the policy

premium mode

manner or frequency that the policyowner pays the policy premium

refund any unearned premium

If the insured dies during a period of time for which the premium has been paid, the insurer must _________ along with the policy proceeds

grace period

is the period of time after the premium due date that the policyowner has to pay the premium before the policy lapses (usually 30 or 31 days, or one month)

Grace periods protect

policyholders from losing insurance coverage if they are late on a premium payment

reinstatement

allows a lapsed policy to be put back in force

maximum time limit for reinstatement

usually 3 years after the policy has lapsed

incontestability

prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2 years, even if there has been a material misstatement of facts or concealment of a material fact

misstatement of age or gender

provision which allows the insurer to adjust the policy at any time due to a _______ is included in the policy

Misstatement of age on the application will result in

adjustment of premiums or benefits

If an insurer does not pay a first-party claim within 30 days after receipt of acceptable proof of loss

the insurer will be required to pay interest at the legal rate from the date the claim is received by the insurer

Exclusions

are the types of risks the policy will not cover

Aviation

Most life insurance will cover an insured as a fare-paying passenger or a pilot on a regularly scheduled airline, but will exclude coverage for noncommercial pilots, or require an additional premium for the coverage.

Hazardous Occupations or Hobbies

If the insured is engaged in a _______ or participates in ______ (such as skydiving or auto racing), death that results from the hazardous occupation or hobby may be excluded from coverage. The underwriter also has the option of charging a higher premium for insuring these risks.

War or Military Service

Most life insurance policies issued today do not exclude military service. However, there are actually two different types of exclusions that may be used to limit the death benefit if the insured dies as a result of war, or while serving in the military

status clause

excludes all causes of death while the insured is on active duty in the military

results clause

excludes the death benefit if the insured is killed as a result of an act of war

suicide provision

protects the insurers from individuals who purchase life insurance with the intention of committing suicide

If the insured dies by suicide after the 2-year period

the policy will pay the death proceeds to the designated beneficiary the same as if the insured had died of natural causes

Policy changes

An agent may not alter or change the policy

executive officer

Only an _______ of the insurer can amend the policy

Producer as a beneficiary

Most states specifically prohibit the issuance of a life insurance policy that names the insurance producer as a beneficiary in the will of an unrelated insured, or allows the producer or relative of the producer to be named the owner or beneficiary of an unrelated insured's policy

Advertising Guaranty Association

An insurer and its producers are prohibited from using any advertisement or statements in the solicitation of insurance that suggests that the company is protected or guaranteed by the existence of the Life and Health Guaranty Association.

beneficiary

the person or interest to which the policy proceeds will be paid upon the death of the insured

class of beneficiary

using a designation such as "my children." This term can be vague

Per Capita

meaning by the head, evenly distributes benefits among the living named beneficiaries

Per Stirpes

meaning by the bloodline, distributes the benefits of a beneficiary who died before the insured to that beneficiary's heirs

If none of the beneficiaries is alive at the time of the insured’s death, or if no beneficiary has been named

the insured’s estate will automatically receive the proceeds of a life insurance policy. The death benefit of the policy may be included in the insured's taxable estate if this occurs.

Trusts 

commonly established for minors, or to create a scholarship fund

primary beneficiary

has first claim to the policy proceeds following the death of the insured

contingent beneficiary

has second claim in the event that the primary beneficiary dies before the insured

revocable designation

The policyowner, without the consent or knowledge of the beneficiary, may change a _________ at any time

irrevocable designation

An __________ may not be changed without the written consent of the beneficiary

Uniform Simultaneous Death Law

if the insured and the primary beneficiary died in the same accident and there is no sufficient evidence to show who died first, the policy proceeds are to be distributed as if the primary beneficiary died first

Common Disaster Clause

provides that if the insured and the primary beneficiary died in a common disaster (even if the beneficiary outlived the insured by a specified number of days), it is presumed that the primary beneficiary died first, so the proceeds will be paid to either the contingent beneficiary or to the insured's estate, if no contingent beneficiary is designated

Common disaster clause protects

contingent beneficiary

facility of payment provision

allows the insurer to pay a portion of the proceeds to any relative or person who has possession of the policy and appears equitably entitled to the payment

policy loan

found only in policies that contain cash value. The policyowner is entitled to borrow an amount equal to the available cash value

Whenever a policy has cash value

it has loan value

Loan value =

Cash value – (unpaid loans + interest)

If there are outstanding loans at the time of the insured’s death

the loan amount will be considered a debt to the policy and the death benefit will be reduced by the amount of indebtedness

Automatic Premium Loans provision

commonly added to contracts with a cash value at no additional charge

special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium

partial withdrawal

Universal life policies allow the ________ of the policy cash value. However, there may be a charge for each ______ and there are usually limits as to how much and how often a ______ may be made

Educational loan provisions

may be included as additional benefits, as part of the policy, or as a rider or as a separate agreement, subject to requirements

waiver of premium rider

waives the premium for the policy if the insured becomes totally disabled

rider usually expires when the insured reaches age 65

Waiver of premium rider waives

the premium for a total disability after a waiting period

waiver of cost of insurance

found in Universal Life Insurance. In the event of disability of the insured, this rider ___________ and other expenses, but does not waive the cost of premiums necessary to accumulate cash values.

disability income rider

in the event of disability the insurer will waive the policy premiums and pay a monthly income to the insured. The amount paid is normally based on a percentage of the face amount of the policy to which it is attached.

payor benefit rider

primarily used with juvenile policies (any life insurance written on the life of a minor); otherwise, it functions like the waiver of premium rider. If the payor (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21

other insured rider

provides coverage for one or more family members other than the insured

spouse term rider

allows the spouse to be added to coverage for a limited period of time and for a specified amount

children's term rider

allows children of the insured (natural, adopted or stepchildren) to be added to coverage for a limited period of time for a specified amount

one premium for ALL children.

family term rider

incorporates the spouse term rider along with the children's term rider in a single rider

provides level term life insurance benefits covering the spouse and all of the children in the family

Accelerated Benefit or Living Needs Rider

provides for an early payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years, or has other qualifying conditions

Accelerated death benefits allow the early payment of a portion of the death benefit if

• A terminal illness;

• A medical condition that requires an extraordinary medical intervention (such as an organ transplant) for the insured to survive;

• A medical condition that without extensive treatment drastically limits the insured's lifetime;

• Inability to perform activities of daily living (ADLs);

• Permanent institutionalization or confinement to a long-term care facility; or

• Any other conditions approved by the Department of Insurance.

Accelerated benefit =

early payment of part of death benefit to the insured from the insurer for qualifying medical expenses

Payable Death Benefit =

Face Amount - Amount withdrawn - Earnings lost by insurer in interest

written disclosure provision

required at the time of application for the policy or rider. A brief description of the accelerated benefit and definitions of the conditions or occurrences triggering payment of benefits must be given to the applicant. The description must include an explanation of any effect of the payment of a benefit on the policy's cash value, death benefit, and policy loans.

cash value

of the insurance policy will be reduced to reflect the loss by the insurance company in interest income

accidental death rider

pays some multiple of the face amount if death is the result of an accident as defined in the policy

double indemnity

The benefit is normally two times the face amount

guaranteed insurability rider

allows the insured to purchase additional coverage at specified future dates (usually every 3 years) or events (such as marriage or birth of a child), without evidence of insurability, for an additional premium

cost of living rider

addresses the inflation factor by automatically increasing the amount of insurance without evidence of insurability from the insured

return of premium rider

implemented by using increasing term insurance. When added to a whole life policy, it provides that at death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary

Disability Riders

• Waiver of Premium

• Waiver of Cost of Insurance

• Disability Income

• Payor Benefit 

Riders Covering
Additional Insureds 

• Spouse

• Children

• Family

Riders Affecting
Death Benefit 

• Accidental Death

• Guaranteed Insurability

• Cost of Living

• Return of Premium

• Accelerated (Living) Benefit

Cash Surrender Value

policyowner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable

insured is no longer covered

policy cannot be reinstated

surrender charge

a fee charged to the insured when a life policy or annuity is surrendered for its cash value

extended-term option

insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy

Know This

Extended term is the automatic nonforfeiture option: same face amount, shorter term of coverage.

Reduced Paid-up Insurance

the policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a reduced face amount from that of the former policy. The new reduced policy builds its own cash value and will remain in force until death or maturity.

Dividends

are a return of excess premiums, and for that reason they are not taxable to the policyowner. Insurance companies cannot guarantee _____________

Cash Payment

insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually

Reduction of Premium

insurer uses the dividend to reduce the next year's premium

Accumulation at Interest

insurance company keeps the dividend in an account where it accumulates interest

The policyowner is allowed to withdraw the dividends at any time

Although the dividends themselves are not taxable, the interest on the dividends is taxable

Paid-up Additions

each of these small single premium payments will increase the death benefit of the original policy by whatever amount the dividend will buy

Paid-up Insurance

insurer first accumulates the dividends at interest and then uses the accumulated dividends, plus interest, and the policy cash value to pay the policy up early

One-year Term

insurance company uses the dividend to purchase additional insurance in the form of __________ that increases the overall policy death benefit

Know This

Settlement options are triggered by the insured’s death or age 100

Cash Payment

Upon the death of the insured, or at the point of endowment, the contract is designed to pay the proceeds in cash, called a lump sum, unless the recipient chooses a different mode of settlement