CH 5 individual life insurance contract provisions riders and options

Riders

Modify existing policy provisions to increase, decrease, or add benefits and premiums.

Options

Provide ways to invest, distribute, or use money available in a life insurance policy.

NAIC (National Association of Insurance Commissioners)

Organization made up of insurance commissioners from all states, D.C., and U.S. territories that creates model regulations and resolves insurance regulatory issues.

The policy + copy of the application + any riders or amendments.

What makes up the entire contract?

Entire Contract Provision purpose

Prevents outside statements made before the contract from changing the policy.

Yes, but only if both parties agree and the change is attached to the contract.

Can policy provisions be changed after issue?

Insuring Clause

States the insurer’s promise to pay the death benefit upon the insured’s death.

On the policy face page.

Where is the insuring clause usually located?

Parties to the contract, coverage period, and type of loss insured.

What does the insuring clause identify?

• Name/change beneficiaries

• Receive living benefits

• Select settlement options

• Assign the policy

• Access cash values

• Receive dividends

• Surrender the policy

What rights does the policyowner have?

The policyowner

Who must have insurable interest at application?

Assignment

Transfer of policy ownership rights, must be reported in writing

No, only ownership rights change.

Does assignment change the insured or coverage amount?

Absolute Assignment

Complete and permanent transfer of all ownership rights.

Collateral Assignment

Partial and temporary transfer of policy rights, usually to secure a loan.

The insured’s estate.

If no beneficiary is named, who receives proceeds?

Per Capita

“By the head”; divides benefits equally among living named beneficiaries.

Per Stirpes

“By the bloodline”; deceased beneficiary’s share goes to their heirs.

Revocable/Irrevocable beneficiary

Can/Cannot be changed anytime with/without beneficiary consent

Common Disaster Clause

Protects contingent beneficiaries.

Spendthrift Clause

Protects beneficiary proceeds from creditors and prevents reckless spending.

3 years

Maximum reinstatement period

Incontestability Clause

Prevents insurer from denying claims due to application misstatements after a certain time.

2 years

Life insurance incontestability period

• Aviation

• Hazardous hobbies/occupations

• War/military service

• Illegal activity

• Suicide during contestability period

Common life insurance exclusions:

Policies with cash value

Which policies allow policy loans?

Automatic Premium Loan

Insurer automatically loans premium amount from cash value.
Prevents lapse due to unpaid premiums.

Waiver of Premium Rider

Waives premiums if insured becomes totally disabled.

Waiver of Monthly Deduction

Waives cost of insurance and expenses during disability.
Found in Universal Life

Disability Income Rider

Provides monthly income and waives premiums during disability.

Accidental Death Rider

Pays additional benefit for accidental death.
Pays face amount

Cost of Living Rider

Increases coverage based on inflation. (CPI)

Accelerated Death Benefits

Allows early access to death benefit for terminal illness/qualifying conditions.

No-Lapse Guarantee Rider

Prevents universal life policy from lapsing due to insufficient cash value.

Guaranteed Insurability Rider

Allows purchase of additional insurance without proof of insurability.

Long-Term Care Rider

Provides accelerated death benefits for LTC expenses.

Nonforfeiture Options

• Cash surrender

• Reduced paid-up

• Extended term

Triggered when policy lapse or surrender

Reduced Paid-Up Insurance

Uses cash value to buy permanent insurance with lower face amount.