Chapter 5: Life Insurance Policy Provisions, Options, and Riders

absolute assignment

a policy assignment under which the assignee receives full control over the policy and full rights to its benefits; when a policy is assigned to secure a debt, the owner retains all the rights in the policy over the debt, although the assignment is absolute in form

accidental death benefit rider

pays an additional sum to the beneficiary if the insured dies due to a covered accident - the amount paid is a multiple of the policy face amount; accident death life insurance provides the cheapest way to add a significant amount of coverage for a limited period

accelerated benefits rider

allows the insured to receive a portion of the death benefit before death if the insured has a terminal illness and is expected to die within 1-2 years; regardless of the amount that's withdrawn in an accelerated death benefit, it will decrease the death benefit when death occurs

automatic premium loan provision

allows the insurance company to deduct the overdue premium from an insured's cash value by the end of the grace period if a payment is missed on a life policy; the insurance company can automatically take out a loan for the insured against cash value to cover premiums if it does not receive payment when due

cash surrender option

non-forfeiture option allows the policy owner to receive the policy's cash value = the policy owner no longer has coverage; the maximum period that a life insurance company may legally defer paying the cash value of a surrendered policy is six months (delayed payment provision)

excess interest provision

cash value increases faster if the insurer's returns exceed the guaranteed rate

reduced paid-up option

uses cash value to buy a smaller permanent policy with no more premiums

extended term option

uses cash value to buy term equal to the original face amount (default)

policy loan provision

owner can borrow against cash value; the loan reduces the death benefit if not repaid

conditional/collateral assignment

assignment of a policy to a creditor as security for a debt - the creditor is entitled to be reimbursed out of policy proceeds for the amount owed; any proceeds above the amount due at the insured's time of death will be paid to a beneficiary designated by the policy owner

consideration clause

states a policy owner must pay a premium in exchange for the insurer's promise to pay benefits; contains the amount and frequency of premium payments; policy owner's consideration consists of completing the application and paying the initial premium

dependent riders

dependents may be added as additional insureds through the use of a dependent rider; other insured riders are typically used for spouses and children

dividend options

options that a policy owner has when receiving dividend payments from an insurance policy (cash, reduced premiums, accumulated interest, paid-up additions, and one-year term insurance)

entire contract provision

states the insurance policy itself, including any riders, endorsements/amendments, and the application comprises the entire contract between all parties

free-look period

states that the policy owner is permitted a certain number of days once the policy is delivered to examine the policy and return it for a refund of all premiums paid

free-look provision

owner can return the policy within the specified period (usually 10 days) for a full refund

grace period

a period after the due date of a premium during which the policy remains in force without penalty (life insurance = 1 month grace)

insuring clause

company's promise to pay benefits upon the insured's death

incontestable clause

after two years, the insurer cannot contest policy validity except for impersonation, no insurable interest, and intent to murder

misstatement of age/sex

policy not voided, but death benefit adjusted to reflect correct age/sex

owner’s provision

policy owner has all rights contained in the policy

assignment provision

owner can transfer policy rights to another person

premium mode

defines premium frequency; the annual mode is least costly, and the monthly one most costly

reinstatement

allows policy to be reinstated within three years if lapsed; requires proof of insurability

beneficiary designation

owner designates who receives the death benefit; it is part of the entire contract

settlement options

ways death benefits can be paid; a lump sum is the principal method

spendthrift clause

protects the death benefit from a beneficiary's creditors; applies to non-lump sum options

long-term care rider

provides benefits if the insured requires long-term care; may reduce the death benefit

riders

optional policy additions that provide supplemental benefits or coverage adjustments, such as waiver of premium, accidental death, guaranteed insurability, and cost of living.

policy loan

a provision allowing the owner to borrow against the policy's accumulated cash value

accelerated death benefits

allows a terminally ill insured to receive a portion of the death benefit while living

CRAPPO

cash - direct payment to policy owner (tax-exempt)
reduction of premium - dividend applied to reduce the next premium payment
accumulate at interest - dividend held by insurer in separate account (interest is taxable)
paid-up additions - purchase additional permanent insurance without proving insurability
paid-up policy - dividends are used to make additional premium payments and pay up the policy sooner
one-year term - purchase term insurance; can cover policy loan amount

waiver of premium rider

waives premiums if an insured becomes totally disabled (6-month waiting period)

disability income benefit rider

pays a monthly income (usually 1% of face amount) if an insured becomes disabled

accidental death & dismemberment rider

adds dismemberment benefits to accidental death coverage

guaranteed insurability option rider

allows purchase of additional insurance without evidence of insurability

cost of living adjustment rider

automatically increases the face amount based on the Consumer Price Index (CPI)

payor benefit rider

waives premiums on juvenile policy if the adult payor dies or becomes disabled

exchange privilege rider

allows changing the insured on business policies

term insurance riders

add temporary coverage to permanent policies (level, decreasing, increasing)

return of premium/cash value rider

adds a death benefit equal to premiums paid or cash value

family/spousal/children’s riders

provide term coverage for family members

war/military service exclusion

status clause - excluded while in military
results clause - excludes death during military activities

aviation exclusion

high-risk aviation activities (not commercial flights)

commission of felony exclusion

death resulting from the insured committing a crime

illegal occupation exclusion

losses from participation in illegal occupations

intoxicants/narcotics exclusion

may exclude death while under the influence

suicide exclusion

excluded first 2 years (only exclusion that “falls off” after a specified period

hazardous activities exclusion

exclude/charge an extra premium for dangerous occupations/hobbies

conditional assignment