7. Policy Provisions

What are provisions (or clauses)?

Explains how the policy works, define the parties involved in the contract, and their rights, privileges, and obligations.

What is the free look?

The right to examine within 10 days of delivery, the policy can be returned for a full refund of all premiums.

What is the insuring clause?

The insuring agreement that the insurer promises to pay benefits upon death.

• what the company will pay

• death benefit amount (face amount)

• to whom it will be paid

• usually signed by an officer of the company

What are ownership rights?

The owner of the policy may exercise all rights and privileges w/out the consent of any beneficiary, such as:

• name or change beneficiary

• select settlement options

• borrow or withdraw cash values

• receive dividends (participating policies)

• surrender or cancel the policy

• assign or transfer ownership

• select/change the premium mode

• select a non-forfeiture option

What is assignment?

A transfer of the owner’s rights, in whole or part, to another individual or entity.

What are the 2 types of assignment?

1. Collateral assignment - temporary or conditional; a pledge for a loan.

2. Absolute or permanent - transfer all rights of ownership to another person or entity. A parent → daughter when she turns 18.

What is the “entire contract”?

• the policy

• a copy of the original application

• any riders or amendments

Provision states: “no statement shall void this policy or be used in defense of a claim under it unless contained in the application.” Can only refer to these documents when denying or paying a claim.

What are endorsements?

Any modifications (changes) made to the contract must be made in writing and agreed by insurer and policyowner — must be signed by executive officer and cannot be authorized by the agent.

Endorsements (modifications):

• can only be made by the company

• owner can request a change

What is consideration?

A legal term meaning something of value — think money 💰

Insured’s consideration - premiums and truthful statements on the application.

Insurer’s consideration - pay benefits at time of claim.

What is payment of premium?

The provision states the premium is due on advance of the coverage period.

Mode = frequency

Amount = level, single payment, graded, or flexible

What is grace period?

If premium is not paid on due date, policy stays in force usually for 31 days. If the insured dies during the grace period, death benefit is paid minus the premium due.

What is reinstatement?

Restoration of a lasped policy as originally purchased.

• policy lasped for nonpayment of premiums

• up to 3 years

• policy not surrendered for cash

• must pay missed premiums + interest

• prove insurability

• saves original policy + issue age

What is incontestability?

After a policy has been effect for 2 years, the company cannot claim that a statement made in the application was meant to defraud the insurer.

• policy can’t be taken away, even if material misrepresentation or fraud (concealment)

What is the contestable period?

The first 2 years of a policy. The insured might be required to substantiate statements made n the application.

What is the suicide clause?

• if insured commits suicide prior to having a policy for 2 years, only the premiums will be paid back.

• after 2 years, the full face amount will be paid.

— suicide is excluded from accidental death benefits

What is misstatement of age?

• insured OLDER than application states (under payment), death benefit amount reduced to correct premium amount

• insured YOUNGER than application states (over payment), death benefit increased to correct premium amount

• incontestability provision does not apply

What is the payment of claims?

Provision says the insurer will pay the death benefit promptly, generally required within 60 days (2 months). If payment after 60 days, interest incurred.

Who can be a beneficiary?

1. Individuals - must have an insurable interest and be identified by name.

2. Classes - “my children” or “my siblings” need not be identified by names.

3. Trusts - legal entity

   • Grantor - sets up the trust

   • Trustee - manages the property according to grantor’s instructions

   • Beneficiary - receives the benefits

4. Minors - under 18 or legally incompetent

5. Estates - pay debts & cost of closing the estate; remaining proceeds distributed to the heirs

6. Charities

7. Universities/Colleges

What is Per Capita?

By head, divides the death benefit equally among surviving members of the class.

Two adult children listed as primary beneficiaries:

• both living when insured dies, each get 50%

• one sibling dies before insured, surviving child gets 100%

What is Per Stirpes?

By the branch (inheritable), divides the death benefit among surviving members of the branch.

Two adult children listed as primary beneficiaries:

• both living when insured dies, each get 50%

• one dies before insured, surviving child gets 50% and the two children of the deceased sibling gets 25% each

What are the levels of beneficiaries?

First - Primary

Second - Contingent or Secondary

Third - Tertiary (if no primary or contingent alive)

Other - estate of insured if no beneficiary named or alive

What is Revocable Beneficiary?

Can be changed by the owner any time w/out notice, or the beneficiaries’ knowledge or consent.

— think cult mom Lori Vallow Daybell, she didn’t know ex changed the beneficiary when she called to collect the life insurance money

What is Irrevocable Beneficiary?

Can’t be changed w/out beneficiary consent.

• loans or withdrawal from cash value requires permission of beneficiary

• usually becomes revocable upon death of irrevocable beneficiary

When are beneficiary changes made?

Changes take effect date of written request.

What is the Facility of Payment Provision?

Insurer can pay someone other than beneficiary if:

• beneficiary is a minor, deceased, or cannot be found

• someone other than the beneficiary incurred the final medical or funeral expenses

What is Uniform Simultaneous Death Act?

It is sometimes impossible to tell who dies first in an accident.

• Insured and primary beneficiary are in same accident

• Both die in accident

• Assumes primary beneficiary dies first

• Proceeds paid to contingent beneficiary

What is Common Disaster Provision?

Assumed that insured survived beneficiary.

• Insured and primary beneficiary are in common accident

• Both die within 30 - 90 days after accident

• proceeds paid as if primary beneficiary died first

• Proceeds paid to contingent beneficiary

What is Spendthrift provision?

May be included in the policy and the death benefits cannot:

• be paid in lump sum

• be claimed by creditors before payment to beneficiary

• be pledged by the beneficiary to a creditor

• be used by the beneficiary as collateral for a loan

What are the life policy exclusions?

• Suicide - not covered before 2 years

• Aviation - private, test, military pilots and crew. Does not apply to commercial flights.

• War or military service - 2 types:

a) Status-type: death occurs while in the military, even if they’re home on leave and have an accident.

b) Results-type: death occurs related to the military.