Chapter 5 KEYWORDS: LIFE INSURANCE POLICY PROVISIONS, OPTIONS, AND RIDERS

Absolute Assignment

This is a policy assignment under which the assignee (person to whom the policy is assigned) receives full control over the policy and also full rights to its benefits. Generally, when a policy is assigned to secure a debt, the owner retains all of the rights in the policy in excess of the debt, despite the fact that the assignment is absolute in form.

Accidental Death Benefit (Multiple Indemnity) Rider

This 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, such as double or triple the original benefit. Accident death life insurance provides the cheapest way to add a significant amount of coverage for a limited period.

Accelerated Benefits Rider

This 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 one-to-two years. Regardless of the amount that’s withdrawn in an accelerated death benefit, it will decrease the death benefit when death occurs.

Accumulate Interest Option

The “accumulate interest” dividend option allows the policy owner to leave dividends with the insurer to accumulate interest. In turn, the policy owner is required to pay taxes on any interest (profit) that’s generated by the dividend.

Assignment Clause

This clause allows for the right to transfer policy rights to another person or entity.

Automatic Premium Loan Provision (or Rider)

This 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 her CASH VALUE to cover her PREMIUM if it doesn’t receive payment when due. This automatic premium loan can continue until the policy owner resumes making payments, or the policy runs out of cash value. Once all of a policy owner’s cash value is gone, if she doesn’t start paying, her policy will lapse.

Cash Option

The “cash” dividend option allows policy owners to cash out the dividends they receive.

Cash Surrender Option

The “cash surrender” non-forfeiture option allows the policy owner to receive the policy’s cash value. If this option is exercised, at this point, the policy owner no longer has coverage. Typically, 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).

Collateral Assignment

This is an 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 that’s owed. Any proceeds above the amount that’s due at the insured’s time of death will be paid to a beneficiary who’s designated by the policy owner.

Consideration Clause

This clause states a policy owner must pay a premium in exchange for the insurer’s promise to pay benefits. A policy owner’s consideration consists of completing the application and paying the initial premium. The amount and frequency of premium payments are contained in the consideration clause. An example of the clause is, “Please CONSIDER me for insurance. Here is my COMPLETED APPLICATION, INITIAL PREMIUM, including how much and how often I agree to pay. Please consider me.”

Dependent Riders (Other Insureds Rider)

Dependents may be added as additional (other) insureds through the use of a dependent rider. Other insured riders are typically used for spouses and children.

Dividend Options

These are the options that a policy owner has when receiving dividend payments from an insurance policy.

Entire Contract Provision

This provision (or clause) states the insurance policy itself, including any riders, endorsements/amendments, and the application comprises the entire contract between all parties.

Exclusions

These are features of an insurance policy which states that the policy will not cover certain risks.

Extended Term Option

This non-forfeiture option permits the policy owner to use the policy’s cash value to buy level, extended term insurance for a specified period. No further premium payments are made.

Free-Look Period

This 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.

Grace Period

This is a period after the due date of a premium during which the policy remains in force without penalty. If an insured dies during the grace period of a life insurance policy before paying the required annual premium, the beneficiary will receive the face amount of the policy minus any required premiums. For life insurance, the grace period is typically one month.

Guaranteed Insurability Rider (Future Increase Option)

This rider permits the policy owner to buy additional permanent life insurance coverage, at the insured’s attained age, at predetermined intervals without submitting proof of insurability. It also includes specific events, such as marriage and births, without requiring proof of insurability. Typically, the benefit is allowed every three years, up to the original face amount of the policy.

Incontestable Provision (Period)

This provision states that the insurance company cannot challenge the validity of the policy once the policy has been in force for a specific period (generally two years). Over the years, case law has established precedence that the incontestable clause applies to cases of fraud.

Insuring Clause (or Insuring Agreement)

This agreement is the insurer’s basic promise to pay specified benefits to a designated person in the event of a covered loss. The agreement stipulates the scope and limits of coverage, and states, “We ensure to INSURE you for…”

Misstatement of Age or Sex Provision

This provision allows the insurer to adjust the policy benefits if the insured’s age or sex is misstated on the policy application. The misstatement of age provision allows the insurer to adjust the benefits payable if the age of the insured was misstated when the application for the policy was made. At the time of application, if the insured was older than what’s shown in the policy, benefits would be reduced accordingly. The reverse is true if the insured was younger than listed in the application.

Non-Forfeiture Options

These are the options an insured has for her cash value if she terminates a policy that has a cash value. For example, “you are closing your account (surrendering your policy); what do you want us to do with your cash (so you don’t forfeit it)?” When a policy owner decides she doesn’t want her insurance policy any longer, she has the option to surrender her policy.

One-Year Term Option

This dividend option allows the policy owner to exchange the dividend for additional coverage in the form of a one-year term policy.

Paid-Up Additions Option

This dividend option allows the policy owner to exchange the dividend for an additional single payment whole life policy.

Payor Provision (Rider or Clause)

This provision waives future premiums for a juvenile life insurance policy if the person who’s responsible for paying the premiums dies or becomes disabled.

Policy Loan (Cash Withdrawal) Provisions

These provisions apply to policies that have cash value, as well as policy loan and withdrawal provisions. These policies must begin to build cash value after a certain number of years which, in most states, is three years. These loans, with interest, cannot exceed the guaranteed cash value. If the loan exceeds the guaranteed cash value, the policy is no longer in force. The policy owner has the right to the policy’s cash value.

Reduced Paid-Up Option

This non-forfeiture option allows the policy owner to reduce the policy’s benefit amount and, in turn, cease making premium payments.

Reduced Premiums Option

This dividend option allows the policy owner to return the dividend payment to the insurer in exchange for a reduction in the following year’s premium payments.

Reinstatement Provision

This provision allows an insured to put a lapsed policy back in force by producing satisfactory evidence of insurability and paying any required past-due premiums. It permits the policy owner to reinstate a policy that has lapsed as long as the policy owner can provide proof of insurability and pays all back premiums, outstanding loans, and interest.

Return of Premium Rider

This rider pays the total amount of premiums paid into the policy in addition to the face value, as long as the insured dies within a specific period that’s identified in the policy. It may also return premiums to the policy owner at the end of a specified period, if the insured is still alive.

Suicide Clause

This clause states that the policy will be voided, and no benefit will be paid, if the insured commits suicide within two years from policy issuance. The primary purpose of a suicide provision is to protect the insurer from applicants who are contemplating suicide.

Waiver of Premium Rider

This rider allows the policy owner to waive premium payments during a disability and keeps the policy in force. The waiver of premium rider is not a loan and doesn’t provide cash payments to the policy owner. The insurance company is “waiving” the premiums.” In other words, it’s just as if the policy owner made the premiums every month.