Life Insurance Contract (Section II)

Beneficiary

Person or organization designated by a policy owner to receive a life policy's death benefit proceeds upon insured's death.

Primary Beneficiary

- The first person(s) named to receive the death benefit at the time of insured's death.

- Must be living at the time of insured's death.

- Can be an individual or more than one person.

- Trusts and charities can also be named as beneficiaries.

Contingent Beneficiary

(Successor Beneficiary)

(Secondary Beneficiary)

- The person(s) named to receive the death benefit upon insured's death if no PRIMARY beneficiary is living.

- Must be living at the time of insured's death.

Final Beneficiary

(Tertiary Beneficiary)

The person(s) named to receive the death benefit upon insured's death if no PRIMARY or CONTINGENT (aka SUCCESSOR or SECONDARY) beneficiaries are living.

- Must be living at the time of insured's death.

Class Beneficiary Designation

- A beneficiary designation which names the beneficiary as a group (or class) instead of naming each person separately.

- For example, Mr. Policy Owner could list his primary beneficiary as: “Children of Insured.”

- This is a simpler way to name his children as beneficiary compared to having to list each child by name. It also allows for any children born or adopted AFTER the designation is made to automatically be included as beneficiary

Per Capita

vs.

Per Stirpes

Per Capita - policy proceeds are divided equally among living beneficiaries of the class

Per Stirpes - a deceased beneficiary’s share of proceeds are passed down the bloodline to his/her heirs

Revocable Beneficiary

- Type of beneficiary designation which grants NO rights in the life policy until AFTER the insured dies.

- Can be changed (or revoked) at any time by the policy owner while the insured is still alive.

Irrevocable Beneficiary

Type of beneficiary designation that gives beneficiary a vested or current interest in the policy, even while insured is alive.

Irrevocable Beneficiary must give written consent for policy owner to:

- Change the beneficiary designation

- Surrender the policy

- Make a policy loan

- Make a withdrawal (UL policies)

- Make collateral assignment on policy

Estate as Beneficiary

Naming one's Estate as their life insurance policy beneficiary may subject that life policy's death benefit proceeds to probate which can be costly and slow and allow creditors to make claims against the proceeds.

Common Disaster Clause

Provision that states when the Insured and Primary Beneficiary both die simultaneously and it is impossible to determine who died first, the Insured will be presumed to have survived the Primary Beneficiary so that proceeds will be paid to Contingent Beneficiary (or Insured’s estate if no Contingent).

- Purpose is to prevent a death benefit from being paid to a beneficiary who outlives the insured only for a short period of time.

Survivorship Clause

Life policy provision that specifies an amount of time by which a Beneficiary must outlive the Insured in order to receive the policy proceeds. (aka Time or Delayed-Payment Clause)

Example: Policy proceeds will be payable to a designated Beneficiary only if the Beneficiary survives the Insured by 30 days.

Spendthrift Clause

Provision that prevents beneficiary’s creditors from being able to make claims on death benefit before they are received

> Creditors cannot take legal action in an attempt to force the insurer to pay the proceeds directly to them and not the beneficiary

Life Settlement Options

Refers to the different methods for paying out a death benefit to beneficiaries when insured dies.Settlement Options include:

- Interest Only

- Fixed Amount

- Fixed Period

- Lump Sum

- Life Income

(Hint: IFFLL Tower)

Lump Sum

- Life settlement option in which the entire death benefit is paid to the beneficiary in one (lump sum) payment.

- This is usually the automatic option when a settlement option has not been chosen by the policy owner or the beneficiary.

Life Income

Policy proceeds retained by insurer and annuitized (i.e. converted to series of payments) to provide lifetime income for beneficiary.

Interest Only

Life settlement option in which policy proceeds (principal) are held in an account with the insurer and periodic payments of interest are made to the beneficiary (monthly, quarterly, semi-annually, annually).

Principal may be paid out to beneficiary at a later date or pass on to a contingent beneficiary, depending on policy owner's instructions.

Fixed Amount

Life settlement option in which fixed amounts are paid to the beneficiary at specified intervals (monthly, quarterly, semi-annually or annually) until the principal and interest are depleted.

Fixed Period

Life settlement option in which installments are paid to the beneficiary over a fixed number of years.Installment amount based on amount of policy proceeds, interest and length of period chosen.

Grace Period

(Life Insurance)

A contractual provision in life insurance contracts that continues coverage under the policy for 60 days AFTER the premium due date when the premium is not paid.

Policy Loan

Loan made by insurer to policyowner that uses life policy's cash value (for permanent plans) as collateral

> Loan Interest accrues

> No fixed time for repayment

> Upon insured's death any outstanding loan (and accrued interest) will be deducted from policy's face amount to arrive at death benefit (limit of liability) payable to beneficiary

Automatic Premium Loan Provision

(APL)

Provision in whole life policies that can be elected by policy owner which authorizes insurer to pay any premium due at the end of the grace period from policy's cash value if premium has not been paid in order to prevent the policy from lapsing.

Reinstatement Provision

Spells out requirements that must be satisfied for insurer to consider reinstating a lapsed policy.

> Overdue premiums + interest must be submitted

> Policy loans + loan interested must be repaid

> 2-year Incontestability and Suicide provisions start all over again

** Reinstatement NOT guaranteed!!!**

Incontestability Clause

Waives most of the insurance company's rights to dispute the validity of the contract after it has been in force for 2 years

Suicide Clause

Limits the insurance company's liability to a refund of premium if the insured commits suicide within the first 2 years of the policy's effective date.

Misstatement of Age or Sex

Life policy provision that says if the insured's age or sex is discovered to be different from what was on the application an adjustment will be made to the policy's coverage based on the correct age or sex.

Nonforfeiture Options

Legally required options for using the cash value of whole life policies.

> Reduced Paid-up

> Extended Term

> Cash Surrender

(Hint: "My life is a REC!")

Reduced Paid-up

Nonforfeiture option in which the whole life policy's cash value is used as a single premium payment to fully pay up the policy with a reduced face amount.

Extended Term

Nonforfeiture option in which the whole life policy's cash value is used as a single premium to buy term insurance with the same death benefit as the whole life policy.

Length of term depends on many factors and can be found in a schedule within the policy.

Cash Surrender

Nonforfeiture option in which the whole life policy is terminated and the cash surrender value is paid to the policy owner.

Because some policies have surrender charges that may apply, the cash surrender value may be less than the policy's actual cash value.

Policy Dividend

- A non-guaranteed return of premium paid to a policy owner out of an insurance company's surplus (profits).

- Can be paid out on par (participating) life policies.

Dividend Options

> One Year Term

> Cash Payment

> Reduce Premium

> Accumulate at Interest

> Paid-up Additions

(Hint: O CRAP!)

Cash Payment

(Dividend Option)

Dividend is simply paid out to the policy owner in cash.

Accumulate at Interest

(Dividend Option)

Dividend is retained by insurer in a special account that earns interest for the policy owner.

Like a savings account in a bank, the policy owner can make withdrawals from the account anytime.

Paid-up Additions

(Dividend Option)

Dividend is used as a single premium to purchase additional paid-up whole life insurance.

(It's like using the dividend to purchase a mini single premium whole life policy.)

Reduce Premium

(Dividend Option)

Dividend will be applied to reduce the premium that is due on the policy anniversary.

One Year Term Insurance

(Dividend Option)

Dividend is used to purchase One Year Term coverage. After the one year term is up the One Year Term coverage expires.

Par Policy

(Participating Policy)

Describes a life policy that is eligible to receive policy dividends.

(“Par” is short for “participating”)

Non-par Policy

(Non-participating Policy)

Describes a life policy that is NOT eligible to receive policy dividends.

(“Non-par” short for “non-participating)

Life Policy Exclusions

War Exclusion – if included in a life insurance policy, it excludes coverage if insured dies from any act of war.

Aviation Exclusion – if included in a life insurance policy, it excludes coverage if insured dies in an aviation-related accident other than as a fare-paying passenger on a scheduled airline.

Life Settlement Broker

Life Settlement Broker - licensed to act on behalf of an Owner of a life insurance policy to negotiate a life settlement contract between the Owner and a Life Settlement Provider.

> Life Settlement – contract in which Life policyowner (Owner) assigns ownership to Provider in exchange for a sum of money that is less than policy’s death benefit, but more than its cash surrender value.

Life Settlements

vs.

Stranger-Originated Life Insurance

(STOLI)

> Both involve transfer of Owner’s life policy to 3rd party in exchange for $

> Life Settlement: Life policy already issued and was originally purchased for traditional reasons (e.g. protect heirs) (LEGAL)

> STOLI: Investors solicit individual to buy new life policy for sole purpose of eventually selling it to them (ILLEGAL)