Cliff Notes CH 3

POLICY PROVISIONS

Standard Provisions

1) Entire contract

2) Grace period

1) policy (with riders and amendments) and copy of the application.

2) time period after the premium is due during which the policy will not lapse. Protects policyholders from losing insurance coverage (unintentional lapse of policy) if they are late on a premium payment. If insured dies during this period, death benefit is payable and any unpaid premium will be deducted from the death benefit. Automatic premium loan provision is activated at end of grade period.

POLICY PROVISIONS

Standard Provisions

3) Incontestability

4) Misstatement of age or gender

3) If an insured lies on an application for life insurance, the insurer may contest the policy within 2 years (in most states). After 2 years have passed, the policy is considered to be incontestable even if there was a material misrepresentation.

4) death benefit is adjusted according to the correct age and gender at policy issue

POLICY PROVISIONS

Standard Provisions

5) Payment of premiums

6) Reinstatement

5) If premium mode is other than annual, there will

be additional charge to offset loss of earnings since the company does not have entire premium at once,

plus additional administrative costs associated with more frequent billing

6) a policy can be restored (put back in force) within a specified period of time (max 3yrs after policy lapsed) with proof of insurability. The advantage to reinstating a lapsed policy as opposed to purchasing a new one is

that the policy will be restored to its original status, and retain all the values that were established at the

insured's issue age.

POLICY PROVISIONS

Other Provisions

1) Assignment

2) Exclusions

1) absolute (complete) or collateral (partial/temporary). Policyowner has right to transfer partial or complete ownership of policy to another person. Owner must notify insurer in writing of the assignment for it to be valid.

2) Items stipulated on contract that insurer will not provide coverage for. Ex: aviation (noncommercial), hazardous occupation, war or military service, suicide within a specified time period (2yrs).

POLICY PROVISIONS

Other Provisions

3) Suicide provision

4) Free look

5) Ownership

3) protects insurers from individuals who purchase life insurance with intention of committing suicide. Usually stipulate a period of time during which the death benefit will not be paid if the insured dies by suicide. Within 2 years following the policy effective date, insurer's liability is limited to refund of premium.

4) policy can be returned for a refund of premium within a specified time period without giving any reason. The free-look period starts upon policy delivery.

5) only the policyowner has rights. Like: right to change the beneficiary, who can take cash surrender, receiving policy's living benefits (like a loan), selecting benefit payment option & assigning policy.

POLICY PROVISIONS

Beneficiaries

(Succession = levels of priority, each level available only if beneficiary has died)

1) Designations

2) Succession: Primary

3) Succession: Contingent (secondary, tertiary)

1) individuals (including minors), classes (like "children" "members"), estates

- Beneficiary does not have to have an insurable interest in the insured.

2) first claim to the policy proceeds

3) next claim if primary beneficiary dies before insured.

- If no beneficiary has been named, the insured's estate will automatically receive the proceeds of a life

insurance policy.

POLICY PROVISIONS

Beneficiaries

(Policyowner's right to change a beneficiary:)

4) Revocable

5) Irrevocable

4) can be changed at any time by policyowner

5) has vested interest in the policy, can only be changed with the beneficiary's consent

POLICY PROVISIONS

Beneficiaries

6) Common disaster clause

- protects the rights of contingent beneficiaries; if insured and primary beneficiary died at approximately same time, it's assumed primary beneficiary died first & insured died last.

POLICY PROVISIONS

Policy Loans, Withdrawals and Partial Surrenders

1) Policy loan

2) Automatic premium loans

1) loan option found only in policies that contain cash value (whole life). Policyowner is entitled to

borrow amount equal to available cash value. Any outstanding loans, and accrued interest, will be

deducted from the policy proceeds upon the insured's death.

2) prevent unintentional policy lapse due to nonpayment of premium. Cash value is used to pay the premium.

- Insurance companies have 6 months to defer a request for a loan or cash surrender, unless reason for loan is to pay policy premium

- Insurer has 30 days to notify insured of policy lapse due to outstanding loans.

RIDERS

(Riders are attachments made to policies that either add or modify coverage.)

Disability Riders

1) Waiver of premium

2) Payor benefit

1) waives the premium if the insured becomes totally disabled; 6-month waiting period before benefits begin

2) Waives the premium until child becomes an adult. Like a waiver of premium rider; used for juvenile policies. Expires when the child reaches age 18 or 21, depending upon the state, or when the payor recovers from a disability.

RIDERS

Disability Riders

3) Disability income

4) Accelerated (Living) Benefit

3) waives the premium and pays monthly income

4) will pay out part of the proceeds prior to death for qualifying medical expenses.

- Death benefit is reduced by the amount paid plus earnings lost by the insurer

RIDERS

Disability Riders

5) Long-Term Care (LTC) coverage-

Using these benefits reduces the death benefit.

Payable Death Benefit = Face Amount - Amount withdrawn - Earnings lost by insurer in interest

RIDERS

Additional Insured

1) Spouse/other insured

2) Children's term

1) provides coverage for one or more family members other than the insured (like spouse).

2) covers all children of the insured (limited time, limited coverage) for one premium;

RIDERS

Riders that affect the Death Benefit

1) Accidental death

2) Guaranteed insurability

1) The benefit is normally two times (double indemnity) the

face amount. Does not cover a health condition, a disability, nor a hazardous hobby.

2) allows for purchase of additional insurance at specified times (usually every 3yrs between the ages of 25-40) or events (such as marriage or birth of child) without evidence of insurability for additional premium, at the insured's attained age.

RIDERS

Riders that affect the Death Benefit

3) Return of premium

4) Term Riders

3) increasing level term; death benefit payable to the beneficiary, but all premiums paid as well.

4) term insurance added to the main policy to enhance the policy or provide additional benefit/coverage.

NONFORTEITURE OPTION

(NCER)

N = Nonforfeiture

C = Cash Surrender Value

N) Triggered by policy surrender or lapse.

C) take cash, after that no more insurance. Cannot be reinstated. Policyowner surrenders policy for current cash value at a time when coverage is no longer needed or affordable. Upon receipt of the cash surrender value, if the cash value exceeds premiums paid, the excess is taxable as ordinary income. Once this option is selected, the insured is no longer covered.

NONFORTEITURE OPTION

(NCER)

E = Extended term (AUTOMATIC)

R = Reduced paid-up insurance

E) Most coverage for temporary period. Insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent whole life policy for a shorter term of coverage.

R) uses cash value as a single premium to purchase a permanent policy with a reduced face amount. This option provides coverage for the longest period of time.

NONFORTEITURE OPTION

Dividend - "Return of unused premium." Dividends are Non-Taxable. Interest is Taxable.

(CRAPO) - *Explain R and P in more detail*

C = Cash

R = Reduction

A = Accumulation at Interest

P = Paid-up additions (AUTOMATIC)

O = One-year term

R) dividend is applied to the next year's premium.

P) Each small single premium payments will increase death benefit of original same type of policy by whatever amount dividend will buy.

SETTLEMENT OPTION

Settlement

Methods used to pay death benefits to beneficiary upon insured's death, or to pay the endowment

benefit if insured lives to endowment date.

Purpose is to determine how death benefit will be paid to

beneficiary. Policyowner may select a settlement option at the time of policy application, and may also change

that option at any time during the life of the insured. Settlement options are triggered by insured's death or age 100.

Example of Settlement option is immediate annuity purchased with face amount or with cash value at

surrender.

SETTLEMENT OPTION

(CLIFF)

C = Cash-lump-sum payment (AUTOMATIC)

L = Life income (AKA straight life)

C) usually not taxable.

L) provides a monthly income the beneficiary cannot outlive;

SETTLEMENT OPTION

(CLIFF)

I = Interest only

F = Fixed period installments (AKA period certain)

F = Fixed amount (don't need to answer for this one)

I) insurer retains the principal and only pays out interest. Some $ now but not all yet. Beneficiary will be responsible to pay taxes on interest.

F) payments for a specified time period until all the

proceeds are paid out. The longer the period selected, the smaller each installment will be.