Life Insurance Policy Provisions, Riders, and Options Flashcards

Flashcards covering terms from Chapter 4: Life Insurance Policy Provisions, Riders, and Options

Activities of daily living (ADLs)

A person's essential activities that include bathing, dressing, eating, transferring, toileting, continence

Assignment

Transfer of rights of policy ownership

Contingent beneficiary

A beneficiary who has second claim to the policy proceeds after the death of the insured

NAIC

National Association of Insurance Commissioners, an organization composed of insurance commissioners from all 50 states to resolve insurance regulatory issues

Primary beneficiary

A beneficiary who has the first claim to the policy proceeds after the death of the insured

Principal amount

The face value of the policy; the original amount invested before the earnings

Trust

An arrangement in which funds or property are held by a person or corporation for the benefits of another person

Absolute Assignment

Transferring all rights of ownership to another person or entity; This is a permanent and total transfer of all the policy rights.

Collateral Assignment

Transfer of partial rights to another person. It is usually done in order to secure a loan or some other transaction.

Entire Contract Provision

This stipulates that the policy and a copy of the application, along with any riders or amendments, constitute the entire contract. No statements made before the contract was written can be used to alter the contract.

Free look provision

Allows the policyowner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium.

Grace Period

The period of time after the premium due date that the policyowner has to pay the premium before the policy lapses (usually 30 or 31 days, or one month).

Reinstatement Provision

Allows a lapsed policy to be put back in force. The maximum time limit for reinstatement is usually 3 years after the policy has lapsed.

Incontestability Clause

Prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2 years, even if there has been a material misstatement of facts or concealment of a material fact.

Exclusions

The types of risks the policy will not cover. Certain exclusions are standard for all policies, while others are attached to the policy as an exclusion rider.

Status Clause

Excludes all causes of death while the insured is on active duty in the military

Results Clause

Only excludes the death benefit if the insured is killed as a result of an act of war (declared or undeclared).

Spendthrift Clause

Protects beneficiaries from the claims of their creditors, as well as prevents the beneficiary's reckless spending of benefits by requiring that the benefits be paid in a fixed period or fixed-amount installments.

Policy Loan Option

Found only in policies that contain cash value. The policyowner is entitled to borrow an amount equal to the available cash value. Any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured’s death.

Automatic Premium Loan Provision

A special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium.

Riders

Written modifications attached to a policy that provide benefits not found in the original policy.

Waiver of Premium Rider

Waives the premium for the policy if the insured becomes totally disabled. Coverage remains in force until the insured is able to return to work.

Disability Income Rider

In the event of disability the insurer will waive the policy premiums and pay a monthly income to the insured.

Payor Benefit Rider

Primarily used with juvenile policies. If the payor becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21.

Other Insured Rider

Provides coverage for one or more family members other than the insured. The rider is usually level term insurance, attached to the base policy covering the insured.

Children's Term Rider

Allows children of the insured to be added to coverage for a limited period of time for a specified amount.

Family Term Rider

Incorporates the spouse term rider along with the children's term rider in a single rider.

Accidental Death Rider

Pays some multiple of the face amount if death is the result of an accident as defined in the policy.

Guaranteed Insurability Rider

Allows the insured to purchase additional coverage at specified future dates or events, without evidence of insurability, for an additional premium.

Cost of Living Rider

Addresses the inflation factor by automatically increasing the amount of insurance without evidence of insurability from the insured.

Return of Premium Rider

Provides that at death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary.

Accelerated Benefit/Living Needs Rider

Provides for an early payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years, or has other qualifying conditions. It does not cover disability.

Long-Term Care Rider

Provides for the payment of part of the death benefit in order to take care of the insured’s health care expenses, which are incurred in a nursing or convalescent home.

Nonforfeiture Values

Guarantees that are built into the policy that cannot be forfeited by the policyowner.

Cash Surrender Value

The policyowner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable.

Extended Term

The insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy.

Reduced Paid-Up Insurance

The policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a reduced face amount from that of the former policy.

Dividends

Paid only on participating policies. A return of excess premiums and for that reason they are not taxable to the policyowner

Cash Payment (Dividend Option)

The insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually.

Reduction of Premium Payments (Dividend Option)

The insurer uses the dividend to reduce the next year's premium.

Accumulation at Interest (Dividend Option)

The insurance company keeps the dividend in an account where it accumulates interest. The policyowner is allowed to withdraw the dividends at any time.

Paid-Up Additions (Dividend Option)

The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy.

One-Year Term Option

The insurance company uses the dividend to purchase additional insurance in the form of one-year term insurance that increases the overall policy death benefit.

Settlement Options

The methods used to pay the death benefits to a beneficiary upon the insured's death, or to pay the endowment benefit if the insured lives to the endowment date.

Lump-Sum Payment (Cash)

Upon the death of the insured, or at the point of endowment, the contract is designed to pay the proceeds in cash.

Life Income (Straight Life)

Provides recipients with an income that they cannot outlive. Installment payments are guaranteed for as long as the recipient lives, irrespective of the date of death.

Single Life

Can provide a single beneficiary income for the rest of their life. Upon the death of the beneficiary, the payments stop.

Joint and Survivor

Guarantees an income for two or more recipients for as long as they live.

Life with Period Certain

The recipient is provided with the "best of both worlds" in terms of a lifetime income and a guaranteed installment period.

Joint life with term certain policy

Pays to 2 or more persons and stops paying at the death of the first. However, if the first death occurs during the specified term, the payments will continue to the other person(s) until the end of the specified term.

Life Refund

Guarantees that the total annuity fund will be paid out to the annuitant or to the beneficiary.

Interest Only

The insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals.

Fixed-Period Installments

A specified period of years is selected, and equal installments are paid to the recipient. The payments will continue for the specified period even if the recipient dies before the end of that period.

Fixed-Amount Installments

Pays a fixed, specified amount in installments until the proceeds (principal and interest) are exhausted.

Retained Asset Accounts

An interest-bearing money market checking account that is established for the beneficiary of a life insurance policy.

What type of beneficiary can be changed at any point by the policyowner?

Revocable

When the insurer selects the extended term nonforfeiture option, the cash value will be used to purchase term insurance in what face amount?

Equal to the original policy for as long the cash values will purchase

Who cannot (beneficiary) and would not be able to receive the death benefit from the insurer in the event of the insured’s death?

A minor

What happens to the proceeds of a life insurance policy if there is no named beneficiary?

Paid to the insured’s estate

What provision allows the policyowner to reactivate a lapsed life insurance policy within a specified period of time with proof of insurability?

Reinstatement

What type of assignment is used to secure the payment of a debt with an existing life insurance policy?

Collateral assignment

Who has the right to the cash value of a life insurance policy?

Policyowner

What nonforfeiture option provides coverage for the longest period of time?

Reduced paid-up

What life policy rider allows the company to forgo collecting the premium if the insured becomes disabled?

Waiver of premium rider

Who does the common disaster clause protect?

Contingent beneficiary

What life insurance policy provision prevents an insurer from disputing or denying a claim due to misstatements on the application after a certain period of time?

Incontestability clause

What does the term double indemnity mean?

The insurer pays a benefit of double the face amount

What are policy dividends?

Return of unused premiums

When can an insurance company use suicide as a defense against paying a death claim?

Insurance typically denies claims for suicide within the first two years of the policy. Or within a specified period of time.

What life insurance policy provision states that both the policy and a copy of the application form the contract between the policyowner and the insurer?

Entire contract

What dividend option can increase the death benefit of the existing life policy?

Paid-up additions

The sole beneficiary of a life insurance policy dies before the insured. If the policyowner does not amend the beneficiary designation, what will happen to the policy’s death benefit?

The death benefit will typically go to the insured's estate

A policyowner borrowed a portion of cash value from his whole life policy. If the loan is not repaid, how will that affect the death benefit to the beneficiary?

The death benefit will be reduced by the outstanding loan amount.

What nonforfeiture option is automatically selected by the company if not chosen by the policyowner?

The extended term

Is the beneficiary required to have insurable interest in the insured?

No

What is the advantage of reinstating a life insurance policy as opposed to applying for a new one?

The policy premium will be set according to the insured’s original age

What required provision protects against unintentional policy lapse?

grace period

What happens to a policy’s cash value under an extended term nonforfeiture option?

The cash value is converted to the same face amount as in the whole life policy

What provision in a life insurance policy extends coverage beyond the premium due date?

Grace period

What are the 3 nonforfeiture options in life insurance policies?

1. cash surrender value

2. extended term

3. reduced paid-up

With the reduction of premium dividend option, how is the dividend used?

The dividend is applied to the next year’s premium, reducing it

What settlement options are available in life insurance policies?

1. lump sum/cash

2. interest only

3. fixed period

4. life income

5. fixed amount

What is the purpose of a free-look period?

To allow the insured to return the policy with a full refund

What is the name for a life insurance policy rider that provides coverage on the insured’s family members?

Other-insured rider

What term is used to describe methods of payment of the death benefit to the beneficiary upon the insured’s death?

Settlement options

To meet the requirement of the entire contract policy provision, an insurance policy must contain what?

A copy of the original insurance application

What type of beneficiary is next in line after the primary beneficiary?

Contingent beneficiary

When will a contingent beneficiary receive death benefits from a life insurance policy?

If the primary beneficiary is deceased or otherwise unable to claim them at the time of the insured's death

What is the purpose of settlement options in life insurance policies?

To determine how the death benefit will be paid to the beneficiary

An insurer has discovered a representation on a life insurance policy application regarding the insured’s age. The insured is 10 years older than he stated on his application. What will the insurer do regarding the death benefit?

Pay a reduced benefit

What is the purpose of the Automatic Premium provision?

To prevent the unintentional lapse of policy because of nonpayment of the premium

An applicant for life insurance misstated her age on the policy application. How will this affect the death benefit?

The insurer will adjust the death benefit based on the correct age of the applicant

What beneficiary designation has first claim to the death proceeds of a life insurance policy?

The primary beneficiary

What are the dividend options in life insurance policies?

1. cash

2. accumulation at interest

3. reduced premium

4. paid-up additions

5. paid-up option

6. one-year term

Which of the 2 types of policy assignments requires transfer of ALL ownership rights in the policy to a third party?

Absolute assignment

Who controls changes in premium payments, face values, and loans in a life insurance policy?

The policyholder.

Under what nonforfeiture option does the company pay the policy’s surrender value and have no further obligations to the policyowner?

Cash surrender

In the fixed-period settlement option, how will the number of installments for the death benefit proceeds determine the amount of installments?

The longer the period chosen, the smaller each installment will be

With the interest only settlement option, what happens to the policy’s death benefit?

Policy proceeds are retained by the insurance company - only the interest is paid to the beneficiary

If a settlement option is not chosen by the policyowner or the beneficiary, what option will be used by the insurer?

Lump-sum payment