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51 Cards in this Set
- Front
- Back
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An Insurance Policy is a Legal Contract
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• Contains provisions setting forth the rights and
duties of parties to the contract • Although there are really no standard policies in life insurance (as there are in property and casualty insurance), many states have provisions that are required in all life policies • This has resulted in certain provisions having become more or less standard for life insurance policies |
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Entire Contract Clause pt. 1
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• Life insurance policy is a contract between the
insurer and the insured • Each party has obligations and rights that are spelled out in the contract • To make sure no misunderstandings occur, policy states that the policy itself and the application, when attached to the policy, make up the entire contract between the parties |
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Entire Contract Clause pt. 2
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• To make sure no misunderstandings occur,
(continued) – Nothing else (company rules, oral understandings, references, etc.) have any bearing on the contract unless they are included in the policy or the attached application – If necessary to adjust the standard contract to satisfy particular situation of a given policyowner, the alterations must be part of contract at the time policy is issued and insurer must make certain policyowner is aware and have the policyowner’s acceptance |
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Entire Contract Clause pt. 3
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• To make sure no misunderstandings occur,
(continued) – If necessary to amend the policy after issuance (for example: policyowner requests that additional coverage be added), any such amendment (also referred to as endorsements or riders) must be in writing, properly attached to the policy, and have policyowner’s acceptance in order to be considered part of the entire contract |
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Entire Contract Clause pt. 4
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• Only the insurer can make changes to a policy
– Nothing can be changed by the agent or the policyowner |
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Insuring Clause
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• Contains the basic promise of the life insurance
company to pay benefits on the insured’s death • Sets forth basic agreement between the company and the insured • Clause generally not titled as such, but usually found on the first page of the policy • Identifies the parties to the contract and other pertinent information, including – Insurer, insured, beneficiary, death benefit, premium, effective date • Typically undersigned by an officer of the insurer |
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Free Look Provision
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• Required by most states
• Gives policyowner the right to return the policy for a full premium refund if returned within a specified period if he decides not to purchase the insurance (sometimes referred to as the buyer’s remorse provision) – 10-day free look period common – Free look period begins when the policy is actually received by the policyowner |
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Consideration Clause
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• Consideration is the value given in exchange for
a contractual promise – Policyowner’s consideration is the payment of premium – Insurer’s consideration is the promise to pay the policy’s benefit • Consideration clause specifies the amount and frequency of premium payments that policyowner must pay in order to keep the insurance in force |
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Ownership Rights/Owner’s Rights pt. 1
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• Policyowner is typically also the named insured,
but in some instances may be more advantageous for the policy to be owned by a third party – Then would have three parties to the contract: insured, insurer, and policyowner |
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Ownership Rights/Owner’s Rights pt. 2
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• Policyowner has certain rights regarding the
policy which include – Name the beneficiary (receives the policy’s proceeds in the event of the death of the insured) – Change the beneficiary – Decide how the policy proceeds will be paid out – Assign the policy • Transfer rights in the policy to another party – If policy is whole life, decides use of the policy’s cash value |
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Ownership Rights/Owner’s Rights pt. 3
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• Policyowner has certain rights regarding the
policy (continued) – Decide premium payment schedule • Can also decide to change the payment schedule – Decide how to use dividends paid by the company – If policy is term, decides whether to convert to whole life or not |
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Payment of Premium pt. 1
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• Specifies when, where, and how premiums are
to be paid • Usually premiums are to be paid in advance • Various modes of paying the premium are identified – Monthly • Usually most expensive method of payment – Quarterly – Semiannually |
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Payment of Premium pt. 2
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• Various modes of paying the premium are
identified (continued) – Annually • Usually least expensive method of payment – Monthly bank plan/automatic check plan • Policyowner permits insurer to take premium from a bank account • Along with annual payment, usually less expensive method of payment |
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Grace Period
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• If policyowner does not pay premium by due
date, this provision typically allows policyowner one extra month (30 or 31 days) during which premiums may be paid to keep policy in force • If insured dies during the grace period and premium has not been paid, the policy benefit is payable, but the premium amount due will be deducted from the benefits paid to the beneficiary |
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Automatic Premium Loan Provision pt. 1
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When included, allows the insurer to
automatically use whatever portion of the cash value is needed to pay premiums if not paid by the policyowner by end of grace period – Loan taken out based on policy’s cash value • Treated as any other loan on the policy would be, including charge of interest • Keeps policy in force when it would otherwise have lapsed due to nonpayment of premiums • Policy must have sufficient cash value to pay the premium due |
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Automatic Premium Loan Provision pt. 2
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• If desired, policyowner must usually request this
provision be part of contract |
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Reinstatement pt. 1
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• Allows policyowner to reinstate a lapsed policy, if
circumstances involved are within certain limitations and all requirements are met • Limitations – There is a limited time period in which policies may be reinstated after lapsing • Typical period is three years, but could be longer in some cases – A new contestable period usually goes into effect, but usually no new suicide exclusion |
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Reinstatement pt. 2
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• Requirements
– Payment of all back premiums – Interest on past-due premiums may be assessed – Any outstanding loans on lapsed policy may be required to be paid – Proof of insurability |
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Policy Loan Provisions pt. 1
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• Found in policies that include cash values
(whole life policies) • Before available to policyowner, policy typically needs to be in force for a specified period (usually three years) • Loan amount available based upon cash value and type of policy • Insurer charges interest at a rate specified in the policy |
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Policy Loan Provisions pt. 2
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• If loan amount and interest are not paid, these
amounts are considered indebtedness against the policy and will result in a reduced death benefit • Could void policy if total amount of loan and accrued interest equals or exceeds the cash value of the policy and is not corrected in time • Insurer may defer a loan request for up to six months from date of the loan application – Unless reason for loan is to pay premiums due |
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Incontestability pt. 1
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• States that after a policy has been in force a
certain length of time, the insurer can no longer contest or void it, except for nonpayment of premiums – Limits the period in which the insurer may contest the insurance contract for misrepresentation or fraud on the part of the applicant. – Length of time usually two years for most states, but in a few states is one year |
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Incontestability pt. 2
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• After policy has been in force for specified time
period, insurer cannot contest a death payment or refuse payment of proceeds even on the basis of material misstatement, concealment, or fraud |
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Suicide Clause
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• Designed to prevent people who are
contemplating suicide from obtaining insurance • States that if insured commits suicide within a specified period, policy will be voided – Specified time period usually one or two years • Once specified period has elapsed, insurer will pay claim even if insured commits suicide • If suicide occurs within specified period, insurer usually refunds premiums paid • Applies whether the insured is sane or insane at time suicide committed |
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Assignment
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• Allows policyowner to transfer rights in the policy
to another party – Can involve either all the rights or a stipulated portion – Can be temporary (used as collateral for a loan)— known as collateral assignment – Can be permanent and irrevocable—known as absolute assignment • Any assignment policyowner decides to make must be filed in writing with the insurer or it will not be valid when the claim is paid |
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Misstatement of Age or Sex pt. 1
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• If insured’s age or sex is misstated on the
application, insurer has the right to adjust the policy’s benefits to reflect the amount of insurance that the premiums paid would have purchased on the basis of the correct age or sex of the insured • If misstatement discovered at time of insured’s death, insurer will adjust benefit accordingly – If insured paying lower premium than should have, benefits reduced – If insured paying higher premium than should have, benefits increased |
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Misstatement of Age or Sex pt. 2
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• If misstatement discovered while insured still
living, company must adjust the amount of future premiums and request payment of the additional premium the policyowner should have paid • This provision allows the insurer to make a change in the policy even though the error is discovered beyond the incontestability period— no time limit |
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Medical Examinations and Autopsy
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• Gives insurer the right and opportunity, at its
own expense, to conduct a medical examination of insured as often as reasonably required when a claim is pending and to make an autopsy in case of death if it is not forbidden by law |
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Modifications
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• States that modifications or changes in the
policy, or any agreement in connection with the policy (such as changes in the beneficiaries, face amount, or additional coverage) must be endorsed on or attached to the policy in writing over the signature of a specified officer or officers of the company • No one else has authority to make changes or agreements, to waive provisions, or to extend the time for premium payment |
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Modifications pt. 2
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• Some also specifically state that no agent has
the right to waive policy provisions, make alterations or agreements, or extend the time for payments of premiums |
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Beneficiaries pt 1
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• Beneficiary is the person or entity to whom
payment of the life insurance proceeds will be made upon the death of the insured • Provision allows the policyowner to direct the benefit payment to party of their choice • Primary beneficiary – Person or entity designated to receive the death benefit upon insured’s death |
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Beneficiaries pt 2
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• Contingent beneficiary
– Person or entity who will receive policy proceeds if primary beneficiary predeceases the insured • Tertiary beneficiary – Third party in line to receive policy proceeds if primary and contingent beneficiaries predecease the insured |
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Beneficiaries pt 3
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• A variety of different parties or interests may be
designated as beneficiaries, including – Individuals • Individual entities may be designated – Trusts • Proceeds are left to the trust, which in turn manages those proceeds according to the trust agreement |
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Beneficiaries pt 4
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• A variety of different parties or interests
(continued) – Estates • If policyowner does not name a beneficiary or all designated beneficiaries predecease insured, proceeds go to insured’s estate • Not advantageous due to tax implications involved, proceeds passing through probate, time involved |
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Beneficiaries pt 5
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• A variety of different parties or interests
(continued) – Minors • Can present problems due to – A minor would not be competent legally to receive payment of and provide receipt for the policy proceeds if the insured dies before the minor came of age – If insurer paid the policy proceeds without a proper receipt from the beneficiary, it might be liable to pay the proceeds again when the beneficiary reached age of majority |
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Beneficiaries pt 6
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• A variety of different parties or interests
(continued) • To avoid potential problems, insurer may do one of several things – May hold on to the proceeds, paying interest on them until the beneficiary reaches legal age – May insist that a trustee or guardian be appointed for the minor, someone who is legally entitled to receive and manage the policy proceeds |
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Beneficiaries pt 7
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• A variety of different parties or interests
(continued) – Class designations • Designates beneficiaries by group or by class, rather than by individual name – Example: all my living children • Saves policyowner trouble of making changes if membership group is altered because of births or deaths |
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Beneficiaries pt 8
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• Distribution by descent
– Per stirpes means “by the way of branches” or “by the root” • When beneficiaries predecease the insured, their share is passed to their children • Passes parent to child (spouses not included) • The per stirpes beneficiary receives the proceeds through the rights of another • Per stirpes method of distribution the more common approach |
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Beneficiaries pt 9
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• Distribution by descent (continued)
– Per capita means “by the person” or “by the head” • Policy proceeds paid only to the beneficiaries who are living at time of insured’s death and have been named in the policy – Any who predecease insured lose their share • The per capita beneficiary claims proceeds in own right – If no per capita or per stirpes designation made, defaults to per capita method |
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Revocable Versus Irrevocable
Beneficiary Designations |
• Revocable
– Policyowner can change the beneficiary at any time for any reason • Irrevocable – Policyowner cannot change the beneficiary without the beneficiary’s written consent • Change of beneficiary – Policyowner has right to change revocable beneficiaries as long as the insured is alive – Change of beneficiary is effective on date that request is signed by the policyowner |
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Uniform Simultaneous Death Act
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• States that if the primary beneficiary and the
insured die in the same accident and there is no proof that the beneficiary actually outlived the insured, the proceeds are paid as if the primary beneficiary had died first and the insured last – Proceeds of policy paid to any named contingent beneficiary(ies) or to the estate of the insured if contingent beneficiaries were not named – If any proof exists that primary beneficiary outlived insured, such as a witness who states he saw the primary beneficiary move after insured had died, then the proceeds must be paid to the primary beneficiary’s estate |
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Common Disaster Provision pt. 1
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• In the event of a common accident that takes the
lives of both the insured and the primary beneficiary, this provision allows policyowner to make certain that the rights of the contingent beneficiary are protected – In the event the primary beneficiary lives a short time longer than the insured, but in doing so receives the proceeds of the policy (or primary beneficiary’s estate receives benefits) |
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Common Disaster Provision pt. 2
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• This provision simply writes into a policy that in
the event of a common accident the primary beneficiary must outlive the insured a specified length of time in cases of simultaneous (or nearly simultaneous) death or the proceeds are paid to the contingent beneficiary – Policyowner requests this provision in the policy – Paves the way legally for contingent beneficiary to receive policy proceeds if both insured and primary beneficiary die within a short time of each other – States that primary beneficiary must outlive the insured by a specified period, usually 10, 15, or 30 days, to receive the proceeds |
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Spendthrift Clause pt. 1
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• One of the unique features of life insurance is
that life insurance proceeds are exempt from the claims of the insured’s (deceased’s) creditors as long as there is a named beneficiary other than the insured’s estate |
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Spendthrift Clause pt. 2
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• The spendthrift clause provides a similar
provision with reference to the beneficiary – Designed to protect the proceeds of a life insurance policy from the beneficiary’s spending habits and creditors – Insured normally elects to have this provision as part of the policy at the time of the application – As long as the proceeds are paid on one of several settlement options whereby the insurer keeps the proceeds and sends a monthly payment to the beneficiary, the amounts are exempt from the claims of the beneficiary’s creditors until they are actually received by the beneficiary |
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Facility of Payment Provision
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• Allows the insurer to select a beneficiary if the
named beneficiaries cannot be found – Provision used if a named beneficiary cannot be found after a reasonable time – Insurer normally selects someone in the insured’s immediate family bloodline • Most commonly found in group life insurance contracts and industrial life policies – Where relatively small death benefits involved |
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Exclusions and Limitations/Restrictions pt. 1
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• For many years, life insurance policies were
written with a number of exclusions, which spelled out the circumstances under which the policy proceeds would not be paid; however, today most life insurance policies no longer contain these exclusions |
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Exclusions and Limitations/Restrictions pt. 2
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• Common exclusions that do still exist in many
policies today include – Aviation exclusion • Restricts payment of benefits in case of death from aviation activities, except when the insured was a fare-paying passenger • Insurer may provide coverage through charge of a higher premium |
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Exclusions and Limitations/Restrictions pt. 3
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• Common exclusions (continued)
– War or military service • Status clause excludes payment of death benefit while insured is serving in the military • Results clause excludes payment of death benefit if insured is killed as a result of war • Many insurers today do not use this exclusion or clause, but instead limit the amount of insurance or charge a higher premium to cover the higher risk involved |
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Exclusions and Limitations/Restrictions pt. 4
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• Common exclusions (continued)
– Hazardous occupation or hobby exclusion • Most occupations today can purchase life insurance – Certain occupations, such as commercial airline pilots, may have a higher than standard rate • Much of underwriting attention instead on applicant’s avocations or hobbies – If deemed necessary for these situations, insurance coverage amount may be limited, higher premium charged, or death benefit excluded if death caused as a result of the hazardous avocation |
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Prohibited Provisions pt. 1
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• In most states, life insurance policies are not
permitted to contain provisions that – Limit the time for bringing any lawsuit against the insurance company to less than one year after the reason for the lawsuit occurs – Allow a settlement at maturity of less than the face amount plus any dividend additions, less any indebtedness to the company and any premium deductible under the policy – Allow forfeiture of the policy because of the failure to repay any policy loan or interest on the loan if the total owed is less than the loan value of the policy |
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Prohibited Provisions pt. 2
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• In most states, (continued)
– Makes the soliciting agent the agent of the person insured under the policy or making the acts or representations of the agent binding on the insured (agent must only be an agent of the company, not the insured) • The law of the state in which the policy is sold governs the contract, and the policy may not contain a provision by which the laws of the home state of the insurer govern the policy provisions |
