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23 Cards in this Set
- Front
- Back
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Rights of Ownership |
• The right to designate and change the beneficiary of the policy proceeds • The right to select how the death proceeds will be paid to the beneficiary • The right to cancel the policy and select a nonforfeiture option • The right to assign ownership of the policy to someone else |
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Entire Contract Provision |
1) States that the policy document, the application (which is attached to the policy), and any attached riders constitute the entire contract. 2) Nothing may be "incorporated by reference," meaning that the policy cannot refer to any outside documents as being part of the contract. 3) Prohibits the insurer from making any changes to the policy, either through policy revisions or changes in the company's bylaws, after the policy has been issued. 4) Does not prevent a mutually agreeable change from being made to the policy if the policy specifically provides a means for modifying the contract after it has been issued (for example, changing the face amount of an adjustable life policy). |
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Insuring Clause |
1) Sets forth the company's basic promise to pay benefits upon the insured's death. 2) Not actually titled as such, but appears on the cover of the policy. Example: The Insurance Company agrees, in accordance with the provisions of this policy, to pay to the beneficiary the death proceeds upon receipt at the Principal Office of due proof of the insured's death prior to the maturity date. Further, the Company agrees to pay the surrender value to the owner if the insured is alive on the maturity date." The insuring clause is typically undersigned by the president and secretary of the insurance company. |
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Owner's Rights Provisions |
The owner’s rights provision defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy. |
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Free-Look Provision |
The free-look provision, required by most states, gives policyowners the right to return the policy for a full premium refund within a limited period of time after the delivery of the policy. |
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Consideration Clause |
1) Consideration is the value given in exchange for a contractual promise. 2) States that the policyowner's consideration consists of completing the application and paying the initialpremium. 3) Specifies the amount and frequency of premium payments that the policyowners must make to keep the insurance in force. |
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Grace Period Provision |
1) Protects the insured. 2) If there is a slight lapse in the payment of a premium, it is to prevent the life insurance company from forcing the insured to provide insurability again. 3) Monthly premium grace period is one month, but no less than 30 days. If an insured dies during the grace period and the premium has not been paid, the policy benefit is payable. However, the premium amount due is deducted from the death benefits paid to the beneficiary. |
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Reinstatement Provision |
1) Policy may lapse, either deliberately or unintentionally. 2) 3-7 years, then after reinstatement no more suicide exclusion period 3) In cases where a policyowner wishes to reinstate a lapsed policy, the reinstatement provision allows the policyowner to do so with some limitations: With reinstatement, a policy is restored to its original status and its values are brought up to date. Most insurers require the following to reinstate a lapsed policy: • All back premiums must be paid • Interest on past-due premiums may be required to be paid • Any outstanding loans on the lapsed policy may be required to be paid • The policyowner typically will be asked to prove insurability |
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Policy Loan Provision |
1) State law: policyowners may borrow money from the cash values of their policies if they wish to do so. 2) Advance on proceeds than a true loan. 3) May not be "called" by the company 4) Can be repaid at any time by the policy owners. 5) If not repaid by the time the insured dies, the loan balance and any interest accrued are deducted from the policy proceeds at the time of claim. 6) If the policy is surrendered for cash, the cash value available to the policyowner is reduced by the amount of any outstanding loan plus interest. When a life insurance policyowner obtains a policy loan, the collateral for the loan is the cash value of the policy • Interest rates on policy loans vary, but most states stipulate a maximum allowable rate. Some newer policies are issued with a variable interest rate tied to the Moody's corporate bond index. • If the policyowner does not make a scheduled interest payment on a policy loan, the amount of interest due will be added to the loan balance • In the event a policy loan plus interest exceeds a life insurance policy's cash value, the policy is no longer in force |
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Incontestable Clause |
1) After a certain period of time has elapsed (usually two yearsfrom the issue date), the insurer no longer has the right to contest the validity of the life insurance policy so long as the contract continues in force. 2) After the policy has been in force for the specified term, company cannot contest a death claim or refuse payment of the proceeds even on the basis of a material misstatement, concealment, or fraud. 3) Even if the insurer learns that an error was deliberately made on the application, it must pay the death benefit at the insured's death if the policy has passed the contestable period. • The incontestable clause applies to the policy face amount plus any additional riders that are payable at death • The incontestable clause allows an insurer to contest a claim during the contestable period Three scenarios this doesn't apply: • Impersonation. When application for insurance is made by one person but another person signs the application or takes the medical exam, the insurer can contest the policy and its claim. • No insurable interest. If no insurable interest existed between the applicant and the insured at the inception of the policy, the contract is not valid to begin with. As such, the insurer can contest the policy at any time.• Intent to murder. If it is proven that the applicant applied for the policy with the intent of murdering the insured for the proceeds, the insurance company can contest the policy and its claim.Since the policy did not have a legal purpose from the start, the insurance company may simply deny coverage. The policyowner is powerless to enforce such a claim as no court of law will force an insurer to provide coverage under these circumstances. |
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Assignment Provision |
1) Transfer of ownership is known as assignment. 2) Sets forth the procedure necessary for ownership transfer. 3) Usually requires that the policyowner notify the company in writing of the assignment. 4) Company then accepts the validity of the transfer without question. 5) Policyowner does not need the insurer's permission to assign a policy. 6) New owner is known as the assignee |
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Two Types of Assignments |
1) Absolute
2) Collateral |
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Absolute Assignment |
1) Transfer is complete and irrevocable, 2) Assignee receives full control over the policy and full rights to its benefits. |
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Collateral Assignment |
1) Policy is assigned to a creditor as security, or collateral, for a debt. 2) If the insured dies, the creditor is entitled to be reimbursed out of the benefit proceeds for the amount owed. 3) The insured’s beneficiary is then entitled to any excess of policy proceeds over the amount due to the creditor. |
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Accelerated Benefits Provision |
1) Standard in life insurance policies. 2) Provide for the early payment of some portion of the policy face amount should the insured suffer from a terminal illness or injury. 3) The death benefit, minus the accelerated payment, is still payable. Example: a $100,000 policy that provides for a 75% accelerated benefit would pay up to $75,000 to the terminally ill insured, with the remaining $25,000 payable as a death benefit to the beneficiary when the insured dies. Accelerated payment can be made in a lump sum or in monthly installments over a special period, such as one year. This provision is given without an increase in premium. |
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Suicide Provision |
1) Protects the insurer against the purchase of a policy in contemplation of suicide. 2) Policy discourages suicide by stipulating a period of time (usually one or two years from the date of policy issue) during which the death benefit will not be paid if the insured commits suicide. 3) If that happens, the premiums paid for the policy will be refunded. 4) Of course, if an insured takes his own life after the policy has been in force for the period specified in the suicide clause, the company will pay the entire proceeds, just as if death were from a natural cause. |
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Misstatement of Age or Sex Provision |
1) Guards against a misunderstanding about the applicant’s age, the company reserves the right to make an adjustment if the age of the insured is misstated. 2) Likewise, an adjustment is made if an applicant's sex is incorrectly indicated in a policy because, age for age, premium rates for females generally are lower than for males. 3) Normally, such adjustments are made either in the premium charged or in the amount of insurance. 4) Assume an error in age is discovered after the death of an insured. If the insured was younger than the policy showed, the amount of proceeds would be increased to a sum the premium paid would have bought at the correct age. If the insured was older than the policy indicated, the amount of proceeds would be decreased to whatever the premium paid would have purchased at the correct age. 5) If an error is discovered while the insured is living, the premium will be adjusted downward if the insured is younger than the policy shows and a refund of the premium overpayments will be made. By the same token, if the insured is older than the policy indicates, the company will either adjust the premium upward and require the difference in premium or reduce the amount of insurance to what it should be for the amount of premium being paid. |
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Automatic Premium Loan Provision |
1) Authorizes the insurer to withdraw from the policy’s cash value the amount of overdue premium if the premium has not been paid by the end of the grace period. |
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Other Policy Provisions |
1) Two additional provisions that appear in all policies. 2) First is beneficiary designation, where the policyowner indicates who is to receive the proceeds. 3) The second is settlement options, where the ways in which the proceeds can be paid out, or "settled", are explained. Beneficiaries and settlement options are discussed later. |
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Discretionary Provision |
1) Designed to protect the insurance company. 2) A Discretionary provision gives discretionary authority to the insurer when determining the eligibility of an insuredfor benefits under the policy. 3) Limits the way a court can review a claim denial and makes it difficult forthe court to conduct a fair review of the claim. 4) Some states have enacted laws that prohibit Discretionary provisionsbecause they are |
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Common exclusions as riders |
• War. This exclusion provides that the death benefit will not be paid if the insured dies as a result of war. This is typically called the results clause. • Aviation. This exclusion is found in older policies. Few policies issued today exclude death as a result of commercial aviation. However, some insurers will exclude aviation deaths for other than farepaying passengers. • Hazardous occupations or hobbies. Individuals who have hazardous occupations or engage in hazardous hobbies may find that their life insurance policies will not pay if death was a result of their occupation or hobby. However, sometimes these risks can be covered with an increased premium charged. •Commission of a felony. Some contracts exclude death when it results from the insured committing a felony. •Suicide. As previously noted, almost all policies exclude payment of the benefit if the insured commits suicide during the specified time period. After that period passes, death by suicide is covered. |
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Cash Surrender Option |
1) Policyowners may request an immediate cash payment of their cash values when their policies are surrendered. 2) The amount of cash value the policyowner receives is reduced by any outstanding policy loans or debts. 3) Insurers are required to make cash surrender values available for ordinary whole life insurance after the first three policy years. However, most policies begin to generate cash values in as little as one year. • Most states permit insurers to postpone payment of cash surrender values for up to six months after policyowners request payment. This is stated in the delayed payment provision. • Some policies require a penalty to be paid if a policy is surrendered in its early years. These surrender charges, sometimes referred to as a “rear-end load”, are deducted from the cash value when the policy is discontinued. • The cost recovery rule states that when a life policy is surrendered for its cash value, the cost basis (total premiumspaid) is exempt from taxation • A partial surrender can allow the policyowner to withdraw the policy's cash value interest free |
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Reduced Paid-Up Option |
1) Second nonforfeiture option is to take a paid-up policy for a reduced face amount of insurance.
2) Policyowner does not pay any more premiums but still retains some amount of life insurance. 3) In essence the cash value is used as the premium for a single-premium whole life policy at a lesser face amount than the original policy. |
