Standard Policy Provisions

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  1. _____ provision states that the contract is made up of the policy itself, the attached application, and any riders or endorsements. The contract cannot be changed arbitrarily orunilaterally by either party after the contract has been issued.
    1. No changes are valid unless approved and endorsed by an executive officer of theinsurer.
    2. All statements made by the applicant on the application are deemed to be representations (statements believed to be true) and not warranties (statements guaranteed to be true).
    3. A "last will and testament" does not supersede an insurance contract.
    Entire Contract
  2. _____ tells the policy owner that the insurer agrees to pay a death benefit to the beneficiary as long as the policy owner has met all of the provisions, i.e., premium payments. The insuring agreement (clause) is usually on the first page of the policy and is theinsurance company's promise to pay. This is also known as the “heart of the contract” and itlists the terms, conditions, benefits, and obligations of the parties to the contract.
    Insuring Agreement
  3. The _____'s rights include:
    1. Determining the disposition of proceeds
    2. Assignment
    3. Rights to the cash value of the policy
    4. Choosing the premium payment mode
    5. Choosing or changing the beneficiary
    6. Canceling and renewing the policy
    7. Deciding how dividends will be used
    The Owner (a.k.a. owner/applicant or Ownership Clause)
  4. _____ states that after a policy has been in force for over two years, the insurance company cannot contest or void the policy except for nonpayment of premium or fraud committed by the insured. If there is a misrepresentation (a lie) or a concealment(withholding of facts) discovered in the first two years, it must be material for the insurance company to deny coverage or to cancel the policy.

    **Material means that it is a fact that is important enough that had the insurance company known it, it could have changed either the decision to issue the insurance policy or to issue the policy on substantially different terms. The misstated information is said to be material only if the truth would have resulted in the insurer making a different underwriting decision. (i.e., rate–up, a surcharge, or exclusion rider).

    **Lying about smoking, age, or gender is NOT considered material. However, the coverage will be adjusted if one lies about age or gender, and the non-smoking discountwill be removed if one lies about smoking.

    **The insurance company must return all of the premiums (no interest) paid if a claim is denied or a policy is canceled during the first 2 years of the contract.
    Incontestability Clause
  5. _____ The period of time (usually 31 days) after premium is due but has not yet been paid, that coverage is still in effect. If the insured dies in the grace period, death proceeds are paid to the beneficiary, but the insurance company subtracts out the past due premium.
    Grace Period
  6. _____ allows a canceled policy to be put back in force:
     The owner must pay all back premiums plus interest.
     The insured must show proof of insurability.
     No more than three years may have passed from the lapsed date.
     _____ starts a new incontestability period and a new suicide clause.
    _____ is not available if the policy has been surrendered for its cash value.
     If the policy is reinstated, it is usually reinstated back to the age of the insured when the policy was issued.
  7. _____ by the applicant would be cause for adjustments to be made to the death benefit. A misstatement of age or gender is not material and will not cause the voiding of a claim or cancellation of a policy. This clause does not have the two year contestability limit for discovery.
    Misstatement of Age or Gender (Sex)
  8. _____ clause is when the policy owner transfers the rights in a policy either as collateral or as a gift:

    Collateral - transfers part of the rights to supply security (collateral) for a loan. Thisis a temporary and partial assignment; only some of the "incidents of ownership"are transferred.

    Absolute - transfers all of the rights to another. Used for giving life insurance as agift so that a tax deduction, in the amount of the cash value, may be taken by theowner. This is a permanent and complete assignment and all "incidents of ownership" are transferred.

    Selling the ownership rights in an insurance policy to an individual investor or investment group is also a type of assignment. This is sometimes referred to asstranger owned life insurance (STOLI) or investor owned life insurance (IOLI). Thesetopics will be covered in a different chapter in this text.
  9. _____  regulation gives the policy owner a minimum of 10 days to examine the policy from the date it is received by the policy owner. All premiums must be refunded within 30 days or the insurance company must pay an additional 10% penalty to the owner should the policy be returned.
    Free Look
  10. ______ are allowed for non-payment of premiums after giving the owner at least a10-day written notice.
  11. _____ identifies that the policy owner must pay premiums as value to the insurance company for the insurance company’s promise to pay. It also states the mode and amount of the premium payment.
    Consideration Clause (sometimes called the Premium Clause)
  12. _____ excludes death due to suicide for a maximum of two (2) years from the effective date of the policy. All premiums paid (no interest) must be refunded to the beneficiary if the insured commits suicide within the first two years of the contract.

     The suicide clause is intended to prevent adverse selection; that is, the two year limit lets the company protect itself financially against situations where life insurance would be purchased in direct contemplation of suicide.
    The Suicide Clause
  13. The ______ states – “This policy is subject to the laws ofthe state where the insured resides. If any part of the policy does not comply with the law, it will be treated by us as if it did.”
    Conformity with State Statutes (provision)
  14. _____ must be included in the policy which prescribes that a policy's cash value must be made available to a policy owner should he stop paying the premiums on his policy. 

    A permanent policy must have cash value by the end of its third year. As the cash value builds each year, so do the values associated with the NFOs. The three options include:

     1. Cash Surrender
     2. Reduced Paid-Up Insurance
     3. Extended Term Insurance (a.k.a. The Automatic Option):
    Non-Forfeiture Options (a.k.a. NFO) three types
  15. Non-Forfeiture Options (a.k.a. NFO)
     1. _____ allows the owner the option to surrender the policy (send back to the company) at any time in return for its cash value. This in effect terminates the policy and ends the promise to pay a death benefit. The insurance company has up to six (6) months to pay the cash to the owner. This is known as the Delay Clause. A policy surrendered for its cash value cannot be reinstated.
    Cash Surrender
  16. Non-Forfeiture Options (a.k.a. NFO)

     2. _____  (the same as dividend paid-up): The cash value is used as a single (NET) premium using the insured's attained age to buy paid-up coverage on a non-medical basis. The policy owner will receive a policy that is paid in full for life.
    Reduced Paid-Up Insurance
  17.  3. _____: The policy owner uses cash value (minus any loan amounts) as premium to purchase term insurance in the original face amount for as long as the cash value (used to pay the premiums) lasts. The insured's attained age is used to calculate the NET premium each year. Riders on the original policy are usually not continued.

    This option goes into effect automatically if no other option is chosen by the owner.
    Non-Forfeiture Options (a.k.a. NFO)

    Extended Term Insurance (a.k.a. The Automatic Option)
  18. ____ section of a policy spells out circumstances under which the policy proceeds would not be paid. Should a death claim be denied because the death of the insured was due to a cause or situation “excluded” in the policy, there will be NO refund of paid premiums. Types of exclusions may include, but are not limited, to:

     The War Exclusion excludes coverage if death is a result of war, whether declared or undeclared. Its main purpose is to control adverse selection.

     The Aviation Exclusion excludes coverage if death occurs while flying other than as a fare-paying passenger on an airplane.

     Hazardous Occupation or Hobby, Foreign Travel or Foreign Residence Exclusions.
    Policy Exclusions
  19. The owner of a policy that builds cash value may make use of the equity in the policy without cashing it in; they may do so through a policy loan. The maximum amount which can be borrowed from a permanent life policy is the amount of the cash value.Should the loan plus interest meet or exceed the cash value, the policy will terminate.

     Loan Interest....The company assumes that funds will earn a certain rate of returnwhen it designs its policies. If money is withdrawn from the company in the form of aloan, it is no longer available for investment. Therefore, the company must chargeinterest on the funds it loans in order to meet its obligations.

     Nonpayment of Policy Loans results in the insurance company either deducting the loan plus interest from cash value upon surrender, or if the insured dies, the loan plus interest will be subtracted from the proceeds which are paid to the beneficiary.

     Automatic Premium Loan, a.k.a. A.P.L., authorizes the insurer to use the policycash values to pay overdue premiums to keep the policy in-force. This option must beadded at the request of the policy owner. The loan plus interest must be re-paid.
    Loan Provisions
  20. _____, gives the insurance company the right to defer loans and/or cash payments to the policy owner for up to six months following the owner's request. This provision is intended to protect the companyagainst runs on the company's cash reserves. The following are exceptions:

     Death benefits must be paid immediately upon proper proof-of-loss.

     The insurer cannot defer loans if they are for making premium payments.
    The Right of the Insurer to Defer Clause, (a.k.a. Delay Clause)
  21. When a policy participates in the favorable investment, mortality, and expense experience of the insurer, the policy owner receives _____ as a refund of an overcharge in premiums.  _____ are not taxable as income to the owner since they are a return of after-taxed dollars. _____ cannot be guaranteed to the insured (constitutes Illegal Rebating).Companies that participate (pay _____) are also called participating companies and issue"par" policies. Mutual companies are owned by the policy owners, and thus, will pay dividends to the policy owners
    Dividends (definition)
  22. Dividends
    1. Cash
    2. Accumulation of Interest
    3. Paid-Up Addition Option
    4. Reduced Premium Option

    5. One-Year Option (a.k.a. Fifth Option)
    Four Basic Options + The Fifth Option:

    1. ____ is paid annually on the renewal date (a.k.a. anniversary date).

    2. _____ means the money stays with the insurance company and earns competitive interest rates on those dividends. The money is not put into the cash value account, so it can be withdrawn at anytime without affecting the cash values. However, the interest earned on the dividend is taxable.
    Accumulation of Interest

    3. ____- An option whereby the insured can leave dividends with the insurer, and each dividend is used to buy a single premium life insurance policy for whatever amount it will purchase:

     Dividends are used as a single (NET) premium to purchase additional coverage that is fully paid for

     Must be the same type of coverage as the original policy

     Uses attained age for premium calculation

     Uses net premium to buy the coverage

     No evidence of insurability is needed

     Can only use current or future dividends to purchase paid-up additions
    Paid-Up Addition Option

    4. _____ is where dividends are used to reduce the next premium payment.
    Reduced Premium Option

    5. _____ is used to buy one year term coverage.

     The amount of the term coverage may be limited to the cash value in the policy

     Uses attained age and uses net premiums

     No evidence of insurability is required

     This term coverage is not renewable nor convertible
    One-Year Option (a.k.a. Fifth Option)
  28. Choosing or changing the _____ is permitted only by the policy owner. It must be in writing to the insurer with an endorsement issued by the insurer acknowledging the change.
    ↣ An endorsement is a provision added to a policy which broadens, restricts or changes a contract. An endorsement is not valid unless signed by an executive officer of the company and is made part of the policy.

    Special Note: Since a _____ has no ownership rights in the life insurance contract,a _____’s signature IS NOT needed on the application for insurance. A life insurance contract does not require a _____ even be listed on the application. If there is a listed _____, they are NOT required to sign the application.
  29. 1. Named Party
    2. Class  
    3. An Estate, Trust or Company
    4. A Minor as _____ NOT WISE.
    5. Revocable _____
    6. IRrevocable _____
    Types of Beneficiaries
  30. Types of Beneficiaries

     _____ specifies a person or persons by name to receive the death proceeds when the insured dies. For example, Jane Doe, spouse. John and Jane Doe, son and daughter.
    Named Party
  31. Types of Beneficiaries

     _____ designates a group rather than an individual name. This saves having to change beneficiary designations if someone in the group (such as children) dies or because of additions due to birth. For example, all my children or all my grandchildren.
  32. Types of Beneficiaries

     An _____, _____ or _____ may be named as a beneficiary to receive the policy proceeds. There are drawbacks as well as advantages to these designations.
    Estate, Trust or Company
  33. Types of Beneficiaries

     A _____ as Beneficiary is not wise because minors are not legally competent to receive policy proceeds. Proceeds can be paid to a properly appointed guardian or trustee for the minor. If the insurer holds the proceeds, interest on the proceeds must be paid.
  34. Types of Beneficiaries

     _____ beneficiary may be changed at anytime by the policy owner, in writing, to the insurance company. The contract is changed by an endorsement to the policy.
  35. Types of Beneficiaries

     _____ beneficiary may only be changed with written consent from the _____ beneficiary and the policy owner.

    No assignment, loans, or withdrawals are allowed without the written consent of the irrevocable beneficiary.

     The owner may still choose dividend options, including the cash option, and may still change his premium payment mode.

     The _____ beneficiary has a vested right in the Face Value only and may continue to make the premium payments to keep the policy in force if it lapses,and is entitled to a copy of the policy. However, the irrevocable beneficiary has no ownership rights in the contract.
  36. Types of Beneficiaries

      ____/____/____ Beneficiary:

     The ____ beneficiary is the first in line to receive the death proceeds when the insured dies.

     The _____ beneficiary only gets the death benefit if the primary beneficiary dies before the insured or at the same time as the insured dies.

     If the insured and primary beneficiary die in the same accident and there is no evidence that the primary beneficiary outlived the insured, proceeds will go to the _____ beneficiary.
     The ____ beneficiary is third in line for the death benefits in the event that boththe primary and contingent beneficiaries predecease the insured.
  37. This provision contains a short-term survivorship clause which states that if the insured and primary beneficiary die due to the same accident but the primary beneficiary dies within a certain number of days after the insured (10, 20 or 30 days and it is stated in the contract), then the contingent beneficiary will receive the proceeds just as if the primary beneficiary had died first.They would not have to die at the same time, but from the same accident.
    Common Disaster Provision...
  38. Part of the insuring clause states that the company promises to pay the policy benefits in consideration of the premium payments. The consideration clause identifies the fact that the policy owner must pay something of value (premiums) for the insurer's promise to pay benefits.

    The more often premium payments are made, the more costly to the insured. When the insurance company designs its policies, it expects the annual premium up-front, so if it is paid any other way, the insured will make-up the difference for not having paid all the premium in the beginning. (more premium is being paid to the insurer)
    Premium Payment (sometimes found in the Consideration Clause)
  39.  Annual (least expensive)
     Semi-annual
     Quarterly
     Monthly (direct billing) (most expensive)
     Pre-authorized checking (automatically withdrawn)
    Premium modes or methods include:
Card Set:
Standard Policy Provisions
2014-12-14 04:02:49
Life Insurance
Life Policy Provisions - Standard Policy Provisions
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