Understanding Life Insurance Contractual Provisions

Chapter 4 Life Insurance Contractual Provisions

LIFE INS. CONTRACTUAL PROVISIONS 1-OWNERSHIP CLAUSE: the owner of a life insurance policy can be the insured, beneficiary, a trust, orany party. the -In most cases, the applicant, insured & owner are the same person. -Policyowner possess all contractual rights in the policy while the insured is living, that include: naming & changing the beneficiary, surrendering the policy, borrowing CV, receiving dividends, changing the owner and electing settlement beneficiary s consent). options (w/out the

LIFE INS. CONTRACTUAL PROVISIONS 2-ENTIRE-CONTRACT that the life application constitute the entire contract between the parties. CLAUSE: policy states insurance & attached Purposes of the entire contract clause: - Prevents the insurer from amending the policy w/out the knowledge or consent of the owner by changing its charteror by laws. - Protects the beneficiary.

LIFE INS. CONTRACTUAL PROVISIONS 3- INCONTESTABLE CLAUSE: stated that the insurer cannot contest (dispute) the policy after it has been in force for 2 years during the insured s lifetime. Ex: fraud: Insured said I don t have blood pressure but he has. Except: fraud of gross nature like letting someone take your medical examination, insurer won t pay, no insurable interest at inception, beneficiary take out insurance with intention of murdering the insured.

LIFE INS. CONTRACTUAL PROVISIONS 4- SUICIDE CLAUSE: states that if the insured commits suicide within years after the policy is issued, the face amount of insurance will not be paid; but only are fund of the premiums paid. Purpose: to reduce adverse selection against the insurer (individual buys insurance with intention of committing suicide).

LIFE INS. CONTRACTUAL PROVISIONS 5- GRACE PERIOD: the policyowner has a period of 31 days to pay an overdue premium & if he dies within it, the overdue premium is deducted from the policy proceeds. Purpose: to prevent the policy from lapsing if insured in a short of funds or have forgotten to pay the premium.

LIFE INS. CONTRACTUAL PROVISIONS 6- REINSTATEMENT CLAUSE:permits the owner to reinstate a lapsed policy. Requirements to reinstate a lapsed policy: 1- Evidence of insurability. 2- Overdue premiums + interest must be paid. 3- Policy loan must repaid or reinstated + interest. 4- Policy must not have been surrendered. 5- Policy must be reinstated within 3 or 5 yrs from the date of lapse.

LIFE INS. CONTRACTUAL PROVISIONS Advantage to reinstate a lapsed policy rather than purchase a new one: 1- Premium is lower because there instated policy was issued at an earlier age. 2- Acquisition expenses incurred in issuing the policy must be paid again under a new policy. 3- CV & dividends are usually higher under the reinstated policy (CV in new policy after 3 yrs).

LIFE INS. CONTRACTUAL PROVISIONS 4- Incontestable period & suicide period under the old policy may have expired. 5- Reinstated policy may contain favorable provisions, such as a 6% intereston policy loans. Disadvantage to reinstate a lapsed policy rather than purchase a new one: 1- Substantial cash amount is required if the policy lapsed several yrs ago. 2- Most life insurers have reduced their rates over time & have developed new products, so, may be it is better to buy a new one.

LIFE INS. CONTRACTUAL PROVISIONS 7- MISSTATEMENT OF AGE OR SEX CLAUSE: If the insured s age or sex is misstated, the amount payable is the amount that the premiums paid would have purchased at the correctage & sex. 8- BENEFICIARY DESIGNATION: beneficiary is the party named in the policy to receive the policy proceeds.

LIFE INS. CONTRACTUAL PROVISIONS The principal types of beneficiary: 8/1 Primary & contingent beneficiary: - A primary beneficiary is first person entitled to receive the benefits on the insured sdeath. - A contingent beneficiary is entitled to the proceeds if the primary beneficiary dies before the insured. 8/2 Revocable & irrevocable beneficiary: - A revocable beneficiary means that the policyowner reserves the right tochange him w/out his consent. - Irrevocable beneficiary cannot be changed w/out the beneficiary s consent.

LIFE INS. CONTRACTUAL PROVISIONS 8/3 Specific & class beneficiary: - A specific beneficiary means the beneficiary is specifically named & identified. - A class beneficiary is a member of a group designated as beneficiary, such as children of the insured . 9- CHANGE OF - PLAN PROVISION: allows policyowners toexchange their policies toanotherone. 10- EXCLUSIONS & RESTRICTIONS: Excludes payment if the insured dies as a direct result of specific peril (war, suicide, ).

LIFE INS. CONTRACTUAL PROVISIONS 11-PAYMENT OF PREMIUMS: can be paid annually or semiannually, quarterly, or monthly (+interest). 12-ASSIGNMENT CLAUSE: 2 types: 1/12- Absolute assignment: all ownership rights in the policy are transferred toa new owner. 2/12- Collateral assignment: the policyowner assigns a life insurance policy as collateral for a loan (rights are transferred to the creditor to protect its interest up to the loan value & the policyowner retains the remaining rights).

LIFE INS. CONTRACTUAL PROVISIONS 13- POLICY LOAN PROVISION: allows policyownerto borrow the cash value (w interest). Advantage: low rate of interest. Disadvantage: policy could lapse if the total debt exceeds the CV. 14- AUTOMATIC PREMIUM LOAN: anover due premium is automatically borrowed from CV after the grace period expires, if CV is sufficient to pay the premium. Disadvantage: may be overused & policy terminated & amount will be reduced if the premium loans are not repaid.

LIFE INS. CONTRACTUAL PROVISIONS 15- NONFORFEITURE OPTIONS: payment to a with drawing policy owner is known as a non forfeiture value or C surrenderV. There are 3 nonforfeiture options or C surrender V options: 15/1- Cash value. 15/2- Reduced paid-up insurance (small amount but same policy). 15/3- Extended term insurance (same amount but term policy).

LIFE INS. CONTRACTUAL PROVISIONS 16- DIVIDENDS OPTIONS: derived from 3 sources: expected mortality > actual; interest > expected on reserves & operating expenses < expected. dividends are Several ways in which dividends can be taken: 16/1- Cash. 16/2- Reduction of next premium 16/3- Accumulate at interest. 16/4- Paid-up additional insurance amount at pure rate & w/out insurability. 16/5- Term insurance.

LIFE INS. CONTRACTUAL PROVISIONS 17- SETTLEMENT OPTIONS: ways that the policy proceeds can be paid to beneficiary other than the lamp sum. 17/1- Interest option: interest paid periodically & insurance amountatanytime. 17/2- Fixed-period option: principal & interest paid periodicallyduring a specific time. 17/3- Fixed-amount option: specific amount from principal & interest paid periodically until it is done. 17/4- Life income options: paid as annuity in 6 ways:

LIFE INS. CONTRACTUAL PROVISIONS 1- Life income (pure): insurance amount used as single premium for annuity paid as long as beneficiary still a life. 2- Life income w certain period: paid as long as beneficiary still a life or for specific period which ever occurs last. 3- Life income w Cash Refund: if beneficiary dies before: annuities received = insurance amount, a 2nd beneficiary receives a lamp sum = insurance amount annuities received.

LIFE INS. CONTRACTUAL PROVISIONS 4- Life income w installment Refund: if beneficiary dies before: annuities received = insurance amount, a 2ndbeneficiary receives an installment = insurance amount annuities received. 5- Joint & Survivor Annuity: paid to 2 beneficiaries (husband & wife) up to second death (may reduced after firstdeath). 6- Use as trust: paid to a trustee if kids are young or needs change overtime.

LIFE INS. CONTRACTUAL PROVISIONS 18-WAIVER OF PREMIUM: due premium will be waived if the insured becomes totally & permanently disabled before a specific age (65) either for whole life or annuityor health. 19-GUARANTEED INSURABILITY (PURCHASE) OPTION: insured can buy extra amount w/out insurability in the future ( he can tafford high premium now).

LIFE INS. CONTRACTUAL PROVISIONS 20-AMOUNT OF INSURANCE: allows the policyowner to buy extra amount every 3 yrs up to some max age (45) w/out insurability. 21-ADVANCE PURCHASE PRIVILEGE: Insured can buy extra amount w/out insurability 1 or more time up to specific age or at some events (marriage, birth or adoption of child). 22-ACCIDENTAL DEATH BENEFIT: provides double or triple or more of face amount in case of death within 90 days as a result of accident before specificage.

LIFE INS. CONTRACTUAL PROVISIONS 23-COST OF LIVING: if needs changew time it provides faceamount that is tied tocostof living. 24-ACCELERATED DEATH BENEFITS: A rider that pays all or part of the face amount prior to the insured death because of some adverse medical condition & takes 3 forms: 24/1- Terminal Illness Coverage: pays 25-50% of the face amount w min & max amount in case of terminal illness with physician certificate, hospital or nursing records & medical examination paid by the insurer.

LIFE INS. CONTRACTUAL PROVISIONS Remaining death benefits, prem., CV, & dividends reduced proportionately. 24/2- Catastrophic Illness Coverage: as terminal illness if insured have one of listed catastrophic illness (stroke, cancer, ). 24/3- Long Term Care Coverage: monthly benefits paid if insured confined at hospital or during convalesce (recover) at homecondition (w conditions).