Basic Principles of Life and Health Insurance and Annuities Part 2

12 Life Insurance Policies TYPES OF LIFE INSURANCE POLICIES 1. Industrial life: insurance issues very small face amounts, such as $1,000 or $2,000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage. 2. Group life: insurance written for members of a group, such as a place of employment, association, or a union. Coverage is provided to the members of that group under one master contract. The group is underwritten as a whole, not on each individual member. One of the benefits of group life coverage is usually there is no evidence of insurability required. 3. Ordinary life: Is made up of several types of individual life insurance, such as temporary (term), permanent (whole). Term life insurance gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period of time because it has a TERMination date. Term insurance is an inexpensive type of insurance, making it an attractive option for large policies. Term life is the CHEAPEST type of pure life insurance, and due to having a termination date and not having any cash value, it will ALWAYS be cheaper than a whole life policy with the same face value. It provides a pure death protection since it only pays a death benefit if the insured dies during the policy term. Term is often renewal and convertible. For example, if you have a 10-year renewable and convertible term; After the 10 years are up, the policy terminates, or you can renew it. If you renew it the premium price will go up, and you will have the policy for another 10 years. This cycle continues until you are too old to renew or it's too expensive. All TERM insurance has a final TERMINATION date where you can no longer renew it. If the policy is CONVERTIBLE, you can CONVERT it to whole life (think rent to own) at any time. Any time you renew or convert ANY type of insurance, you do not have to worry about your health, is your insurability is locked in. However, the price will always go up, because your attained (or current) age is used for your new policy. Term is typically thought of as "renting" -- you have a roof over your head, but they're going to raise the price and until it no longer makes sense for you to keep it or at some point they TERMINATE the contract and kick you out. Level term: also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. Life insurance written to cover a need for a specified period of time at the lowest premium is called Level Term Insurance. Term insurance always expires at the end of the policy period. For example, if D needs life insurance that provides coverage for the remainder of her working years and wants to pay as little as possible, D would need Level term. Level term provides a fixed, low premium in exchange for coverage which lasts a specified time period. Decreasing term: Term life insurance that provides an annually decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. A decreasing term policy is a type of life policy which has a death benefit that adjusts periodically (according to a schedule) and is written for a specific period of time. Decreasing term policies are usually written for a mortgage or other debt that typically decreases over time until it is paid off. For example, a 15- y e a r decreasing term policy could protect a 15-year mortgage. As the mortgage balance reduces each year, the face value of the insurance policy will adjust accordingly to match. After the mortgage 13 is paid off, the insurance policy will expire. Credit Life Policies are limited benefit policies and typically purchased using a decreasing term life insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining loan balance. Since Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding. For example, if you wanted an insurance policy to protect a $20,000, 5-year auto loan, you would use a 5-year decreasing term life insurance policy with an initial face value of $20,000. You will pay the same level premium every month for the 5-year term of the policy. The face value will start out at $20,000 and change according to a schedule (the decreasing balance of the auto loan). After 5 years, the car will be paid for and the insurance policy will no longer be needed. Increasing term: Term life insurance that provides an increasing face amount over time based on specific amounts or a percentage of the original face amount. Convertible term: A term life policy has a provision that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. Convertible Term provides temporary coverage that may be changed to permanent coverage without evidence of insurability. For example, if you take out a term insurance policy when you are young to take advantage of your good health and the policy’s lower premium, but want the option convert the policy to a permanent one for final expense benefits once your finances improve, you would want a convertible term life policy. The conversion privilege of a group term life policy allows an individual to leave the group term (temporary) plan and convert his or her insurance to an individual (permanent) policy without providing evidence of insurability. The most important factor to consider when determining whether to convert term insurance at the insured's attained age or the insured's original age is the premium cost. The number one factor which impacts life insurance premium cost is the insureds current or attained age. For example, a $25,000 policy on a healthy 7-yearold boy will cost substantially less than a $25,000 policy on a 57-year-old man. Whether converting an individual or group term insurance policy, although your insurability is guaranteed, your age is typically reevaluated to your current (attained) age, not left at the age you were when you applied for the original term policy. Convertible Term would allow you to take your temporary coverage and change it to permanent coverage without evidence of insurability or good health, but your premiums will increase due to using your attained age. Renewable term: Term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having to prove insurability. Renewable Term provides temporary level coverage at the lowest possible cost for a limited period of time, but then allows the policyowner to renew the policy to maintain coverage past the policy’s termination. When a term policy is renewed, the insured does not have to prove insurability. However, the premium price will rise because the insurance company will use the insureds current or attained age to determine the new premiums. If a customer wanted coverage at the lowest possible cost that was good for a limited period of time but offered the ability to continue the coverage after the expiration, the customer would want a renewable term policy. Annual renewable term: Term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability. Term – Rider: term rider is a type of life insurance product which covers children under their parent's policy. Family plan policies usually cover the family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is always level term. This is cheaper than every family member getting their own policy. For example, the main policy may be on Dad, then mom and the children are riding on 14 (attached to) to dad’s policy as term riders. Term riders allow for additional family members to be covered under one policy by attaching everyone to a main policy. Term riders can also allow an applicant to have excess coverage by adding an additional term rider for them to the main policy. Whole life: insurance that provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium. Whole Life Insurance: Provides both living and death benefits. Provides permanent life insurance protection for the insured’s entire life. It also provides living benefits such as cash value and policy loans. Advantages of whole life insurance: • • • Covers the entire life of the insured Living benefits - cash value and policy loans Fixed premiums Drawbacks of whole life insurance: • • Protection is more expensive because of living benefits Premium paying period may extend beyond the income-earning years Whole life is often compared to BUYING like BUYING a house: You can pay the house off slowly or quickly, but once it’s paid for, you still own the house. There are several types of whole life All whole life has the same type of benefits. The only difference in "types" of whole life is how the policy is paid. Some will be paid straight until death or age 100, some will be paid for after a few years or by a specific age, some may give you a little discount in the early years to help you get started, etc. All whole life lasts until death or age 100, has a fixed premium, and level benefit with cash value accumulation, regardless of how it is paid. Types of whole life insurance include: • straight whole life • limited pay whole life • single-premium whole life • modified whole life • graded whole life Straight life: This is basic whole life insurance with a level face amount and fixed premiums payable over the insured’s entire life. Premium payments made until death of insured or age 100 (maturity of policy). Limited Pay life: This is whole life insurance where the insured is covered for his entire life, but premiums are paid for a limited time. As the premium payment period shortens, cash values 15 increase faster and the fixed premiums are higher. For example, under a life paid-up at 65 policy, premiums are only paid until the insured is 65 years old. With a 20-pay life policy, the insured only pays for 20 years. These policies are in effect until the insured’s death or they reach age100. Single premium whole life: Allows the insured to pay the entire premium in one lump-sum and have coverage for the insured’s entire life. • An immediate nonforfeiture value is created • An immediate cash value is created • A large part of the premium is used to set up the policy’s reserve Modified whole life: Low premiums in the early years and jumps to a higher premium in the later years and remains fixed thereafter. Premiums increase just once. Graded whole life: Under a typical graded premium life insurance policy, the premium increases yearly for a stated number of years, then remains level. Premiums continue to stay level for the remainder of the policy. For example, a policy can start out low in a graded whole life and increase a small amount every year up until the fifth year, then levels off for the remainder of the policy. SPECIAL USE POLICIES In addition to the basic types of life insurance policies, there are a number of "special use" policies insurance companies offer. Many of these are a combination or "packaging" of different policy types, designed to serve a variety of needs. Family Plan Policies: These are designed to insure all family members under one policy. Usually the family head is covered by permanent (whole life) insurance and the spouse/children are included on the same policy as level term life riders (family term riders) . The term coverage on the spouse and children are normally convertible to permanent coverage without evidence of insurability. If "Attached" to someone else's policy. Think side car on motorcycle. Riders must RIDE on something. Family Plan Policy Example: Husband – Whole Life Policy Wife (spouse) – Term Policy – convertible without proof of insurability Children – Term Policies – convertible usually at age 18 or 21 without proof of insurability; premium remains same regardless of the number of children Family Income Policies: Whole life and decreasing term insurance (begins date of purchase). Provides monthly income to a beneficiary if death occurs during a specified period after date of purchase. If the insured dies after the specified period, only the face value is paid to the beneficiary since the decreasing term insurance expired. Income this concern typically DECREASES over time because the household shrinks. They use decreasing term instead of level. With decreasing term, the benefit begins to decrease as soon as the policy begins. Family Maintenance Policy: Whole life and level term (begins date of death). Provides income to a beneficiary for a selected period of time if an insured die during that period. At the end of the income- paying period, the beneficiary also receives the entire face amount of the policy. If an insured die after the end of the selected period, the beneficiary receives only the face value of the policy. Maintenance "maintains" the family using level term. This means the family 16 will receive a benefit for so many years after the insured’s death. Multiple protection policies: Pays a benefit of double or triple the face amount if death occurs during a specified period. If death occurs after the period has expired, only the policy face amount is paid. The period may be for a specified number of years - 10, 15, or 20 years or to a specified age such as 65. These policies are combinations of permanent insurance and level term insurance. Joint Life Policy: A policy that covers two or more people. The age of the insureds are “averaged”, and a single premium is charged. It uses permanent insurance (as opposed to term) and pays a death benefit when one of the insureds dies. The survivors then have the option of purchasing an individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies. ONE policy covers two. Think "joint accounts" with a bank. One account, two people. Note: A variation of the joint life policy is the joint and survivor policy, or a “survivorship life policy” (it can also be known as a "second to die" policy). This plan also covers two lives, but the benefit is paid upon the death of the last surviving insured. Compared to the combined premium for separate life insurance policies on two individuals, the premium for a survivorship life policy is lower. Juvenile Insurance: Life insurance which is written on the lives of a minor is called juvenile insurance. The adult applicant is usually the premium payor as well, until the child comes of age and is able to take over the payments. A payor provision is typically attached to juvenile policies. It provides that, in the event of death or disability of the adult premium payor, the premiums will be waived until the child reaches a specified age (such as 18, 21, or 25). Payor Provision protects the insured in the event the PAYOR dies or is disabled. Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. It is normally issued in an amount not to exceed the outstanding loan balance and is usually paid entirely by the borrower. A decreasing term policy is most often used. NONTRADITIONAL LIFE POLICIES In the 1980s, insurance companies introduced a number of new life products designed to keep up with inflation and are interest-sensitive, most of which are more flexible in design and provisions than their traditional counterparts. The most notable of these are interest-sensitive whole life, adjustable life, universal life, variable life, and variable universal life. Interest-Sensitive Whole Life: Interest-sensitive life insurance is a type of whole life insurance where the cash value can increase beyond the stated guarantee if economic conditions warrant. This is also called current assumption whole life insurance. It also gives the insured the opportunity to either increase the face amount or use the extra cash value to lower future premiums. Premiums can vary to reflect the insurer’s changing assumptions with regard to its death, investment, and expense factors. CAWL (current assumption whole life) policies are almost always a MEC due to accelerated premiums. Adjustable life policies (Blended/Combination): are distinguished by their flexibility that comes from combining term and whole life insurance into a single plan. 17 • The policyowner determines how much face amount protection is needed and how much premium the policyowner wants to pay Adjustable life insurance allows you to vary your coverage as your needs change without requiring evidence of insurability • Consequently, no new policy needs to be issued when changes are desired • Adjustable life has all the usual features of level premium cash value life insurance Universal life: is a variation of whole life insurance, characterized by considerable flexibility. • • • • • • Changes may be made with relative ease by the policyowner with these flexible-premium policies Investment Gains go towards cash value Unlike whole life (with its fixed premiums, fixed face amounts, and fixed cash value accumulations) universal life allows its policyowners to determine the amount and frequency of premium payments which will adjust the policy face amount Basic characteristics of a universal life policy are flexible premiums, flexible benefits, no minimum death benefit, and cash value withdrawals Cash value accumulations are subject to a minimum interest guarantee Any surrender charges of a universal policy must be disclosed Target premium is a suggested premium used in Universal Life policies. It does not guarantee there will be adequate funds to maintain the policy to any time, especially to life. It may give an indication of what will be needed (under conservative estimates), to maintain the policy. Equity Index Universal Life insurance (EIUL): A permanent life insurance policy that allows policyholders to tie accumulation values to a stock market index, like the S&P 500. Indexed universal life insurance policies typically contain a minimum guaranteed fixed interest rate component along with the indexed account option. Indexed policies give policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns. Potential extra interest based on the investments of the company’s general account. Modified Endowment Contracts (MEC): A policy that is overfunded, according to IRS tables, is classified as a Modified Endowment Contract. Policies that do not meet the 7-pay test are considered MEC’s and will lose favorable tax treatment. The 7-pay test is a limitation on the total amount you can pay into your policy in the first seven years of its existence. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a seven-year period. For example, if yearly premium is $500, in a seven-year period a total amount paid would equal $3,500. If you paid $3,501, it has now exceeded the 7-pay test and is no longer a life insurance contract. It will now be taxed as an investment. • • • • If withdrawn prior to age 59 ½, there is a 10% penalty. Taxation only occurs when cash is distributed Funds withdrawn from a MEC are subject to last-in first -out (LIFO) tax treatment, which assumes that the investment or earnings portion of the contract's values is withdrawn first (making these funds fully taxable as ordinary income). Penalty taxes on premature distributions from a modified endowment contract (MEC) normally apply to policy loans 18 VARIABLE INSURANCE PRODUCTS Note: Because of the transfer of investment risk from the insurer to the policyowner, variable insurance products are considered securities contracts as well as insurance contracts. A producer is required to register with the National Association of Securities Dealers to sell variable products. Variable whole life insurance was created to help offset the effects of inflation on death benefits. It’s permanent life insurance with many of the same characteristics of traditional whole life insurance. The main difference is the manner in which the policy's values are invested. With traditional whole life, these values are kept in the insurer's general accounts and invested in conservative investments selected by the insurer to match its contractual guarantees and liabilities. With variable life insurance policies, the policy values are invested in the insurer's separate accounts which house common stock, bond, money market, and other securities investment options. Values held in these separate accounts are invested in riskier, but potentially higher yielding, assets than those held in the general account. The basic characteristics of a variable life policy are fixed premiums, a guaranteed minimum death benefit which fluctuates over the minimum, and cash values which fluctuate and are not guaranteed. Variable universal whole life (VUL): is a type of life insurance that builds cash value. It combines all the characteristics of a universal life and variable life. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to the ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. This provides the policyowner with flexible premiums, adjustable death benefits, a guaranteed minimum death benefit and gives the insured growth potential for higher returns, but also potential for loss. Evidence of insurability can be required for an individual covered by a variable universal life policy when the death benefit is increased. 19 Life Insurance Provisions, Options, and Riders Required Provisions Insuring Clause (or Insuring Agreement): The insurer’s basic promise to pay specified benefits to a designated person in the event of a covered loss. The insuring clause is the part of the health insurance policy that states the kind of benefits provided and the circumstances under which they will be paid. The purpose of the insuring clause in an insurance policy is to specify the scope and limits of the coverage provided. The insuring clause is the part of the insurance policy that identifies the specific type of benefits or services that are covered by that policy and the circumstances under which they will be paid. Any promises the INSURER makes will be in the INSURING clause. Consideration Clause: A policyowner must pay a premium in exchange for the insurer’s promise to pay benefits. A policyowner’s consideration consists of completing the application and paying the initial premium. The amount and frequency of premium payments are contained in the consideration clause. In insurance, the insurance company exchanges the promises in the policy for a two-part consideration from the insured. (Consideration is an exchange of something of value on which a contract is based). An insurance contract is valid only if the insured provides consideration in the form of the initial full minimum premium required and the statements made in the application. The applicant begs, “Please CONSIDER me for insurance. Here is my completed application, my initial premium, and how much money/how often I agree to pay. Please CONSIDER me!” Entire Contract • • • • • • The entire contract includes the actual policy and the application It states that nothing outside of the contract (the contract includes the signed application and any attached policy riders) can be considered part of the contract It also assures the policyowner that no changes will be made to the contract or waive any of the provisions after it has been issued, even if the insurer makes policy changes that affect all policy sales in the future. This, however, does not prevent a mutually agreeable change or modifying the contract after it has been issued. Any change to a policy must be made with the approval of an executive officer of the insurance company whose approval must be endorsed on the policy or attached in a rider This mandatory health policy provision states that the policy, including endorsements and attached papers, constitutes the entire insurance contract between the parties We can't send you additional paperwork later. THE ENTIRE POLICY AND APPLICATION is sent to you and that makes up your ENTIRE CONTRACT. Grace Period: The period of time policyowners are allowed to pay an overdue premium during which the policy remains in force, usually 30 days. If an insured die during the Grace Period of a life insurance policy before paying the required annual premium, the beneficiary will receive the face amount of the policy less any required premiums. The purpose of the Grace Period is to give the policyowner additional time to pay overdue premiums. The policyowner is given a number of days after the premium due date during which time the premium payment may be delayed without penalty and the policy continues in force. Grace period is the same definition for your insurance bill as it is for all of your other bills. Don’t pick it as an answer if the question isn’t talking about paying your bill late and keeping your insurance. 20 Reinstatement: Permits the policyowner to reinstate a policy that has lapsed - as long as the policyowner can provide proof of insurability and pays all back premiums, outstanding loans, and interest. Most states allow reinstatement up to 3 years after a policy has lapsed. However, some states are 5-7 years. The Reinstatement provision specifies that if an insured fails to pay a renewal premium within the time granted but the insurer subsequently accepts the premium, coverage may be restored. Under certain conditions, a policy that has lapsed may be reinstated. Reinstatement is automatic if the delinquent premium is accepted by the company or its authorized agent and the company does not require an application for reinstatement. If it takes no action on the application for 45 days, the policy is reinstated automatically. To reinstate any policy, you need: A reinstatement application, statement of good health, all back premiums. Incontestable Clause: The clause in a life insurance contract that prohibits the insurer from questioning the validity of the contract after a certain period of time has elapsed. Misstatement of Age or Sex: Allows the insurer to adjust the policy benefits if the insured’s age or sex is misstated on the policy application. The misstatement of age provision allows the insurer to adjust the benefit payable if the age of the insured was misstated when application for the policy was made. The insurer can adjust the benefit to what the premiums paid would have purchased at the insured’s actual age. If the insured was older at the time of application than is shown in the policy, benefits would be reduced accordingly. The reverse would be true if the insured were younger than listed in the application Policy Loan Provisions: Policies that have cash value also have policy loan and withdrawal provisions. These policies must begin to build cash value after a certain number of years, in most states, this is 3 years. These loans, with interest, cannot exceed the guaranteed cash value or the policy is no longer in force. The policyowner has the right to the policy’s cash value. Policy loans are not taxable. Any loans with interest due at the time of death will be deducted from the insured’s policy proceeds. Automatic Premium Loans: Allows the insurer to automatically use the policy cash value to pay an overdue premium. There is no cost for this provision. Automatic Premium Loans: Like using a savings account for overdraft protection, but there's no fee, just interest for borrowing your money. If you don't pay it back, interest is added to the loan, it also will be subtracted from any death benefit or cash surrenders if not paid back first. Other insureds Provision Also known as, Dependent riders may be added to a primary policy to cover a spouse or “another insured”, children or adopted children. 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. Assignment Clause or Provisions: The right to transfer policy rights to another person or entity. The new owner is known as the assignee. Absolute assignment: When the assignee receives full control of the policy and rights to the policy benefits from the 21 current policyowner. Under an absolute assignment, the transfer is complete and irrevocable, and the assignee receives full control over the policy and full rights to its benefits. Collateral assignment: The partial and temporary transfer of rights to another person or entity. Collateral assignments are usually intended for securing a loan with a creditor. A collateral assignment is one in which the policy is assigned to a creditor as security, or collateral, for a debt. If the insured dies (or sometimes becomes totally/permanently disabled), the creditor is entitled to be reimbursed out of the benefit proceeds for the amount owed. The insured’s beneficiary is then entitled to any excess of policy proceeds over the amount due to the creditor. Free Look: The policyowner is permitted a certain number of days once the policy is delivered to look over the policy and return it for a refund of all premiums paid. Notice of Claim • • • The notice of claim provision describes the policyowner’s obligation to notify the insurance company of a claim in a reasonable period of time Typically, the period is 20 days after the occurrence or a commencement of the loss, or as soon thereafter as is reasonably possible You need to let the insurance company know that you are going to be filing a claim, so they are expecting your claim forms. Claim Forms • • • It is the company's responsibility to supply a claim form to an insured within 15 days after receiving notice of claim If the insurance company fails to send out the claim forms within the time period required by the provision, the insured should submit the claim in any form, which must be accepted by the company as adequate proof of loss You can submit your claim using a napkin and crayon as long as you provide all the necessary information. Proof of Loss • • • The statement that an insured must give an insurance company to show that a loss actually occurred is a Proof of Loss After a loss occurs, or after the company becomes liable for periodic payments (e.g., disability income benefits), the claimant has 90 days in which to submit proof of loss. Insurance company can’t pay you if you don’t prove there is a loss. Time of Payment of Claims • • The time of payment of claims provision provides for immediate payment of the claim after the insurer receives notification and proof of loss. If the claim involves disability income payments, they must be paid at least monthly if not at more frequent intervals specified in the policy 22 • The purpose of the Time of Payment of Claims provision is to prevent the insurance company from delaying claim payments • You did your part (Paid your bill and got injured/sick/ etc.) now the insurance company must immediately do our part (Pay you) and it can't be less often than monthly, or you wouldn't be able to pay your bills. Payment of Claims • • • • The payment of claims provision in an insurance contract specifies how and to whom claim payments are to be made. Payments for loss of life are to be made to the designated beneficiary If no beneficiary has been named, death proceeds are to be paid to the deceased insured's estate. Claims other than death benefits are to be paid to the insured. Should the insurance company pay you, or the doctor, or someone else? Physical Exam and Autopsy • • The physical exam and autopsy provision entitle a company, at its own expense, to make physical examinations of the insured at reasonable intervals during the period of a claim, unless it’s forbidden by state law. Forget everything you learned on “Law and Order,” only the state can forbid an autopsy. You gave up your (and your families) rights to refuse when you applied for insurance. Legal Actions The insured cannot take legal action against the company in a claim dispute until after 60 days from the time the insured submits proof of loss. Beneficiary designation Where the policyowner indicates who is to receive the proceeds. Change of Beneficiary The insured, as policyowner, may change the beneficiary designation at any time unless a beneficiary has been named irrevocably. Settlement Options/Payment of Claims Where the ways in which the proceeds can be paid out or settled are explained. Excess Interest Provision If a beneficiary decides to leave life insurance proceeds with an insurer following the death of the insured, the insurance company must pay interest on the proceeds. The interest credited to or paid to the beneficiary is taxable as ordinary income. 23 Discretionary Provision Limits the way a court can review a claim denial and makes it difficult for the court to conduct a fair review of the claim. Some states have enacted laws that prohibit Discretionary provision because they are designed to protect the insurance company. Change of Occupation This provision also allows the insurer to reduce the maximum benefit payable under the policy if the insured switches to a more hazardous occupation or to reduce the premium rate charged if the insured changes to a less hazardous occupation Unpaid Premiums If there is an unpaid premium at the time a claim becomes payable, the amount of the premium is to be deducted from the sum payable to the insured or beneficiary. Cancellation • • • • Though prohibited in a number of states, the provision for cancellation gives the company the right to cancel the policy at any time with 45 days' written notice to the insured This notice must also be given when the insurer refuses to renew a policy or change the premium rates If the cancellation is for nonpayment of premium, the insurer must give 10 days' written notice to the insured, unless the premiums are due monthly or more frequently The cancellation provision also allows the insured to cancel the policy any time after the policy's original term has expired by notifying the insurer in writing Conformity with State Statutes Any policy provision that is in conflict with state statutes in the state where the insured lives at the time the policy is issued is automatically amended to conform with the minimum statutory requirements. Illegal Occupation The illegal occupation provision specifies that the insurer is not liable for losses attributed to the insured’s being connected with a felony or participation in any illegal occupation. Intoxicants and Narcotics • • The insurer is not liable for any loss attributed to the insured while intoxicated or under the influence of narcotics. Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded Right to Defer Loan This provision grants the right to an insurer to defer a policy loan or the payment of the cash value (in most states up to six months after its request). This right does not apply to the payment of death claims. It is 24 designed to protect an insurer if a large amount of policyholder’s desire to make withdrawals at the same time. The Policy Face The Policy face contains a summary of the type of policy and the coverage provided by the policy. It Identifies the insured, the term of the policy (the effective date and termination date), and how the policy can be renewed. Guaranteed Insurability Option Rider Allows a policyowner to purchase additional life insurance coverage at specified dates without providing evidence of insurability. Payor Provision (Rider) Provides waiver of premiums if the adult premium payor should die or, with some policies, become totally disabled. Accidental Death Benefit Rider (Double Indemnity) Provides an additional amount of insurance usually equal to the face amount of the base policy if the cause of death was an accident. COMMON EXCLUSIONS OR RESTRICTIONS o o o o o o o o o o o o Exclusions: A feature of a life insurance policy stating that the policy will not cover certain risks. Exclusions and restrictions are situations or conditions which are not covered or covered with substantial limits. The common ones are injuries due to war or an act of war, self-inflicted injuries, and those incurred while the insured is serving as a pilot or crew member of an aircraft Other exclusions are losses resulting from suicide, hernia (as an accidental injury), riots, or the use of drugs or narcotics Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded Foreign travel may not be excluded in every instance, but extended stays overseas or foreign residence may cause a loss of benefits Occupational injuries and illnesses are covered by Workers’ Compensation and typically excluded The exclusions section is NOT included in the policy face (first page of an insurance policy) Suicide Clause: The policy will be voided, and no death benefit will be paid if the insured commits suicide within 1 year from policy issuance. The primary purpose of a suicide provision is to protect the insurer against the purchase of a policy in contemplation of suicide. Aviation: The insurer will not pay the claim if the insured dies due to involvement with aviation, such as a military pilot flying a jet aircraft. War or Military Service: The insurer will not pay the claim if the insured dies while in active military service or due to an act of war. Hazardous Occupation or Hobby: If the insured dies as a result of a hazardous occupation or hobby, the insurer will not pay the claim. 25 Waivers for Impairments • • When an insurance company does not cover a loss due to a specific condition the insured has. This is usually called an impairment rider. If the insured's condition improves, the company may be willing to remove the waiver. Policy Options Nonforfeiture Options You are closing your account (surrendering your policy), what do you want us to do with your cash (so you don't forfeit it)? When a policyowner decides he does not want his life insurance policy anymore, he has the option to surrender his policy. If there is cash value remaining, he must use one of the following nonforfeiture options: Cash Surrender: allows the policyowner to receive the policy’s cash value. Policyowner no longer has coverage at this point. Normally, the maximum length of time a life insurance company may legally defer paying the cash value of a surrendered policy is 6 months (Delayed Payment provision). Extended Term Option: permits the policyowner to use the policy’s cash value to buy level, extended term insurance for a specified period. No premium payments are made. The coverage provided with the extended term nonforfeiture option is equal to the net death benefit of the lapsed policy. Reduced Paid-Up Option: the policyowner pays no more premiums but the face amount is decreased. Dividend Options Participating policies pay dividends to policyowners if the company’s operations result in a divisible surplus. Recall that dividends are a return of overcharged premiums and are therefore not taxable. Insurers typically pay dividends on an annual basis. The following dividend options are available to policyowners for settling dividend payments. • • • • • Cash Option: Take the cash – It’s your money, you can take it and run. Reduced Premiums Option: Reduces premium payments – “Just keep them and next year don’t charge me so much. Accumulate Interest Option: Allows dividends to accumulate interest. Interest is the only thing you can be charged tax on. Paid-Up Additions Option: Purchase single payment whole life coverage One-Year Term Option: Purchase one-year term protection Keep in mind, with dividends, the policy is still active. POLICY RIDERS Waiver of Premium Rider: Allows the policyowner to waive premium payments during a disability and keeps the policy in force. It does not provide cash payments to the policyowner. The disability must be total and permanent and have sustained through the waiting period (90 days or 6 months). After a certain age (usually 60 or 65), the 26 waiver of premium rider is void. Waiver: Covers the PRIMARY INSURED. Does NOT provide income. Is NOT a loan. The insurance company is "waiving" the premiums" it's just as if the insured made the premiums every month. Payor Rider (or Payor Clause): If the individual paying the premiums on a juvenile life policy becomes disabled or dies, the Payor Rider ensures that premiums will be waived. Accelerated Benefit Rider: Allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness and expected to die within 1 -2 years. Whatever amount is withdrawn in an accelerated death benefit will decrease the death benefit when death occurs. Accelerated Benefit: Your doctor said you are going to die, so you aren't going to stop paying your insurance (since you know you'll need it soon). Insurance company now knows you are going to die soon which means they are going to have to pay out the benefit. To make things a little easier and less stressful, they will give YOU some of the proceeds NOW and deduct from what would go to your beneficiary at your death. Accidental Death Benefit Rider (multiple indemnity): Pays an additional sum to the beneficiary if the insured dies due to an accident. The amount paid is a multiple of the policy face amount such as double or triple the original benefit. Truly the cheapest way to add a lot of coverage for a period of time. Accidental Death and Dismemberment: May be added to a life insurance policy. Pays benefits for dismemberment and accidental death. Pays a principal sum for loss of both hands, both arms, both legs, or loss of vision in both eyes. AD&D: FACE VALUE= amount for accidental loss or loss of 2 hands, feet, eyesight, etc. ½ face value for loss of 1 foot, hand eye, etc. One foot and one hand = 100% face value. Guaranteed Insurability Rider (future increase option): Permits the policyowner to buy additional permanent life insurance coverage at specific points of time in the future without submitting proof of insurability. It also includes specific events like marriage and births, without requiring the proof of insurability. Usually the benefit is allowed every 3 years, up to the original face amount of the policy. Cost of Living Rider: Allows the policy face amount to be adjusted to account for inflation based on the consumer price index. Return of Premium Rider: pays the total amount of premiums paid into the policy in addition to the face value, as long as the insured dies within a certain time period specified in the policy. It also returns premiums to the living insured at the end of a specified period of time, as long as the premiums have been paid. Automatic Premium Loan Rider: Allows the insurance company to deduct overdue premium from an insured’s cash value by the end of the grace period if a payment is missed on a life policy. The insurance company can AUTOMATICALLY take out a LOAN for you against your CASH VALUE to cover your PREMIUM in the event they don't receive payment from you. This can continue for as long as they don't receive a payment and you still have cash value. Once all of your cash value is gone, if you do not start paying, your policy will lapse. This is just like any other cash value loan. Exchange Privilege Rider: This rider permits a policyowner to exchange a life insurance policy for another in the future if desired. As more advantageous products are developed in the future, this rider allows a policyowner to take advantage of a policy that may be more suitable.