chapter 4 life insurance contractual provisions. life ins. contractual provisions 1-ownership...
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Chapter 4
Life Insurance Contractual Provisions
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LIFE INS. CONTRACTUAL PROVISIONS
1-OWNERSHIP CLAUSE: the owner of a life insurance policy can be the insured, the beneficiary, a trust, or any party.
-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 options (w/out the beneficiary’s consent).
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LIFE INS. CONTRACTUAL PROVISIONS
2-ENTIRE-CONTRACT CLAUSE: states that the life insurance policy & attached application constitute the entire contract between the parties.
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 charter or by laws.
- Protects the beneficiary.
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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.
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LIFE INS. CONTRACTUAL PROVISIONS
4- SUICIDE CLAUSE: states that if the insured commits suicide within ½ 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).
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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.
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LIFE INS. CONTRACTUAL PROVISIONS6- 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.
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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).
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LIFE INS. CONTRACTUAL PROVISIONS4- Incontestable period & suicide period under
the old policy may have expired.5- Reinstated policy may contain favorable
provisions, such as a 6% interest on 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.
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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 correct age & sex.
8- BENEFICIARY DESIGNATION: beneficiary is the party named in the policy to receive the policy proceeds.
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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’s death.- 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 to change him w/out his consent.- Irrevocable beneficiary cannot be changed w/out
the beneficiary’s consent.
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LIFE INS. CONTRACTUAL PROVISIONS8/3 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 to exchange their policies to another one.
10- EXCLUSIONS & RESTRICTIONS:Excludes payment if the insured dies as a direct result of
specific peril (war, suicide,…).
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LIFE INS. CONTRACTUAL PROVISIONS11-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 to a 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).
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LIFE INS. CONTRACTUAL PROVISIONS
13- POLICY LOAN PROVISION:
allows policyowner to 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: an over 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.
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LIFE INS. CONTRACTUAL PROVISIONS
15- NONFORFEITURE OPTIONS: payment to a with drawing policy owner is known as a non forfeiture value or C surrender V.
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).
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LIFE INS. CONTRACTUAL PROVISIONS16- DIVIDENDS OPTIONS: dividends are
derived from 3 sources: expected mortality > actual; interest > expected on reserves & operating expenses < expected.
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.
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LIFE INS. CONTRACTUAL PROVISIONS17- 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 amount at anytime.
17/2- Fixed-period option: principal & interest paid periodically during 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:
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LIFE INS. CONTRACTUAL PROVISIONS1- 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.
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LIFE INS. CONTRACTUAL PROVISIONS4- Life income w installment Refund: if
beneficiary dies before: annuities received = insurance amount, a 2nd beneficiary receives an installment = insurance amount – annuities received.
5- Joint & Survivor Annuity: paid to 2 beneficiaries (husband & wife) up to second death (may reduced after first death).
6- Use as trust: paid to a trustee if kids are young or needs change over time.
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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 annuity or health.
19-GUARANTEED INSURABILITY (PURCHASE) OPTION: insured can buy extra amount w/out insurability in the future ( he can’t afford high premium now).
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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 specific age.
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LIFE INS. CONTRACTUAL PROVISIONS
23-COST OF LIVING: if needs change w time it provides face amount that is tied to cost of 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.
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LIFE INS. CONTRACTUAL PROVISIONSRemaining 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 home condition (w conditions).