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This chapter covered the provisions, riders, and options found in individual life insurance contracts. Remember that provisions state the rights and obligations under the contract, riders modify those provisions, and options specify the different ways policy values and proceeds can be distributed. Let's recap the major points of this chapter.
Policy Provisions
Topic
Key Points
Entire contract
The policy, riders/amendments, and a copy of the application make up the whole agreement
Insuring clause
The insurer's basic promise to pay the death benefit
Consideration
Each party exchanges something of value — premium and truthful statements from the insured; the promise to pay from the insurer
Ownership
Only the policyowner has ownership rights: assignment, changing beneficiaries/premium mode, conversion, cash values, dividends, surrender
Assignment
Absolute (all rights, permanent) or collateral (partial rights, temporary, usually to secure a loan)
Free look
Policy may be returned for a full premium refund within a specified period (10 days in CA) from delivery
Grace period
Time after the premium due date during which the policy will not lapse (60 days minimum in CA; 61 for flexible-premium variable life)
Reinstatement
A lapsed policy can be restored, usually within 3 years, with proof of insurability and payment of back premiums plus interest; a surrendered policy cannot be reinstated
Incontestability
Insurer cannot contest application misstatements after 2 years, except for nonpayment of premium or misstatement of age/sex
Misstatement of age or sex
Benefit is adjusted to what the premium paid would have purchased at the correct age/gender
Exclusions
Aviation (noncommercial pilots), hazardous occupation/hobbies, war or military service (status vs. results clause), illegal activity, suicide within a specified period (usually 2 years)
Beneficiaries
Topic
Key Points
Designations
Individuals (including minors), classes (per capita vs. per stirpes), estates, and entities such as trusts
Succession
Primary has first claim; contingent (secondary/tertiary) is only eligible if the level above has died before the insured
Revocable vs. irrevocable
Revocable can be changed at any time; irrevocable requires the beneficiary's written consent
Common disaster clause
Presumes the primary beneficiary died first if the insured and primary beneficiary die at approximately the same time
Spendthrift clause
Protects proceeds from a beneficiary's creditors and reckless spending by requiring fixed installment payments
Policy Loans
Topic
Key Points
Cash loans
Available only against cash value; loan value = cash value minus unpaid loans and interest
Automatic premium loans
Prevent an unintentional lapse by borrowing against cash value to cover a missed premium
Riders
Topic
Key Points
Disability
Waiver of premium (6-month waiting period, expires at 65) and waiver of monthly deduction (universal life) waive charges during total disability; disability income rider also pays a monthly benefit
Accelerated benefit / LTC
Early payment of part of the death benefit for a terminal illness or long-term care need; reduces the amount payable to the beneficiary at death
Additional insured
Spouse/other-insured term rider, children's term rider, and nonfamily rider extend coverage to people beyond the primary insured
Riders affecting the death benefit
Accidental death (double/triple indemnity within 90 days), guaranteed insurability (buy more coverage without proof of insurability, usually to age 40), return of premium (refunds all premiums paid if death occurs before a stated age)
Options
Topic
Key Points
Nonforfeiture
Reduced paid-up (smaller permanent policy); extended term (automatic; same face amount, shorter duration); cash surrender (ends coverage; cannot be reinstated)
Dividend
Cash; reduction of premium; accumulation at interest (interest is taxable); paid-up additions (automatic); one-year term
Settlement
Cash (automatic); life income (cannot outlive; single life, joint and survivor, life refund, period certain variations); interest only (temporary); fixed period; fixed amount