Term
| 1. What constitutes the entire contract? |
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Definition
| The policy and a copy of the application, along with any riders or amendments. |
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Term
| 2. Can a policy be reinstated after the grace period expires? If so, how? |
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Definition
| Yes. The policyowner will have to prove insurability and will be required to pay all back premiums, plus interest (usually not to exceed 6%), and may be required to repay any outstanding loans and interest. |
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Term
| 3. If a claim is made, what happens if the insured has misstated his or her age? |
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Definition
| The insurer, in the event of a claim, is allowed under the misstatement of age provision, to adjust the benefits to an amount that the premium at the correct age would have otherwise purchased. |
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Term
| 4. What is the maximum time period within which a life insurer must pay the death claims? |
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Definition
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Term
| 5. What does an absolute assignment do to a life insurance policy? |
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Definition
| Transfers all rights of ownership to another person or entity. |
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Term
| 6. What is the free look period, and when does it begin? |
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Definition
| Otherwise known as the "Right to Examine," the free look provision allows the policyowner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. The free look period starts when the policyowner receives the policy (policy delivery), not when the insurer issues the policy. Certain transactions, such as replacement, will require a longer free look period. |
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Term
| 7. When will the proceeds of a life insurance policy be paid to the insured's estate? |
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Definition
| If none of the beneficiaries is alive at the time of the insured's death, or if no beneficiary has been named, the insured's estate (assets and liabilities left by the insured at death) will automatically receive the proceeds of a life insurance policy. The death benefit of the policy may be included in the insured's taxable estate if this occurs. |
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Term
| 8. Under what circumstances does the contingent beneficiary receive the death benefit? |
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Definition
| The contingent beneficiary has second claim in the event that the primary beneficiary dies before the insured. Contingent beneficiaries (those after the primary) do not receive anything if the primary beneficiary is still living at the time if the insured's death. |
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Term
| 9. Under what circumstances can a revocable beneficiary be changed? |
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Definition
| A revocable beneficiary can be changed at any time by the policyowner. Consent or knowledge of the beneficiary is unnecessary in these circumstances. |
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Term
| 10. What is the common disaster clause? Who does it protect? |
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Definition
The Common Disaster Clause, which is provided under the Uniform Simultaneous Death Law, has been adopted by most states to address this problem, in order to protect the policyowner's original intent, as well as to protect the contingent beneficiary.
Under the Uniform Simultaneous Death Law, the law will assume that the primary beneficiary died first in a common disaster. This provides that the proceeds will be paid to either the contingent beneficiary or to the insured's estate, if not contingent beneficiary is designated. The intent is to fulfill the wishes of the policyowner. Most insurers specify a certain period of time, such as 30, or 60, or 90 days, in which death must occur in order to follow this provision. As long as the beneficiary dies within this specified period of time following the death of the insured, it will still be interpreted that the beneficiary died first. |
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Term
| 11. Who does the spendthrift clause protect? How does it restrict spending? |
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Definition
| When included in a life insurance policy, the spendthrift clause prevents reckless spending of benefits by requiring that the benefits be paid in a fixed-period or fixed-amount installments.The beneficiary does not have the right to select a different settlement option and is not allowed to assign or borrow any of the proceeds. The spendthrift clause is designed to protect life insurance policy proceeds that have not yet been paid to a named beneficiary from the claims of the creditors of the beneficiary or policyowner. |
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Term
| 12. Explain how the number of installments might determine the amount of the installments in settlement options with fixed period installments. |
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Definition
| Under the fixed-period installments option (also called period certain), a specified period of years is selected, and equal amounts are paid to the recipient. Both the principal and interest are liquidated together over the selected period of time. The payments will continue for the specified period even if the recipient dies before the end of that period. In the event of the recipient's death, the payments would continue to a beneficiary. The size of each installment is determined by the amount of principal, guaranteed interest, and the length of period selected. The longer the period selected, the smaller each installment will be. Excess interest will not extend the period of time installments are received, only the size of the installment. This option does not guarantee income for the life of the beneficiary; however, it does guarantee that the entire principal will be distributed. |
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Term
| 13. What could potentially be a downfall of selecting the life income option? |
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Definition
| The life-income option provides the recipient with an income that he or she cannot outlive. Quite simply, the installment payments are guaranteed for as long as the recipient lives, irrespective of the date of death. The amount of each installment paid is based on the recipient's life expectancy and the amount of principal. If the beneficiary lives for a very long time, payments may exceed the total principal.However, if the beneficiary dies shortly after he or she begins receiving installments, the balance of the principal is forfeited to the insurer. Because there is a chance that the beneficiary may not live long enough to receive all the life insurance proceeds, insurers make options available which provide at least a partial guarantee that some or all of the proceeds will be paid out. With each of the guarantees, the size of the installment is decreased. The life-income option guarantees payments for the life of the beneficiary; however, there is no guarantee that the beneficiary will receive all of the death benefit. The amount of the payments is based upon the value of the contract and the life expectancy of the recipient. |
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Term
| 14. When do benefit payments stop under a Joint and Survivor settlement option? |
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Definition
The Life Income Joint and Survivor option guarantees an income for two or more recipients for as long as they live. This option is a modification of the life income option in that it guarantees an income for two or more recipients that none of the recipients can outlive. Although it is possible for the surviving recipient(s) to receive payments in the same amount as the first recipient to die, most contracts provide that the surviving recipient will receive a reduced payment after the first recipient dies.
Most commonly, the reduced option is written as "joint and 1/2 survivor" or "joint and 2/3 survivor," in which the surviving beneficiary receives 1/2 or 2/3 of what was received when both beneficiaries were alive. This option is commonly selected by the policyowner who wants to protect two beneficiaries, such as elderly parents. Unless a period certain option is chosen, as with the life income option, there is no guarantee that all the life insurance proceeds will be paid out if all beneficiaries die shortly after the installments begin. This option guarantees, however, an income for the lives of all beneficiaries. |
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Term
| 15. What are the 3 non-forfeiture options in life insurance policies? |
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Definition
| Cash surrender value, reduced paid-up insurance, and extended term option. |
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Term
| 16. Which nonforfeiture option is automatically selected if the policyowner does not choose? |
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Definition
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Term
| 17. What happens if a policyowner takes the reduced paid-up option? |
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Definition
| Under this option, the policy cash value is used by the insurer as a single premium to purchase a completely paid up permanent policy that has a reduced face amount from that of the former policy. The new reduced policy builds its own cash value and will remain in force until death or maturity. |
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Term
| 18. What happens to a policy loan at death? |
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Definition
| The policy loan option is found only in policies that contain cash value. The policyowner is entitled to borrow an amount equal to that available cash value. Any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured's death. |
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Term
| 19. What is the purpose of the Automatic Premium Loan provision? |
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Definition
| The automatic premium loan provision is not required, but is commonly added to contracts with a cash value at no additional charge. This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium. For example, a loan against the policy cash value for the amount of premium due is automatically generated by the insurer when the policyowner has not paid the premium by the end of the premium-paying grace period. It is a loan for which the insurer will charge interest. If the loan and interest are not repaid and insured dies, then it will be subtracted from the death benefit. While the insurer may defer requests for other loans for a period of up to 6 months, loan requests for payment of due premiums must be honored immediately. |
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Term
| 20. What are policy dividends? |
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Definition
| Dividends are paid on participating policies. When the policyowner purchases a policy from a participating insurer, he or she actually pays a "grossed-up" premium. The higher premium is charged as a safety margin in the event the insurer's experience is higher than anticipated. If this extra amount is not needed by the insurer to pay death claims and expenses, or if actual mortality experience improves or interest earned by the company exceeds the assumptions, a dividend will be paid to the policyowner. |
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Term
| 21. Under the cash option, how does a policyowner receive the dividend? |
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Definition
| Under the cash option, the insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually. |
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Term
| 22. With the reduction of premium option, how must a policyowner use the dividend? |
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Definition
| With the reduction of premium option, the insurer uses the dividend to reduce the net year's premium. For example, if the policyowner usually pays an annual premium of $1,000 and the insurer declares a $100 dividend, the policyowner would only pay a $900 premium for the year. |
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Term
| 23. With the accumulation at interest option, what happens to the dividend? |
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Definition
| With the accumulation at interest option, the insurance company keeps the dividend and places it in than account where it accumulates interest. The policyowner is allowed to withdraw dividends at any time. The amount of interest is specified in the policy and compounds annually. Although the dividends themselves are not taxable, the interest on the dividends is taxable to the policyowner when credited to the policy, whether or not the policyowner receives the interest. |
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Term
| 24. Which dividend option increases the death benefit? |
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Definition
| One-year Term Option; with the one-year term option, the dividend is used to purchase additional insurance in the form of one-year term insurance to increase the overall policy death benefit. The policyowner's choice is to either use the dividend as a single premium on as much one-year term insurance as it will buy or to purchase one-year term insurance equal to the policy's cash value for as long as it will last. If the insured dies during the one-year term, the beneficiary receives both the death benefit of the original policy and the death benefit of the one-year term insurance. |
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Term
| 25. Which rider provides life insurance coverage for the spouse and children? |
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Definition
| Family Term Rider; The family term rider incorporates the spouse term rider along with the children's term rider in a single rider. When added to a whole life policy, the family term rider provides level term life insurance benefits cover the spouse and all of the children in the family. |
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Term
| 26. What does the term "double indemnity" mean and what rider is it used with? |
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Definition
| In the case of the insured's death, "double indemnity" means that a rider of a particular policy will pay double the normal face amount of the death benefit. The "double indemnity" rider is used with the "Accidental Death Rider" |
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Term
| 27. How does the guaranteed insurability rider work? |
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Definition
The guaranteed insurability rider allows the insured to purchase additional coverage at specified future dates (usually every 3 years) or events (such as marriage or birth of a newborn child), without evidence of insurability. When this option is exercised, the insured purchases the additional coverage at his or her attained age. The maximum purchase that is allowable under this rider is specified in the base policy. This rider usually expires at the insured's age 40.
The guaranteed insurability rider is not modified or defeated by the existence of other riders.
For example, Alan's life insurance policy contains both guaranteed insurability and waiver of premium rider. Three years after the policy was issued, Alan was totally and permanently disabled. Not only are Alan's life insurance premiums waived, but at the specified times or events stated in the policy, Alan may purchase additional amount of insurance with the premiums on those increases also waived. |
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Term
| 28. Which rider allows the early payment of a portion of the death benefit to the insured? |
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Definition
| The Accelerated Benefit or Living Needs Rider provides for an early payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years, or has other qualifying conditions. The purpose of this rider is to provide the insured with the necessary funds to take care of necessary medical and nursing home expenses that incur as a result of the terminal illness. Many insurance companies do not charge for this rider since it is simply an advance payment of the death benefit. The remainder of the policy proceeds are payable to the beneficiary at the time of the insured's death. |
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