CHAPTER 14

Standard Life Insurance Contract Provisions and Options

No standardized life insurance policies exist; however, life insurance policies must have provisions required by law.

INSURED, OWNER, AND BENEFICIARY A Life insurance policy creates three

distinct classifications of interest: insured, owner and beneficiary.

The insured is the person whose death causes the insurer to pay the claim.

The owner is the person who may exercise the rights created by the contract.

Ownership rights in life insurance policies may include the following:

The right to change ownership The right to assign the policy as security

for a loan The right to name a beneficiary The right to participating dividends The right to take any surrender value

INSURED, OWNER, AND BENEFICIARY

The beneficiary is the person receiving the proceeds when the insured dies. A person, a trust, an estate or a business may be a beneficiary.

A person may be both insured and owner or owner and beneficiary.

A person cannot be both insured and beneficiary.

Revocable and Irrevocable Beneficiary

The revocable beneficiary has no rights in the policy while the insured is alive.

An irrevocable beneficiary has a vested interest in the death benefit and can prevent the owner from taking any action , reducing the beneficiary’s interest.

Beneficiary Designation

Policyowners should identify the beneficiary clearly. A designation such as «my wife» or «my children» can lead to litigation in cases of multiple marriages, childrem born of different marriages or illegitimate children.

INTERPLEADER In cases involving frequent beneficiary

changes or unclear beneficiary designations, the insurer can transfer the policy proceeds to the court and let the court decide who is rightfully entitled to money.

This process is called INTERPLEADER. Interpleader relieves the insurer from

having to make restitution to an injured party if the «wrong» person is paid the policy benefits.

General Life Insurance Policy Provisions

The policies must satisfy at least the minimum provisions.The following provisions appear in life insurance contracts issed in New York: Grace Period Reinstatement Incontestable Clause Entire Contract Provision Misstatement of age provision Annual apportioment of surplus

Grace Period

If the insured neglects to pay a premium when it is due, the policy does not end immediately.

Before the due date, the insurer will send the insured a notice of when the premium is due. If the insured forgets to pay the premium or decides to end the contract, the grace period provides him or her a period of 31 days to pay the premium without forfeiting any contractual rights.

Grace Period

If the policyholder dies during the grace Period, the insurer will pay the proceeds, minus the overdue premium, to the beneficiary. If the policy does not pay the premium before the end of the 31 days provided by the grace period, however, the policy is said to have lapsed.

Lapsed policy A lapsed policy means that insured voluntarily

has given up the life insurance contract. Letting a life insurance policy lapse usually is

expensive to the insured and to the insurer. As most of the expenses of acquiring the life

insurance policy and putting it in force occur in the first year of the policy, these expenses must be recovered in the early years of the contract of the insurer loses money.

   

The Reinstatement Provision

After a policy lapses, the insured has an opportunity to reinstate(renew) it if specified conditions are met.

The opportunity to renew a lapsed policy is called the reinstatement provision.

The conditions must be met to reinstate the policy : good health; payment of all premiums including interest;repayment of any policy loans with interest.

Evidence of Insurability

Beyond the good health of the insured, means the other things, the insured must not be engaged in any dangerous occupations or hobbies or be awaiting execution for a crime.

The Incontestable Clause

Insurance contracts are contracts made in utmost good faith, which means that an applicant may not answer questions untruthfully or conceal information that an honest person would reveal.

If an insured lies or conceals material facts the insurer may go to court and contest the policy for the pupose of voiding the policy.

The Entire-Contract Provision The Entire Contract Provision serves for

two purposes . It allows the insured achance to review the answers as they are recoreded in the application and it prevents the inurer from making hidden document or undisclosed restrictions a part of the contract.

The Misstatement of Age Provision The incontestable clause prevents an

insurer from voiding a policy because of an insured’s misrepresentations.

The age is a key factor in underwriting and pricing the insurance.

This provision allows the insurer to adjust the true age rather than allowing insurer to void the contract.

Annual Apportiomnet of Divisible Surplus

NY law requires that once a year, the life insurance company must determine wheter any dividends are payable to its policyholders. If there is a divisible surplus, the insurer must pay dividends. The rule applies to participating policies.

Nonparticipating policies use more realistic projections of operating results and require a lower initial premium.

Tontine NY law requires insurers to calculate and

pay dividends annually on participating policies. This requirement prevents insurance companies from retaining the dividends and not paying them to policyholders who die or let their policies lapse. Some inurers used this plan called the tontine system.

The Suicide Clause and Other Restrictive Clauses NY law allows a life insurer to exclude

payment for death by suicide if the suicide occurs within two years from the policy issue date.

The purpose of the suicide clause is to control the moral hazard.

Restrictive Clauses War restrictions:This clause may exclude

death while in the military or death caused by the military action.

Aviation restrictions: restrict payments for noncommercial flights.

Hazardous occupation restrictions: May reduce or eliminate payment if the insured changes to a more hazardous occupation.

FOUR OPTIONS THAT PROVIDE THE INSURED WITH CHOICESDividend optionsNonforfeiture optionsPolicyholder loansSettlement options

Dividend OptionsParticipating life insurance policies pay dividends to the policyowner. Owners may choode what form the dividends take. Dividends may be taken in cash Dividends may be used to pay a portion

of the next premium Dividends may be left in an account with

the insurer to accumulate at interest Dividends may be used to purchase

single-premium, paid up insurance...

Nonforfeiture Options In general business, if one party fails to

complete contractual arrangements as called for debt.

If a life insurance company were allowed to cancel a life insurance policy for nonpayment of premiums, the consumer would be seriously disadvantaged.

To prevent such injustices, the law provides that life insurance policies that have a savings value are not forfeited if the policies are lapsed.

Nonforfeiture Options

Cash surrender value Extended-term option Reduced paid-up insurance option

Conversion to an Annuity

Policyholder Loans Life insurance policies with cash surrender

values have a loan provision. This provision gives the policyowner the right to borrow an amount of money less than or equal to the cash value of the policy.

The company generally has the right ot delay making the loan up to six months.

The interest rate charged for the loan is stated in the policy.

The policyholder loan is secured by the cash surrender value to the life insurance policy. The insured is not legally required to repay the loan.

Policyholder Loans

The Automatic Premium Loan(APL)provision is found in policies with cash surrender value, requires the insurer to advance a loan to the insured for the purpose of paying the premium.

Thus if an insured does not pay the premium when due and the grace period expires( and ther is sufficient cahs value) the insurer makes an automatic loan to the insured to pay the overdue premium.

Settlement Options Settlement options determine how the death

proceeds are paid to the beneficiary . The following are five basic options:

Cash- beneficiaries take more than 95% of all life insurance proceeds in cash. If there is no settlement option then insurers pay the proceeds in cash.

Fixed amount- regular fixed-income payments is paid to the beneficiary. The payment continues till death. The option is logical when people need income for a limited period.

Settlement Options

Fixed Period – similar to the fixed amout option. The lenght of the payment determines the size of each payment.

Interest Only- the proceeds are left with the insured. The insurer pays the first beneficiary regular payments composed entirely of interest earnings. After the first beneficiary’s death, the insurer pays the death proceeds to a secondary beneficiary.

Life Income option- guaranteed for a lifetime a series of reguşar payments to the beneficiary.

AVAILABLE RIDERS AND OPTIONSConsumers frequently purchase the following three options:

Guaranteed insurability Waiver of premium Double indemnity

The Guaranteed-Insurability Option It provides the insured to obtain the

legal right to puchase more insurance at predetermined intervals and at standard rates, regardless of changes in insurability.

The Waiver –of –Premium Options It provides a valuable right for the

insured. If the insured becomes totally disabled, the insurer forgives any premium due during the period of disability and the life insurance policy remains in force.

The Double-Indemnity Option It provides that if the insured’s death is

a result of s specified peril, essentially some form of accident, twice the face of the policy will be paid.