life and Health Insurance - FIN-3660
Abu khaled
chapter20820individual20life20insurance20policy20provisions.pptxLife and Health Insurance FIN 3660
Chapter 8
Individual Life Insurance Policy Provisions
Objectives
Describe the free-look provision of an insurance policy.
Identify the documents that make up the entire contract between the owner of a life insurance policy and the insurer.
Explain the purpose and operation of the incontestability provision.
Apply the terms of the standard grace period provision in a given situation to determine whether a life insurance policy has lapsed for nonpayment of premium.
Identify situations in which a life insurance policy can be reinstated and the conditions the policyowner must meet to reinstate the policy.
Describe the rights provided by a policy loan provision and a policy withdrawal provision, and explain the differences between a policy loan and a commercial loan.
Identify and describe the nonforfeiture options typically included in cash value life insurance policies.
Identify the exclusions that insurers sometimes include in individual life insurance policies
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Standard Policy Provisions
Free-Look Provision (“free-examination provision” or “cooling-off provision”) – gives the policyowner a stated period of time – usually 10-30 days – after the policy is delivered in which to examine the policy
The free-look period runs from the date the policy is delivered to the policyowner, not from the date of issue
During the free-look period, the policy owner has the right to cancel and receive a refund of the premium
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Entire Contract Provision
Entire Contract Provision – defines the documents that constitute the contract between the insurance company and the policyowner
Closed Contract – a contract for which only those terms and conditions that are printed in – or attached to – the contract are considered to be part of the contract
Open Contract – a contract that identifies the documents that constitute the contract between parties, but all the enumerated documents are not necessarily attached to the contract
Declaration of Insurability – a form in which a proposed insured answers specific questions about his medical history
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Contact Provision (Cont.)
In addition to defining the documents that make up the contract, the entire contract provision usually state that:
Only specified individuals – such as certain officers of the insurer – can change the contract
No change is effective unless made in writing
No change will be made unless the policyowner agrees to it in writing
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Incontestability Provision
Insurance laws in many jurisdictions impose two important limits on an insurer’s right to avoid an insurance contract on the basis of misrepresentation:
Only certain misrepresentation – referred to as material misrepresentations – give the insurer the right to avoid an insurance contract
The insurer has only a limited amount of time in which to avoid an insurance contract
Incontestability Provision – describes the time limit within which the insurer has the right to avoid the contract on the ground of material misrepresentation in the application
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Material Misrepresentation
Misrepresentation – a false or misleading statement in an application for insurance
Material Misrepresentation – a misrepresentation that is relevant to the insurance company’s evaluation of the proposed insured
A misrepresentation is considered material if, had the truth been known, the insurer would not have issued the policy or would have issued the policy on a different basis, such as with a higher premium or a lower face amount
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Operation of the Incontestability Provision
Fraudulent Misrepresentation – a misrepresentation that was made with the intent to induce the other party to enter into a contract and that did induce the innocent party to enter into the contract
Obtaining sufficient evidence to prove that a misrepresentation was fraudulent usually is quite difficult
“During the lifetime of the insured” is an important part of the incontestability clause
This phrase makes the policy contestable forever if the insured dies during the contestable period
If this phrase were not included and the insured died during the contestable period, the beneficiary could possibly delay making a death claim until after the contestable period expired
The incontestability provision is to assure policyowners and beneficiaries that, after the contestable period has ended, the insurer cannot avoid the policy on the basis of a material misrepresentation in the application for insurance.
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Grace Period Provision
Grace Period Provision- Specifies a length of time following each renewal premium due date within which the premium may be paid without loss of coverage.
Grace period- the specified time; typically 30 or 31 days. Coverage remains in force throughout that period.
If a required renewal premium is not paid by the end of the grace period, a life insurance policy typically lapses; however, cash value life insurance policies contain a nonforfeiture provision that typically allows a policyowner to continue coverage under specific circumstances even if a renewal premium is not paid by the end of the grace period.
The grace period provision contained in a universal life insurance policy applies when the cash value is insufficient to meet the policy’s monthly mortality and expense charges.
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Reinstatement Provision
Reinstatement Provision- describes the conditions that the policyowner must meet to reinstate a policy.
Reinstatement- the process by which a life insurance company puts back into force a life insurance policy that either has been terminated because of nonpayment of renewal premiums or has been continued under the extended term or reduced paid-up insurance nonforfeiture option.
The following conditions typically must be met to reinstate a policy:
The policyowner must complete a reinstatement application within the time frame stated in the reinstatement provision.
The policyowner must provide the insurance company with satisfactory evidence of the insured’s continued insurability.
The policyowner must pay a specified amount of money; the amount required depends on the type of policy being reinstated.
The policyowner may be required to either pay any outstanding policy loan or have the policy loan, including any additional accrued interest, reinstated with the policy.
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Misstatement of Age or Sex Provision
A misstatement of the insured’s age or sex is a significant error.
Most life insurance policies include a misstatement of age or sex provision that describes the action the insurer will take to adjust the amount of the policy benefit in the event that the age or sex of the insured is incorrectly stated.
Insurers adjust the face amount of the policy when they discover a misstatement of age or sex after the death of the insured.
If the misstatement is discovered before the death of the insured, the insurer may give the policyowner the option to pay- or receive as a refund- any premium amount difference caused by the misstatement instead of having the insurer adjust the policy’s face amount.
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Policy Loans and Policy Withdrawls
Cash value life insurance policies typically grant the policyowner the right to borrow money from the insurer by using the cash value of the policy as security for the loan.
Policy Loan Provision- specifies the terms on which the policyowner of a cash value insurance policy can obtain a loan against the policy’s cash value.
Some policy loan provisions allow the policyowner to take out a loan in an amount that does not exceed the policy’s cash value less one year’s interest on the loan.
Policy loan vs. commercial loan:
The policyowner is not legally obligated to repay a policy loan.
Policy loan can be repaid at any time.
The insurance company does not perform a credit check on the policyowner for a policy loan.
Policy Withdrawal Provision-permits the policyowner to reduce the amount of the policy’s cash value by withdrawing up to the amount of the cash value in cash.
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Nonforfeiture Provision
Nonforfeiture Provision- sets forth the options available to the owner of a cash value policy if the policy lapses or if the policyowner decides to surrender- or terminate- the policy.
Nonforfeiture options: cash payment nonforfeiture option, two continued insurance coverage options, and the automatic premium loan option.
Most policies include an automatic nonforfeiture benefit which is a specific nonforfeiture benefit that becomes effective automatically when a renewal premium for a cash value life insurance policy is not paid by the end of the grace period and the policyowner has not elected another nonforfeiture option.
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Cash Payment Nonforfeiture Option
Cash Payment Nonforfeiture Option- states that a policyowner who discontinues premium payments can elect to surrender the policy and receive the policy’s cash surrender value in a lump-sum payment.
Cash value policies include a chart that lists cash surrender values at various times, and these policies describe the method used to compute those values.
The amount of cash value actually available to the policyowner upon surrender of the policy may not be the exact cash surrender value amount described in the policy.
After additions and subtractions have been made, the amount the policyowner receives is called the net cash surrender value.
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Nonforfeiture (Cont.)
Reduced paid-up insurance nonforfeiture option- the policy’s net cash surrender value is used as a net single premium to purchase paid-up life insurance of the same plan as the original policy.
The premium charged for the paid-up insurance is based on the insured’s attained age when the option goes into effect.
Policies including this option typically contain a chart listing the amount of reduced paid-up insurance that is available each year for the first 20 years the policy is in force.
Any supplemental benefits that were available on the original policy are not usually available when the policy is continued as a reduced paid-up insurance.
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Nonforfeiture (Cont.)
Extended Term Insurance Nonforfeiture Option- the insurance company uses the policy’s net cash surrender value to purchase term insurance for the full coverage amount provided under the original policy, for as long a term as the net cash surrender value can provide.
Life insurance policies that contain the extended term insurance option typically contain a chart showing the length of time the original face amount of the policy will be continued in force under the extended term option for each of the first 20 policy years.
Because of the way they usually operate, universal life insurance policies typically do not include an extended term insurance nonforfeiture option.
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Automatic Premium Loan Option
Automatic Premium Loan (ALP) Option- the insurer will automatically pay an overdue premium for the policyowner by making a loan against the policy’s cash value as long as the cash value equals or exceeds the amount of the premium due.
The use of the ALP option keeps the original policy in force for the full amount of coverage, including all supplemental benefits.
Universal life insurance policies usually do not include an ALP provision because a similar benefit is already provided in these policies as apart of their monthly cash value deduction mechanism.
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Life Insurance Policy Exclusions
Exclusions- provisions that describe circumstances under which the insurer will not pay the policy proceeds following the death of the insured.
Suicide Exclusion Provision- states that policy proceeds will not be paid if the insured dies as the result of suicide as defined by the policy within a specified period following the date of policy issues.
Other exclusion can include:
War Exclusion Clause- the insurer will not pay the policy proceeds if the insured’s death results from war or an act of war.
Hazardous Activities Exclusion Provision- the insurer will not pay the policy proceeds if the insured’s death results from specified dangerous activities such as mountain climbing, sky diving, or scuba diving.
Aviation Exclusion Provision- the insurer will not pay the policy proceeds if the insured’s death results from aviation-related activies.
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