What kind of policy does not typically require proof of insurability A?

An insurance policy is a legal contract between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured). Reading your policy helps you verify that the policy meets your needs and that you understand your and the insurance company’s responsibilities if a loss occurs. Many insureds purchase a policy without understanding what is covered, the exclusions that take away coverage, and the conditions that must be met in order for coverage to apply when a loss occurs. The SCDOI would like to remind consumers that reading and understanding your entire policy can help you avoid problems and disagreements with your insurance company in the event of a loss.

The Basics of an Insurance Contract

There are four basic parts to an insurance contract:

• Declaration Page
• Insuring Agreement
• Exclusions
• Conditions

It is important to understand that multi-peril policies may have specific exclusions and conditions for each type of coverage, such as collision coverage, medical payment coverage, liability coverage, and so on. You will need to make sure that you read the language for the specific coverage that applies to your loss.

The Declaration Page

This page is usually the first part of an insurance policy. It identifies who is the insured, what risks or property are covered, the policy limits, and the policy period (i.e. time the policy is in force).

For example, the Declarations Page of an automobile policy will include the description of the vehicle covered (e.g. make/model, VIN number), the name of the person covered, the premium amount, and the deductible (the amount you will have to pay for a claim before an insurer pays its portion of a covered claim).

Similarly, the Declarations Page of a life insurance policy will include the name of the person insured and the face amount of the life insurance policy (e.g. $25,000, $50,000, etc.).

The Insuring Agreement

This is a summary of the major promises of the insurance company and states what is covered. In the Insuring Agreement, the insurer agrees to do certain things such as paying losses for covered perils, providing certain services, or agreeing to defend the insured in a liability lawsuit. There are two basic forms of an insuring agreement:

• Named–perils coverage, under which only those perils specifically listed in the policy are covered. If the peril is not listed, it is not covered.
• All–risk coverage, under which all losses are covered except those losses specifically excluded. If the loss is not excluded, then it is covered. Life insurance policies are typically all-risk policies.

The Exclusions

Exclusions take coverage away from the Insuring Agreement. The three major types of Exclusions are:

• Excluded perils or causes of loss
• Excluded losses
• Excluded property

Typical examples of excluded perils under a homeowners policy are flood, earthquake, and nuclear radiation. A typical example of an excluded loss under an automobile policy is damage due to wear and tear. Examples of excluded property under a homeowners policy are personal property such as an automobile, a pet, or an airplane.

The Conditions 

Conditions are provisions inserted in the policy that qualify or place limitations on the insurer’s promise to pay or perform. If the policy conditions are not met, the insurer can deny the claim. Common conditions in a policy include the requirement to file a proof of loss with the company, to protect property after a loss, and to cooperate during the company’s investigation or defense of a liability lawsuit.

Definitions 

Most policies have a Definitions section, which defines specific terms used in the policy. It may be a stand-alone section or part of another section. In order to understand the terms used in the policy, it is important to read this section.

Endorsements and Riders

An insurer may change the language or coverage of a policy at the time of the policy renewal. Endorsements and Riders are written provisions that add to, delete, or modify the provisions in the original insurance contract. In most states, the insurer is required to send you a copy of the changes to your policy. It is important that you read all Endorsements or Riders so you understand how your policy has changed and if the policy is still adequate to meet your needs.

Want to Review Your Policy? 

To obtain a copy of your insurance policy, please contact your insurance agent or company.

Term & Universal Life

Chapter 3

Policy Features and Provisions

� Life insurance contracts have various features and provisions that reflect the type of product it is.� While all life insurance contracts will have some similarities, there will also be differences.

Premiums

� Insurance contracts have premiums; a premium is the payment the insured makes for his or her insurance coverage.� The premium due date will be listed on the policy.� The insured has the option of paying premiums monthly (usually through a bank draft), quarterly, semi-annually, or annually.� Annual premiums may be less than quarterly or semi-annual payments.� If the insured pays their premiums monthly through a bank draft costs are likely to be less than monthly payments the insured must manually send in.

� Policies have grace periods for payments.� This is the amount of time allowed past the premium due date to pay the premiums without lapsing the policy or providing proof of insurability.� If the premium is not paid within the grace period the policy will lapse and the life insurance coverage ends (except in policies that have provisions to pay the premium from cash values).� Reinstatement may require proof of insurability.

Policy Options

� Cash value or participating insurance policies offer three sets of options: nonforfeiture, dividend, and settlement options.�

Nonforfeiture Options

� Nonforfeiture options provide an avenue of premium refund.� If the owner discontinues paying premiums the insured may:

1.      Surrender the policy for its cash value, if any;

2.      Convert the policy to a paid-up contract of the same type but with a reduced face amount; or

3.      Convert to a paid-up term policy for its full-face amount for a period usually shorter than the original policy.� This is called extended term insurance.

� If the policy is participating the insurance under the reduced-paid-up option continues as participating.� Insurance under the extended term option often becomes non-participating.� Some companies might continue the extended term as participating but at higher rates.

� Policies commonly have provisions that automatically convert to extended term insurance if the owner discontinues payments and fails to elect one of the other available options.

Dividend Options

� Dividends are paid on insurance policies participating in the insurance company�s earnings.� It is usually expressed as �par� for participating and �non-par� for non-participating insurers.� Mutual insurers are commonly companies that issue dividends to their policyowners.� Stock insurers may issue both non-par and par policies, but most stock insurers issue only non-par policies.

� A par company generally pays dividends in cash, but typically no money is actually transferred unless the policy is paid up (all premiums have been paid).� The insurer applies the cash dividend towards the next premium that comes due.

� Dividends may be �accumulated at interest.�� The insurance company retains the dividends in this situation and accumulates them at not less (and usually more) than the interest rate specified in the policy.

� Dividends may also be used to buy paid-up additions to the policy at net rates.� This is an opportunity to acquire low cost insurance since these additions are purchased at net rates.� In other words, the insurance is purchased without the expense allowance.� This can be especially important if the insured has experienced declining health since this additional coverage is purchased without regard to current health or even occupation (some occupations are considered high risk) when the dividend is paid.� Paid-up additions must be the same type as the policy the dividend is paid on.� Paid-up additions may be selected for current dividends at any time without proof of insurability.

� Another dividend option is one-year term insurance.� Under this option the amount of insurance that can be purchased by the dividend is often limited to the cash value of the policy.� If the dividends exceed the amount required to purchase the maximum term insurance the policyowner may elect to use the excess for a different option available under the policy.

� If the policyowner wants additional death protection either the paid-up insurance or the one-year term dividend option is a good choice.� If the insured is more interested in saving money for retirement the accumulate-at-interest dividend option could be chosen.� Interest paid on dividend accumulations is taxable income but annual increases in the cash value of paid-up additions are not generally subject to current income taxation.� As always, it is important to consult with a tax expert.

Settlement Options

� The generally accepted method of paying proceeds from a life insurance policy is by lump sum distribution.� However, two alternative methods offer periodic payments:

1.      The interest-only option, and

2.      The annuity options.

� If the annuity options is elected there are several choices available, including lifetime income options, installments for a specified time period (such as twenty years), and installments of a fixed amount of money each month or each year.� The amount of income available and the time over which income is available is directly related to the amount of money deposited into the distribution vehicle (the annuity).� Obviously, the more money deposited the more income one will receive.

� The word "annuity" means "a payment of money."� The insurance industry designed them to do just that.� Choosing an annuity payout option requires understanding of how payout options work.

� There tends to be some standard options offered:

1.      Lifetime Option (Single Life):� For as long as the annuitant lives, he or she will receive a check each month for a specified sum of money.� The payment amount received each month will never change.� This option will pay the maximum amount in comparison to other available annuity payout options.� Selecting the lifetime option is a gamble.� If the annuitant lives a long time, he or she could collect handsomely over time.� If their life is cut short, the insurance company will keep any balance left unpaid.� No leftover funds will be distributed to any heirs.�

2.      Joint-and-Survivor (Two or More Lives):� Under this option, the insurance company will make monthly payments for as long as either of two named people lives.� In some cases, it could involve more than two lives, but usually there are just two people involved as annuitants.� This option is often utilized by married couples.� However, the couple need not be married.� Any two people named will be honored by the insurance company.

3.      Life and Installments Certain:� The key word here is CERTAIN.� The "certain" period of time is usually either ten or twenty years, but may be another time period also.� This option states that should the annuitant die prior to the stated "certain" time period, payments would then continue to the beneficiary until that specified number of years had been met.� On the other hand, the annuitant may receive payments longer than the "certain" period stated.� That is where the "life" part comes in.

4.      Cash Refund Annuity:� If the annuitant dies before the amount invested has been paid out by the insurance company, then the remainder of the invested money (plus interest) will be paid out in monthly installments or in a lump sum to the named beneficiary or beneficiaries.

� In each of these options, the insurance company pays nothing beyond the agreed period of time:

1.      Single Life = nothing after the death of the annuitant (no beneficiary designated money);������������������

2.      Joint and Survivor = nothing after BOTH named people have died (no beneficiary designated money);�������

3.      Life and Installment Certain = nothing after the death of the annuitant or until the stated time period; whichever comes last (so a named beneficiary could receive something if the annuitant died prematurely).��

4.      Cash Refund = nothing after the full account has been paid out whether to the annuitant or a beneficiary.

� A lifetime option will mean a higher monthly payment to the insured but the insured is gambling that he or she will live long enough to receive more than they deposited into the annuity.� If the annuitant dies before they receive the amount deposited the insurance company keeps any remaining money; heirs receive nothing.� However, when considering retirement financial security is the first consideration, not potential beneficiaries.

� Under the interest-only option the insurer retains policy proceeds paying interest to the beneficiary.� A minimum interest rate is guaranteed with the actual interest payment determined by the amount the insurer earns.� Although there are minimum guarantees, the amount actually paid has traditionally been higher.

State Required Provisions

� Each state will have specific state requirements.� While these may vary from state to state (so we are not quoting any specific state�s provisions) there does tend to be some basic requirements in all states.� There will be some provisions mandated by the state, some provisions allowed by the state and provisions the insurer feels are necessary.� Some provisions are included to protect the insurer from excessive claims although that is more likely to occur in health contracts than in life contracts.

� Generally, all states have specific items they feel are necessary for consumer protection, which may include incontestability, misstatement of age (sometimes even misstatement of sex), deferment, nonforfeiture, loan values, grace periods and reinstatement provisions.� It is always important to know one�s own state laws; as an insurance professional this is an agent�s duty and moral obligation to his or her clients.� It is also an obligation the agent has to the companies they license with.

Incontestability

� The incontestability provision prevents the insurer, following a specifically stated period of time, from rescinding (contesting) the policy on the basis of misstatements made or omission of facts on the original application.� While the applicant may not have intended to leave out information or state the facts incorrectly, during the initial period following policy issuance the insurer could rescind the policy for such occurrences.� States want that period of time to be reasonable so they impose incontestability requirements.

� Exact wording will vary based on state requirements but the incontestability statement may be similar to the following:

�This policy shall be incontestable after it has been in force during the lifetime of the insured for a period of two years from the date of issuance, except for nonpayment of premiums.�

� If premiums are not paid in a timely manner, the policy will lapse independent of any omission or misstatement of application facts.� The courts have interpreted the clause in favor of consumers, allowing it to become an agreement to disregard consumer fraud.� It makes sense to do so since it would be impractical to gather enough evidence or find sufficient witnesses to prove the applicant intended to defraud the insurance company.� The insurers also realize that misstatements and omissions in the application sometimes result from agents who wish to receive a commission.� In other words, the applicant claims he or she did in fact disclose the information to the agent, but the agent failed to disclose them to the insuring company.

� One advantage of incontestability clauses that agents and policyowners alike may not be aware of is how it affects beneficiaries.� The clause is valuable to them because it prevents delayed settlements resulting from long and costly court action if the policy has been in force for more than two years.

Misstatements in the Application

� Generally, misstatements concern the applicant�s age, but it can involve the stated gender as well.� The incontestability clause does not excuse the misstatement of age or sex since they are primary life insurance rating factors.� Obviously the older an individual is the greater the risk to the insuring company.� The gender is also a factor since women generally live longer than men.� However, such misstatements would seldom cause the policy to be rescinded although the insurer is allowed to adjust premium rates and back charge to the inception of the policy for any additions that are owed in premium.� If the insured is deceased, an adjustment would be made in the face amount of the policy to correctly reflect the premiums that were paid.� In other words, the beneficiary is paid the amount of proceeds the premiums would have purchased if the age and sex had been correctly stated.

� The author is not aware of any adjustments stated in policies for surgical sex changes.� Generally, issues of this nature must experience a court case before it becomes legally addressed in policies.� However, even in surgical sex changes it is likely that insuring factors would be based on the gender at birth since all those attributes (risk factors based on age and gender) would still exist.

Deferment Clause

� In the 1930�s insurance companies experienced multiple policyholders withdrawing or borrowing cash values from their policies simultaneously.� This forced insurers to sell assets at depressed prices, causing the companies substantial financial losses that would not otherwise have occurred.� Since then life insurance companies have been required to include a clause giving them the right to defer payment of cash or loan values in policies for a period not to exceed six months, unless the loan is for renewal of premiums.

� The deferment clause does not apply to death proceeds when the insured dies, although it may apply to lump-sum withdrawals of proceeds left with the company under the interest-only option or the prepayment of any guarantees under an installment or life income option.

Nonforfeiture

� Since cash-value contracts contain nonforfeiture provisions, the cash-value rights in a policy are not forfeited if the policy is discontinued.

Loan Values

� Many types of life insurance policies develop cash values.� Term insurance never develops cash values, so this would apply to the various forms of permanent life insurance.� Some term policies are coupled with such things as annuities but only the non-term portion would acquire cash values.

� If the policyowner wants to keep his or her life insurance policy in force while still acquiring cash he or she can arrange a loan from the insurer up to the cash value in the policy.� The insurer lends the money at the guaranteed policy rate; the rate varies so it is necessary to consult the policy and policy attachments.

� Some policyowners may feel it is unfair to charge interest when they withdraw their own policy values but there is a valid reason for doing so.� Insurance companies take into consideration the investment income of the cash values when computing premium.� Therefore, if the policyowner withdraws the cash values the insurer must be compensated for the investment income they lose.

� Originally the purpose of policy loans was to provide a source of funds for policyowner emergencies but people soon realized they could use the money for any purpose � not just emergencies.� Savvy investors pulled their cash values through policy loans and invested them in short-term vehicles at higher rates to earn a profit.� For example, a policyowner earning 5 percent on his cash values might withdraw the money and invest in short-term financial paper at 8 percent, earning a higher rate than he could have in his life insurance policy.� This became a widespread occurrence and it put insurance companies at a competitive disadvantage.

� The National Association of Insurance Commissioners, partially as a result of this problem, approved a model bill permitting a policy loan provision for new polices that allowed periodic adjustments of the policy loan rate.� The adjustments are based on specified indexes of long-term corporate bond yields.� The maximum loan rate for each policy must be determined at regular intervals, at least once a year but not more often than once in any three-month period.� The rate charged may be increased if the increase would be 0.5 percent per annum.� It must be decreased if the decrease would amount to 0.5 percent per annum.� The NAIC model bill permits a fixed policy loan interest rate of 8 percent in place of the variable rate.

Grace Periods and Reinstatement

� Insurance contracts provide a grace period during which the insured may pay their premiums without losing insurability.� While it is never wise to pay premiums late, the grace period does allow policyowners to maintain their policies even if premiums are paid late, as long as they are paid within the grace period allowed.� Grace periods are 30 or 31 days following the premium due date.� If late premiums are paid within this time period the policy remains in effect, as though premiums had been paid on time.

� If premium is not paid by the end of the grace period policies without cash value will terminate.� Those with a cash value will be placed on the appropriate nonforfeiture option. �If death occurs during the grace period any unpaid premium will be deducted from the life proceeds the beneficiary receives.

� Policyholders may reinstate their lapsed policy within specified time periods.� He or she will be required to pay all back premiums prior to reinstatement and provide proof of insurability.� The length of reinstatement varies but usually the time is three to five years.� If reinstatement is sought by the insured within a short time of lapse proof of insurability may be no more than a simple statement made by the policyholder.� For longer periods of lapse the insurer may require a medical examination similar to what a new application would require.

Allowed Policy Provisions

� Some policy provisions are allowed since they do not violate state or federal requirements.� State laws generally allow insurers to include restrictions for such things as suicide, aviation, and war, for example.

Suicide

� If an individual was suicidal it would be logical to first buy a life insurance policy naming loved ones as beneficiaries.� This would be considered �adverse selection.�� Obviously, it would not benefit insurers to have very many people buy a policy and then commit suicide.� Therefore, there is a restriction in life insurance policies restricting benefits when death is the result of suicide.� Polices will not pay benefits for suicide within two years from the date of issuance (a few restrict payment for one year).� Insurers must still return all premiums that have been paid but no death benefit is due.

Aviation

� Aviation restriction provisions are usually limited to planes flown by nonprofessionals and the insured individual.� Flight in commercial airlines would not be restricted.� Usually the provision states exclusion �for aviation deaths, except those of fare-paying passengers on regularly scheduled airlines.�� Military aircraft is typically excluded since that would imply active duty in the military, which would be covered by military life insurance.� Military exclusions may read similar to: �exclusion of deaths in military aircrafts only; exclusion of pilots, crew members, or student pilots and aviation death while on military maneuvers.� �There was a time when only policies issued during periods of war would include these clauses but today, with America involved in non-declared war conflicts, these are more likely to appear in contracts.

War

� War clauses vary widely so it is always important to review the actual policy for details.� Some policies will totally prohibit payment for deaths resulting from war in any capacity while others will prohibit payment only for specific situations.� If the death occurred while the insured was in the military, for example, but the death itself was not related to war activities the policy might still pay benefits to the beneficiary.� The insurer will refund any premiums that were paid or an amount equal to the policy reserve.

General Provisions

� Insurance companies certainly underwrite and create policies with profits in mind.� It would actually be unethical for them to do otherwise since they must remain in business if they are to pay out benefits to those that deserve them.� Even state and federal laws recognize that insurers must remain profitable.� With that goal in mind, there are general provisions designed for the protection of the insurer, which in turn protects policyowners.

Deduction of Indebtedness and Premium Refund

� Indebtedness to the insurer from a policy loan will be deducted from any proceeds payable to a beneficiary at death, or from cash values upon surrender of the policy.� Insurers may refund unused premiums if the insured dies with an insured term paid for, but this is not generally required by law.

For example: Ivan Insured mails a quarterly life insurance premium payment to his insurance company on December 15th for the policy term from January 1 through March 31.� On December 28th he unexpectedly dies from injuries incurred in an automobile accident. His insurer may or may not automatically refund his quarterly payment to his estate, depending upon company practice.

� His insurance company is not required to return his premium but may do so if it is their normal practice to do so.� Even when an insurance company does not ordinarily return unused premium, they may do so upon request.� Therefore, estate administrators typically do request refund of unused premiums as a matter of standard estate settlement practices.

Change of Beneficiary

� When an application is taken for life insurance coverage the agent requests a primary beneficiary listing.� The beneficiary may be a single person or multiple people.� When multiple people are named the application will request a listing of each beneficiary percentage of proceeds upon the insured�s death.� For example, it may state: Mary Maxwell: 50% and James Higgins: 50%.� If the agent is wise, he or she will also request a contingent beneficiary in case the first named beneficiary or beneficiaries predeceases the insured.�

� In most policies the applicant reserves the right to change the primary and contingent beneficiary designations.� In many cases change of beneficiary is merely a matter of filling out a new beneficiary designation form, but some companies may require the original policy be returned along with the completed form.

Assignment

� In property insurance contracts the consent of the insurer is needed to assign benefits to another, but this is not typically the case for life insurance contracts.� However, the life insurance company is likely to require notice of assignment be filed with their home office.� This is usually considered a consumer protection measure.

Beneficiary Designations

� While it is not mandatory, the wise policyowner will always name an individual or individuals as policy beneficiaries.� Seldom would entering �estate� on the beneficiary line be wise.� Policy benefits bypass probate proceedings when a person is the listed beneficiary.� The designation may be either revocable or irrevocable.� Most people would always choose a revocable designation, meaning the insured can change his or her named beneficiary any time they wish to, and usually as often as they wish.

� If the beneficiary designation is irrevocable all policy rights are vested in the beneficiary and the policyowner may not assign the policy or borrow on it without first getting the beneficiary�s permission.� An irrevocable beneficiary designation may be either reversionary or absolute.� In reversionary designations the policy rights revert to the policyowner if the beneficiary dies first. �In absolute designations the value of the policy is included in the beneficiary�s estate for the beneficiary�s heirs.

� It is important to be precise when listing beneficiary designations.� An agent is unlikely to ever allow his or her client to list �Granddaughter Nancy� for example.� While there may currently be only one granddaughter named Nancy there is no way to know what the future may bring.� It is important to list full names so there is no doubt as to who the intended beneficiary is.� If available, listing the beneficiary�s Social Security number is also advisable.

� Policy forms allow both a primary and secondary beneficiary listing.� The secondary beneficiary is often referred to as the contingent beneficiary designation.� The contingent beneficiary would receive the life insurance proceeds if the primary beneficiary had died prior to the insured individual.

� Some third-party rights do exist in life insurance contracts.� Beneficiary rights are determined by the type of beneficiary designation and by the ownership of the policy.� In some cases, the beneficiary is both the beneficiary and the policy owner; certainly he or she can then exercise all policy rights by virtue of contract ownership.� The owner may exercise all policy rights including policy loans and assignments regardless of the type of beneficiary designation.

� If the beneficiary is not also the owner but is revocably designated as beneficiary he or she has a contingent interest in the policy.� This is an interest that is contingent upon the subject dying prior to the named beneficiary and prior to revoking that person in favor of another.� A revocable designation may be changed to someone else if the insured wishes to.

� A person named as an irrevocable beneficiary has a vested interest in the policy.� He or she can deny the owner permission for policy loans, assignment and any other action relating to the policy that would affect the proceeds the irrevocable beneficiary would receive, assuming he or she outlives the insured.

� Creditors� rights to the insured�s cash values and life insurance proceeds are generally restricted by common law, federal statutes, and state statutes.� Sometimes creditors� rights depend to some degree on how the beneficiary designation is stated.� If the insured dies and the beneficiary designation listed �estate� it will likely make the funds available to creditors.� It may be possible to legally attach a life insurance policy but the availability of any cash reserves or values would depend on the policy�s provisions.� If removing the cash values will not cancel out the policy, the courts may allow it.� Even so, if the right to collect is a policy option to be exercised by the insured, the insurance company is not obligated to pay the cash value until the insured elects that option, so creditors may not be able to actually receive the cash values.� Creditors do not have the right of election and the courts will not typically force election on the insured.� Creditors can claim cash values only through formal bankruptcy proceedings.

� In the case of death, the courts have ruled that policy proceeds then belong to the named beneficiaries, as long as �estate� was not listed rather than an actual person.� As a result proceeds are not subject to the insured�s creditors because they now belong to the third party beneficiaries.� If the insured owes taxes, usually collection is limited to cash values, not death proceeds.

� Two federal statutes concern creditor�s rights to life insurance: federal tax liens and bankruptcy. The federal government can collect its tax claims directly from the insured�s insurance company, although it is limited to the policy�s cash values. If the insured dies prior to paying the taxes he or she owes, the tax claim is still collected but it is limited to the cash values contained in the policy immediately prior to death.

� When a policyowner files bankruptcy the Federal Bankruptcy Act determines how life insurance policies are treated.

� State statutes have generally exempted life insurance from creditor�s claims, although each state will have variances.� State statutes take precedence over the Federal Bankruptcy Act.� Crossman Co. v. Ranch in New York stated exemptions on life insurance proceeds were enacted for �the humane purpose of preserving to the unfortunate or improvident debtor or family the means of obtaining a livelihood and preventing them from becoming a charge upon the public.�

� In many states the exemption extends only to policies payable to the insured�s spouse and children.� In some states it extends the protection to any person that was dependent upon the insured, which could even include aged parents.� Some states extend this creditor protection to any listed beneficiary (that is not the estate).� In most states this protection includes not only the death proceeds but also any cash values.� A few states provide protection from creditors to the beneficiaries as well as the insured.� If the statute is not applicable to the beneficiary�s creditors the insured may provide this protection by including a spendthrift trust clause in the policy settlement agreement.� This clause gives the beneficiary protection from their personal creditors.� A spendthrift trust clause requires the policyowner to elect an installment settlement option.� Only the proceeds held by the insurer for the benefit of the beneficiary are protected; any money the beneficiary receives is then available to creditors.

� Every time an application for life insurance is made the applicant has several decisions to make.� These decisions concern beneficiary designations as well as ownership and policy options.� All decisions are important.

Policy Payments

� Policyholders and beneficiaries may receive payments under the terms of their life insurance policy.� The payment amount depends upon a variety of factors relating to the policy.� Obviously, a term insurance policy would not have any cash values whereas a universal life insurance policy might.� Even in a permanent policy, such as universal life, payments would depend upon how many and how long premiums have been paid.� It would also depend how the insurance carrier handles policy costs.

Cash Values

� All forms of permanent insurance, such as universal life, have cash values if sufficient premiums have been paid.� The policy will state the amount of cash value available each year the policy remains in force.� A cash value policy is expensive if the insured does not keep the policy active for a sufficient length of time; short term life insurance needs are best suited to term coverage (with no cash values).� Experts recommend cash value policies be kept for no less than ten years.� For those that do select cash value products and keep them long enough to make the cost worthwhile cash values can be effective in supplying retirement income or emergency cash.�

� Cash values may be accessed at any time at the policyowner�s request.� However, there are other options besides just withdrawing the funds.� These options include:

1.      Borrowing against the policy.� Once money is borrowed, if the insured dies prior to repaying the loan, the amount borrowed will be subtracted from the benefits that are payable to the listed beneficiaries.

2.      Buying reduced coverage.� If the insured finds he or she is not able to pay the premiums but still wants to keep the coverage, it is possible to get reduced permanent life insurance.� The cash value is used to buy a smaller policy that is paid in full.

3.      Changing to term insurance.� If it becomes difficult to manage the premiums in a cash value life insurance policy, the insured could elect to reduce the cost by using cash values to purchase a paid-up term life policy, assuming sufficient cash values exist to do this.� When the term contract ends, coverage also ends.� This may be referred to as extended term life insurance.

Dividends

� For insurance purposes, dividends are refunds of premiums for those who have participating policies.� A participating policy (called a par policy) is one that has a premium fixed at an amount higher than the insurance company believes will be needed to cover the costs of providing protection.� The extra payment is returned to the policyholder as a dividend after the actual insurance costs are determined.� The policyowner is guaranteed not to have to pay higher premiums than those stated in the policy.� The dividends can be used to pay the lower premiums, buy additional insurance, or earn interest if left in the policy cash values.

� Nonparticipating policies, referred to as non-par policies, have premiums fixed as close as possible to the actual cost of providing the coverage.� As a result, there would not be any dividends paid to the policyowner.

Proceeds

� Proceeds are paid to a listed beneficiary when the insured individual dies.� To receive the proceeds the beneficiary must file a claim with the insuring company.� Once the proper filing has been made, the individual will receive the face amount of the policy, called the proceeds.� Proceeds can be received in one of several ways, called settlement options.� The settlement options include:

1.      Lump-sum option, which allows the beneficiary to receive the entire amount in cash.

2.      Amount option, which allows the beneficiary to take a certain amount each month until the money and interest run out.

3.      Time option, which allows the beneficiary to take the money plus interest paid out over a specified period of time (such as ten or twenty years) on a monthly installment basis.

4.      Interest option, in which the cash values are left on deposit with the insurance company to earn interest indefinitely.� The recipient simply withdraws the interest earning periodically as the need for cash arises.

5.      Lifetime income option, in which the individual receives a guaranteed income for their lifetime.� The payments consist of interest only so they can never run out.

Special Clauses

� While all contracts can be intimidating, some of the most difficult contract language is found in insurance policies that have special clauses.� Special clauses may do multiple things, depending upon the insurer�s intent. �These clauses might limit the insured�s rights or grant the policyowner important privileges.� Agents must understand and be able to communicate the options or limitations special clauses contain.

� Nearly all policies have clauses of some sort.� They might include:

1.      Incontestable clauses, which state that the insured has a �temporary� policy for a specified length of time; incontestability of the coverage is typically two years.� If the insurer finds the insured has lied or misrepresented the facts on their application for the specified period of time the company may refuse to pay a claim or even rescind (take back) the coverage entirely.� Of course a life insurance policy would end anyway upon the death of the insured, so rescission is not really an issue if the insured has died.

2.      Waiver-of-premiums clause, which waives payments for a stated period of time, usually six months.� This provision is particularly important if the insured becomes disabled, sick, or injured and cannot work for a period of time.� Without this provision failure to pay the premiums, even if it is due to a disabling injury, will mean lapse of coverage.� Some policies will pay the premiums on the insured�s behalf up to the age of sixty-five, so this provision is a significant benefit to the insured individual and his or her family.

3.      Automatic premium loan, which will pay the premium on behalf of the insured if he or she fails to do so.� The premiums are charged against the policy as an automatic premium loan so the policy does not lapse. �Interest will be charged on the loan.

4.      Accidental death benefit, which might also be called an indemnity.� An indemnity clause promises the policy will pay an extra amount if the insured dies as a result of an accident rather than natural causes.� We sometimes hear this referred to as a �double indemnity clause� when the insurer will pay double the face value when death results from an accident. It can be more than a double indemnity, depending upon contract terms; it could be triple indemnity or even quadruple indemnity.� There are often some identifying requirements for indemnity payment; for example, the insured may have to die within 90 days of the accident to receive these additional proceeds.� If he or she lives longer than the requirement, it would not be treated as death by accident, but instead it would be considered death by natural causes (so no indemnity payment would be available).� Most policies do charge an additional premium for the accidental death benefit, but it is typically very low since accidental death is not as likely as natural death.� The actual premium will depend upon risk factors for the insured.

5.      Assignment clause; if the insured has kept the right to change his or her life insurance beneficiary, the policy can be assigned to another party to serve as security for a debt or loan.� Some banks will lend money on a life insurance policy if it can be assigned to them, for example.� If the insured does not have the legal right to assign the life insurance policy, then the beneficiary would have to give permission to do so.

6.      Non-cancelable clause, which allows the insured to continue an insurance policy for as long as the premiums are paid.� It cannot be canceled for any reason other than nonpayment of premium.� This becomes very important if the insured develops a medical condition that renders him or her uninsurable.

7.      Guaranteed insurability option, which allows the policyowner to buy additional insurance at some point without proving his or her current insurability.� Like the non-cancelable clause this becomes important if health status changes, making the insured uninsurable.� Typically, this option is available to new applicants who are under the age of forty who are buying a whole-life, universal life, or endowment policy.� Although the availability of buying additional insurance depends upon contract language, often additional insurance is available every few years until the age of forty.� The amount of additional insurance available may be limited so it is important to read the policy carefully.

8.      Exclusions: some policies exclude certain situations entirely from coverage.� For example, non-fare airplane flight is often completely excluded under the policy exclusions.� Exclusions tend to be similar in all policies but since there may be some variance the buyer should shop around if a particular exclusion applies that he or she would like covered by their life insurance policy.� In many cases, if death results from an exclusion companies will return premiums if the death occurs within the first two policy years.

End of Chapter 3

What is not an example of a valid insurable interest?

Do you have to prove insurability?

When would evidence of insurability be required for a person already covered?

What are sources of insurability?