Focus view 34

POLICIES COMPARED
Adjustable Life	Key Features: Can be Term or Whole Life; can convert from one to the other Premium: Can be increased or decreased by policyowners Face Amount: Flexible; set by policyowner with proof of insurability Cash Value: Fixed rate of return; general account Policy Loans: Can borrow cash value
Universal Life	Key Features: Permanent insurance with renewable term protection component Premium: Flexible; minimum or target Face Amount: Flexible; set by policyowner with proof of insurability Cash Value: Guaranteed at a minimum level; general account Policy Loans: Can borrow cash value
Variable Life	Key Features: Permanent insurance Premium: Fixed (if Whole Life); flexible (if Universal Life) Face Amount: Can increase or decrease to a stated minimum Cash Value: Not guaranteed; separate account Policy Loans: Can borrow cash value

3: When a reduced-paid up nonforfeiture option is chosen, what happens to the face amount of the policy?

A It decreases over the term of the policy.

B It remains the same as the original policy, regardless of any differences in value.

C It is reduced to the amount of what the cash value would buy as a single premium.

D It is increased when extra premiums are paid.

In a reduced paid-up policy, the original policy’s cash value is used as single premium to pay for a permanent policy with a reduced face amount from the original, hence the name. The new policy accumulates in cash value until its maturity or the insured’s death.

6: An insured has chosen joint and 2/3 survivor as the settlement option. What does this mean to the beneficiaries?

A The beneficiary will receive 2/3 of the lump sum up front, and the remaining 1/3 will be paid over time.

B The beneficiary will receive 2/3 of the total benefit, with the final 1/3 payable when the first beneficiary dies.

C One of the beneficiaries will receive 1/3 and the other 2/3 of the proceeds when the insured dies.

D The surviving beneficiary will continue receiving 2/3 of the benefit paid when both beneficiaries were alive.

When the reduced option is written as “joint and 2/3 survivor,” the surviving beneficiary receives 2/3 of what was received when both beneficiaries were alive.

11: A father owns a life insurance policy on his 15-year-old daughter. The policy contains the optional Payor Benefit rider. If the father becomes disabled, what will happen to the life insurance premiums?

A The premiums will become tax deductible until the insured's 18th birthday.

B Since it is the policyowner, and not the insured, who has become disabled, the life insurance policy will not be affected.

C The insured will have to pay premiums for 6 months. If at the end of this period the father is still disabled, the insured will be refunded the premiums.

D The insured's premiums will be waived until she is 21.

If the payor (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21.

1: Which of the following is true about the premium on the children’s rider in a life insurance policy?

A It decreases when the oldest child reaches the age of 21.

B It increases when a newborn baby is added to the policy.

C It decreases when an adopted child is added to the policy.

D It remains the same no matter how many children are added to the policy.

The premium does not change on the inclusion of additional children; it is based on an average number of children.

1: Children's riders attached to whole life policies are usually issued as what type of insurance?

A Variable life

B Adjustable life

C Whole life

D Term

Children’s term riders provide term insurance with coverage expiring when the minor reaches a certain age.

2: The rider in a whole life policy that allows the company to forgo collecting the premium if the insured is disabled is called

A Guaranteed insurability.

B Waiver of cost of insurance.

C Payor benefit.

D Waiver of premium.

Waiver of premium rider waives the premium if the insured owner has been totally disabled for a predetermined period. The payor benefit provides for an owner other than the insured and the waiver of cost of insurance is found in Universal Life.

7: An insured has a life insurance policy from a participating company and receives quarterly dividends. He has instructed the company to apply the policy dividends to increase the death benefit. The dividend option that the insured has chosen is called

A Paid-up additions.

B One-year term purchase.

C Accumulation at interest.

D Reduction of premiums.

When this option is selected, the annual dividend acts as a single premium each year to buy additional amounts of insurance, based on the insured's currently attained age.

12: A life insurance policy does not have a war clause. If the insured is killed during a time of war, what will the beneficiary receive from the policy?

A A refund of premiums

B Nothing, since the insured was killed as a result of a war

C The full death benefit

D The policy’s cash value

War or Military Service Clause specifically excludes or limits the insurer's liability for losses caused by war or active military service. If a life insurance policy does not have that exclusion, the benefits are paid to the beneficiary, as if the insured died of any other cause.

13: When the insured selects the extended term nonforfeiture option, the cash value will be used to purchase term insurance with what face amount?

A The same as the original policy minus the cash value

B Equal to the original policy for as long as the cash values will purchase.

C In lesser amounts for the remaining policy term of age 100.

D Equal to the cash value surrendered from the policy

With this option, the cash value is used as a single premium to purchase the same face amount as the original policy for as long a period of time as the cash will buy at the insured's current age.

TYPE OF RIDER	AVAILABLE RIDERS
Disability Riders	Waiver of Premium Waiver of Cost of Insurance Disability Income Payor Benefit
Riders Covering  Additional Insureds	Spouse Children Family
Riders Affecting  Death Benefit	Accidental Death Guaranteed Insurability Cost of Living Return of Premium Accelerated (Living) Benefit

nonforfeiture options: cash surrender value, reduced paid-up insurance, or extended term.

OPTION TYPE	AVAILABLE OPTIONS
Nonforfeiture Options	Reduced Paid-up Extended Term (automatic) Cash
Dividend Options	Cash Reduction of Premium Accumulation at Interest Paid-up Additions (automatic) Paid-up Insurance One-year Term
Settlement Options	Cash (automatic) Life Income Interest Only Fixed Period Fixed Amount

F. Chapter Recap

In this chapter you learned about provisions, options and riders available in life insurance policies. Remember that provisions state the rights and obligations under the contract; riders modify provisions, and options specify ways to distribute policy proceeds. Let's recap the major points of this chapter:

POLICY PROVISIONS
Required Provisions	Assignment Entire contract Grace period Incontestability Misstatement of age Ownership Payment of premiums Proof of death Reinstatement Right to examine (free look) Statements of the applicant/insured
Exclusions	Aviation Hazardous occupation Suicide (within a specified time period) War or military service
Beneficiaries	Designations: Individuals, classes, estates, minors, trusts Succession - the levels of priority. Each level in the succession is only eligible if the beneficiary in the level above has died: Primary - first claim to the policy proceeds Contingent (secondary, tertiary) - next claim after primary Policyowner's right to change a beneficiary: Revocable - can be changed at any time Irrevocable - can only be change with the beneficiary's consent Common disaster clause - protects the rights of contingent beneficiaries; if the insured and the primary beneficiary died at approximately the same time, it is assumed that the primary beneficiary died first Spendthrift clause - protects policy proceeds from the claims of creditors
Policy Loans, Withdrawals and Partial Surrenders	Cash loans available - policy's cash value minus any unpaid loans and interest Automatic premium loans - prevent unintentional policy lapse due to nonpayment of premium Withdrawals and partial surrenders - available in Universal Life; a charge may apply
OPTIONS
Nonforfeiture	Cash surrender value - after that, no more insurance Extended term - automatic option; uses cash value to convert to term insurance Reduced paid-up insurance - uses cash value as a single premium to purchase a permanent policy with a reduced face amount
Dividend	Cash - insurer sends a check to the insured Reduction of premium - dividend is applied to the next year's premium Accumulation at interest - insurer keeps the dividend in an account where it accumulates interest One-year term - dividend is used to buy additional insurance Paid-up addition - dividend is used to increase the face amount
Settlement	Cash - lump-sum payment; usually not taxable Interest only - insurer retains the principal and only pays out interest Fixed period - payments for a specified time period until all the proceeds are paid out Fixed amount - payments in specified amounts until all the proceeds are paid out Life income - provides an income the beneficiary cannot outlive; no guarantee that the principal will be paid out (if the beneficiary dies too soon); available as single life or as joint and survivor
RIDERS
Disability	Waiver of premium - waives the premium if the insured becomes totally disabled; 6 months waiting period before benefits begin Waiver of cost of insurance - in Universal Life policies: waives the cost of insurance in the event of the insured's disability Disability income - waives the premium and pays monthly income
Accelerated Benefit	Early payment if insured is diagnosed with a specified catastrophic illness A portion of the death benefit Death benefit is reduced by the amount paid plus earnings lost by the insurer
Additional Insureds	Spouse/other insured - term rider (limited time, limited coverage); usually expires when spouse turns age 65 Children's term - covers all children of the insured (limited time, limited coverage); can be converted to a permanent policy Family term - spouse and children covered under one rider
Riders that affect the Death Benefit	Accidental death - pays double or triple indemnity if accidental death occurs as defined in the policy; death must occur within 90 days of accident Guaranteed insurability - allows for purchase of additional insurance at specified times without evidence of insurability, at the insured's attained age Cost of living - increases the face amount by a cost of living factor died to inflation Return of premium - increasing term is added to a whole life policy that provides that if death occurs prior to a given age, not only is the death benefit payable to the beneficiary, but all premiums paid as well

5: An insured has a life insurance policy that requires him to only pay premiums for a specified number of years until the policy is paid up. What kind of policy is it?

A Limited-pay Life

B Variable Life

C Adjustable Life

D Graded Premium Life

In limited-pay policies, the premiums for coverage will be completely paid-up well before age 100, usually after a specified number of years.

7: When an employee terminates coverage under a group insurance policy, coverage continues in force

A Until the employee can obtain coverage under a new group plan.

B Until the employee notifies the group insurance provider that coverage conversion policy is issued.

C For 31 days.

D For 60 days.

An employee has 31 days under the conversion privilege to convert to an individual policy.

14: The type of policy that can be changed from one that does not accumulate cash value to the one that does is a

A Decreasing Term Policy.

B Whole Life Policy.

C Convertible Term Policy.

D Renewable Term Policy.

A convertible term policy has a provision that allows the policyowner to convert to permanent insurance.

2: An insured pays $1,200 annually for her life insurance premium. The insured applies this year's $300 worth of accumulated dividends to the next year's premium, thus reducing it to $900. What option does this describe?

A Reduction of Premium

B Accumulation at Interest

C Cash option

D Flexible Premium

The Reduction of Premium option allows the policyholder to apply policy dividends toward the next year's premium. The dividend is subtracted from the premium amount, yielding the new premium due for the next year.

4: An insured purchased a life insurance policy on his life naming his wife as primary beneficiary, and his daughter as contingent beneficiary. Under what circumstances could the daughter collect the death benefit?

A The primary and contingent beneficiaries share death benefits equally

B With the primary beneficiary’s written consent

C If the insured died from accidental means

D If the primary beneficiary predeceases the insured

The daughter, as contingent beneficiary, would need to outlive the insured and primary beneficiary.

11: The clause that protects the proceeds of a life insurance policy from creditors after the death of the insured is known as the

A Spendthrift clause.

B Benefit protection clause.

C Incontestability clause.

D Beneficiary protection clause.

The spendthrift clause protects the policy proceeds from creditors of the policyowner or beneficiary.

14: If an insured continually uses the automatic premium loan option to pay the policy premium,

A The insurer will increase the premium amount.

B The policy will terminate when the cash value is reduced to nothing.

C The face amount of the policy will be reduced by the automatic premium loan amount.

D The cash value will continue to increase.

This option, usually elected at the time of application, provides that in case of a possible policy lapse, the premium will be automatically paid form the contract’s guaranteed cash value. However, once the cash value is exhausted, the policy will terminate.