Recap of Chapter Four

Insurance policies may differ in structure and features, but all insurance contracts contain certain standardized provisions. 4.1

The Entire Contract Clause states that the policy, any riders or endorsements, amendments, and a copy of the application together make up the complete contract. No document may be incorporated into the contract by reference. 4.1

The Insuring Clause represents the insurer's promise to pay the benefits stated in the contract if the insured dies while the policy is in force. This clause is typically located on the first page of the policy. 4.1

The Free Look Provision allows the policyowner a limited period of time—usually 10 days—to review the policy and decide whether to keep it. If the policy is returned during the free look period, the insurer must provide a full refund of any premiums paid. 4.1

The Consideration Clause specifies the premium amount and the schedule of payments required from the policyowner in order to maintain the policy in force. 4.1

Policy changes may be requested by the policyowner; however, no modification becomes valid unless it is made in writing and signed by an authorized executive officer of the insurance company. 4.1

The Incontestability Provision states that after a policy has been in force for two years, the insurer can no longer deny a claim based on material misrepresentations made in the insurance application. 4.1

Misstatements regarding the insured's age or gender are not subject to the incontestability provision and may be corrected at any time. 4.1

An absolute assignment allows the policyowner to transfer ownership of the policy to another person after notifying the insurer. This type of assignment permanently transfers all ownership rights. 4.1

A collateral assignment occurs when the policyowner assigns part or all of the policy proceeds to a third party as security for a debt. This assignment is temporary and remains in effect only until the debt is fully repaid. 4.1

A collateral assignment has priority over the beneficiary's claim to the policy proceeds to the extent of the outstanding debt. 4.1

An assignment is not binding on the insurer unless it is submitted in writing and received at the insurer's home office. 4.1

The Suicide Provision states that if the insured dies by suicide within the first two years after the policy is issued, the insurer will not pay the death benefit. Instead, the insurer will refund the premiums paid to the beneficiary. 4.1

A misstatement of age or gender is not considered material to the risk of death, but it does affect the cost of insurance. If such a misstatement is discovered—often after the insured's death—the policy benefits will be adjusted to the amount that the paid premiums would have purchased based on the insured's correct age or gender. 4.1

The four most common exclusions in life insurance policies are often referred to as the “WASH” exclusions: War, Aviation, Status (military status), and Hazardous Occupations or Hobbies. 4.1

Insurance producers do not have the authority to waive or modify the terms of an insurance policy, either verbally or in writing. Any changes to the policy must be made by the insurance company and must be signed by an authorized executive officer of the insurer. 4.1

Premium mode refers to how frequently premiums are paid. The four standard premium payment modes are annual, semiannual, quarterly, and monthly. Generally, the more frequently premiums are paid, the higher the total cost of premiums over the course of the year. 4.2

The grace period in a life insurance policy is typically 31 days, although the exact timeframe is specified in the policy. This is the period during which coverage continues even if the premium has not been paid. 4.2

If the insured dies during the grace period, the death benefit will still be paid, but any unpaid premium will be deducted from the proceeds. 4.2

A cash value policy may include an Automatic Premium Loan (APL) provision. This provision allows the insurer to automatically borrow from the policy's cash value to pay an overdue premium at the end of the grace period, helping prevent the policy from lapsing. 4.2

If a policy does lapse, coverage is no longer in effect. The reinstatement provision allows the policy to be restored if the insured (1) provides evidence of insurability, (2) pays all overdue premiums with any required interest, and (3) repays or reinstates any outstanding policy loans along with accrued interest. 4.2

Reinstatement restores the policy to its original terms, which benefits the policyowner by maintaining the original premium rate and policy provisions established at the time the policy was issued. 4.2

Because reinstatement requires a new application, a new contestability period begins. During this time, a claim may be denied if material misrepresentation or concealment is discovered in the reinstatement application. 4.2

Interest on policy loans, including automatic premium loans, is typically charged annually. If the interest is not paid, it is added to the loan balance and will also accrue interest in the future. 4.3

Any unpaid loan principal and accumulated interest will be deducted from the policy's death benefit if the insured dies while the loan is still outstanding. 4.3

Beneficiaries are generally named in the insurance application. Unless a beneficiary is designated as irrevocable, the policyowner may change the beneficiary at any time. 4.5

The insurer will process a change of beneficiary once a properly completed request has been received. The change becomes effective as of the date the request was signed by the policyowner. 4.5

If a beneficiary is designated as irrevocable, the beneficiary cannot be changed without that beneficiary's written consent or death, since an irrevocable beneficiary has a vested interest in the policy proceeds. 4.5

The primary beneficiary holds the first priority to receive the death benefit when a claim is paid. 4.5

A contingent beneficiary holds a secondary position and receives the policy proceeds only if the primary beneficiary does not survive the insured. 4.5

There is no limit to the number of primary or contingent beneficiaries that may be named. When multiple beneficiaries are designated, their shares should generally be specified as percentages, unless they are intended to receive equal dollar amounts. 4.5

If no beneficiary survives or no beneficiary has been named, the policy proceeds are payable to the policyowner. If the insured is also the policyowner, the proceeds are paid to the insured's estate. 4.5

Naming beneficiaries by individual name, such as John Smith or Mary Jones, is generally preferable to using a class designation, as it helps prevent complications and potential probate issues. 4.5

A Common Disaster Provision addresses situations in which the insured and the primary beneficiary die in the same accident. The provision requires that the beneficiary survive the insured by a specified number of days; otherwise, the insurer assumes the insured died last and the proceeds pass to the contingent beneficiary or next eligible party. 4.5

Life insurance proceeds are protected under spendthrift laws, which prevent creditors of either the deceased insured or the beneficiary from claiming policy proceeds that have not been previously assigned. 4.5

Settlement options describe the different methods by which a beneficiary may receive life insurance policy proceeds. 4.6

A settlement option may be selected by the policyowner before the insured's death, or by the beneficiary after the insured's death if no option was previously chosen. The policyowner may change the selected option at any time while the insured is living; however, once the insured has died, the settlement option generally cannot be changed. 4.6

The lump-sum settlement option is the most commonly selected method of payment. Under this option, the beneficiary receives the entire death benefit in a single payment, which is typically income tax free. 4.6

A fixed amount option specifies the dollar amount of each payment, while a fixed period option specifies the length of time over which payments will be made. In both cases, the policy proceeds remain with the insurer and earn interest, which is taxable to the recipient. 4.6

An interest-only option allows the beneficiary to receive periodic payments consisting solely of the interest earned on the policy proceeds held by the insurer. The beneficiary may withdraw part or all of the remaining principal at any time, generally income tax free. 4.6

Life insurance proceeds may also be used to purchase an annuity, which provides periodic payments under several available payout options. Each payment consists of a portion of non-taxable principal and taxable interest. 4.6

A life-income only option provides the largest periodic payments to the beneficiary, but payments stop upon the beneficiary's death and no further benefits are paid to others. 4.6

A life income with period certain option guarantees payments for a specified number of years and continues payments for the lifetime of the beneficiary if the beneficiary lives beyond that period. If the beneficiary dies before the guaranteed period ends, the remaining payments are made to a designated beneficiary. 4.6

Nonforfeiture options apply only to policies that accumulate cash value during the insured's lifetime. Traditional term life policies do not include nonforfeiture options. 4.6

The policyowner may choose among three nonforfeiture options: cash surrender value, reduced paid-up insurance, or extended term insurance. 4.6

Cash surrender value allows the policyowner to terminate the policy and receive the available cash value as a lump-sum payment. Any amount received that exceeds the total premiums paid may be subject to taxation as ordinary income. 4.6

Reduced paid-up insurance uses the policy's cash surrender value to purchase a single-premium whole life policy with a reduced face amount based on the insured's attained age. The new policy has its own cash value equal to the premium used to purchase it and typically endows at age 100. It may also be surrendered for its increasing cash value at any time. 4.6

Extended term insurance uses the policy's cash value to purchase term insurance with the same face amount as the original policy. Coverage continues for as long as the available cash value can purchase term coverage based on the insured's attained age. In many states, this option is the default nonforfeiture option if no other option is selected. 4.6

Dividend options are available only on participating policies. Term life policies are rarely participating. Dividends come from the insurer's divisible surplus, which the company's board of directors may distribute to policyowners. 4.6

For income tax purposes, policy dividends are treated as a return of excess premium and are not taxable until the total dividends received exceed the total premiums paid. 4.6

Common dividend options include cash payment, purchase of paid-up additions, purchase of one-year term insurance, premium reduction, and accumulation at interest. 4.6

Paid-up additions function as additional small life insurance policies that accumulate their own cash value and increase the overall death benefit. 4.6