Chapter 4

Life Insurance Contractual Provisions

LIFE INS. CONTRACTUAL PROVISIONS

1-OWNERSHIP CLAUSE: the owner of a life insurance policy can be the insured, the beneficiary, a trust, or any party.

-In most cases, the applicant, insured & owner are the same person.

-Policyowner possess all contractual rights in the policy while the insured is living, that include: naming & changing the beneficiary, surrendering the policy, borrowing CV, receiving dividends, changing the owner and electing settlement options (w/out the beneficiary’s consent).

LIFE INS. CONTRACTUAL PROVISIONS

2-ENTIRE-CONTRACT CLAUSE: states that the life insurance policy & attached application constitute the entire contract between the parties.

Purposes of the entire contract clause: - Prevents the insurer from amending the policy w/out the knowledge or consent of the owner by changing its charter or by laws.

- Protects the beneficiary.

LIFE INS. CONTRACTUAL PROVISIONS

3- INCONTESTABLE CLAUSE: stated that the insurer cannot contest (dispute) the policy after it has been in force for 2 years during the insured’s lifetime.

Ex: fraud: Insured said I don’t have blood pressure but he has.

Except: fraud of gross nature like letting someone take your medical examination, insurer won’t pay, no insurable interest at inception, beneficiary take out insurance with intention of murdering the insured.

LIFE INS. CONTRACTUAL PROVISIONS

4- SUICIDE CLAUSE: states that if the insured commits suicide within ½ years after the policy is issued, the face amount of insurance will not be paid; but only are fund of the premiums paid.

Purpose: to reduce adverse selection against the insurer (individual buys insurance with intention of committing suicide).

LIFE INS. CONTRACTUAL PROVISIONS

5- GRACE PERIOD: the policyowner has a period of 31 days to pay an overdue premium & if he dies within it, the overdue premium is deducted from the policy proceeds.

Purpose: to prevent the policy from lapsing if insured in a short of funds or have forgotten to pay the premium.

LIFE INS. CONTRACTUAL PROVISIONS6- REINSTATEMENT CLAUSE: permits the

owner to reinstate a lapsed policy.

Requirements to reinstate a lapsed policy:

1- Evidence of insurability.

2- Overdue premiums + interest must be paid.

3- Policy loan must repaid or reinstated + interest.

4- Policy must not have been surrendered.

5- Policy must be reinstated within 3 or 5 yrs from the date of lapse.

LIFE INS. CONTRACTUAL PROVISIONS Advantage to reinstate a lapsed policy

rather than purchase a new one:

1- Premium is lower because there instated policy was issued at an earlier age.

2- Acquisition expenses incurred in issuing the policy must be paid again under a new policy.

3- CV & dividends are usually higher under the reinstated policy (CV in new policy after 3 yrs).

LIFE INS. CONTRACTUAL PROVISIONS4- Incontestable period & suicide period under

the old policy may have expired.5- Reinstated policy may contain favorable

provisions, such as a 6% interest on policy loans.

Disadvantage to reinstate a lapsed policy rather than purchase a new one:

1- Substantial cash amount is required if the policy lapsed several yrs ago.

2- Most life insurers have reduced their rates over time & have developed new products, so, may be it is better to buy a new one.

LIFE INS. CONTRACTUAL PROVISIONS

7- MISSTATEMENT OF AGE OR SEX CLAUSE: If the insured’s age or sex is misstated, the amount payable is the amount that the premiums paid would have purchased at the correct age & sex.

8- BENEFICIARY DESIGNATION: beneficiary is the party named in the policy to receive the policy proceeds.

LIFE INS. CONTRACTUAL PROVISIONS The principal types of beneficiary:

8/1 Primary & contingent beneficiary: - A primary beneficiary is first person entitled to

receive the benefits on the insured’s death.- A contingent beneficiary is entitled to the proceeds

if the primary beneficiary dies before the insured.

8/2 Revocable & irrevocable beneficiary:- A revocable beneficiary means that the policyowner

reserves the right to change him w/out his consent.- Irrevocable beneficiary cannot be changed w/out

the beneficiary’s consent.

LIFE INS. CONTRACTUAL PROVISIONS8/3 Specific & class beneficiary: - A specific beneficiary means the beneficiary is

specifically named & identified.- A class beneficiary is a member of a group

designated as beneficiary, such as “children of the insured”.

9- CHANGE – OF - PLAN PROVISION: allows policyowners to exchange their policies to another one.

10- EXCLUSIONS & RESTRICTIONS:Excludes payment if the insured dies as a direct result of

specific peril (war, suicide,…).

LIFE INS. CONTRACTUAL PROVISIONS11-PAYMENT OF PREMIUMS: can be

paid annually or semiannually, quarterly, or monthly (+interest).

12-ASSIGNMENT CLAUSE: 2 types:

1/12- Absolute assignment: all ownership rights in the policy are transferred to a new owner.

2/12- Collateral assignment: the policyowner assigns a life insurance policy as collateral for a loan (rights are transferred to the creditor to protect its interest up to the loan value & the policyowner retains the remaining rights).

LIFE INS. CONTRACTUAL PROVISIONS

13- POLICY LOAN PROVISION:

allows policyowner to borrow the cash value (w interest).

Advantage: low rate of interest.Disadvantage: policy could lapse if the total debt exceeds

the CV.

14- AUTOMATIC PREMIUM LOAN: an over due premium is automatically borrowed from CV after the grace period expires, if CV is sufficient to pay the premium.

Disadvantage: may be overused & policy terminated & amount will be reduced if the premium loans are not repaid.

LIFE INS. CONTRACTUAL PROVISIONS

15- NONFORFEITURE OPTIONS: payment to a with drawing policy owner is known as a non forfeiture value or C surrender V.

There are 3 nonforfeiture options or C surrender V options:

15/1- Cash value.

15/2- Reduced paid-up insurance (small amount but same policy).

15/3- Extended term insurance (same amount but term policy).

LIFE INS. CONTRACTUAL PROVISIONS16- DIVIDENDS OPTIONS: dividends are

derived from 3 sources: expected mortality > actual; interest > expected on reserves & operating expenses < expected.

Several ways in which dividends can be taken:

16/1- Cash.

16/2- Reduction of next premium

16/3- Accumulate at interest.

16/4- Paid-up additional insurance amount at pure rate & w/out insurability.

16/5- Term insurance.

LIFE INS. CONTRACTUAL PROVISIONS17- SETTLEMENT OPTIONS: ways that

the policy proceeds can be paid to beneficiary other than the lamp sum.

17/1- Interest option: interest paid periodically & insurance amount at anytime.

17/2- Fixed-period option: principal & interest paid periodically during a specific time.

17/3- Fixed-amount option: specific amount from principal & interest paid periodically until it is done.

17/4- Life income options: paid as annuity in 6 ways:

LIFE INS. CONTRACTUAL PROVISIONS1- Life income (pure): insurance amount used

as single premium for annuity paid as long as beneficiary still a life.

2- Life income w certain period: paid as long as beneficiary still a life or for specific period which ever occurs last.

3- Life income w Cash Refund: if beneficiary dies before: annuities received = insurance amount, a 2nd beneficiary receives a lamp sum = insurance amount – annuities received.

LIFE INS. CONTRACTUAL PROVISIONS4- Life income w installment Refund: if

beneficiary dies before: annuities received = insurance amount, a 2nd beneficiary receives an installment = insurance amount – annuities received.

5- Joint & Survivor Annuity: paid to 2 beneficiaries (husband & wife) up to second death (may reduced after first death).

6- Use as trust: paid to a trustee if kids are young or needs change over time.

LIFE INS. CONTRACTUAL PROVISIONS

18-WAIVER OF PREMIUM: due premium will be waived if the insured becomes totally & permanently disabled before a specific age (65) either for whole life or annuity or health.

19-GUARANTEED INSURABILITY (PURCHASE) OPTION: insured can buy extra amount w/out insurability in the future ( he can’t afford high premium now).

LIFE INS. CONTRACTUAL PROVISIONS

20-AMOUNT OF INSURANCE: allows the policyowner to buy extra amount every 3 yrs up to some max age (45) w/out insurability.

21-ADVANCE PURCHASE PRIVILEGE:Insured can buy extra amount w/out insurability 1 or more

time up to specific age or at some events (marriage, birth or adoption of child).

22-ACCIDENTAL DEATH BENEFIT: provides double or triple or more of face amount in case of death within 90 days as a result of accident before specific age.

LIFE INS. CONTRACTUAL PROVISIONS

23-COST OF LIVING: if needs change w time it provides face amount that is tied to cost of living.

24-ACCELERATED DEATH BENEFITS: A rider that pays all or part of the face amount prior to the insured death because of some adverse medical condition & takes 3 forms:

24/1- Terminal Illness Coverage: pays 25-50% of the face amount w min & max amount in case of terminal illness with physician certificate, hospital or nursing records & medical examination paid by the insurer.

LIFE INS. CONTRACTUAL PROVISIONSRemaining death benefits, prem., CV, &

dividends reduced proportionately.

24/2- Catastrophic Illness Coverage: as terminal illness if insured have one of listed catastrophic illness (stroke, cancer,…).

24/3- Long Term Care Coverage: monthly benefits paid if insured confined at hospital or during convalesce (recover) at home condition (w conditions).