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					Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

1-OWNERSHIP CLAUSE: the owner of a life
  ins. 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 &
  electing settlement options (w/out the
  beneficiary’s consent).
MHA, C18                                     T1
Ch 18: 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 bylaws.
-Protects the beneficiary.
MHA, C18                                    T2
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

3-INCONTESTABLE CLAUSE: stated that
 the insurer cannot contest 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 @
 inception, beneficiary take out ins. w
 intention of murdering the insured.
MHA, C18                                     T3
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

4-SUICIDE CLAUSE: states that if the
  insured commits suicide within 1/2 years
  after the policy is issued, the face amount of
  ins. will not be paid; but only a refund of the
  prem.’s paid.
-Purpose: to reduce adverse selection against
  (individual buys ins. w intention of
  committing suicide).
5-GRACE PERIOD: the policyowner has a
  period of 31 days to pay an overdue prem. &
  If he dies within it, the overdue prem. is
  deducted from the policy proceeds.
MHA, C18                                        T4
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

-Purpose: to prevent the policy form lapsing if
  insured in a short of funds or have forgotten
  to pay the prem.
6-REINSTATEMENT CLAUSE: permits the
  owner to reinstate a lapsed policy.
Requirements to reinstate a lapsed policy:
1-Evidence of insurability.
2-Overdue prem.’s + 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.
MHA, C18                                      T5
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

Advantage to reinstate a lapsed policy rater
   than purchase a new one:
1-Prem. is lower because the reinstated 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).
MHA, C18                                    T6
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

4-Incontestable period & suicide period under
  the old policy may have expired.
5-Reinstated policy may contain favorable
  povisions, such as a 6% interest on policy
  loans.
Disadvantage to reinstate a lapsed policy
   rater 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.
MHA, C18                                    T7
Ch 18: 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 prem.’s 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.


MHA, C18                                   T8
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

The principal types of beneficiary:
1/8-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.
2/8-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.
MHA, C18                                        T9
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

3/8-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,…).
MHA, C18                                          T10
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

11-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 ins. 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). T11
MHA, C18
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

13-POLICY LOAN PROVISION: allows
  policyowner to borrow the cash value (w
  interest).
Advantages: low rate of interest.
Disdvantages: policy could lapse if the total
  debt exceeds the CV.
14-AUTOMATIC PREMIUM LOAN: an
  overdue prem. is automatically borrowed
  form CV after the grace period expires, if CV
  is sufficient to pay the prem.
Disdvantages: may be overused & policy
  terminated & amount will be reduced if the
  prem. loans are not repaid.
MHA, C18                                      T12
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

15-NONFORFEITURE OPTIONS: payment
  to a withdrawing policyowner is known as a
  nonforfeiture value or C surrender V.
There are 3 nonforfeiture options or C
  surrender V options :
1/15-Cash value.
2/15-Reduced paid-up ins. (small amount but
  same policy).
3/15-Extended term ins. (same amount but
  term policy).
MHA, C18                                  T13
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

16-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:
1/16-Cash.
2/16-Reduction of next prem.
3/16-Accumulate at interest.
4/16-Paid-up additional ins. Amount @ pure
  rate & w/out insurability.
5/16-Term insurance.
MHA, C18                                    T14
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

17-SETTLEMENT OPTIONS: ways that the
  policy proceeds can be paid to beneficiary
  other than lamp sum.
1/17-Interest option: interest paid periodically
  & ins. amount @ any time.
2/17-Fixed-period option: principal & interest
  paid periodically during a specific time.
3/17-Fixed-amount option: specific amount
  from principal & interest paid periodically
  until it is done.
4/17-Life income options: paid as annuity in 6
  ways:
MHA, C18                                     T15
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

-Life income (pure): ins. amount used as
  single prem. for annuity paid as long as
  beneficiary still a life.
-Life income w certain period: paid as long as
  beneficiary still a life or for specific period
  whichever occurs last.
-Life income w Cash Refund: if beneficiary
  dies before: annuities received = ins.
  amount, a 2nd beneficiary receives a lamp
  sum = ins. amount – annuities received.
MHA, C18                                      T16
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

-Life income w installment Refund: if
  beneficiary dies before: annuities received =
  ins. amount, a 2nd beneficiary receives an
  installment = ins. amount – annuities
  received.
-Joint & Survivor Annuity: paid to 2
  beneficiaries (husband & wife) up to second
  death (may reduced after first death).
-Use as trust: paid to a trustee if kids are
  young or needs change over time.

MHA, C18                                    T17
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

18- WAIVER OF PREM.: due prem. 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 prem. now).


MHA, C18                                       T18
Ch 18: 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 @ 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.
MHA, C18                                      T19
Ch 18: 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:
1/2-Terminal Illness Coverage: pays 25-50%
  of the face amount w min & Max amount
  in case of terminal illness w: physician
  certificate, hospital or nursing records &
  medical exam. paid by insurer.
MHA, C18                                   T20
Ch 18: LIFE INS. CONTRACTUAL PROVISIONS

-Remaining death benefits, prem., CV, &
  dividends reduced proportionately.
2/2-Catastrophic Illness Coverage: as terminal
  illness if insured have one of listed
  catastrophic illness (stroke, cancer,…).
3/2-Long Term Care Coverage: monthly benefits
  paid if insured confined @ hospital or during
  convalesce @ home condition (w conditions).



MHA, C18                                    T21

				
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