1. Loss of Life Chapter 16
©2005, Thomson/South-Western

2. Chapter Objectives
To distinguish among the insurer, the beneficiary, the insured, and the policyowner of the life insurance policy
Describe the major characteristics of term life, whole life, universal life, variable life, and other forms of life insurance and give examples of appropriate uses for each
List three general premium payment arrangements for whole life insurance and discuss the effects of each arrangement on the buildup of the policy’s cash value
Explain how life insurance premiums, death benefits, and cash values are treated for federal income tax purposes

3. Chapter Objectives
Explain the intent of the following contract provisions
Incontestability clause, suicide clause, misstatement-of-age clause, misstatement-of-sex clause, entire contract clause, provisions related to policy assignment clause, war hazard exclusion, aviation hazard exclusion, spendthrift trust clause, and grace period and reinstatement provisions
Explain the nature of policyowner dividends, nonforfeiture options, and settlement options and describe the choices available for each of these terms
Give examples of important considerations in wording the beneficiary designation in a life insurance policy
Explain the intent of the waiver of premium benefit, the accidental death benefit, and living benefit options

4. Introduction
For many people, the risk management tool most appropriate for dealing with the exposure of premature death is life insurance
The standard arrangement is a contract specifying that upon the death of a person whose life is insured
A stated sum of money (the policy’s face amount) is paid to the person or organization designated in the policy as the beneficiary
Many life insurance contracts also have benefits that may be payable due to circumstances other than death
One example is the savings element (called the cash value) that accumulates under some policies
The cash value can be refunded to the owner of the policy if the contract is terminated prior to death

5. Types of Life Insurance
In 2002 the face amount of new life insurance sold in the U.S. was $2.9 trillion
Total life insurance in force by the end of 2002 was $16.3 trillion
Three major types of life insurance
Term
Whole life
Universal life
Other types of life insurance exist
Some were more prevalent in past years but decreased in popularity as newer forms of life insurance were developed and marketed

6. Term Insurance
Designed to provide protection if the insured person dies during a specified period of time
Accounts for a substantial portion of the face amount of all life insurance purchased by individuals in the U.S. each year
In most cases it has no cash value and cannot be used to meet savings needs
Its exclusive focus on death protection means that, for a given amount of premium dollars
A person can usually buy a larger face amount of term insurance coverage than can be purchased with any other type of life insurance

7. Duration of Term Coverage
Term insurance contracts are issued for a specific period of time
Such as 1 year, 5 years, or 20 years
At the end of the period, the insurance protection ceases unless the coverage is renewed
Some term insurance is sold with the expectation that the coverage will be renewed several times
Straight term insurance is generally not renewable
Another way of stating the policy’s duration of coverage, instead of specifying an exact number of years
The contract remains in effect up to a particular age

8. Coverage Options and Guarantees
A legitimate concern regarding the purchase of term insurance would arise if there were no guarantees allowing insureds to renew their term insurance protection
A person’s health might deteriorate while the coverage was in effect
The individual could be considered uninsurable in the future
Thus, when the term period ended, the insurance protection would expire
And the former insured would be unable to obtain new coverage
Because many insureds want to protect their right to buy coverage in the future regardless of their health
Most insurance companies issue what is known as renewable term insurance

9. Coverage Options and Guarantees
Renewable term policies are written for a specified number of years
Are renewable for similar periods of time, regardless of the insured’s health
Each time the policy is renewed
The premium increases to reflect the insured’s current age
Changes in health status that may have taken place since the policy was issued are not reflected in future premiums

10. Coverage Options and Guarantees
Term insurance renewal rights usually are not completely unlimited
Due to insurers’ concerns about adverse selection
Without some limitation on the right to renew
Overall mortality rates among insureds would be higher due to these types of behaviors
Insurance premiums would have to be greater
Previously this concern about adverse selection caused many insurers to offer the renewability option only until about age 60 or 65
However, with greater experience and in response to competitive pressures
It is now common for insurers to issue policies that can be renewed until more advanced ages

11. Coverage Options and Guarantees
Most term policies are convertible into a different form of life insurance
Standard conversion provision gives the insured the option to change the term policy into some form of permanent coverage to remain in effect for the person’s entire lifetime
Rather than expiring on a specified date
When term insurance is convertible, the right to change to permanent coverage is provided
Regardless of the insured’s health at the time of conversion
Some policies can be converted at any time before they expire
However, term insurance contracts that can be renewed up to very advanced ages often are more restrictive regarding conversion rights
It is not unusual for conversion rights to end after age 65 for 70
Even though right to renew policy as term insurance extends to age 90 or beyond

12. Face Amount Variability
The majority of term policies have a face amount that does not change over time
Referred to as level term contracts
Term insurance can also be arranged so that the face amount either
Decreases over time (decreasing term insurance)
Usually purchased for specific purpose
Such as providing cash to pay off a mortgage or other debt if the insured dies with some of the loan still outstanding
Increases over time (increasing term insurance)
Face amount increases periodically on a predetermined basis
A more common approach for meeting an increasing need is through a cost-of-living rider or a guaranteed insurability rider
Both of these are endorsements to a basic level term or permanent insurance policy

13. Face Amount Variability
Cost-of-living rider
Automatically increases the amount of protection by the same percentage that the Consumer Price Index has increased since the basic policy was issued
As long as the insured accepts and pays for the additional amount of coverage each time it is offered, no evidence of insurability is required
Guaranteed insurability rider
Provides that the insured will be able to purchase additional amounts of insurance protection in the future
Regardless of health
Subject to stated maximums

14. Whole Life Insurance
May be kept in force for the insured’s entire lifetime
Has accounted for more than half of all life insurance policies sold in the U.S. in recent years
Lags behind term insurance with respect to the total face amount of coverage issued
Contains the savings elements called cash values
If the owner of the whole life policy decides to terminate it before the insured’s death, the cash value can be refunded

15. Whole Life Insurance
A straight life contract is arranged so that the premiums are payable as long as the insured lives
A limited-pay life policy requires that the premiums are payable for only a specified period of time
Such as 20 years or until age 65
After that time, no further premiums are necessary, but the coverage remains in effect until the insured’s death
Is also possible to pay for a whole life policy with only one premium
Called a single-premium life

16. Whole Life Insurance
When a premium for whole life insurance is paid to the insurer
Part of that premium is used to help pay the policy’s fair share of death benefits for insureds who die that year
Part of the premium not needed to pay that year’s death benefits is used to pay current expenses of the insurer
Any remaining amounts are invested to earn interest
Life insurance premiums are calculated such that, when they are combined over time with the premiums and investment earnings from other similar policies
All mortality and expense costs can be paid as incurred until all insureds are dead

17. Whole Life Insurance
If insureds terminate their whole life contracts before death
They are entitled to refunds of the excess premiums that have accumulated for their policies to date
Called the policy’s cash value
The more premium dollars that are paid earlier in the life of the contract
The greater the cash value available on policy termination
Life insurers make various assumptions about mortality costs, interest earnings, and expenses
On the basis of these assumptions, it is possible to guarantee within the contract the cash values that will be generated by policy termination at various times

18. Universal Life Insurance
First introduced in the U.S. in 1979
Offers more flexible premium payment options than do most other forms of life insurance
The minimum initial premium required to activate the policy is specified by the insurer
But the policyowner usually decides the timing and size of subsequent premiums
Policyowners can also periodically adjust the size of the death benefit in most universal life contracts
Although insurers may require proof of insurability if a request is made to increase the death benefit

19. Universal Life Insurance
The cash value of the universal life policy is established deliberately and varies regularly
Depending on such factors as
The insurer’s investment savings, mortality experience, and expenses
The amount and timing of premiums paid by the insured
Basic versions of life insurance contracts–differ only with respect to how the death benefit is designated
Type A universal life
Type B universal life

20. Universal Life Insurance
Type A universal life
The death benefit is an amount that remains the same while the policy is in force
The death benefit is the cash value plus whatever amount is necessary to bring the total to the specified amount
Type B universal life
Has fluctuating death benefits that are made up of a specified amount of death protection plus the policy’s cash value
Table 16-1 provides an illustration of the structure of the Type B universal life policy
As the cash value grows over time so does the death benefit
The actual rates credited correspond closely to money market rates
The interest rate credited is an especially crucial item in determining the size of the cash value and the death benefit for Type B contracts

21. Table 16-1: Illustration of Type B Universal Life Insurance Policy Structure (Male, age 25)

22. Universal Life Insurance
In the first several years following their introduction
Universal life cash values were credited with interest that substantially exceeded the minimum guarantees
Illustrations for selling policies were often based on the assumption that interest rates of 10 or 11% would continue throughout the life of the policy
However, in the early 1990s interest rates dipped to their lowest levels in decades
Insurers were forced to credit universal life cash values with much lower interest rates
Leading to dissatisfaction among many policyowners
For the policy illustrated in Table 16-1, a wide range of potential cash values may result at various ages
Depending on the interest rate assumption
Table 16-2 shows some of the possible results

23. Table 16-2: Interest Rate Sensitivity of Type B Universal Life Policy Cash Values (Initial Death Benefit of $100,000)

24. Variable Life
The death benefit and cash value fluctuate with the investment performance of one or more portfolios of securities
Policyholders can designate the types of investments that they want supporting their policies
If the selected investments increase in value
Both the face amount and the cash value of the variable life contract will also increase
Poor investment performance will result in decreasing coverage and cash values
Although a minimal face amount is usually guaranteed
Originally designed to provide an inflation hedge for both the death protection and savings elements of the policy

25. Variable Universal Life
Combines some of the features of both universal life and variable life insurance
Referred to as flexible premium variable life
Contract usually is designed similarly to a universal life policy with respect to death benefits and flexible premium arrangements
A primary difference is that policyowners are given a choice of investments to be used to support the contract
Rather than using only high-grade, short-term money market investments as in the standard universal life policy
Usually only the cash value of a variable universal policy varies with the performance of the underlying securities

26. Modified Life Can describe many different policy structures
Usually the contract is a form of whole life insurance with premiums that are lower than usual for an initial period of time
After that time, the premiums are somewhat higher than they otherwise would be
Can be especially appropriate for insureds with limited incomes who want to own permanent life insurance they cannot currently afforded
Convertible term insurance can meet the same need
But many persons who plan to convert their term insurance do not actually do so because of the substantial premium increase
An advantage of modified life is that the policyowner does not have to initiate any type of positive action to obtain the permanent insurance

27. Endowment
The amount of endowment insurance sold in the U.S. is now negligible
Provides death benefits for a specified period time
Has a cash value, and the policyowners pay the contract’s face amount at the end of the protection period if the insured is still alive
While the policy does provide death protection
On a relative basis it emphasizes savings to a much greater degree than any policy discussed so far
Most insureds now seek other alternatives because of the adverse tax treatment now accorded to endowment policies

28. Industrial Life
Known variously as industrial life, home service life, or debit insurance
Type of cash value life insurance that is sold in very small amounts
Primarily to meet burial needs of low income insureds
The face amount is only a few thousand dollars
Premiums are only a few dollars each week and are usually collected personally at the insureds’ homes

29. Industrial Life
More expensive on a relative basis than other forms of life insurance because
Of the high cost of its premium collection method
Mortality rates tend to be higher for persons who purchase this form of coverage
Because the face amount is so small, underwriting standards are often fairly liberal
Medical exams are rarely required
Those who purchase industrial life insurance would be better served by regular term or whole life insurance
The low-income status of most of these insureds makes it unlikely that they will be approached by traditional life agents

30. Credit Life
Offered in connection with installment sales of consumer durables, such as automobiles
Decreasing term insurance issued without a medical examination
Will expire when the installment sales contract is paid off
Cost of protection is incorporated into the regular payment made by the purchaser
If the insured dies before the loan is repaid
Sufficient coverage exists to repay the balance of the debt
Protects the insured’s dependents as well as the lender

31. Income Tax Treatment of Life Insurance
Premiums
In most cases, individuals cannot deduct the premiums they pay for individual life insurance
The primary exception is for someone who is paying premiums on a life insurance policy owned by a charitable organization
Death benefits
As a general rule, when an insured dies and a death benefit is paid
The beneficiary does not have to report the death benefit as taxable income if the proceeds are paid in a lump sum
When settlement is made through a series of periodic payments from the insurer
The beneficiary generally can exclude only part of each payment from taxable income
The amount of each payment that represents a distribution of the original death benefit is not taxed
While the portion that is due to interest earnings is subject to taxation

32. Income Tax Treatment of Life Insurance
Cash values
If a life insurance policy with a cash value is terminated before death and the contract is surrendered for cash
It is likely that there will be taxable income that must be reported in the year of the surrender
The amount of taxable income is the difference between the cash received at termination and premiums that were paid during life of the contract
While a cash value policy is in force, the annual increments to the cash value (inside buildup) often escape immediate taxation
In many policies these increments are not taxed until the policy is surrendered for its cash value

33. Income Tax Treatment of Life Insurance
Cash Values
In some policies however, taxation of part of the inside buildup occurs every year
The determining factor depends on whether the policy meets the statutory definition of life insurance as specified in the IRC
Policies that meet this definition are not subject to immediate taxation of their inside buildup
Cash values of policies that cannot meet the requirements will be partially taxed each year
According to the IRC, a policy is considered to be life insurance for tax purposes of it meets at least one of two tests
The intent of both tests is to assure that the cash value in a particular policy is not excessive in relationship to the policy’s death benefit
Contracts that are primarily savings vehicles and have a only a nominal death benefit will be unable to pass these tests
Therefore, these contracts will not be granted an income tax advantage for the inside buildup

34. Life Insurance Contract Provisions
The contractual provisions of the life insurance policy are of special significance to the insured
Because it is through the wise use of these rights that some of the most valuable benefits of protection can be obtained

35. Incontestability Clause
If the policy has been in force for a given period and if the insured has not died during that time
The insurer may not afterward refuse to pay the proceeds, nor may it cancel or contest the contract, even due to fraud
Thus, if an insured is found to have lied about his or her physical condition at the time the application was made for life insurance
And this misrepresentation is not discovered until after the expiration of the incontestability clause
The insurer may neither cancel the policy nor refuse to pay the face amount if the insured has died from a cause not excluded under the basic terms of the policy
Serves as a time limit within which the insurer must discover any fraud or misrepresentation in the application or be barred thereafter from asserting what would otherwise be its legal right
The legal justification for this clause is protection of beneficiaries from doubtful claims by an insurer
That the deceased had made misrepresentations after it becomes impossible for the deceased to defend against or to deny the allegation

36. Suicide Clause
Partially protects the beneficiary from the financial consequences of suicide
States that if the insured does not commit suicide for at least a stated period (usually two years after issuance of the contract)
The insurer may not deny liability under the policy for subsequent suicide
If the suicide occurs within two years of the issuance of the policy
The insurer’s only obligation is to return without interest the premiums that have been paid

37. Misstatement of Age or Sex
Misrepresenting one’s age in life insurance is material to accepting the risk and normally would become a defense against payment of the proceeds
If it were not for the incontestability clause
Without some control over this possibility
It would become possible for people to understate their ages to obtain lower life insurance premiums
Proof of age is therefore required before proceeds are paid
Under the misstatement-of-age clause
If it is determined that the policyholder’s age has been misrepresented
The insurer adjusts the amount of proceeds payable rather than canceling the agreement altogether
Proceeds will be adjusted in a similar manner through the misstatement-of-sex clause
It is common for females to pay lower premiums than males of the same age when purchasing life insurance

38. Entire Contract Clause
Provides that the policy, together with the application, constitutes the entire contract between the parties
Desirable for the protection of the insured and the beneficiary because
Without the clause it might be possible to affect the rights of the respective parties through changes in the bylaws or in the charter of the insurer

39. Assignments
An insured may wish to assign the benefits of a life insurance policy
Often as collateral for a loan
Permission of the insurer is not necessary
But the insurer must be properly notified in writing of an assignment or else is not bound by it
If the insured dies, the insurer pays the holder of the assignment that part of the proceeds equal to the outstanding debt
Then pays the remainder to the named beneficiaries

40. Dividend Options Some life insurance policies are participating
They pay the policyowner dividends
The dividend is not a distribution of profit but a partial return of the premium payment
Reflects the insurer’s experience with respect to mortality, investment income, and expenses
Dividends are not taxable to the recipient
Insurers are not required to pay dividends
However, dividends may be substantial

41. Cash or Payment of Premium
A policyowner may specify that all dividends are either to be paid to the policyowner in cash
Or be applied toward the payment of the next premium due

42. Accumulation at Interest
The insurer may retain the dividends and pay interest on the accumulated amount
A minimum guaranteed interest rate is stated in the policy
Although insurers often pay more than the guaranteed minimum
The dividends themselves are not taxable
But interest paid on them through this option is taxable to the policyowner in the year in which it is credited
When dividends are paid and are not withdrawn prior to the insured’s death
The accumulated dividends are added to the policy face amount and are paid to the beneficiary as part of the death benefit
Accumulated dividends distributed as part of the death benefit are not considered taxable income

43. Paid-Up Additions
Policyowners of whole life policies usually are offered the paid-up additions option
Each dividend is used to purchase as much single premium whole life insurance as possible
An economical way to buy additional life insurance
No commission or other acquisition expenses must be paid
No medical examination or other evidence of insurability is required
The insurance purchased under this option provides additional death protection and has a cash value

44. One-Year Term Option
Uses each year’s dividend to purchase as much one-year term insurance as possible
Insureds can increase their death protection to the maximum extent without additional premium payment
Sometimes the amount of term insurance may be limited to the size of the policy’s accumulated cash value or its face amount
Any remaining dividend can be taken under another dividend option

45. Nonforfeiture Options
Guarantee that the savings element in a policy will not be forfeited to the insurer under any circumstances
But will always accrue to the benefit of the insured
Required by law in all states
Prior to this requirement there were cases in which aged persons agreed to sell their policies to speculators when they could no longer afford to pay the premiums
The insured seldom fared well in these transactions

46. Cash Value Option The policy may be surrendered for cash
A schedule of guaranteed minimum cash values is included in the policy
Although the actual cash value in policies may vary considerably from the minimums guaranteed
Before payment is made, any outstanding indebtedness is subtracted
The cash is usually paid immediately
Although the insurer has the right to delay payment for as long as six months
After 30 days the insurer is entitled to interest on the amount due

47. Paid-Up Insurance Option
The insurer uses the cash value to buy as much single-premium insurance as possible on the life of the insured
Given the size of the cash value
The same type of insurance is purchased as existed for the original policy
The only difference is that the new death benefit will be for lower now than before
And no more premiums will be required after the option is exercised

48. Extended-Term Option
If the insured does not select a nonforfeiture option and has not implemented the automatic premium loan provision
Most insurers automatically place a cash value policy on the extended-term option
If premiums remain unpaid after expiration of the grace period
The policy’s cash value is used to purchase term insurance for as many years and months as are allowed by the rates in effect for the insured’s age when the lapse occurs
Minimum guarantees regarding this option are included in the policy

49. Policy Loans
Sometimes the policyowner may need access to funds that are only available through the cash value of his or her life insurance policy
And it may not be desirable to terminate the policy
The cash value may be borrowed from the insurer with the insurance coverage remaining intact
If the insured dies with an outstanding policy loan
The amount of the loan is subtracted from the policy proceeds before payment is made to the beneficiary
Otherwise, there is no obligation to repay policy loans
However, because the insurer calculates premiums on the assumption that interest will be earned on the funds supporting the policy
Interest is charged to anyone--including the policyowner—who borrows some of these funds
Unpaid interest accumulates and is added to the total loan outstanding

50. Policy Loans
If the policyowner takes a policy loan but still wants to maintain the full amount of death protection
The one-year term dividend option can be helpful, assuming that the contract is participating
Because policies without flexible premium arrangements will lapse after expiration of the grace period if premiums are not paid when due
Many insurers encourage the use of an automatic premium loan provision
Automatically authorizes the insured to use cash values to pay unpaid premiums that are due
Policy loans from cash value life insurance contracts generally are not taxable as income

51. Beneficiary Designation
The beneficiary of a life insurance policy generally must have an insurable interest in the insured’s life at the time the policy is issued
Attention should be given to the way the beneficiary designation is worded
So that the death benefit will be paid to the intended person
If children are listed by name, then any subsequent children born to the insured will be excluded
Thus, is better to say “children of the insured” if the policy is intended to benefit all children at the time of the insured’s death

52. Beneficiary Designation
Policyowners have the right to change beneficiaries without notice to those affected
Provided that a beneficiary was not named irrevocably
A revocable beneficiary has no control over the policy
But an irrevocable beneficiary can be changed only if the beneficiary gives written consent
Contingent beneficiaries
Will receive the policy proceeds if the primary beneficiary is not alive at the time of the insured’s death
If both the insured and the primary beneficiary die under circumstances such that it cannot be determined who died first
The general rule is that the proceeds will be paid to the contingent beneficiaries

53. Beneficiary Designation
If the primary beneficiary clearly survives the insured and then dies
The death benefit is payable to the primary beneficiary’s estate
A common disaster clause may be used in the beneficiary designation
Specifies that upon an insured’s death, the insurance proceeds are to be held by the insurer for a period of time
After that time, if the primary beneficiary is alive
The proceeds are distributed to that person
Otherwise, the death benefit is paid to the contingent beneficiaries
In situations where no primary or contingent beneficiaries are alive when the insured dies
The death benefit is paid to the insured’s estate

54. Excluded Causes of Death
Uncommon for life insurers to exclude coverage for death arising out of specific causes
One occasionally used exclusion is the war hazard exclusion
During periods when there is a serious threat of war or other hostilities involving military forces of at least two countries
Insurers may insert a war hazard exclusion in policies issued to insureds who are either in the military or of an age that may cause them to become subject to military duty
Eliminates insurance coverage for death that is a direct result of war or other hostile actions between countries
The aviation hazard exclusion limits coverage for death from aviation activities other than as a fare-paying passenger on a commercial aircraft
Rarely found in policies currently being issued

55. Settlement Options
The different ways in which the policyowner or beneficiary may elect to have the benefits of a policy paid
Lump-sum option
Proceeds of the life insurance are paid in a lump sum
Vast majority of benefits are paid in this manner
Insurer’s obligations are over
Fixed-period option
The insurer pays the proceeds in equal installments over a specific time frame
The size of each installment varies with the
Desired frequency of payment
Length of the total time period during which payments are to be made
Interest rate paid by the insurer on proceeds not yet distributed

56. Settlement Options Fixed-amount option
Used when a specified amount of income is desired
The length of time the payments are made is a function of the size and frequency of each payment and the interest rate paid by the insurer on the proceeds
Interest earned in excess of the guaranteed level increases the length of time during which payments are made

57. Settlement Options Interest option
The insurer holds the proceeds of the policy and pays the beneficiary an income consisting of interest only
A guaranteed minimum rate is stated in the policy
With excess interest often used to increase the amount of each payment
The beneficiary usually has the right to withdraw some or all of the principal amount

58. Settlement Options Life income options
Several variations guarantee a beneficiary an income for his or her remaining lifetime
Additional guarantees may be made concerning the number of payments that will be made or the guaranteed total dollars to be paid
Regardless of how long the beneficiary lives

59. Waiver of Premium Benefit
Provides that insureds who become disabled before a specified age will be excused from paying premiums for as long as the disability continues
The life insurance policy will have the same cash values, death benefits, and dividends as it would have had if all premiums had been paid
Policies vary as to how they define disability for this purpose
Many contracts also require a six-month waiting period after the onset of the disability before premiums are waived
This is not expensive and is generally recommended as a way of assuring that the life insurance policy will remain intact regardless of the insured’s health

60. Accidental Death Benefit
Makes it possible for the beneficiary to receive an accidental death benefit if the insured dies from an accident
The size of the accidental death benefit is often equal to the face amount of the underlying policy
Numerous restrictions exist in this benefit
Common exclusions include death from suicide, death that occur more than 120 days following an accident, death from illness, death due to war or aviation
May lead naive insureds to believe that their total death protection has doubled for only an small extra premium
However, accidents are far from being the leading cause of death
And accidents that satisfy the definitions of the accidental death benefit are even less common

61. Accelerated Death Benefit
Also known as a living benefit option
Under specified circumstances, a percentage of the policy’s face amount, discounted for interest, can be paid to the insured before death
Some insurers consider such payments to terminate all future contractual rights to benefits
Others allow some or all of any remaining face amount to be paid to the beneficiary when the insured dies
Accelerated death benefits can be an important income source for persons with terminal illnesses
Some insurers also offer this option to help pay for an insured’s long-term care needs
An additional agreement known as a long-term care rider may be attached to a permanent form of coverage

62. Accelerated Death Benefit
Variations exist among insurers regarding
The percentage of the death benefit that can be paid on an accelerated basis
Whether an additional premium is charged
The types of policies for which the main benefit options are available
Whether the accelerated death benefit can be payable in a lump sum or only via installments
Whether complete surrender of all future policyowner rights accompanies the payment of accelerated benefits

63. Accelerated Death Benefit
One of the factors impeding the growth of living benefit options is a concern that the payment erodes the death benefit protection provided for beneficiaries
Often one of the major reasons for purchasing a life insurance policy in the first place
Until recently another problem had been the unclear tax status
Should living benefits be exempt from income taxes in the same way that death benefits are?
The Health Insurance Portability and Accountability Act of 1996 states that
From December 31, 1996 forward accelerated death benefits are excluded from taxable income
If a physician certifies that the insured has a terminal illness that is expected to result in death within 24 months or less

64. Spendthrift Trust Clause
One of the legal rights granted to the life insurance owner in most states is the exemption of death proceeds in cash values from claims of creditors
Creditors cannot attach the cash value of life insurance for the payment of the insured’s debts
Unless the insured has wrongfully bought or paid up a life insurance policy with money rightfully subject to creditors’ claims
Neither may the insured’s creditors attach the death proceeds of life insurance

65. Spendthrift Trust Clause
May the beneficiary incur large debts using as security the right to receive income from life insurance proceeds?
Technically this is possible unless the state law has a provision to the contrary or unless the law has permitted the attachment of the spendthrift trust clause
If this clause is attached to a life insurance policy, the beneficiary’s right to that promised income cannot be attached by creditors in any court in the state of residence
Without such a clause there might be a temptation for an unscrupulous creditor to persuade a beneficiary to purchase goods beyond the ability to pay
Secure in the knowledge that the life insurance could be attached
Once the proceeds have been paid to the beneficiary
The protection is lost since the money lose its identity as life insurance proceeds

66. Grace Period and Reinstatement Clauses
Always gives the insured an extra 30 days in which to pay any premium that is due before lapse takes place
Can forestall policy lapses as long as sufficient cash values exist to cover the premium due
Once the policy actually lapses, special application must be made under the reinstatement clause to restore coverage
Contracts may be reinstated within a certain period after lapse, usually three or five years, with evidence of insurability
Sometimes a new medical exam must be taken
But in most cases the insured is required only to make a statement of personal good health at the time of reinstatement

67. Grace Period and Reinstatement Clauses
All premiums in arrears must be paid plus interest
Reinstatement reopens the incontestability clause for another two years
But generally the suicide clause is held not to be reopened
It is sometimes desirable to reinstate an old policy rather than to take out a new one because the old policy may have certain provisions
Such as more favorable settlement options, immediate eligibility for dividends, or higher interest assumptions
Also, no new acquisition costs have to be paid in the reinstated policy, as they would on a new contract