1. CHAPTER 14 Standard Life Insurance Contract Provisions and Options

2. No standardized life insurance policies exist; however, life insurance policies must have provisions required by law.

3. INSURED, OWNER, AND BENEFICIARY
A Life insurance policy creates three distinct classifications of interest: insured, owner and beneficiary.
The insured is the person whose death causes the insurer to pay the claim.
The owner is the person who may exercise the rights created by the contract.

4. Ownership rights in life insurance policies may include the following:
The right to change ownership
The right to assign the policy as security for a loan
The right to name a beneficiary
The right to participating dividends
The right to take any surrender value

5. INSURED, OWNER, AND BENEFICIARY
The beneficiary is the person receiving the proceeds when the insured dies. A person, a trust, an estate or a business may be a beneficiary.
A person may be both insured and owner or owner and beneficiary.
A person cannot be both insured and beneficiary.

6. Revocable and Irrevocable Beneficiary
The revocable beneficiary has no rights in the policy while the insured is alive.
An irrevocable beneficiary has a vested interest in the death benefit and can prevent the owner from taking any action , reducing the beneficiary’s interest.

7. Beneficiary Designation
Policyowners should identify the beneficiary clearly. A designation such as «my wife» or «my children» can lead to litigation in cases of multiple marriages, childrem born of different marriages or illegitimate children.

8. INTERPLEADER
In cases involving frequent beneficiary changes or unclear beneficiary designations, the insurer can transfer the policy proceeds to the court and let the court decide who is rightfully entitled to money.
This process is called INTERPLEADER.
Interpleader relieves the insurer from having to make restitution to an injured party if the «wrong» person is paid the policy benefits.

9. General Life Insurance Policy Provisions
The policies must satisfy at least the minimum provisions.
The following provisions appear in life insurance contracts issed in New York:
Grace Period
Reinstatement
Incontestable Clause
Entire Contract Provision
Misstatement of age provision
Annual apportioment of surplus

10. Grace Period
If the insured neglects to pay a premium when it is due, the policy does not end immediately.
Before the due date, the insurer will send the insured a notice of when the premium is due. If the insured forgets to pay the premium or decides to end the contract, the grace period provides him or her a period of 31 days to pay the premium without forfeiting any contractual rights.

11. Grace Period If the policyholder dies during the grace
Period, the insurer will pay the proceeds, minus the overdue premium, to the beneficiary. If the policy does not pay the premium before the end of the 31 days provided by the grace period, however, the policy is said to have lapsed.

12. Lapsed policy
A lapsed policy means that insured voluntarily has given up the life insurance contract.
Letting a life insurance policy lapse usually is expensive to the insured and to the insurer.
As most of the expenses of acquiring the life insurance policy and putting it in force occur in the first year of the policy, these expenses must be recovered in the early years of the contract of the insurer loses money.

13. The Reinstatement Provision
After a policy lapses, the insured has an opportunity to reinstate(renew) it if specified conditions are met.
The opportunity to renew a lapsed policy is called the reinstatement provision.
The conditions must be met to reinstate the policy : good health; payment of all premiums including interest;repayment of any policy loans with interest.

14. Evidence of Insurability
Beyond the good health of the insured, means the other things, the insured must not be engaged in any dangerous occupations or hobbies or be awaiting execution for a crime.

15. The Incontestable Clause
Insurance contracts are contracts made in utmost good faith, which means that an applicant may not answer questions untruthfully or conceal information that an honest person would reveal.
If an insured lies or conceals material facts the insurer may go to court and contest the policy for the pupose of voiding the policy.

16. The Entire-Contract Provision
The Entire Contract Provision serves for two purposes . It allows the insured achance to review the answers as they are recoreded in the application and it prevents the inurer from making hidden document or undisclosed restrictions a part of the contract.

17. The Misstatement of Age Provision
The incontestable clause prevents an insurer from voiding a policy because of an insured’s misrepresentations.
The age is a key factor in underwriting and pricing the insurance.
This provision allows the insurer to adjust the true age rather than allowing insurer to void the contract.

18. Annual Apportiomnet of Divisible Surplus
NY law requires that once a year, the life insurance company must determine wheter any dividends are payable to its policyholders. If there is a divisible surplus, the insurer must pay dividends. The rule applies to participating policies.
Nonparticipating policies use more realistic projections of operating results and require a lower initial premium.

19. Tontine
NY law requires insurers to calculate and pay dividends annually on participating policies. This requirement prevents insurance companies from retaining the dividends and not paying them to policyholders who die or let their policies lapse. Some inurers used this plan called the tontine system.

20. The Suicide Clause and Other Restrictive Clauses
NY law allows a life insurer to exclude payment for death by suicide if the suicide occurs within two years from the policy issue date.
The purpose of the suicide clause is to control the moral hazard.

21. Restrictive Clauses
War restrictions:This clause may exclude death while in the military or death caused by the military action.
Aviation restrictions: restrict payments for noncommercial flights.
Hazardous occupation restrictions: May reduce or eliminate payment if the insured changes to a more hazardous occupation.

22. FOUR OPTIONS THAT PROVIDE THE INSURED WITH CHOICES
Dividend options
Nonforfeiture options
Policyholder loans
Settlement options

23. Dividend Options
Participating life insurance policies pay dividends to the policyowner. Owners may choode what form the dividends take.
Dividends may be taken in cash
Dividends may be used to pay a portion of the next premium
Dividends may be left in an account with the insurer to accumulate at interest
Dividends may be used to purchase single-premium, paid up insurance...

24. Nonforfeiture Options
In general business, if one party fails to complete contractual arrangements as called for debt.
If a life insurance company were allowed to cancel a life insurance policy for nonpayment of premiums, the consumer would be seriously disadvantaged.
To prevent such injustices, the law provides that life insurance policies that have a savings value are not forfeited if the policies are lapsed.

25. Nonforfeiture Options
Cash surrender value
Extended-term option
Reduced paid-up insurance option
Conversion to an Annuity

26. Policyholder Loans
Life insurance policies with cash surrender values have a loan provision. This provision gives the policyowner the right to borrow an amount of money less than or equal to the cash value of the policy.
The company generally has the right ot delay making the loan up to six months.
The interest rate charged for the loan is stated in the policy.
The policyholder loan is secured by the cash surrender value to the life insurance policy. The insured is not legally required to repay the loan.

27. Policyholder Loans
The Automatic Premium Loan(APL)provision is found in policies with cash surrender value, requires the insurer to advance a loan to the insured for the purpose of paying the premium.
Thus if an insured does not pay the premium when due and the grace period expires( and ther is sufficient cahs value) the insurer makes an automatic loan to the insured to pay the overdue premium.

28. Settlement Options
Settlement options determine how the death proceeds are paid to the beneficiary . The following are five basic options:
Cash- beneficiaries take more than 95% of all life insurance proceeds in cash. If there is no settlement option then insurers pay the proceeds in cash.
Fixed amount- regular fixed-income payments is paid to the beneficiary. The payment continues till death. The option is logical when people need income for a limited period.

29. Settlement Options
Fixed Period – similar to the fixed amout option. The lenght of the payment determines the size of each payment.
Interest Only- the proceeds are left with the insured. The insurer pays the first beneficiary regular payments composed entirely of interest earnings. After the first beneficiary’s death, the insurer pays the death proceeds to a secondary beneficiary.
Life Income option- guaranteed for a lifetime a series of reguşar payments to the beneficiary.

30. AVAILABLE RIDERS AND OPTIONS
Consumers frequently purchase the following three options:
Guaranteed insurability
Waiver of premium
Double indemnity

31. The Guaranteed-Insurability Option
It provides the insured to obtain the legal right to puchase more insurance at predetermined intervals and at standard rates, regardless of changes in insurability.

32. The Waiver –of –Premium Options
It provides a valuable right for the insured. If the insured becomes totally disabled, the insurer forgives any premium due during the period of disability and the life insurance policy remains in force.

33. The Double-Indemnity Option
It provides that if the insured’s death is a result of s specified peril, essentially some form of accident, twice the face of the policy will be paid.