Bảo hiểm - Chapter 12: Life insurance contractual provisions

Chapter 12Life Insurance Contractual ProvisionsAgendaLife Insurance Contractual ProvisionsDividend OptionsNonforfeiture OptionsSettlement OptionsAdditional Life Insurance BenefitsLife Insurance Contractual ProvisionsUnder the ownership clause, the policyowner possesses all contractual rights in the policy while the insured is livingRights include naming beneficiaries and surrendering the policy for its cash valueThe policyholder can designate a new owner by filing an appropriate formThe entire-contract clause states that the life insurance policy and attached application constitute the entire contract between the partiesPrevents the insurer from making amendments without the policyholder’s knowledgeLife Insurance Contractual ProvisionsThe incontestable clause states that the insurer cannot contest the policy after it has been in force two years during the insured’s lifetimeProtects the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued The insurer has two years to detect fraudThe insurer can contest a claim after the incontestable period if:The beneficiary takes out the life insurance policy with the intent of murdering the insuredThe applicant has someone else take a medical examinationAn insurable interest does not exist at the inception of the policyLife Insurance Contractual ProvisionsThe suicide clause states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paidReduces adverse selection against the insurerA life insurance policy contains a grace period during which the policyholder has a period of 31 days to pay an overdue premiumPrevents the policy from lapsing by giving the policyowner additional time to payLife Insurance Contractual ProvisionsThe reinstatement provision permits the owner to reinstate a lapsed policyTo reinstate, the following requirements must be met:Evidence of insurability is requiredAll overdue premiums plus interest are paidAny policy loans are repaid or reinstatedThe policy was not surrendered for its cash valueThe policy must be reinstated within a certain period, usually 3-5 years after the date of lapseAlthough it may require a large outlay of cash, it may be cheaper to reinstate a lapsed policy than to purchase a new policy Life Insurance Contractual ProvisionsThe beneficiary is the party named in the policy to receive the policy proceedsThe primary beneficiary is the first entitled to receive the policy proceedsA revocable beneficiary means that the policyowner reserves the right to change the beneficiary designation without the beneficiary’s consentAn irrevocable beneficiary is one that cannot be changed without the beneficiary’s consentA specific beneficiary is specifically identifiedA class beneficiary is a member of a group, e.g., children of the insuredLife Insurance Contractual ProvisionsUnder the 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 and sexA change-of-plan provision allows policyowners to exchange their present policies for different contractsLife insurance contracts do not contain many exclusionsSuicide excluded for two yearsInsurers might insert a war clause to exclude payment if the insured dies as a direct result of warSome policies contain aviation exclusionsPremiums can be paid annually, semiannually, quarterly, or monthlyIf premiums are not paid annually, a carrying charge is appliedLife Insurance Contractual ProvisionsA life insurance policy is freely assignable to another partyUnder an absolute assignment, all ownership rights in the policy are transferred to a new ownerUnder a collateral assignment, the policyowner temporarily assigns a life insurance policy to a creditor as collateral for a loan Only certain rights are transferred to the creditorPurpose is to protect the insurer from paying the policy proceeds twiceLife Insurance Contractual ProvisionsA policy loan provision allows the policyowner to borrow the cash value The policyowner must pay interest on the loan to offset the loss of interest to the insurerA policy could lapse if the policyowner does not repay a loan and the total indebtedness exceeds the available cash valueUnder the automatic premium loan provision, an overdue premium is automatically borrowed from the cash value after the grace period expiresPrevent the policy from lapsingPolicyowner may become lazy and exhaust all cash valueDividend OptionsIf a policy pays dividends it is a participating policy Otherwise it is a nonparticipating policyDividends come from three main sources:The difference between expected and actual mortality experienceExcess interest earningsThe difference between expected and actual operating expensesDividend OptionsPolicyowners have several ways to take dividends:Take the cashReduce the next premium coming dueLet the dividends accumulate at interest and withdraw laterApply toward the purchase of paid-up whole life insurance under the paid-up additions optionBenefits of the paid-up additions option include:Paid-up additions are purchased at net rates, not gross ratesEvidence of insurability is not requiredOne disadvantage is that paid-up additions are a form of single premium whole life insurance, which is rarely appropriate for most insuredsDividend OptionsApply toward the purchase of term insuranceThe dividend can be used to purchase one-year term insurance equal to the cash value of the basic policyThe remainder of the dividend is used to buy paid-up additions or is accumulated at interestAlternatively, the dividend may be used to purchase yearly renewable term insuranceConvert the policy to a paid-up contractThe policy becomes paid up when the reserve value of the paid-up additions or deposits equal the net single premium for a paid-up policy at the insured’s attained ageMature a policy as an endowmentThe policy matures as an endowment when the reserve value under the basic policy plus the reserve value of the paid-up additions or deposits equal the face amount of insuranceNonforfeiture OptionsThe payment to a withdrawing policyowner is known as a nonforfeiture value or cash surrender valueA policyowner has a right to the policy’s accumulated cash value; all states have standard nonforfeiture lawsPolicyowners have three nonforfeiture options:The policy can be surrendered for its cash valueUnder the reduced-paid up insurance option, the cash surrender value is applied as a net single premium to purchase a reduced paid-up policyUnder the extended term insurance option, the net cash surrender value is used as a net single premium to extend the full face amount of the policy into the future as term insuranceExhibit 12.1 Table of Guaranteed Values*$100,000 Ordinary Type Policy, Male Age 37Settlement OptionsThe policyowner can choose among several options for paying the policy proceedsOr, the beneficiary may be granted the choiceThe most common options include:Proceeds are paid in a lump sumUnder the interest option, the proceeds are retained by the insurer, and interest is periodically paid to the beneficiaryThe beneficiary can be given withdrawal rightsUnder the fixed-period option, the proceeds are paid to a beneficiary over some fixed period of timeUnder the fixed-amount option, a fixed amount is periodically paid to the beneficiary until the principal and interest are exhaustedExhibit 12.2 Income for Elected Period (minimum monthly payment per $1000 of proceeds)Settlement OptionsUnder the life income option, installment payments are paid only while the beneficiary is alive and cease on the beneficiary’s deathThere is no refund feature or guarantee of paymentsOther life income options include:Life income with guaranteed period: if the beneficiary dies before receiving the guaranteed number of years of payments, the remaining payments are paid to a contingent beneficiaryLife income with guaranteed total amount: if the beneficiary dies before receiving installment payments equal to the total amount of insurance placed under the option, the payments continue until the total amount paid equals the total amount of insurance Under the joint-and-survivor settlement option, income payments are paid to two persons during their lifetimes, such as a husband and wife Exhibit 12.3 Life Income with Guaranteed Period (minimum monthly payment per $1000 of proceeds)Exhibit 12.4 Life Income with Guaranteed Total Amount (minimum monthly payment per $1000 of proceeds)Exhibit 12.5 Joint-and-Survivor Income Option 10-Year Guaranteed Period (minimum monthly payment per $1000 of proceeds) Settlement OptionsSettlement options allow for periodic payments to the family, restoring their financial securityDisadvantages include:Interest rates offered by insurers may be lower than rates offered elsewhereThe settlement agreement may be inflexible and restrictiveAdditional Life Insurance BenefitsOther benefits can be added to a life insurance policy for an additional premiumUnder a waiver-of-premium provision, if the insured becomes totally disabled, all premiums coming due during the period of disability are waivedIn many cases, total disability means that the insured cannot do any of the essential duties of his or her job for which he or she is suited based on schooling, training, or experienceThe guaranteed purchase option permits the policyowner to purchase additional amounts of life insurance at specified times in the future without evidence of insurabilityThe option guarantees the purchase of specified amounts of life insurance in the future even though the insured may become uninsurableAdditional Life Insurance BenefitsThe accidental death benefit rider doubles the face amount of life insurance if death occurs as a result of an accidentAlso known as double indemnityThe cost-of-living rider allows the policyowner to purchase one-year term insurance equal to the percentage change in the consumer price index with no evidence of insurabilityThe accelerated death benefits rider allows insureds who are terminally ill to collect part or all of their life insurance benefits before they die Forms include: a terminal illness rider, catastrophic illness rider, and long-term care riderAdditional Life Insurance BenefitsA viatical settlement is the sale of a life insurance policy by a terminally ill insured to another party, typically an investor group, who hopes to profit by the insured’s early deathA life settlement is a financial transaction by which a policyowner who no longer needs or wants to keep a life insurance policy sells the policy to a third party for more than its cash valueThese options create a moral hazard problem, and may not be adequately regulated by the states