Insurance Concepts To Know
Assignment
Life insurance is
a contract. It is also personal property. Because of these two
factors, it can be transferred to another person. Keep in mind,
assignment is sometimes prohibited in the insurance contract.
However, assuming that it is assignable, there are two types of
assignment. The first is absolute assignment. Absolute assignment
means that all ownership rights have been transferred to another
person. The second type of assignment is collateral assignment.
Collateral assignment means that only certain rights are
transferred. Generally, this is used in situations where the life
insurance policy will serve as security for a loan or some other
type of debt.
Grace Period
To protect the
insured against an inadvertent lapse in the policy, there is an
extended period of time in which the policy remains in full force
despite the fact that the premium hasn't been paid. The amount of
time is usually 31 days. However, this may vary. Always check and
know what the grace period is.
Incontestable
This is a
provision in the life insurance contract which prohibits the
insurance company from denying a claim after a certain period of
time (usually 2 or 3 years). After the stated period of time, the
insurer can not contest a claim based on error, concealment, or
misstatement. There is no statute of limitations on fraud. Fraud can
be contestable. For instance, if you had your brother take your
physical, that would be fraud. And the insurance company could then
contest paying the policy claims. Otherwise, after death, it may be
very difficult for the beneficiary to contest the insurance
company's denial of the claim.
Delay
By law, the
insurance company must include this provision in the insurance
contract. It states that the insurance company can delay by up to 6
months, payment of the cash surrender or loan value of a policy.
Otherwise, in times of severe economic distress, there could be a
run on the cash reserves of the insurance company.
Suicide
Usually, during
the first 2 years of a life insurance contract, if the insured
commits suicide, the insurance company only has to return the
premiums plus interest paid by the insured. After this two year
period, suicide becomes a covered risk.
Reinstatement
This clause
permits an insured who failed to pay his premiums on time, and whose
life insurance contract expired, to reinstate the life insurance
contract within a period of time (usually 3 years). However, you
must provide evidence of insurability. This is an important clause.
At some point in the future, when the insured wants to reinstate the
old policy or take out a new one, the new contract may not have
terms as favorable as the old one. Therefore, one would want to
reinstate the old contract. On the other hand, the new contract
might have more favorable terms than the old one. In this case, the
insured would take out a new policy. These two alternatives should
be examined carefully should this ever occur. Remember, with the old
contract, the suicide clause and the incontestable clause might have
passed with time. Taking out a new policy would require the insured
to go through these periods again.
Policy Loan
This clause
states that the insured may take a loan (this loan does not have
to be repaid) against the policy in an amount which does not
exceed the cash value portion of the policy as of the next policy
anniversary. The rate of interest is stated in the contract. If the
loan is not repaid, the death benefit is reduced to the beneficiary
in the amount of the loan plus the interest. With Whole Life the
only way to get money out is through a loan. With Universal and
Variable Life, you can either take out a loan or take a withdrawal.
On a loan, the clock starts ticking right away. With a withdrawal,
there is a $25 administrative fee. That's all. And the money never
has to be repaid. On all loans, the interest is deducted from the
amount of the loan.
Automatic
Premium Loan
Always have
this provision included in your permanent life insurance policies!!
If an insured fails to pay his premium on time, and the policy will
lapse beyond the 31 day grace period, the automatic loan provision
kicks in and the premium is paid. The only requirement is that there
be enough cash in the cash value portion of the policy to cover the
loan. This must be elected at time of application. This is only good
with Whole Life Insurance. With Universal and Variable there is a
similar provision. But it is not an APL. You just tell the company
to use accumulated proceeds to pay the premium.
Beneficiary
Designation
This is the
person or people who receive the proceeds of the life insurance
contract. However, there are two different beneficiary designations.
The first is a revocable designation. This means that the insured
can change the beneficiary of the life insurance policy. Most people
use this type of beneficiary designation. The second is an
irrevocable designation. This means that the gives up the right to
change the person or people named as beneficiaries. In effect, this
means that the beneficiary is a joint owner of the policy. In order
to take out a loan against the policy or assign the policy, the
irrevocable beneficiary must also sign.
Aviation
Clause
In most of the
newer life insurance policies death as a result of an airline
accident is now a covered risk. If you have an older policy, you may
want to contact the insurance company to see if they will eliminate
the clause or if they are currently ignoring the old exclusion.
War
Generally, death
due to war is an excluded risk.
Nonforfeiture
Clauses
Non forfeiture
options protect the insured in case he wants to stop paying premiums
or wishes to surrender the contract. The first is the cash
surrender value. After a couple of years in force, the life
insurance contract will have a cash value. If the insured elects the
cash value option of his policy, the policy is no longer in force,
and the insurer has no further obligations. The insured will receive
the cash value of his life insurance policy. At age 65, the insured
may have a paid up life insurance policy of $100,000 with a cash
value of $65,000. If the insured chooses cash value he will receive
$65,000. However, if he does nothing, his heirs will receive the
$100,000 upon his death. The second non-forfeiture option is
Reduced Paid Up Insurance. The insured can elect to take the
cash value portion of his policy as paid up insurance of the same
type as the original policy for a reduced face amount. This option
would be elected if a smaller amount of insurance is sufficient.
The third non-forfeiture option is extended term insurance. The
extended term insurance option allows the insured to exchange the
cash value for the full face amount of the original life insurance
contract. The length of the new term insurance would be the amount
the net cash value applied as a single premium will permit him to
buy at his present age. The insured might choose this option where
the need for the full amount of the coverage is still necessary;
however, the insured cannot or will not continue to pay premiums.
Dividend
Options
Participating
life insurance contracts may provide dividends. The policyholder has
several options available to him with respect to dividends. The
first is to take the dividends in cash. This is generally done when
the policy is fully paid. The second is to apply the dividends
toward future premiums. This is an easy and simple way to pay the
premiums. The third option is to leave the dividends with the
insurance company to accumulate as interest. This is sort of like a
savings account. You should periodically check the interest rate
being applied. Be advised, these particular dividends count toward
gross income and are taxable. The fourth option is to use the
dividends to purchase additional whole life insurance. This is
called paid up additions. You may have to provide proof of
insurability. The fifth and last option is to use the dividends to
purchase one year term insurance. Not every company offers this. The
amount of term insurance the insured may purchase is usually limited
to the net cash value of the policy. This is also called a Split
Dividend Option. The insured buys one year term insurance to cover
the existing cash value with the balance of any dividend to be used
either to reduce premium, accumulated interest, or buy paid up
additions. Some insurance carriers do not offer this provision, as
it would in essence indemnify the insured who has taken policy
loans. Under this scenario the carrier would be obligated to pay the
face amount of the policy, plus the cash value minus the amount of
the existing loan indebtedness. This amount would at least equal the
original face amount of the contract even though loan transactions
had taken place.
Settlement
Options
When the life
insurance policy becomes payable, the insured or the beneficiaries
may elect to take payment in one lump sum. There are then no other
options available. However, the insured or the beneficiary, may
elect not to take a lump sum payment. In this case, there are
several options. The first settlement option is known as the
Interest Option. With the interest option, the entire proceeds
are left with the insurance company. The insurance company pays a
guaranteed interest rate. Additionally, the insurance company will
pay excess interest should their investments do well. It is similar
to leaving the money in a savings account. At any time in the
future, the beneficiary can withdraw the funds. The second
settlement option is known as the Fixed Amount Option. The fixed
amount option provides the beneficiary with a fixed amount of money
each month until the proceeds are exhausted. The insurer pays a
guaranteed minimum amount of interest which consists partly of
interest and partly of principal. For example, the beneficiary might
elect to receive $2,000 per month until the death benefit is used
up. The third settlement option is known as the Fixed Period
Option. The fixed period option will pay to the beneficiary
equal payments over a fixed period of time. The time might be 10
years or 20 years or as short as 5 years. Excess interest earned
will increase the amount of these payments. The fourth settlement
option is known as the Life Income Option. The life income
option provides the beneficiary with the proceeds paid over the rest
of their life. Pure Life Income provides the beneficiary with income
for the rest of their life. However, when the beneficiary dies, the
balance of the policy are considered used up. Most people shy away
from this choice. Life Income With Period Certain the proceeds are
paid out to the beneficiary for the rest of their life. However, if
the beneficiary dies before a specified period of time (usually 10
or 20 years) the payments continue for the rest of that period to a
second payee. Refund Life Income Options provides the beneficiary
with income for the rest of their life. Further, if the beneficiary
dies before the proceeds are used up, the payments continue to a
second payee until the difference between what was paid and what
remains is used up. With Joint and Last Survivor Life Income Options
the proceeds will be paid to two or more recipients. A husband and
wife might choose to have income while they both live and then
continue upon the death of one of them. The less the amount which is
paid to the survivor is, the greater will be the proceeds while they
are both alive.
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