Chapter 5: Life Insurance Questions and Answers Already Passed

Chapter 5: Life Insurance Questions and Answers Already Passed Insurable Interest Imposed by law to prevent gaming/wagering. 1)Personal 2)Business What is the PURPOSE of Insurable Interest? We don't want people to profit off the death of someone there is no financial interest in. (4) Personal Parties where there's Insurable Interests in the insured: 1) Parent to the child 2) Child to the Parent 3) Grandparent to Grandchild 4) Siblings BLOOD RELATIVES *Another ex: Spouses to each other (3) Business Parties where there's Insurable Interests in the insured: 1) Employer to Employee 2) Partners in a Partnership 3) Buy-Sells For a policy to be valid, when does the insurable interest have to exist? Must exist at the time of inception --INSURED MUST CONSENT 3 Different Purposes of Financial Underwriting? 1) To determine if insurance can justify the amount of insurance. 2)Insurabilty3)Insurable Interest 3) Justify coverage Aleatory Contract Insurer's promise to pay is conditioned upon an uncertain event--death must occur while policy in effect ---Obligation to pay is uncertain Contract of Adhesion -favor of owner -the insurance contact is a "take it or leave it" agreement -Insurer selects all wording and there is no negotiation of the terms Face Page & Free Look Period -a summary of terms of the policy -Free-look period (10 days to look over policy=cooling off period) Grace Period -protection for customers -gives policy owner additional period of time (typically 31 days) to pay premium before policy lapses Incontestable clause & Exclusions -After 2 years from the policy date (during Insured's life) the company is barred from challenging validity of contract Exclusions: *Fraudulent impersonations *Lack of insurable interests *Procurement of policy w/ intent to murder Suicide Clause -*Proceeds won't be paid if insured commits suicide w/ in 2 years from the policy date (whether Sane/Insane) -Insurer will return premiums paid, less any debt or partial surrenders -Accidental death benefits will NOT be paid as a result of an insured's suicide (suicide considered a deliberate act) Misstatement of Age Adjustment Clause -Proof of age is not required @ time of application, BUT when insured dies, a death certificate is required -Proceeds of the policy will be adjusted to proceeds that would have been payable at the correct age. Dividend Clause & The 3 factors that most often determine whether a life insurer will pay dividends: -Return on Investments -Dividends are influenced by insurer's experience w/ 3 factors: 1) Mortality 2) Interest 3) Expenses Dividend OPTION Clause: -options other than take dividends cash?(list 3) -Take dividends in cash -have dividends reduce in the next premium -Dividends purchase paid-up additions= Increases Cash Value and dividends -Dividends accumulate in account w/ interest -Dividends purchase 1-year term insurance *Insurers are allowed to specify what will happen if the policy owner does not specify which dividend option he/she wants Nonforfeiture Options/Provisions -Generally 3 options for the policy owner w/ respect to the cash surrender value: 1) Policy owner surrenders policy for its' cash surrender value 2) Cash Val. is applied as a single "premium" to create an EXTENDED TERM POLICY 3) Reduced Paid-up Insurance Extended Term Policy -Death Ben. remains the same, only the term that the policy is in effect will change -If the insured dies after the term ends=no benefits! Policy lapse & Reinstatement Clause -3 steps -Policy lapses when premium is not paid by the end of the grace period -A lapse policy can be reinstated -Reinstatement Conditions: A policy owner must... *Apply for Reinstatement *Provide evidence of insurability *Pay back all premiums plus interests Reasons to Reinstate: (list at least 2) -Exisiting policy better than what;s currently available -Simpler/Quicker than applying for a new contact -On a new contract suicide and incontestable clause start anew Reasons NOT to reinstate: (list at least 2) -New Contract will have superior features/benefits -May cost more -Rates for new policy may be lower than for original policy Naming & Changing a Beneficiary *Revocable-can be changed anytime by the policy owner *Irrevocable-requires consent of the original beneficiary -Requires Spouses to consent if policy is purchased with community prop. funds -Beneficiary must have insurable interest if pol. owner is someone other than insured Policy Loans -Insured can access Cash value for policy loans -Loan does not require re-payment, and the interest can be borrowed as well -@ death, loan balance is deducted from the total death proceeds Automatic Premium loan Provisions *advances the insurer makes under this provision pay premiums in the event the insured does not pay by the end of the grace period Policy Assignments & explain the difference b/w the 2 assignments: *Policy owner can transfer to another person or entity -Absolute assignment--Irrevocably transfers all policy owner's rights -Collateral Assignment--assigns as much of the death proceeds as necessary to secure the lender's rights *Insurance company must be notified in writing by the policy owner 3 options the beneficiary can choose to apply the death benefit other than lump sum: 1) Life Income Options 2) Leave proceeds w/ insurer and receive Annual Pmts. 3) Fixed-years installments/Fixed-amounts installments Example of a Waiver *Definition: international voluntary surrender of a known right --Ex. right of the insurer to demand that the applicant have an insurable interest in the insured Example of an Estoppel *def: a legal way of arriving @ a fair/just result --Ex: agent tells applicant to ignore that one fainting spell b/c the insurance company is only concerned w/ long-term history of fainting ------ Insurer later denies death benefit claim on grounds that fainting was not admitted on application ------- The insurer is "estopped" from claiming misrep. b/c the insurance comp. induced the applicant to take action