Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

169 Cards in this Set

  • Front
  • Back

Policy provision definition

Set out terms of agreement between two parties and describe operation and effect of contract. Also defines rights and obligations of all parties involved.

What provisions do all individual life policies include? (Standard provisions)

Free Look Provision, Entire Contract Provision, Incontestability Provision, Reinstatment Provision, Misstatement of Age/Sex Provision.

Free Look Provision

Gives policy owner 10-30 days after policy is delivered to examine policy (not date of issue). They have right to cancel and receive refund of initial premiums paid. Coverage is in effect during this time, or until they reject policy - whatever happens sooner. Aka: free look period, cooling off provision, or free examination provision.

Entire Contract Provision

Defines documents that constitute the contract between insurer & owner. Limits terms of contract to specific written documents, preventing oral statements from altering terms of contract.

What do entire contract provisions state? (3)

1) Only specified people can change contract.

2) No change is effective unless made in writing.

3) No change will be made unless policy owner agrees in writing.

Wording of contract provision depends on what?

Whether policy is closed contract or open contract

Closed Contract

Only terms & conditions that are printed or attached to contract are considered as part of contract. Most individual life policies are closed contracts.

Entire Contract provision in a closed contract consists of what?

Policy, attached riders, copy of application for insurance. Provision ensures policy owners have access to all terms of conract.

What isn't part of entire contract provision?

advertising materials, or insurer's governing corporate documents.

Open Contract

Identifies documents that constitute contract, but all enumerated documents aren't necessarily attached to contract. Fraternal insurers usually issue open contracts.

Entire contract provision in open contract states what?

Entire contract consists of the policy and any attached riders.

Why are open contract permitted? What isn't included in these policies?

Because membership in societies are a requirement of the society. Receive and can examine copies of charter, constitution and bylaws. That is why when fraternal insurers issue a policy, they do not attach a copy of those documents to policy.

Incontestability Provision

Insurers have a right to avoid obligations under enforceable contract if applicant misrepresented any facts in application.

Two limits imposed on incontestability provisions (laws)

1) Only certain material misrepresentations give insurer right to avoid contract.

2) insurer has limits amount of time to avoid contract. Describes this time in the provision.

Material Misrepresentation

Relevant to the evaluation; if truth had been known, insurer would have declined or issued on a different basis.

Operation of incontestability provision

if company discovers material misrepresentation, terms of provision determine whether they can avoid or not. Usually incontestable after it's been in force for 2 years from policy issue date, maximum is usually included. Can be shorter than 1 year.

What happens after incontestability period has passed?

Insurer's can't avoid contract, unless there is an exception in law which allows them to contest at any time if application contained a fraudulent misrepresentation.

Fraudulent Misrepresentation

Made with intent to induce other party to contract - and did induce innocent party to enter into contract. Rarely used as proof is difficult to get.

What line is important to incontestability provision? Why?

"During lifetime of insured". Makes party contestable forever if insured dies during contestable period. Company will have opportunity to investigate whenever death arises within contestable period.

Why is "during lifetime of insured" important to incontestability clause?

Beneficiary could delay making death claim until after contestable period expires. Insurer would be prevented from contesting and would be required to pay death benefit even if application contained material misrepresentation.

Can application be used for incontestability?

Application isn't considered as part of policy unless a copy was attached when policy was issued and delivered to applicant. Insurer has right to use material misrepresentation in the application only if application was attached to policy when it was issued/delivered to applicant.

Country who has a 1 year incontestability period


Countries who have 2 year incontestability period

Canada, China, India, USA

Countries who have a 3 year incontestability period

New Zealand, South Africa.

Country that has a 5 year incontestability period


Grace Period Provision

Length of time following each renewal premium due date where premiums can be paid without loss of coverage (30 or 31 days). Coverage remains in force throughout grace period. If insured dies within grace period, benefits are paid. Deducts any unpaid premiums from amount of proceeds.

What happens when renewal premiums aren't paid at the end of a grace period? Any exceptions?

Policy lapses. Cash value life insurance policies contain a "non-forfeiture provision" that allows policy owner to continue coverage under specific circumstances even if renewals aren't paid by end of grace period.

What kind of plans don't require scheduled premium payments? What happens with grace periods in these situations?

Universal life policies and variable universal policies. Grace period applies when cash value isn't sufficient to meet expense charges.

When does grace period begin in universal policies? (2)

1)Grace period begins on day cash value is insufficient to cover mortality/expense charges. Grace period would be 61 or 62 days following that date.

2) Date cash value is zero and continues for 30-31 days. Requires insurer to notify policy owner at least 31 days before expiration that policy will be terminated. If insured dies within grace period, insurer will pay but deduct amount required to pay overdue mortality/expense charges.

Reinstatement Provision

Conditions that a policy owner must meet to reinstate a policy (terminated due to non-payment, or has been continued under extended terms/reduced paid up insurance non-forfeiture option).

When do insurer's not allow reinstatement provision?

If policy has surrendered for its cash surrender value.

When reinstating, do you get a new policy?

No, original policy is in effect - no new policy is issued.

To reinstate, policy owner must fulfill what conditions? (4)

1) Complete app within time frame (2-5 years)

2) Provide evidence of continued insurability

3) Pay specified amount (depends on policy)

4) May be required to pay any outstanding policy loans or have policy loan/interest reinstated with their policy.

Amount of money required to reinstate a fixed premium policy (whole life)?

Policy owner must pay back all premiums plus interest. Insurer charges interest based on rates specified in reinstatement provision. Payment with interest is needed to bring the policy reserve to the same level as the reserve for a similar policy that has been kept in force without lapse.

Amount of money required to reinstate a flexible premium policy (universal life)?

Policy owner must pay sufficient amount to cover policy's mortality and expense charges for the period between date of lapse and date of reinstatement.

Advantage to reinstating a policy compared to getting a new one? (2)

Premium rate for original policy is based on your age at the time the policy is purchased. New policy would call for higher premiums because it's based on your attained age.

Original cash value is also reinstated.

What is the contestable period on a reinstated policy?

Contestable period begins on the date of reinstatement.

If policy is reinstated, what happens with material misrepresentations?

Insurer can avoid reinstated policy based on material misrepresentations made in the application for reinstatement during the new contestable period. Can't avoid on the basis of original application unless original contestable period hasn't expired yet.

Misstatement of Age/Sex Provision

Action insurer will take to adjust amount of the policy benefit in the event the sex or age is misstated. If incorrectly stated and results in incorrect premiums, insurer will adjust the face amount of the policy to the amount the premiums actually paid would have purchased if age/sex was correct.

Is a misstatement of age/sex considered a material misrepresentation?

No - not treated in the same manner as a material misrepresentation. Although it is a significant factor/error.

What happens if insurer discovers misstatement of age prior to death of member?

Insurer may give policy owner option to pay or receive refund of any premium difference caused by the misstatement instead of having to adjust the face amount of the policy.

Is adjusting an amount due to a misstatement of age the same as contesting a contract?

No - they are not contesting the contract, only enforcing a misstatement.

Does a policy's incontestability provision prohibit a company from making any adjustments based on misstatement of age/sex?


Larry purchased a life insurance policy and listed his age as 30 when he was actually 33. Larry died 5 years later after incontestability provision expired. Discovery of the misstatement happened while processing his death claim. What happens now?

Company reduces policy's face amount to the amount that the premiums paid would have purchased a 33 year old Larry and will pay that amount to his beneficiary.

While processing Alice's death claim, Medavie discovers that when Alice purchased the plan on the life of her mother Denise, she had misstated that her mother was a male instead of female. What happens now?

Medavie will increase the face amount to the amount the premiums would have purchased for a female.

Provisions unique to cash value policies relate to what?

Policy loans, withdrawals, and non-forfeiture options.

Cash value policies allow owners to do what? Using what?

Policy owner can borrow money from insurer by using cash value of the policy as security for the loan.

Policy Loan Provision

Specifies terms on which policy owner of cash value policy can obtain a loan against their policy's cash value.

How much can policy loans be taken out for?

Some allow policy owners to take out a loan in an amount that doesn't exceed cash value, less one year's interest on the loan. Others allow stated maximum or loan of a certain percentage of the policy's cash value.

What is a policy loan?

Advance payment of part of the amount the insurer will eventually pay out under the policy.

What are the two differences between a policy loan and a commercial loan?

1) Policy owner isn't legally obligated to repay policy loan - may repay part or entire part, if loan hasn't been repaid when they die, insurer deducts anything outstanding including interest.

2) Insurer's don't perform credit checks on policy owners requesting policy loans. Request is only evaluated in terms of the amount of the net cash value available.

Do policy owners need to pay interest on policy loans?

No - it's charged every year, but isn't required to be paid. Any leftover interest becomes part of the policy loan. If amount plus interest increases to a point where total policy debt exceeds the cash value of the policy, it terminates without any further value. Must notify at least 30 days prior.

Policy Withdrawal Provision (what type of plan usually requires this? what is it)

Universal life insurance policies usually require one. Permits policy owner to reduce cash value by withdrawing up to the amount of the cash value in cash. No interest is charged on policy withdraws, the amount of cash value is just reduced. Many impose an admin fee for each withdraw and limit number allowed in one year.

Non Forfeiture Provision (what type of policy, what are they)

Cash Value Policies - if policy lapses or if they surrender or terminate, gives the owner the right to select a non-forfeiture option if renewal premium is unpaid when grace period expires.

What types of non-forfeiture options are there? (4) What is the most common?

1) Cash payment non-forfeiture options

2) Reduced paid up insurance

3) Extended term insurance

4) Automatic premium loan option.

Most common = extended term.

Automatic non-forfeiture option

Most policies include this. Becomes effective automatically when renewal premium for cash value life insurance policy isn't paid by the end of the grace period and owner hasn't elected another non-forfeiture option.

Cash Payment Non Forfeiture Option

Policy owner who discontinues payments can elect to surrender and receive cash surrender value in a lump sum. All coverage terminates. Must provide cash surrender value by end of the second or third policy year.

How are surrender values determined in a cash payment non-forfeiture option

Chart that outlines surrender values at various times. Laws require cash values meet or exceed amount that would be provided to policy owner on the basis of an actuarial formula state in the laws.

Is the cash value available to a policy owner the exact cash surrender amount described in the policy? Explain.

No - insurer will subtract any outstanding policy loans and any interest from the cash surrender value. You're left with the "net cash surrender value"

Net cash surrender value

Amount the policy owner actually receives after adjustments and deductions are made.

Continued Insurance Coverage Non Forfeiture Options (what policies, what are they, what are the options)

Policies that build cash values.

Discontinuing premium payments but continuing coverage as reduce paid up insurance or extended term insurance.

Reduced Paid Up Insurance Non Forfeiture option

Policy's net cash surrender value is used as a net single premium to purchase paid up life insurance of the same plan as the original.

What is the premium based on for paid up plans?

Based on attained age when option goes into effect.

What are features of a paid up policy?

Amount is smaller than face value of original policy. Based on cash value listed in the policy for that year. Continues to build cash value and has right to surrender the policy for cash value.

What happens to any supplemental benefits when reduced paid up non-forfeiture option is selected?

Not available when a policy is continued as a reduced paid up insurance plan.

Extended Term life Insurance Non Forfeiture Option

Uses net cash surrender value to purchase term insurance for full coverage amount under original policy, for as long a term as the value can buy.

Owner of a $500,000 whole life policy can purchase how much in term life insurance under a Extended Term Life Insurance Non Forfeiture option?

Can purchase $500,000 of term life insurance for as long a term as the net cash surrender value can provide.

What is the premium based on for extended term non forfeiture?

Based on attained age.

What rights do owners lose when electing a Extended Term life Insurance Non Forfeiture Option?

Can't exercise policy loan privilege or receive dividends.

What can policy owner do with a Extended Term life Insurance Non Forfeiture Option?

Cancel extended term policy and surrender for the remaining cash value.

Are supplemental benefits available under extended term options?


Do universal life policies include extended options?

No - insurer deducts mortality/expense charges from universal cash value, so even if owner pays no premiums, policy continues until cash value is over due to monthly deductions.


Automatic Premium Loan Option - insurer automatically deducts overdue premiums by making a loan against the policy's cash value as long as the value is equal or exceeds amount of premium due.

What is maintained under an Automatic Premium Loan option?

Keeps original policy in force for full coverage, and includes any supplemental benefits.

What policies don't include an automatic premium provision? Why?

Universal life insurance policies - because a similar benefit is already available for those policies.

Life Insurance Policy Exclusions

Describes circumstances when insurer won't pay proceeds following deaths.

Suicide Exclusion Provision

Policy proceeds won't be paid out if insured dies as a result of suicide. Laws specify maximum allowable length of suicide provision - usually one or two years.

Suicide provision length

Suicide while sane or insane within two years of issue is not covered.

Is anything paid if someone commits suicide within the two year suicide exclusion provision?

Will either pay the policy's cash surrender value, or premiums paid (less any loans) if suicide happens during exclusion period.

What happens to suicide exclusion provision if a policy is reinstated?

Exclusion provision starts over again (two years).

War Exclusion Clause

Will not pay policy proceeds if death results from war or an act of war.

Military Exclusion Clause

Will not pay policy proceeds if death results from military service during time of war. Usually issued during periods of war or threats of war.

Hazardous Activities Exclusion Provision

Insurer won't pay proceeds if death resulted from specified dangerous activities. Ex: Mountain climbing, sky diving, scuba diving.

Aviation Exclusion Provision

Benefits not payable if insured's death results from aviation related activities. Some apply only to military activities or experimental aircraft. Others apply to pilots and crew members of private planes. A few exclusions apply to any aviation related death, unless they were a passenger on a regularly scheduled commercial flight.

Alternatives to hazardous activities exclusion

Some offer option of 1) excluding hazardous activities from coverage of 2) paying additional premiums for the coverage.

What is insurance subject to?

Insurance policy is a type of property and is thereforesubject to property law.


bundle of rights a person has with respect to something. Either real property or personal property.

Real property

Land or what is growing on or attached to land.

Personal Property

all property other than real property. Tangible or intangible.

Tangible personal property

Physical form (cars, jewelry, clothing).

Intangible personal property

Property representing ownership of a legal right (contractual right). Represents legal rights that have value and can be enforced by law.

Who holds the ownership of a policy?

The owner of the policy, no the insured or the beneficiary.

What is the most important ownership right to a life insurance policy?

Naming your beneficiary.

Who can be your beneficiary?

A named individual or another entity recognized by laws (executor of an estate, corporation, charity).

Class designation

Beneficiary designation that identifies a group of people rather than naming each person. Ex: my children.

Primary Beneficiary

First beneficiary, receives proceeds after death of the insured. If more than one party is a primary beneficiary, you divide among them. If it's not indicated, you divide evenly.

In order to receive benefits, what must happen with primary beneficiaries?

They must survive the insured - estate claims the proceeds if the beneficiary dies first.

Contingent beneficiary

Receives policy proceeds if primary beneficiary dies before the insured (secondary beneficiary). Only if all designated primary beneficiaries pre-decease the insured. Can haev as many as you want and can decide how to divide. There are different levels of contingent beneficiaries.

Mere expectancy

Revocable beneficiaries have "mere expectancy" of receiving policy proceeds, and have no legal interest in the proceeds while insured is alive and can't prohibit the policy owner from its right to change beneficiary.

Updates to beneficiary when the beneficiary is revocable.

Can only be made during the lifetime of the insured - once they have died, the named beneficiary has a vested interest.

Right of revocation

Right to change beneficiary designation. It's revocable if policy owner has the unrestricted right to change designation during the lifetime.

Irrevocable Beneficiary

Can designate an irrevocable beneficiary at any time. After making that choice, policy owner gives up right to change the beneficiary unless the beneficiary consents. The irrevocable beneficiary has a vested interest in the proceeds, even during the lifetime of the insured.

Do policy owners have all ownership rights with irrevocable beneficiary?

No - because of vested interest, policy owner can't exercise all ownership rights without consent of the beneficiary.

What can't a policy owner do if they have an irrevocable beneficiary?

Obtain a policy loan, surrender for cash value, assign ownership of policy to someone else, change beneficiary - without consent of irrevocable beneficiary.

Are there circumstances when a policy owner can name new beneficiary even if the original was irrevocable?

Yes. If they obtain written consent, or if beneficiary dies before the insured dies.

How are most individual policy premiums paid?

Periodic renewal premiums that are required to keep plans in force.

Premium payment mode (definition)

The frequency renewal premiums are payable.

How are premium payment modes determined

Each company decides their own payment modes, usually offer to accept renewal premiums for life insurance policies annually, semi annually, quarterly or monthly.

Can mode of premium payment change?

Applicants select one and policy owner can change mode of payment after policy takes effect,

What is the most common mode of premium payment? Why?

Annual. Admin costs are charged for processing renewal premiums, the more frequent the payment, the greater the admin costs will be. Charged more than the annual premium when a policy chooses to pay more frequently than one year.

On what basis can policies be issued on? (2)

Participating Policy or a Non-Participating Policy

Dividends for participating policy

Policy owners share in the company's divisible surplus.

Dividends and Non Participating Policies

Policy owners don't share in insurer's surpluses.

Company's surplus

Amount that its assets exceed its liabilities, plus its capital.

Where does surplus result from?

Profitable operations.

Divisible surplus

Set aside a portion of surplus to distribute to owners of participating policies called "policy dividends". Considered a refund of part of their premiums.

What percentage of individual life policies are non-participatory?


Premiums for non-participatory policies?

Lower because insurers use less conservative assumptions regarding mortality, investment earnings and expenses.

Are policy dividends guaranteed?

No - but most periodically pay on their policies that are expected to remain in force long term.

When are policy dividends paid?

On anniversary date.

Any terms to policy dividends?

Policy must be in force two years before any dividends are payable.

Amounts for policy dividends?

Determined by board of directors.

Do policy dividends increase or decrease with age?

Increase with age of policy.

Dividend options (5)

Cash Dividend Option

Premium Reduction Option

Policy Loan Repayment Option

Paid Up Additional insurance Option

Additional Term Insurance Option

Who selects dividend option?

Selected by applicant during application process, can be changed but can be restricted.

Cash Dividend Option

Insurer sends policy owner a check in the amount of the dividend that was declared. Laws require insurers to offer cash dividend option to all owners or life insurance policies.

Premium reduction option (dividend)

Insurer applies dividends toward payment of renewal permiums. Unless it's been in force for several years, annual dividend is usually not large enough to pay entire premium. Bills for difference between premium and amount of dividend. If amount exceeds annual premium, policy owner can select another option to receive remainder, or the insurer will apply the automatic dividend option.

Policy Loan Repayment Option (dividends)

Insurer applies dividend toward repayment of outstanding policy loan. Amount is applied first to repay any interest and then principal. If amount exceeds amount of loan, policy owner can select another dividend option or insurer will apply automatic dividend option.

Accumulation at Interest Option (dividend)

Policy dividends are left on deposit with insurer to accumulate interest. Insurer specifies the interest rate annually based on economic conditions. Policy usually guarantees insurer will pay minimum interest rate. Can withdrawal during life of policy - if surrenders, the amount of dividends and interest is paid to policy owner. Any on deposit when insurer dies are payable to beneficiary.

Paid Up Additional Insurance Option

Insurer uses dividends to purchase paid up additional insurance on insured's life. Issued on same plan as basic policy and in whatever face amount the dividend can provide at their attained age. Cash value policies - builds cash value and can surrender those additions for their value at any point. Face amount of additions each year are small but total ends up being substantial over time.A

Additional Term Insurance Option

Rare. Insurer uses dividends to purchase one year term insurance on insured's life. Rights are limited in terms of the amount of cash value that can be purchased in a year, and before they can change to another option they need EOI in order to avoid anti-selection.

Transfer of policy ownership (what is required)

If owner of individual life policy has contractual capacity, they have the right to transfer all or some rights in the policy.

Two ways policy owners can transfer ownership rights

Assignment and Endorsement

Restrictions to transferring ownership of a policy through assignment

Policy owner transfers some/all rights to someone else. To be valid, policy owner must have contractual capacity (can't be minor). Can't infringe on vested rights of irrevocable beneficiary. Can't be made for illegal purposes (speculation).

Types of assignment (transferring ownership)

Absolute assignment, collateral assignment.

Absolute assignment

Policy owner transfers all ownership rights to assignee. Assignor has no further rights, assignee becomes policy owner. Can assign to anyone regardless of insurable interest.

Assigner (transferring ownership)

Person who makes the assignment.

Assignee (transferring ownership)

Person who gets the policy from an assignor.

Ways assignment can be done

Can make a gift of life insurance policy by signing policy without receiving payment, or you can sell policy by assigning to an assignee in exchange for compensation.

Collateral assignment

Temporary assignment of monetary value of life insurance policy as collateral or security for a loan.

How does collateral assignment differ from absolute assignment?

Collateral assignee's rights are limited to rights that concern monetary value of policy. Assignee has vested right to monetary values, but that is limited. Assignee's rights are only temporary.

What rights does a policy owner keep in a collateral assignment?

Retains all ownership rights that don't affect the policy's monetary value - right to select beneficiary, right to select settlement options, etc.

What isn't permitted under a collateral assignment? Why?

Can't take out policy loan or surrender for cash surrender while assignment is in effect unless the assignee consents. This is to protect the assignee's right to the policy's value because a policy loan and surrender both diminish the value.

If policy becomes unpayable, what happens in a collateral assignment?

Assignee is entitled to receive only the amount of the indebtedness, anything remaining must be paid to the beneficiary. Assignee can receive this amount only in a lump sum and can't select any settlement options.

If policy owner repays the amount owed to the collateral assignee during the lifetime of the insured, what happens?

Assignment terminates and all policy ownership rights revert to the original policy owner. Once loan is repaid, the policy owner usually secures from the assignee a release of the assignee's claim to policy proceeds.

Assignment Provision

Most life insurance policies include one - describes role of insurer and policy owner during an assignment.

Is insurer party of the assignment?

Not party to the agreement - states that the insurer isn't responsible for validity of the assignment. If they receive written notice of assignment, they assume it is valid - can't be held liable for invalid assignment.

When is insurer not obliged to act in accordance with assignment?

If they don't receive written notice. Once debt is paid, policy owner must notify insurer that assignment is no longer in effect.

Who has responsibility of notifying insurer of an assignment? What about notification of the debt being paid (collateral)?

The assignee must notify the insurer in writing.

Transfer of ownership by endorsement

Simple, direct method. Completely transferring without requiring policy owner to enter into separate assignment agreement.

When is endorsement method of assignment usually used?

When the policy is given as a gift.

Receiving policy proceeds when no surviving beneficiary

Proceeds are paid to policy owner if policy owner is still living. if not, paid to owner's estate.p

Preference Beneficiary Clause

Aka: succession beneficiary clause. States if no beneficiary is stated, insurer will pay proceeds in a stated order of preference (group life insurance more than individual policies). If none are living, paid to estate.

Simultaneous Death Act

Governs how companies evaluate common disaster situations. If insured and beneficiary die at same time or can't determine who died first, proceeds are payable as if insured outlived the beneficiary. (Doesn't impact situations when beneficiary survives).

What happens if beneficiary survives the insured by only a few minutes?

The beneficiary is still entitled to benefits. If they then die, it's put toward the beneficiary's estate.

Survivorship Clause

beneficiary's must survive the insured by a certain period of time (usually 30 or 60 days) to be entitled to benefits. if not, proceeds are paid as if beneficiary pre-deceased the insured.

What happens if beneficiary wrongfully kills the insured?

Laws disqualify beneficiary from receiving proceeds if beneficiary wrongfully killed the insured. Will pay proceeds to the contingent beneficiary. If policy was purchased with intent to profit, policy is voidable as lawful purpose doesn't exist.

Calculating amounts of benefits payable for individual life policies (what does the insurer add, and what do they deduct?)

Add: amount of basic death benefit, accidental death benefits, declared but unpaid dividends, accumulated dividends including interest left on deposit, face amount of any paid up additions,amount of any unearned premiums in advance.

Subtract: amount of outstanding policy loans, premiums due and unpaid.

Samir died - he was insured by $250,000 life insurance policy. At that time, $450 in accumulated dividends were on deposit, and Samir had paid $500 in advance premiums. Samir had an outstanding policy loan of $5300. What is insurer liable to pay the beneficiary?


$250,000 face amount.

$450 accumulate dividends

$500 advance premiums

-$5300 Outstanding policy loan

What are settlements

Alternative method other than a lump sum for receiving proceeds of a life insurance policy.

Settlement option provision

gives policy owner or beneficiary several choices as to how to distribute proceeds of life insurance policy. Can select during application, or at any point during the lifetime of the policy.

What happens if policy owner hasn't selected a settlement option when proceeds become payable?

Beneficiary can choose a settlement option.

Payee (settlements)

Person who is to receive proceeds under a settlement option.

Contingent payee

Party who elects settlement can designate a contingent beneficiary who will receive benefits still payable at the time of payee's death.

Four modes of settlement options in individual life policies

Interest Option

Fixed Period Option

Fixed Amount Option

Life Income Option

Interest option (settlement)

Insurer invest policy proceeds and pays interest on proceeds on the payee. Guarantees minimum interest rate, but can pay higher. Payee has right to withdrawal part or all proceeds at any time, or place all proceeds/interest under another settlement option (can place some rights on right to withdrawal, such as only 10% for first year, etc.)

Fixed Period Option (settlement)

Insurer pays proceeds in equal installments to payee for certain time. Each consists of proceeds being held by company and interest being earned. Minimum interest, but rates can be higher. Amounts depend on policy proceeds, interest rate and length of payment period selected. Payee can cancel at any time and collect funds in lump sum (if not irrevocable). Can't withdrawal a portion because it would reduce amount of funds and insurer would need to recalculate entire schedule of benefit payments.

Fixed Amount Option (settlement)

Insurer pays equal installments of a stated amount until all proceeds and interest are exhausted. Minimum interest rate on proceeds guaranteed. Number of installments depends on amounts. Has right to withdrawal all or part - will just reduce number of installments. Payee can increase amount of payments.

Life Income Option (settlement)

Company pays periodic installments over the lifetime of the payee. Permanent source of income, although smaller payments than all the others. Uses proceeds to purchase an annuity for payee. Able to select from various types of annuities. If insurer's annuity rate at time of settlement would result in larger payout options, insurer gives larger amounts instead of guaranteed amount.