Life Insurance Policy Provisions Quiz

Questions and Answers

What happens if an insured is still totally disabled after the six-month premium payment period?

The rider goes into effect and will pay back the premium paid and waive ongoing premiums as long as they are disabled.

An insured died during the grace period of her life insurance policy and had not paid the required annual premium. What is the insurance company obligated to pay to the beneficiary?

The face amount of the policy less any earned premiums (correct)

The cash value of the policy, if any

The full face amount of the policy

A refund of any premiums paid

A life insurance benefit payable while the insured is still living is known as what?

Double indemnity

Accidental death benefit

Accelerated benefits (correct)

Fixed amount settlement option

The insuring agreement or clause in a life insurance policy contains all of the following EXCEPT?

How to change the beneficiary Signup and view all the answers

Most assignments of life-insurance policies are made in order to protect what?

Insured's personal or business credit Signup and view all the answers

Which statement about Automatic Premium Loan on a life insurance policy is true?

It pays premiums due at the end of the grace period Signup and view all the answers

A revocable beneficiary has which of the following?

Has no vested interest in the policy Signup and view all the answers

If a client bought an annual renewable term policy and died without paying his renewal premium when due, the insurer would pay:

$99,800 Signup and view all the answers

If the insured's age was overstated at the time a life-insurance policy was purchased and the error is discovered at death, the insurance company will:

Provide the additional insurance in the amount that has been purchased by the additional premium Signup and view all the answers

Which of the following statements is true about a policy assignment?

It transfers the owner's rights under the policy to the extent expressed in the assignment form Signup and view all the answers

Which statement about a typical Suicide Clause in a life insurance policy is true?

Suicide is excluded for a specific period of years and covered thereafter Signup and view all the answers

If the insured understated his age and the error is discovered after death, the insurance company will:

Pay the amount the premium would have purchased at the correct age Signup and view all the answers

Life insurance policy dividends are considered to be:

A return of a premium overcharge Signup and view all the answers

The life insurance policy clause that prevents an insurance company from denying payment of a death claim after a specified period is known as the:

Incontestability Clause Signup and view all the answers

When the primary beneficiary predeceases the insured, the proceeds are paid to the:

Contingent beneficiary Signup and view all the answers

The provision in a life insurance policy that provides protection against unintentional policy lapse is known as the:

Automatic Premium Loan Provision Signup and view all the answers

Upon your death, if your beneficiary chooses the interest only settlement option, the:

Interest is taxable Signup and view all the answers

All of the following are true about the reinstatement of a lapsed Life insurance policy EXCEPT:

Reinstatement is based upon current age Signup and view all the answers

When an insured sells or assigns their life insurance policy to another party in order to get money to pay for terminal expenses, it is known as a(an):

Viatical settlement Signup and view all the answers

Which of the following Settlement Options provides for payments to be made in regular installments of a specified amount until the principal and interest are exhausted?

Fixed Amount Signup and view all the answers

Which of the following is a non-forfeiture option that provides continuing cash-value buildup:

Reduced Paid-up Signup and view all the answers

If a parent purchases life insurance on their child all of the following are true EXCEPT:

The parent is the insured Signup and view all the answers

If a life insurance policy does not permit the policyholder to change the beneficiary, the beneficiary is:

Irrevocable Signup and view all the answers

Which of the following statements about Adjustable Whole Life is true:

Adjusting the premium will also adjust the face amount Signup and view all the answers

Generally, all are true, EXCEPT:

You can project future dividends on a non-participating policy Signup and view all the answers

Which Life insurance settlement option takes into account the life span of the beneficiary:

Life income option Signup and view all the answers

All of the following are a part of a life insurance policy, EXCEPT the:

Conditional Receipt Signup and view all the answers

A collateral assignment on a Life insurance policy:

Is a partial assignment of some rights to a creditor Signup and view all the answers

The Spendthrift Clause on a life insurance policy keeps the beneficiary from doing any of the following, EXCEPT:

Spending the proceeds Signup and view all the answers

If the beneficiary of a life policy wants the proceeds to be paid out in equal monthly payments, they should select which settlement option:

Fixed amount Signup and view all the answers

All of the following are true regarding accelerated benefits, EXCEPT:

They are treated as a policy loan Signup and view all the answers

All of the following are dividend options on a life insurance policy issued by a mutual insurer, EXCEPT:

Extended term option Signup and view all the answers

When the insured lists a group of beneficiaries it is known as a:

Class designation Signup and view all the answers

If the interest on a policy loan is not repaid:

It will be added to the amount of the loan outstanding Signup and view all the answers

When someone other than the insured is the owner of a life insurance policy, the owner may do all of the following without the insured's consent, EXCEPT:

Increase the amount of insurance Signup and view all the answers

Which of the following is true if the insured/owner of the policy does not pre-designate a settlement option for the beneficiary prior to death:

The beneficiary may select the settlement option upon death of the insured Signup and view all the answers

A life insurance customer misstates his age as being five years less than it really is. The rate he pays is $13 per $1,000 of coverage, but the correct rate is $15 per $1,000. If he dies, how much will the insurer pay:

13/15s of the face amount purchased Signup and view all the answers

Seth Brown, whose wife is his business partner, buys a life insurance policy on his wife's life. Because of this third-party ownership, the beneficiary should be the:

Policyholder Signup and view all the answers

Which whole life non-forfeiture option provides lifetime coverage?

Reduced Paid up Signup and view all the answers

When a creditor has a temporary interest in a life insurance policy, it is known as a:

Collateral assignment Signup and view all the answers

Which is not a reason to buy life insurance on the life of a child?

To provide the child with benefits in the event that a parent dies Signup and view all the answers

An insurance company has which of the following options when an insured wishes to cash in his policy?

It may defer payment for as long as six months Signup and view all the answers

A life insurance company may contest a policy during the contestable period for which of the following reasons?

Material misrepresentation Signup and view all the answers

Which statement about the Misstatement of Age Provision in a life insurance policy is true?

If the insured's age has been understated, it provides that a death benefit smaller than the face amount of the policy will be payable Signup and view all the answers

An insured on a tight budget who has a Whole Life insurance policy written by a mutual insurer should select which dividend option?

Reduction of premiums Signup and view all the answers

Which settlement option might provide payments that exceed the proceeds of the policy and the interest earned?

Life Annuity Signup and view all the answers

In a policy insuring the life of a child, which of the following allows the premiums to be waived in the event of the death or disability of the person responsible for premium payments?

Payor Provision Signup and view all the answers

Protection against unintentional lapse of a Life policy is afforded by:

An automatic-premium loan Signup and view all the answers

An insured has a Whole Life policy with a $100,000 face amount and a $40,000 cash value. The insured's policy lapses, which non-forfeiture option should they select to provide lifetime coverage?

Reduced Paid-up Signup and view all the answers

In 1990, Mr. Smith bought a Life insurance policy on his 6-year-old son, Jimmy, naming himself as beneficiary. Now that Jim is 18 years old, Mr. Smith may transfer all rights of ownership in the policy to him by executing a:

Absolute assignment Signup and view all the answers

If an insured buys the Return of Premium Rider and dies, the policy will pay the beneficiary:

The face amount plus all premiums paid up until the date of death Signup and view all the answers

A Life insurance rider that provides Whole Life on the primary insured and Term Life on the insured's spouse and children is the:

Family rider Signup and view all the answers

A $10,000 life insurance policy with a Triple Indemnity Clause has been in force for three years. The insured is injured in a train wreck and dies in a hospital five months later. The death proceeds payable under the policy would be:

$10,000 Signup and view all the answers

A rider added to a life policy to create coverage for your entire family is the:

Family Rider Signup and view all the answers

The purpose of a Grace Period provision is to:

Protect the policyholder against unintentional lapse Signup and view all the answers

All of the following are true when a life insurance premium is overdue, EXCEPT:

A policy will be reinstated without a physical exam if overdue premiums are paid Signup and view all the answers

Darla Jenkins purchased a $100,000 individual Whole Life policy January 1, 2009 and paid an initial annual premium of $1,000. After her policy is issued, Darla becomes interested in hang gliding and dies in a hang gliding accident on January 15, 2010, without paying her annual premium. What will the insurer pay to her beneficiary?

$99,000 Signup and view all the answers

The cash value of a life insurance policy may be used for all, EXCEPT:

To meet the expenses of college tuition one year after purchase Signup and view all the answers

Which of the following best describes the waiver of premium rider?

It is a rider that can be added to any policy, that will pay the insured's premium after a waiting period if the insured becomes totally disabled Signup and view all the answers

Study Notes

Life Insurance Policy Provisions

Automatic Premium Loan Provision: Protects against unintentional lapses by borrowing from the policy's cash value to pay overdue premiums; not available for Term insurance.
Interest Only Settlement Option: Beneficiaries receive taxable interest on death benefit payments; the principal remains non-taxable.
Reinstatement of Lapsed Policies: Applicants must apply within a designated period, repay back premiums with interest, and may need to pass a physical exam; reinstatement premiums are based on the original age.
Viatical Settlement: Allows insured individuals to sell their life insurance policy at a discount to cover terminal expenses; differs from accelerated benefits which provide funds in advance.
Settlement Options: Fixed Amount option allows payments in regular installments until proceeds are exhausted; other options include Fixed Period, Interest, and Life Income.
Non-Forfeiture Options: Reduced Paid-Up allows for continuous cash value growth without further premiums; other options include Cash Surrender and Extended Term for lapsed policies.
Third-Party Ownership: In life insurance for a child, the parent acts as the owner while the child is the insured; the parent handles premium payments and beneficiary designation.
Irrevocable Beneficiary: Once a beneficiary is designated as irrevocable, their consent is required for any changes, and policy loans cannot be taken without consent.
Adjustable Whole Life: Features flexibility in premium and coverage amount; changes to premiums affect the face amount.
Dividends and Mutual Insurers: Only mutual insurers offer dividend options; misrepresentation on applications can void coverage, but dividend projections cannot be made for non-participating policies.
Life Income Option: Based on the expected lifespan of the beneficiary, providing regular payments until death; operates like an annuity.
Conditional Receipt: Not part of the life insurance policy itself, but an important component of the application process.
Collateral Assignment: Allows the policy to be used as collateral for loans without transferring full ownership; creditors may claim proceeds if the insured dies with outstanding loans.
Spendthrift Clause: Prevents beneficiaries from commuting, assigning, or transferring proceeds; ensures payment structure is followed as designated by the policyholder.
Fixed Amount Settlement Option: Requires beneficiaries to select it for payments in equal monthly installments until proceeds are depleted.
Accelerated Benefits: Provide a portion of the death benefit before death without being treated as a loan, reducing the final payout to beneficiaries.
Dividend Options: Include cash, application to premiums, and paid-up additions from mutual insurers; extended term is a non-forfeiture option.
Class Designation for Beneficiaries: Allows policyholders to designate a group of beneficiaries, such as "all my children."
Policy Loan Interest: Accrues annually and adds to the outstanding loan amount; unpaid interest increases the total debt owed, affecting the policy's cash value.
Third-Party Policy Ownership: Owners can surrender, make loans, and change beneficiaries without the insured’s consent, but need it to increase policy limits.
Beneficiary Designation Choices: If no pre-designated settlement option exists, the beneficiary chooses upon the insured's death; default is a cash payout.
Material Misrepresentation of Age: Insurer adjusts the payout based on the premium paid versus the correct age; typically results in decreased face value upon death.
Key Person Insurance: Example of third-party ownership where a business partner buys insurance on another partner's life for business continuity upon their death.
Lifetime Coverage from Reduced Paid-Up Option: Provides a paid-up whole life policy upon lapse, ensuring lifelong coverage without further premiums.
Collateral Assignment's Temporary Interest: Allows lenders a claim on the policy proceeds while the owner retains overall ownership rights.### Life Insurance Assignments
Permanent vs. Collateral Assignment: Permanent assignment relinquishes ownership rights irrevocably; collateral assignment is temporary and often used for loans.
Notification Requirement: Assignments become valid only after the insurer receives written notification.

Reasons for Child Life Insurance

Common Purposes: Life insurance may cover expenses when a child dies, provide cash value for future needs, and secure benefits for parent(s), but not solely for retirement.

Cashing In a Policy

Insurance Company Timeline: Insurers can defer payment for up to six months when cashing in a policy or taking a loan.

Contestability Period

Reasons for Contestation: Insurers can contest policies within the first two years for material misrepresentation, but cannot do so for nonpayment, occupation change, or misstatement of age after this period.

Misstatement of Age Provision

Benefit Adjustment: If the insured's actual age is understated, the death benefit is adjusted downward, but a policy remains in effect.

Dividend Options for Mutual Insurers

Budgeting for Dividends: Those on tight budgets should choose the reduction of premiums option to lower out-of-pocket expenses by applying dividends toward upcoming premiums.

Settlement Options

Life Annuity: This option may provide payments exceeding the policy's proceeds due to the longevity of the beneficiary.

Child Policy Provisions

Waiver of Premium: The Payor Provision waives premiums for children in case the payer becomes disabled or dies.

Automatic Premium Loan (APL)

Protection Against Lapse: APL ensures coverage continues by borrowing from the cash value to cover missed premiums.

Non-Forfeiture Options

Choosing Reduced Paid-up: If a policy lapses, selecting the reduced paid-up option provides permanent insurance without further premiums.

Assignment of Policy Rights

Transferring Ownership: An absolute assignment allows policy owners to completely transfer rights to another party.

Return of Premium Rider

Policy Benefits on Death: This rider pays the face amount plus all premiums paid at the time of death.

Family Coverage Rider

Cost-Effective Family Protection: Adding a Family Rider to a whole life policy is economically efficient for covering spouses and children.

Death During Grace Period

Payout Calculation: If death occurs during the grace period, the insurer pays the full face amount minus any overdue premium.

Cash Value Limitations

Immediate Use: While cash values can grow, they are generally not robust enough for immediate use shortly after policy purchase.

Waiver of Premium Rider Definition

Differentiation: This rider applies to various policies, waiving premiums while ensuring coverage continues after a six-month disability.

Insurance Policy Details

Insuring Agreement Contents: Key information includes parties to the contract, coverage specifics, and premium details, while beneficiary changes fall under the owner's rights section.

Assignments in Relation to Creditors

Collateral Assignments: These protect the insured's credit by pledging their policy to secure loans, ensuring payment upon the insured's death.

Automatic Premium Loan Clarification

Misconceptions: It is often confused with non-forfeiture provisions; however, APL is a free rider that may prevent lapses by paying overdue premiums from cash value.### Life Insurance Policy Provisions and Riders
Automatic Premium Loan (APL) ensures a policy remains active if the owner misses premium payments by borrowing from its cash value, subject to interest.
Outstanding loans plus interest will be deducted from policy proceeds upon the insured's death.

Beneficiary Designation

A revocable beneficiary can be changed at any time, while irrevocable beneficiaries have vested interests and must consent to changes or loans.
Beneficiaries can be designated "by class" (e.g., all children) or individually (e.g., specific names).

Coverage and Premiums

A grace period of at least 30 days is mandated for 'ordinary' life insurance policies; death during this period results in payment minus overdue premium.
If the insured overstated their age, the insurer will adjust the death benefit based on the correct age, increasing the coverage based on higher premiums paid.

Policy Assignments

Assignments can be Absolute (transferring all rights) or Collateral (using policy as collateral for a loan).
Policyholders maintain the right to assign policies as outlined in the assignment form.

Non-Forfeiture Options

Non-forfeiture options include cash surrender, reduced paid-up insurance, and extended term options; paid-up additions are not considered a non-forfeiture option.

Suicide Clause

Coverage excludes suicide for the first two years of the policy; only premiums paid are refunded if the insured dies by suicide within this time.

Riders and Additional Benefits

Accidental Death Benefit Rider pays an additional benefit if death results from an accident but excludes coverage for death from illness.
The Payor Benefit Rider ensures premiums are paid for a child's policy if the policyholder dies or becomes disabled.

Misstatement of Age Clause

If age is understated, death benefits are adjusted to match premiums that would have been charged at the correct age, not voiding the policy.

Dividends and Taxation

Life insurance policy dividends are considered a return of premium overcharges and are not guaranteed, occurring at the discretion of mutual insurers.

Incontestability Clause

This clause prevents insurers from denying payments on claims after two years, even if the insured provided misinformation, ensuring policyholder protection.

Beneficiary Hierarchy

If a primary beneficiary dies before the insured, the contingent beneficiary receives the benefits; without one, proceeds go to the insured's estate.

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Test your knowledge on the various provisions included in life insurance policies with these flashcards. This quiz covers essential concepts such as Automatic Premium Loan and more, helping you understand policy features that protect against lapses.