Understanding Beneficiary Provision and Assignment in Life Insurance

Suicide Clause

• If an insured takes their own life after two years, the company pays the full proceeds.
• If suicide occurs within two years, the company refunds the premiums, except when suicide is caused by insanity.

Settlement Options

• Lump Sum: full face amount (FA) is given.
• Interest Option: interest earnings of the proceeds are given.
• Fixed Period Option: pays an equal amount over a fixed period.
• Fixed Amount Option: pays a fixed amount until the principal is exhausted.
• Life Annuity Option: pays part of the principal for a fixed period or for a fixed period and for life if the insured lives beyond the fixed period.

Beneficiary Provisions

• The beneficiary is the person who receives the insurance proceeds upon the death of the insured.
• The beneficiary must have an insurable interest in the life of the insured.
• Insurable interest is defined as financial benefit derived from the income of the proposed insured while they live.
• Insurable interest must be present at the time of insurance application.

Types of Insurable Interest

• Ties of Love and Affection: married couple, parents, child, siblings, relatives.
• Pecuniary Relationship: business relationship, debtor-creditor, business partners, employer-employee, keyman insurance.

Beneficiary Assignment

• Assignment is based on priority and right.
• Primary beneficiary: first in line to receive the proceeds.
• Secondary/Contingent beneficiary: next in line if the primary beneficiary is unable to receive the proceeds.
• Estate: can be a beneficiary.
• Irrevocable assignment: acts as a co-policy owner.
• Revocable assignment: can be changed or revoked.

Beneficiary Limitations

• Assignments made between persons guilty of adultery or concubinage at the time of donation are not allowed.
• Assignments made between persons found guilty of the same criminal offense are not allowed.
• Assignments made to a public officer or their wife, descendants, or ascendants by reason of their office are not allowed.

Policy Provisions

• When the Insured Quits: non-forfeiture options are available.
• Non-forfeiture options:
  • Cash Surrender Value.
  • Reduced Paid-Up Insurance: cash value is used to buy the same kind of insurance but with a reduced FA.
  • Extended Term Insurance: cash value is used to buy a term insurance with the same FA but a shortened length.
  • Pure Endowment: given if the cash value is more than enough to pay for extended term coverage.

Reinstatement Provisions

• If premiums remain unpaid after the grace period, the policy lapses.
• Policyowner can reinstate the policy within 3 years.
• Proof of insurability will be required, and the contestability period resets.
• Pure/straight reinstatement: policyowner pays back all unpaid premiums plus interest.

Grace Period Provision

• The insured has 30 days from the due date to pay premiums and remains insured within the period.
• If the insured dies during the grace period, FA – unpaid premiums = net proceeds.

Automatic Premium Loan

• Premiums not paid beyond the grace period will be automatically paid by making a loan against the cash value of the policy.
• Loan is subject to interest.

Loan Provisions

• The policyowner can make a loan on the policy not exceeding 80% of the cash value.
• Cash value + interest = Loan Value.
• There is no specific repayment date.
• If the interest is not paid, the insurance company increases the present loan with interest.

Assignment Provisions

• The transfer of some or all of the ownership rights from assignor to assignee.
• Absolute assignment: the transfer of all ownership rights permanently.
• Collateral assignment: transfers some rights to a bank or lender to provide security for a loan.

Dividend Options

• Dividends may be earned if there are few claims, better earnings, and less expenses of the company.

Learn about beneficiary provision, beneficiary assignment based on priority and right, primary and secondary beneficiaries, revocable and irrevocable assignments, and beneficiary limitations in life insurance policies.