d. Guaranteed Insurability. This option allows the insured to increase coverage at stated intervals without further medical examination. e. Accelerated Benefits. This provision allows the policyholder to receive a portion of the life insurance proceeds before he or she dies. Nonforfeiture. This provision allows the insured to receive the current cash value of the policy in exchange for the future payment of the death benefit. This exchange can involve either the receipt of cash or the receipt of another paid-up policy of reduced benefit. Participation Features. Life insurance premiums are a function of mortality experience, investment earnings, and company expenses. When these factors are favorable, the company will have a good year. Participating policies provide a mechanism by which the benefits of a good year can be returned to the policyholder in the form of a dividend which really represents a refund of previously paid premiums. The participation feature may be included in either term or whole life policies. Policy Loans. Most whole and universal life policies allow the insured to borrow against the cash value of the policy. Generally, the rate of interest charged by the insurance company is lower than the prevailing loan rate. Since the insured is borrowing against his or her own money, neither the principal of the loan nor the accruing interest has to be repaid. However, if the policyholder dies, any unpaid loan balances plus accrued interest will be deducted from the insurance proceeds paid to the beneficiary. Since the purpose of insurance is financial protection, some insurance advisors counsel against policy loans because the practice often results in the premature spending of policy proceeds. Policy Reinstatement. Policies which have lapsed may be eligible for reinstatement for up to a five year period. Insurance companies that permit reinstatement generally require a current physical examination plus the payment of all past due premiums and accumulated interest. Settlement Options. In addition to a lump sum settlement, insurance companies will generally offer several different procedures for the payment of death benefits: a. Payments for a Stated Period. Under this approach the beneficiary receives the policy proceeds plus accrued interest in a series of periodic income payments that are made for a specified time period. Generally, once a time
It is very important to keep your beneficiaries up-to-date to ensure payment of proceeds as intended. An irrevocable beneficiary is a beneficiary that can only be changed with the permission of that beneficiary. Many parents designate their children as contingent beneficiaries in order to ensure that the children will receive the insurance benefits in the event of the simultaneous death of both parents. However, this could create a problem because state law may prohibit the payment of insurance proceeds to young children. Consequently, if you have younger children, you may want to designate as the contingent beneficiary the individual who would care for the children in the event of the simultaneous death of both parents. Contestability Period. The period of time (normally two years) during which the insurer can challenge the validity of a life insurance policy based on misstatement of health or other material facts. Grace Period. A period of time, usually 30 days following the due date for the premium, during which an overdue payment can be paid without penalty. Incontestability. This clause prohibits the insurance company from denying payment after the policy has been in effect for a period of time (generally two years). The purpose of this clause is to protect the beneficiary from error or misstatements made by the insured on the original application. Insurance Riders. These are provisions that are attached to the policy that provide either additional benefits or limit the company’s liability. Riders that provide additional benefits usually result in higher premium costs. Insurance riders may include: a. Multiple Indemnity. This feature provides for an increased death benefit if the insured dies either in an accident or within some specified period of time as a result of injury sustained in an accident. For example, a Double Indemnity rider provides for a death benefit payment that is twice the face value of the policy. b. Cost of Living. This rider increases the policy’s death benefit over a period of time to accommodate the impact of inflation. c. Disability Waiver. This provision permits the waiver of premium payments in situations where the insured becomes disabled before a certain age (usually 60 to 65).
CHAPTER 13: LIFE INSURANCE
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