Chapter 4: Life Insurance Policies, Options And Riders

A decreasing term life insurance policy would be the least expensive option to pay off a 30-year mortgage balance. This type of policy provides coverage that decreases over time, which aligns with the decreasing balance of a mortgage. As the mortgage balance decreases, the amount of coverage needed also decreases, resulting in lower premiums compared to other types of life insurance policies. This makes it a cost-effective option for ensuring that the mortgage is paid off in the event of the policyholder's death.

Term insurance is appropriate for someone who seeks temporary protection and lower premiums. Term insurance provides coverage for a specific period, such as 10 or 20 years, and does not build cash value. It is designed to provide financial protection to the policyholder's beneficiaries in case of their untimely death during the term of the policy. Since it does not accumulate cash value, the premiums for term insurance are generally lower compared to permanent insurance policies. This makes it a suitable choice for individuals who want affordable coverage for a specific period of time.

A guaranteed insurability rider is a type of insurance rider that allows the policyholder to purchase additional insurance at specific dates or events without having to provide evidence of insurability. This means that Barbara can increase her coverage without having to go through the usual underwriting process, such as providing medical information or undergoing a medical examination. This rider provides flexibility and convenience for the policyholder to adjust their coverage as their needs change over time.

Decreasing term insurance is the correct answer because it is specifically designed to pay off a mortgage balance if the insured person dies within a certain period of time, in this case, the 30-year mortgage term. The coverage amount decreases over time, aligning with the decreasing mortgage balance. This type of insurance provides financial protection to ensure that the mortgage is paid off in the event of the insured person's death, relieving the burden on their family or beneficiaries.

During the grace period, an insurer will accept a premium from the insured and continue the coverage in full force as though it was not late. The grace period is a specified period of time after the premium due date, during which the insured can make the payment without any penalty or loss of coverage. It provides a buffer period for the insured to make the payment and ensures that coverage remains in effect even if the premium payment is slightly delayed.

Term life insurance is a type of policy that does not build cash value. Unlike other types of life insurance policies, such as straight life, endowment, and variable life, term life insurance only provides coverage for a specific term or period of time. If the insured individual passes away during the term of the policy, the death benefit is paid out to the designated beneficiaries. However, if the insured individual outlives the term of the policy, there is no cash value or investment component to be received.

The correct answer is the Disability income rider. This rider provides a monthly payment to the policyowner in the event of a total and permanent disability resulting from an automobile accident. It is specifically designed to provide income replacement in case of disability, ensuring that the policyowner can continue to meet their financial obligations despite being unable to work.

Universal life insurance policies offer a guaranteed interest rate, which means that the policyholder will earn a minimum rate of return on their cash value. However, these policies also have the potential to earn a higher interest rate based on the performance of the underlying investments. This flexibility allows policyholders to potentially earn more on their policy's cash value compared to other types of life insurance policies.

The insuring clause in a life insurance policy states the insurer's obligation to pay a death benefit upon an approved death claim. This means that if the insured person passes away and the death claim is approved, the insurer is obligated to provide the agreed-upon amount of money to the beneficiaries listed in the policy. The insuring clause is a fundamental part of the life insurance contract and outlines the primary responsibility of the insurer in the event of the insured's death.

A certificate of authority is not part of an insurance contract. It is a document issued by a regulatory authority that grants an insurance company the legal authority to operate in a specific jurisdiction. It is not a contractual document that outlines the terms and conditions of the insurance agreement between the insurer and the insured. The policy, application, and riders, on the other hand, are all integral components of an insurance contract. The policy outlines the coverage and terms, the application is the initial request for insurance, and riders are additional provisions or modifications to the policy.

A collateral assignment is a provision that allows a policyowner to temporarily give up ownership rights to secure a loan. This means that the policyowner can use the policy as collateral for a loan, providing security to the lender. In the event that the policyowner defaults on the loan, the lender has the right to claim the policy's cash value or death benefit to recoup the loan amount. This arrangement allows the policyowner to access funds while keeping the policy in force.

The death benefit would be $500,000. This is because Rob purchased a standard whole life policy with a $500,000 death benefit, which means that upon his death, his beneficiaries will receive the full amount of the death benefit stated in the policy, regardless of the cash value of the policy at the time of his death. The fact that the policy would be paid up if he reached age 100 is irrelevant to the death benefit amount.

The automatic continuance of insurance coverage is referred to as "renewal." This means that the insurance policy is extended for another term without the policyholder having to take any action. Renewal ensures that the policy remains in force and provides continuous coverage. Reinstatement, resumption, and renovation do not accurately describe the automatic continuance of insurance coverage.

A guaranteed insurability rider is an additional feature that can be added to a life insurance policy. It allows the policyholder to purchase additional insurance coverage at specific intervals in the future, regardless of their insurability at that time. This means that even if the individual's health or other factors change, they can still obtain more coverage without having to go through the underwriting process again. This rider is beneficial because it ensures that the policyholder can increase their coverage as they age, providing them with the financial protection they need.

The Reinstatement Clause is a provision in an insurance policy that allows a policyholder to reinstate their coverage after it has lapsed due to non-payment of premiums. In order to comply with this clause, the policyholder needs to provide evidence of insurability, which typically involves submitting a health questionnaire or undergoing a medical examination to prove that they are still insurable. Additionally, they need to pay any past due premiums that were missed during the lapse period. By fulfilling these two actions, the policyholder can reinstate their coverage and continue their insurance policy as before.

A securities license is required for a life insurance producer to sell variable life insurance because variable life insurance policies allow the policyholder to invest a portion of the premium payments into various investment options, such as stocks, bonds, or mutual funds. This means that the policy's value can fluctuate based on the performance of these investments. Since variable life insurance involves an investment component, it falls under the jurisdiction of securities regulations, hence the need for a securities license to sell it.

A child term rider is a type of insurance policy add-on that provides coverage for the policyowner's children. It is designed to provide a death benefit if any of the insured children were to pass away during the term of the rider. This allows Jonas to add coverage specifically for his two children, ensuring that they are protected financially in the event of their untimely death.

A limited payment whole life policy provides lifetime protection, meaning that the policyholder is covered for their entire life as long as premiums are paid. This type of policy does not have an expiration date or a specified term of coverage like the other options mentioned. It offers the peace of mind of knowing that the policyholder's beneficiaries will receive a death benefit whenever they pass away, regardless of when that may be.

A partial surrender allows a policyowner to withdraw a policy's cash value interest free. This means that the policyowner can take out a portion of the cash value without any penalties or charges. This provision provides flexibility to the policyowner, allowing them to access their funds when needed without incurring any additional costs.

A rider is an additional provision added to an insurance policy that alters or enhances its coverage. It is an endorsement that modifies the policy's provisions, usually to provide additional benefits or coverage for specific situations or risks. A rider can be used to customize an insurance plan according to the policyholder's specific needs or preferences. Therefore, a rider is the correct answer as it accurately describes an endorsement that modifies the provisions of an insurance policy.

This is a Universal Life policy because it has a cash value component that accumulates over time. The policyholder's premiums go towards both the insurance coverage and the cash value, which can grow based on interest rates and investment performance. The face amount of the policy also increases, indicating that it has a flexible death benefit that can be adjusted by the policyholder.

Term, whole, and universal life insurance are normally used for key employee identification. Term life insurance provides coverage for a specific period of time and is often used to protect against the loss of income that would result from the death of a key employee. Whole life insurance provides coverage for the entire lifetime of the insured and can be used to provide a cash value that can be accessed by the company if needed. Universal life insurance offers flexibility in premium payments and death benefits, making it suitable for key employee identification.

A nonforfeiture option is a whole life policy option where extended term insurance is selected. This means that if the policyholder decides to surrender the policy before it matures, they will receive the cash value of the policy or the option to convert it into an extended term insurance policy. This ensures that the policyholder does not lose the value of their investment if they choose to discontinue the policy.

The provision that states that a copy of the application must be attached to the policy when issued is called the "Entire Contract" provision. This provision ensures that the application, which contains important information about the insured, is included with the policy to provide a complete and accurate record of the insurance agreement.

Level premium permanent insurance is a type of insurance where the premiums paid by the policyholder remain the same throughout the life of the policy. Over time, these premiums accumulate and create a reserve within the policy. This reserve will continue to grow until it eventually equals the face amount of the policy. In other words, the reserve will reach a point where it is equal to the death benefit that will be paid out to the policyholder's beneficiaries upon their death. Therefore, the correct answer is that the reserve will equal the face amount of the policy.

A life insurance policy normally contains a provision that restricts coverage in the event of death under all of the following situations except for a fare-paying passenger. This means that if the insured person dies while being a fare-paying passenger, the policy will still provide coverage. However, coverage may be restricted or denied in the case of the insured person being a pilot of a personal airplane, death by suicide, or death due to war.

Universal life insurance policies are subject to a contract interest rate. This means that the cash value of the policy can earn interest based on the performance of the underlying investments. The policyholder has the flexibility to adjust the premium payments and death benefit as needed. Universal life insurance provides a combination of a death benefit and a savings component, allowing the policyholder to accumulate cash value over time. The contract interest rate determines the growth of the cash value, making it a key feature of universal life insurance policies.

If Mike dies first, the policy proceeds will no longer provide insurance protection. This means that the policy will no longer cover the lives of Shawn and Dave. The purpose of the policy is to provide insurance coverage in the event of the death of any of the brothers. Since one of the brothers has already passed away, the policy can no longer fulfill its intended purpose of providing insurance protection.

If Joanne borrows $15,000 against the $25,000 cash value of her whole life policy, the net death benefit will be reduced if the loan is not repaid. This is because the cash value is used as collateral for the loan, and if the loan is not repaid, the insurance company will deduct the outstanding loan balance from the death benefit payout.

A Modified Endowment Contract (MEC) is a type of life insurance contract that accumulates cash values that exceed the limits set by the IRS. This means that the policyholder is depositing more money into the policy than what is allowed under the tax laws. As a result, the tax advantages of the policy may be limited or even eliminated.

A collateral assignment allows the temporary transfer of ownership of a life insurance policy. This means that the policyholder can use the policy as collateral for a loan or other financial arrangement. The policyholder retains the right to reclaim ownership once the loan is repaid. This type of assignment is commonly used when the policyholder needs to secure a loan but does not want to permanently transfer ownership of the policy.

A 20-pay life policy means that the policyholder pays premiums for 20 years. After 20 years, the policy may be paid up early, meaning the policyholder no longer needs to pay premiums, by using policy dividends. Policy dividends are a portion of the insurance company's profits that are returned to policyholders. Therefore, the correct answer is "The policy may be paid up early by using policy dividends."

Loans obtained by a policyowner against the cash value of a life insurance policy would not be treated as taxable income. This is because these loans are considered a borrowing against the policyholder's own assets, rather than an income or gain. As a result, they are not subject to taxation.

A decreasing term policy is a type of life insurance policy where the death benefit decreases over time. However, the premiums paid for this policy remain level throughout the term. This means that the policyholder pays the same amount of premium throughout the duration of the policy, regardless of the decreasing death benefit. This allows the policyholder to have a consistent premium payment and plan their budget accordingly.

A payor rider is a type of insurance policy rider that ensures premiums will be paid on a juvenile policy until the child reaches a specific age. This means that if the payor, who is typically the parent or guardian, becomes disabled or dies before the child reaches the specified age, the insurance company will continue to pay the premiums on behalf of the child. This rider provides financial protection for the child's policy and ensures that it remains in force until the child reaches adulthood.

The given options are all valid policy dividend options for a life insurance policyowner, except for "accumulate without interest." This means that policyholders can choose to receive a cash outlay, have a reduction in policy premium, or buy additional insurance coverage using their policy dividends. However, accumulating without interest is not a valid option as it would not provide any growth or benefit to the policyholder's investment.

An endowment policy is a type of life insurance policy that pays the face amount at the end of the specified period if the insured is still alive. This means that if the insured survives the specified period, they will receive the full benefit amount. Unlike other types of life insurance policies, an endowment policy provides both life insurance coverage and a savings component, making it a popular choice for individuals who want to ensure a payout regardless of whether they pass away or not.

The word "level" in Level Term describes the face amount. In a level term life insurance policy, the face amount remains constant throughout the entire term of the policy. This means that the death benefit paid out to the beneficiaries will not decrease over time. It provides a consistent and predictable payout, which can be beneficial for individuals who want to ensure a certain amount of financial protection for their loved ones.

Adding a children's term rider to a life insurance policy means that the coverage for the children cannot be converted to permanent coverage without providing evidence of insurability. This means that if the children want to continue the coverage beyond the term period, they will need to go through the underwriting process and prove that they are insurable. This can be advantageous for the primary insured as it provides flexibility and control over the policy, ensuring that the coverage for the children is not automatically converted without their consent or without meeting certain criteria.

The correct answer is that the benefit can be offered as a rider at a specific extra cost or may be at no cost. This means that the Accelerated Death Benefit option can be added to a policy as a rider, either with an additional cost or without any additional cost. This is not a characteristic of the option, as it does not specify whether the face amount or policy premium are affected by the payment, or whether there may be a dollar limit on the maximum benefit.

The Family term insurance rider is designed to provide a death benefit if the insured's spouse dies. This rider is typically added to a life insurance policy to extend coverage to the insured's family members, specifically the spouse. In the event of the spouse's death, the rider ensures that a death benefit will be paid out to the insured, providing financial protection during a difficult time.