Life Insurance Regulation and Policy Provisions

The Louisiana Department of Insurance regulates:

Policy Content

Sales practices

Insurance companies financial stability

Advertising

All communication with the public is advertising, including a producer’s oral sales presentation.

Advertising cannot mislead by:

Lies

Exaggerations

Omissions

Cost Comparisons cannot ignore the time value of money.

Company Solvency

Regulators must normally examine all admitted companies at least every five years or as often as they deem necessary.

State Life and Health Guaranty Associations aid policy owners in the event of company insolvency.

Consumer Privacy

Many states require insurance companies to give proposed insureds written notice regarding their practices concerning:

What information can be collected

How it will be used

How sensitive information will be protected

Policy Content

Two types of policy provisions:

Required Provisions – must be found in the policy

Discretionary Provisions – may be found in the policy

Required Provisions – Protect the policy owner.

Entire Contract Clause

The entire agreement is contained in the application and the policy.

Statements on the application are representations.

Only an executive officer of the insurance company can make changes to the policy. This must be done in writing.

Insuring Clause

A general statement

Contains the insurance company’s promise or consideration

Premium Payment Clause

Premiums are paid in advance

Incontestability Clause

Company may not deny a claim due to statements on the application after the policy has been in force for a certain period, which is usually a maximum of one to two years.

Misstatement of Age and Sex Clause

By adjusting the death benefit up or down is “how we’ll make it right”.

This is true regardless of how long ago the misstatement occurred and whether the misstatement was intentional pr unintentional. This is an exception to the Incontestable Clause.

Grace Period Clause

A short period of time usually 30 or 31 days

Coverage exists, even though the premium has not been paid

Death during the grace period – overdue premium and interest subtracted from the death benefit

Reinstatement Clause

The right to reinstate the policy within the reinstatement period, which is usually a minimum of 3 to 5 years. This can be done only if the policy has enough cash value.

Requirements:

Back premium

Proof of insurability

Repay any outstanding policy loans

Ownership Clause:

All rights rest with the owner of the policy.

Assignment Clause:

Transfer of ownership of policy to by notifying the company in writing only.

Two types:

Absolute

Collateral

Policy Change (endorsement)

Higher premium form – requires additional money

Lower premium form – requires proof of insurability

Tax Fact: section 1035 Exchange

The IRS says that no gain or loss will be recognized for the following changes.

Life policy exchanged for a life policy

Life policy exchanged for an Annuity

Annuity exchanged for an Annuity

Loan Values:

If the life insurance policy has cash value, the policy owner may borrow up to that portion

Interest charged in advance

The interest rate must be stated in the policy and regulated by state law

Outstanding loans and interest reduce the available death benefit

Borrowing cash value of an Annuity has three disadvantages

Interest is charged in advance

First money out is considered growth and is taxed

10% penalty if under age 59 ½

Time Limit on Lawsuits:

Reasonable time for a policy owner or beneficiary to sue is one year in Louisiana.

Methods of Settlement:

The insurance company cannot offer a settlement of less than what the policy promises to pay.

Back Dating

Lowers attained age

Six-month s maximum

Application of State Law:

The state law where the policy was sold controls

Free Look or Return Exchange Provision:

Return the policy to the company within a specified time, which is normally ten days for a 100% refund

Discretionary Provisions – Protects the company

Suicide Clause:

No death benefit if the insured commits suicide within a specified time, which is usually less than two years, but return the premium paid with no interest.

Once excluded, now a reason “rate” a policy:

Military Service Clause

Aviation Clause

Hazardous Occupation or Hobby Clause

Foreign Travel or Residence Clause

Policy can not be rated after the policy is issued but can be unrated.

Beneficiary Provisions

Death benefit paid to the:

Primary beneficiary

Secondary beneficiary if the primary is not alive

Tertiary beneficiary if neither the primary nor the secondary is alive

Note: all except the primary are contingent beneficiaries.

Dying intestate is dying without a will.

It is possible to name a trust as beneficiary. A trust is a legal arrangement by which money or property is held by a trustee for the benefit of another. A trust can be the beneficiary of a Life insurance policy when judgment and flexibility are desired.

If:

No beneficiaries are named or all of the beneficiaries died before the insured then the company pays the estate of the insured.

A beneficiary does not need insurable interest in the insured.

Class Designations:

Per capita- per living beneficiary
Per stripes – per bloodline

Revocable Beneficiary:

Right to change beneficiary remains with the owner but has no stake in the policy.

Irrevocable Beneficiary:

Receives the death benefit, even predeceasing the insured estate. All rights rest with the irrevocable beneficiary.

Has a vest interest in the policy

Irrevocable on a Reversionary basis:

All policy rights return to the owner upon the irrevocable beneficiary’s death.

Uniform Simultaneous Death Act

If we do not know, we assume that the beneficiary dies first.

Common Disaster Provision:

Used if the beneficiary fails to outlive the insured by less than 30 or 60 days

Freezes time and creates the fiction that the beneficiary died first

Spendthrift Clause:

While the insured is alive, creditors cannot attach the cash value of a policy unless assigned as collateral.

After death, the death benefit belongs to the beneficiary, and the insured’s creditors could not attach the proceeds.

Note: Creditors of your beneficiary could attach the proceeds unless the benefits are paid out in installments through a Spendthrift Trust.

Life Insurance Policy Options

The Dividend, No forfeiture and Settlement options allow a policy owner to customize the policy to his or her particular needs or desires.

Dividends – Only in participating policies (return of overcharge which makes it not taxable). Never guaranteed

Trigger – The Company declares a Dividend

Cash – Send a check

Reduction of Premium – Use dividend to reduce next year’s premium.

Accumulate at Interest – Company holds dividends, lets money accumulate and it earns interest (taxable in the year that interest is earned).

Paid Up Additions– Single premium purchase of the same type of policy at the newly attained age. One makes automatic option if no choice.

One Year Term – Single premium that is often used in whole or in part as a temporary patch to cork the hole left by a policy loan.

Paid Up Life Insurance – Dividend shortens the payment period.

No forfeiture – Polices with cash value allows one to quit paying premiums and not forfeit the cash value that is built in the policy.

Triggers – Surrender the policy or it will lapse.

Cash – Guaranteed amount with no right to reinstate. The growth is taxed.

Reduced Paid Up Insurance – Paid Up Insurance is another name for single premium. Smaller face amount but it will be the same form of insurance.

Extended Term Insurance – Single premium with same face amount of death benefit as original policy. It will expire if the insured outlives the term specified in the table of values. Reinstatement of the policy is possible. The no forfeiture option is usually the automatic one, unless the original is a rated policy.

Settlement – How is the face amount of a policy paid?

Triggers – Options that are available upon maturity of the policy if the insured

Term: Dies during the policy period

Whole Life: Dies or reaches the age of 100

Endowment: Dies during the endowment period or reaches the endowment period or reaches the endowment date or age

Cash– The beneficiary is sent the money.

Interest – Death benefits are not taxed as income it is invested by the company. The beneficiary receives the interest that is taxed as income and it earns the flexible option. In the end, the full death benefit is paid out.

Fixed Period – The insurance company pays out a set amount to the beneficiary over a certain period. This is also referred to as Annuity Certain. This is not a Life Annuity.

Fixed Amount – The insurance company pays out a certain amount to the beneficiary until the death benefit is paid up. This is also referred to as Annuity Certain. This is not a Life Annuity.

Life Income or Annuity – The Company takes the death benefit as a single premium and agrees to pay the beneficiary an income for their life span.

Variations:

Life Annuity or Single Life Income pays for life.

The Life Annuity with Period Certain pays for life but at least for a guaranteed period.

The Refund Life Annuity pays for life but refunds any principle balance remaining at the death of the beneficiary.

Joint and Survivor Life Income Annuity – The beneficiary or another party gets an income for as long as either one of them lives.

Living Benefit Option – This allows part of the death benefit to be paid before death.

Distinctiveness –

Percentage limit which is usually 50% and a dollar limit

Specific conditions must exist
- Dread disease
- Terminal illness
- Admission to a nursing home

This can be part of the policy or endorsed or added as a rider

The face amount, cash value and premium for the policy are proportionately reduced after the benefit is paid

Specialized Life Insurance Polices and Riders

Consumer needs may require that the basic policy forms be modified or sometimes combined.

Combination Policies

Family Policy: This is one policy covers everyone. Whole life is placed on the breadwinner.

Convertible Term is placed on the spouse and the children.

Family Income: This is done when only the breadwinner is insured. A combination policy is Whole Life for long term needs with Decreasing Term for short-term needs. Income period funded by the Term.

Periodic payments that are based on the date of issuance followed by a lump sum benefit from Whole Life.

Modified Life: This is permanent protection for those who cannot afford the combination of Whole Life and Convertible Term Life. There is Automatic conversion dates or ages for these policies. The premium Increases as Term is converted to Whole Life.

Modified Policies

Joint Life is when there are two or more insureds. It will pay at the death of the first insured.

Juvenile Life is policies that are sold on the lives of children.

Policy Riders

Multiple Indemnity is also known as accidental death and dismemberment (AD&D).

Multiple of death benefit if death is due to an accident. The accident is the sole cause of the death and happens within 90 days of the accident.The coverage normally is limited to age 60 or 65.

Guaranteed Insurability is the right to buy more insurance without proof of insurability at specified times. The new coverage rate would be based on the attained age.

Cost of Living is an increased face amount of policy to keep track with inflation. The rider can be automatic. This can be accomplished by an Increasing Term rider.

Waiver of Premium will waive Life Insurance premiums. This rider requires permanent or total disability. There would be no decrease in coverage. The company would pay the premium. There is a six-month waiting period in Louisiana. There are some states that the waiting period is only three months.

Waiver of Cost of Insurance will waive the premiums until Disability Income Rider benefits begin.

Payor Benefit:

For Juvenile Policies – If the policyholder dies, the company waives premiums, until the child becomes the policy owner at age of eighteen or twenty-one.

Accelerated Death Benefit:

The Living Benefit Rider is attached as a rider.

Automatic Premium Loan:

After the grace period, the company borrows premiums due from the Cash Value. This is not like Reinstatement because there is no need to prove insurability. There is no charge for this rider because it also benefits the company.

Term Riders can be added to Whole Life +

Convertible Term = Family Policy

Decreasing Term = Family Income

Increasing Term = Return of Premium, Return of Cash Value or Cost of Living

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