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Aleatory Contract
unequal values are exchanged by the parties because chance is involved.
Contract of Adhesion
the contract must be accepted in its entirety, but any ambiguity is construed against the insurer.
Conditional Contract
the promise of payment is conditional--correct behavior is required.
Unilateral Contract
only one party, the insurer, makes a legally binding promise.
Valued Contract
life insurance is not a contract of "indemnity" as the insured is not restored to his/her pre-loss positon. It's a valued contract.
Contract of "Utmost Good Faith"
a high standard of integrity is required of the parties to the contract because of information asymmetry.
Incontestable Clause
policy is incontestable after it's been in force for two years. The provision protects the insurer, insured, and beneficiary.
Entire Contract Clause
the contract is the pre-printed material PLUS the application
Grace Period
policy remains in force for 30 days (60 for U.L.) even though a premium payment is late. If insured dies during the period, the premium is deducted from the proceeds.
Ownership Clause
the policyowner makes the major decisions about the policy.
after a nonforfeiture option is used, the policyowner may want the coverage back in force. Reinstatement "revives" the old contract. A number of conditions must be met to reinstate the policy.
interests in a life insurance policy can be transferred through an assignment of rights. There are two types of assignment: Collateral and Absolute
limited assignment in which the life insurance policy is used to secure a loan
transfer of all ownership interests in a life insurance policy-- often used in "gift" situations
Suicide Clause
one- or two-year death by suicide exclusion to reduce adverse selection. If death is by suicide during the exclusion, the insurer must only refund premiums (w/ or w/o interest). The burden of proof is the insurer.
Policy Loan Provision
permits the policyowner to borrow the cash value. Insurers are using higher fixed rates or variable interest rates on new policies. Unpaid loans and interest are deducted from the settlement if outstanding at the time of death. Some older policies were "enhanced" to guard against the loan problems (disintermediation) that occured in the 1980s.
Beneficiary Designation
care is required to assure the proceeds go to the desired party or parties. There are several types of beneficiaries. (Primary v. Contingent, Specific v. Class, Revocable v. Irrevocable (absolute/revisionary))
Misstatement of Age
If an individual understates his/her age to get a lower premium, and the "misstatement" is later discovered, the face amount is adjusted to reflect the correct age (regardless of when death occurs). Note it's a "misstatement," not a material misrepresentation.
Nonforfeiture Options
Alternative ways the cash value may be used if the policy is surrendered. Has to be whole-life or have some sort of cash/ savings element.
Nonforfeiture Options: Cash Surrender
take the cash value. Surrender policy for cash value--taxed.
Nonforfeiture Options: Reduced paid-up Insurance
less permanent insurance--reduce total amount of coverage in force. All premium payments acquired are paid.
Nonforfeiture Options: Extended Term
full face value, but no longer permanent coverage.
Dividend Options
Alternative methods of using/ recieving policyowner dividends: cash, paid-up additions, acceleration, apply to premium, accumulate at interest (savings account option), one-year term insurance (adverse selection- buying at net rate & not the gross rate).
Settlement Options
Alternative methods the insurer can use to pay the proceeds. If the policyowner does not pre-select and option, then the beneficiary chooses a settlement method. The options include: lump sum, life income, fixed amount, accumulate at interest, fixed period, "checking account"
Accidental Death (Double Indemnity)
face amount of coverage will be doubled is accidental death. Less life insurance if accidental death doesn't make sense.
Waiver of Premium
if become disabled, premium is waived--> policy on your own life.
Guranteed Insurability Option (aka "Guaranteed Purchase Option")
you are insurable--even if later in life develop heart disease.
Disability Income Rider
not many purchase because seperate disability insurance does the same thing. Usually buy together--$10 per $1000 of coverage is payable to you.
Increasing Term Rider
Life insurance needs increase with inflation. Increasing amount of coverage in force.
Living Benefits Rider
use the death benefit before you die. Permit policy owner to add this provision at no cost. Why? it is the humane thing to do.
Renewal Provision
states terms and conditions under which the policy remains in force. Two issues: insurability and premiums.
Grace Period and Reinstatement
similar to life insurance provisions. Demonstrate reinsurability.
Time Limit on Certain Defenses
like incontestable clause in life insurance. Honesty is important.
Pre-existing Conditions Clause
physical or mental conditions present or treated prior to policy's effective date are not covered for an initial time period (e.g. 2 years).
remedy used if it's clear a claim should be paid, but the insurer does not want to pay the "wrong" party. Proceeds are paid to a court, and the court decides disbursement. (Multiple beneficiaries, payment to court who has jurisdiction).
remedy used to correct clerical errors. Usually the incontestable clause is inapplicable regarding clerical errors.
used to render a contract null and void. Contracts may be rescinded during the contestable period (for misrepresentation or concealment) or later if gross fraud is involved. (Restore parties to their pre-contract "refund premiums")
Voluntary relinquishment (the right but can't later resert the right) of a contractual right. Once waived, the right cannot be asserted to the detriment of the insured, beneficiary, or policyowner.
Prevents a statement from being retracted if the statement was reasonably relied upon and taking the statement back would cause harm (e.g. Sur v Glidden-Durkee)
Contract Formation and Agency
Insurance contracts may arise in three ways: 1) Contractual relationship 2) Agency by Ratification 3) Agency by estoppel
Contractual Relationship
agent acting within his/her authority bings the insurer. This is the usual case. (Between agent and company (insurer)).
Agency by ratification
here an agent is acting ouside of his/her authority, but without the insurer's assistance. Insurer can ratify the contract or deny it.
Agency by estoppel
insurer helps to create the appearance that an agency relationship exists. The insurer must honor the contract.
Requirements to Form a Binding Life/Health Insurance Contract
There are four requirements: 1) Contract is for a legal purpose, 2) Competent parties to the contract, 3) Exchange of consideration, 4) Valid offer and acceptance.
Legal Purpose
No intent to murder the insured, defraud the insurer, or otherwise act in bad faith or break the law.
Competent Parties
insurer must be licensed to operate in the state and comply with state rules (capitalization, forms, etc.). The applicant/ insured must satisfy the usual age and state of mind (sober, mentally competent, etc.) requirements.
Applicant and policyowner provide consideration through their representations and the premium payment. The insurer provides a conditional promise to pay benefits. The promise of payment is conditioned upon adherence to policy provisions.
Offer and Acceptance
if the premium does not accompany the application, the insurer offers coverage by issuing the policy. The offer is accepted by paying the premium. Usually the premium accompanies the application and the insurer provides a "conditional receipt".
Conditional Receipt
is a conditional offer of insurance, with the premium and application constituting acceptance of the conditional offer. As the offer is conditional, it may be with drawn if the applicant is determined to be unacceptable. The policy's "effective date" may be a key issue (period of contestability).
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