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Legal Aspects of Life Insurance

Learn about the legal requirements, clauses, and parties involved in life insurance contracts. Explore insurable interests, types of clauses, and key contract elements in the insurance planning process.

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Legal Aspects of Life Insurance

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  1. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Introduction • Life insurance is a legally contract • Issued by the insurer • In consideration for application and premium payment • Parties to the contract • The insurer • Operates in corporate form • Licensed in each state where it does business • The insured • The person whose life is insured

  2. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Requirements of insurance interest • Imposed by law to prevent Gaming or wagering • The applicant must have an insurable interest in the insured • Everyone has an unlimited insurable interest in their own lives • Blood relatives • Parent to the child • Child to the parent • Grandparent to the grandchild • Siblings

  3. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Requirements of insurance interest (cont'd) • Marriage • Spouses have insurable interest in each other • Some courts have held that insurable interest holds for those who are engaged • Those related by marriage generally do not • In-laws • Step-sons & step daughters • Business • Employer-employee • Partners in a partnership

  4. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Requirements of insurance interest (cont'd) • Business (cont'd) • Person, or financial enterprise that would suffer a financial loss at the insured’s death • Creditors • Business associates funding the purchase of the business(Buy-sell agreements) • Insurable interest must exist only at the time of inception(Life and health insurance) • Corporations can collect proceeds on the life of a former key employee • Consent of the insured must be present

  5. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Aleatory contract • The insured’s promise to pay the policy proceeds conditions upon the an uncertain event • Unilateral contract • The insurance company is the only party to the contract which makes a legally enforceable promise • Contract of Adhesion • The insurance contract is a “take it or leave it” agreement • Insurer selects all wording • No negotiation of the terms • Ambiguities are usually interpreted in the policyowner;s favor and against the insurer

  6. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Grace period • Gives the policyowner an additional period of time(typically 31 days) after due date of premium during which the policy remains inforce • Death during grace period • Full death benefit paid less premium that was due and not paid • Incontestable clause • After 2 years from the policy date (during the insured’s life) • Company barred from challenging validity of contract

  7. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Incontestable clause (cont'd) • Why? • Clause allows a reasonable time for discovery by the insurer • Avoids long, expensive and uncertain litigation for the policyowner • Difficult to collect evidence from years, even decades ago • Exceptions • Fraudulent impersonations • Lack of insurable interest • Procurement of the policy with intent to murder

  8. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Suicide clause • Proceeds will not be paid if insured commits suicide • Within 2 years from the policy date • Whether sane or insane • Insurer will returns premiums paid, less any debt or partial surrenders • Presumption is that the insured did not commit suicide • Insurer must demonstrate death did not occur by accident • Accidental death benefits will not be paid as a result of an insured’s suicide • Suicide is a deliberate act • Conversions to permanent insurance do not re-start clock

  9. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Misstatement of age adjustments clause • Proof of age not required at time of application • At death, a death certificate is required • Proceeds of the policy will be adjusted • To proceeds that would have been purchased at the correct age • Dividend Clause • Dividends are influenced by insurers experience with 3 factors • Mortality • Excess by which actual morality expenses were greater or less than the expected

  10. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Dividend Clause (cont'd) • Dividends are influenced by insurers experience with 3 factors (cont'd) • Interest • Excess by which actual interest earning were greater or less than the expected • Expenses • Excess by which actual business expenses were greater or less than the expected • Dividends are payable to and legally the property of the policyowner • Dividend options • Policyowner chooses how dividends will be applied to policy

  11. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Dividend Clause (cont'd) • Dividend options (cont'd) • Take dividends in cash • Have dividends reduce premium • Dividends purchase paid-up additions • Dividends accumulate with interest • Dividends purchase one-year-term insurance equal to the cash value • Insurer’s allowed to specify what will happen if the policyowner does not specify which dividend option they want

  12. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Nonforfeiture provisions • Define options for the policyowner with respect to the cash surrender value • Cash surrender • Policyowner surrenders policy for its cash surrender value • Extended Term Insurance • Cash value is applied as a single “Premium” to create an extended term policy • No additional premiums required • Death benefit remains the same • Since the death benefit is the same, only the term for time for which coverage will last will change • If the insured dies after the term ends – no benefits • Good choice for some with a shortened life expectancy

  13. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal Form and Contents of The Contract • Nonforfeiture provisions (cont'd) • Reduced paid-up insurance • Cash used as a single premium to pay-up the contract for the life of the insured • Amount of coverage is reduced to what a net single premium in the amount of the policies cash value would purchase at the attained age of the insured • Policy has both cash values and loan values and is more flexible than extended term insurance • Good choice for insured in good to excellent health, but does not want to continue paying premiums

  14. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Policy lapse and reinstatement clause • Policy “Lapses” when premium are not paid by the end of the grace period • A lapsed policy can be resuscitated to put the insurer back in a position prior to the lapse • Reinstatement conditions • Applies for reinstatement • Provides evidence of insurability • Pays all back premiums plus interest

  15. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Policy lapse and reinstatement clause • Why reinstate? • Annuity purchase rates rates in original contract more favorable than what's currently available • More favorable policy loan rates in original policy than what’s currently available • More favorable interest and mortality assumptions in original policy than what’s currently available • Premiums lower that what’s currently available in new policies • Simpler and quicker than applying for a new contract • On a new contract suicide and incontestable clause start anew

  16. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Legal form and contents of the contract (cont'd) • Policy lapse and reinstatement clause • Why one might not reinstate? • New contract have superior features and benefits • Larger outlay to reinstate than to buy a new contract • Rates for new policy may be lower than for original policy • Naming & changing a beneficiary • Beneficiary is the person designated by the policyowner to receive the death proceeds • Revocable – Can be changed anytime by the policyowner • Irrevocable – requires consent of the original beneficiary before it can be changed to another beneficiary

  17. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Naming & changing a beneficiary (cont'd) • Limitations • Beneficiary must have insurable interest if policyowner is someone other than insured • Community property state requires consent of spouse to change beneficiary if policy purchased with community property funds • Insured minor change change beneficiary upon reaching majority • Employer cannot be named as beneficiary for group term insurance • Beneficiaries named as part of a divorce decree cannot be changed without their consent • Legally adjudicated incompetent cannot change beneficiary • Uniform Simultaneous Death Act(USDA) • Proceeds distributed as if insured survived beneficiary

  18. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Naming & changing a beneficiary (cont'd) • Primary beneficiary • First in line to receive proceeds • Secondary beneficiary • Receive proceeds in the event they outlive the primary beneficiary • Per Capita class of beneficiaries • “By the head” distribution • Proceeds split according to the number of beneficiaries in the class • If there are three children, then each gets 1/3rd

  19. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Naming & changing a beneficiary (cont'd) • Per Stirpes Class of beneficiaries • “By the branches” distribution • Proceeds are first divided among the class • If 2 out 3 children survive, the proceeds are split 3 ways with the deceased child’s children splitting the share the deceased child would have had • Trustee should be named as beneficiaries involving minors

  20. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Modes of settlement (death proceeds) • Lump sum payable in cash • Leave proceeds with insurer and receive annual payments • Fixed-years installments • Fixed amount installments • Life Income Options • Straight Life • Life income with period certain • Life refund annuity • Joint and survivor annuity

  21. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Modes of settlement (death proceeds) (cont'd) • Issues and considerations (Electing a non lump sum settlement option) • Advantages • No separate charge made by the carrier • No other commercial institution can pay a life income • Both principal and minimum interest rate are guaranteed • Disadvantages • Alternative investments may product higher returns • A trust may prove more flexible • The trust may be more responsive to the beneficiary needs and circumstances

  22. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Policy loans • Insured can access the cash value for policy loans • Loan does not require re-payment • In fact, the interest due can be borrowed as well. • Cash values must be sufficient • At death, loan balance is deducted from the total death proceeds • Automatic policy loan provision • Advances the insurer makes under the policy clause to pay premium in the event the insured does not pay by the end of the grace period • If loan value insufficient to pay annual premium, then they will pay a semi-annual, quarterly or monthly premium

  23. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Assignments • A Life insurance policy can be transferred to another person or entity • It is a piece of property • Lifetime transfers • Absolute assignment • Transfers all policyowner's rights irrevocably • Collateral assignment • Assigns as much of the death proceeds as necessary to secure a lenders rights • Insurance company must be notified in writing by the policyowner

  24. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Waiver • Intentional voluntary surrender of a known right • Rights that cannot be waived by the insurer • Rights that protect a party to the contract as well as the public • Example – Insurer tries to demand that the applicant have an insurable interest in the insured • Rights that would create coverage were none previously existed • Rights to receive a sum of money cannot be waived • Types of Waivers • Express – Surrender of a legal right expressly declared by written or orals words of an insurance agent • Implied – Conduct infers the intention to forego a legal right

  25. Legal Aspects of Life Insurance Chapter 5 Tools & Techniques of Life Insurance Planning • Waiver (cont'd) • Types of Waivers (cont'd) • Waiver by silence – Where insurer has legal duty to speak, but fails to do so • Estoppels • Legal way of arriving at a fair and just result • Insurer through words or conduct mislead policyowner • Action or inaction results in policyowner loss • Example – Agent tells applicant to ignore that one fainting spell because the insurance company is only concerned with long- term history of fainting • The result – Insurer denies death benefit claim on the grounds that the fainting was not admitted on the application • The insurer is “estopped” from claiming misrepresentation, because the insurance agent’s comments induced the applicant into taking action

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