1. 5 - 1 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

2. 5 - 2 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

3. 5 - 3 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

4. 5 - 4 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

5. 5 - 5 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

6. 5 - 6 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

7. 5 - 7 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

8. 5 - 8 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

9. 5 - 9 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

10. 5 - 10 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

11. 5 - 11 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

12. 5 - 12 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

13. 5 - 13 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

14. 5 - 14 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

15. 5 - 15 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

16. 5 - 16 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

17. 5 - 17 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

18. 5 - 18 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

19. 5 - 19 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

20. 5 - 20 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

21. 5 - 21 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

22. 5 - 22 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

23. 5 - 23 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

24. 5 - 24 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning

25. 5 - 25 Legal Aspects of Life Insurance  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 Chapter 5 Tools & Techniques of Life Insurance Planning