Consumer Services: Frequently Asked Questions

Life Insurance is a contract in which an insurance company promises to pay a death benefit in the event the person insured under the policy dies. Protects against economic loss in the event of death.

Kinds of Life Insurance

There are two major types of life insurance, Term and Whole Life. Term insurance generally does not accumulate cash value and is issued to just cover the life of the insured for a specified period of time. Whole Life Insurance does accumulate cash value and is issued to cover the insured throughout their lifetime. Other variations of these products include: Decreasing Term (Mortgage Insurance), Universal Life (Flexible Premium Adjustable Life), Variable Life, Endowment, Graded Life, and Single Premium Paid-Up.

QUESTION: Which kind of life insurance is the best for me?

ANSWER: Each type of life policy has advantages and disadvantages. Only you with the advice of a certified financial advisor can decide what form of coverage is best for you.

QUESTION:What is Decreasing Term Life insurance?

ANSWER: The face value decreases usually monthly or annually until the policy expires while the premium remains level. Decreasing term policies are used for mortgage insurance and other credit installment transactions.

QUESTION:What is Annual Renewable Term Life insurance?

ANSWER: Like an annual renewable term policy, the insured can renew the coverage without evidence of insurability and the premium remains level for the period specified, i.e. 5 year, 10 year, etc. At the end of the specified period the premium is adjusted to reflect the insured’s attained age.

QUESTION:What is Convertible Term Life insurance?

ANSWER: A convertible term policy is one in which the insured can convert a portion or all of the term insurance to a permanent or whole life insurance contract without proving evidence of insurability.

QUESTION:What is Whole Life insurance?

ANSWER: Provides life time coverage at a premium rate that does not increase. The amount of the level premium is high in comparison to the risk in the early years of the contract and eventually becomes less than the actual cost to insure you in later years. The result is that the policy builds cash value which is used to insure you.

QUESTION:What is a Graded Premium Whole Life Policy?

ANSWER: A type of whole life policy in which premiums increase once or at specified points in time, such as every three years, until a premium that remains level is reached. Enables a person to purchase a higher amount of insurance at a more affordable rate. When the rate increases, the insured’s income, hopefully, will have increased too.

QUESTION:What is a Graded Death Benefit Whole Life Policy?

ANSWER: A graded death benefit policy will generally pay 30% of the face amount if the insured dies in the first year, 70% of the face amount if death occurs in the second year and 100% if death occurs later.

QUESTION:What is a Universal Life Policy?

ANSWER: A type of Whole Life policy that utilizes Annual Renewable Term insurance and a cash fund that pays interest according to defined market factors. The insured can adjust the amount of insurance downward and upward, subject to the insurer’s underwriting guidelines. Premium payments are pre-determined based on loss experience and investment return assumptions. The amount the insured pays is flexible but must be adequate enough to fund the actual cost of insurance which increases each year with the attained age of the insured.

QUESTION:What is a Variable Life Policy?

ANSWER: A type of Whole Life policy similar to Universal Life but allows the insured to designate where the portion of the premium left after deducting for the cost of the insurance and general administrative expense will be invested. The insured can choose market based securities and the agent that sells this product must be licensed by the National Association of Securities Dealers. The money invested can grow or decline based upon the performance of the securities market.

Contestable Claims

By law, claims submitted within two years of the date of issue may be investigated by the insurance company to determine if the representations made by the insured on the application are accurate. If the application contains material misrepresentations, the insurer can deny the claim, rescind the policy and return the premium.

QUESTION:My husband’s life policy had been in effect for less than 2 years when he passed away. The insurance company wants medical records that go back several years. Can they do this?

ANSWER: Yes. The insurance company can obtain any medical records needed to evaluate whether the application contained erroneous information and whether the claim is owed.

QUESTION:My husband’s life policy had been in effect for more than 2 years when he passed away. The insurance company wants medical records that go back several years. Can they do this?

ANSWER: Yes. Though the claim is not subject to the contestable provision of the contract, the insurer can still rescind coverage and return premium if the insurance company feels fraud was committed by the insured in completing the application.

QUESTION:What is the purpose of the 2 year contestable provision and why doesn’t the insurance company verify that the medical information on the application is correct before the policy is issued?

ANSWER: The 2 year contestable period is the only time that the insured can deny a claim on the basis that the application contained information intentionally and unintentionally misstated or omitted by the insured. After 2 years, the insured can only deny coverage and rescind the contract if information material to the acceptance of the policy was intentionally misstated or omitted from the application, thus, fraud. Finally, insurers issue life insurance contracts in reliance that the applicant answers each question truthfully. If the insurer had to order medical records on every application to verify that the applicant provided accurate information, the increased cost of life insurance would be significant.

Application Issues

The application is a critical part of any life insurance contract. The application becomes a part of the life insurance contract and contains information relied upon by the issuing company in accepting the applicants request/offer for life insurance coverage.

QUESTION: The life insurance company has rescinded my husband’s life insurance policy because the application indicated that he did not have high blood pressure even though he did. We told the agent that he had high blood pressure but the agent indicated no on the application. Why should the company be allowed to deny my claim?

ANSWER: When the applicant signs the application, he/she attests that information contained in the application is true and the insurance company can rely upon it’s accuracy. It behooves the applicant to read the application before signing to make sure that the underwriting insurance company is not misled by the information contained therein.

QUESTION: The agent told us that my husband’s health problems were minor and there was no need to mention them on the application. The insurance company now will not honor his claim. Shouldn’t the company be held liable for the agent’s actions?

ANSWER: This involves a question of fact about what was said or understood between the agent and the applicant and places the applicant in a compromised position. In addition, the agent’s contract with the company generally holds the company harmless for statements or actions made by the agent that violate the terms of the agent’s agreement and underwriting standards.

QUESTION:I completed a life insurance application and paid the required premium to effect coverage. If I die before the policy is issued, will the insurance company honor my beneficiary’s claim?

ANSWER: When the applicant submits an application for life insurance, the applicant receives a conditional receipt. There are basically 3 types of conditional receipts: insurability type, approval type and binding receipts. Under the insurability type, the application will be processed even after the death of the applicant. If the insurer determines that the applicant was insurable under the terms of the receipt then the claim will be honored. Under the approval type, coverage becomes effective only after the application has been approved. Thus, if death occurs before the approval of the policy, the claim will not be honored. Though not as common, a binding receipt covers the applicant from the date of the application. The insurer can still reject coverage but if death occurs before rejection, the claim is honored.

Rights of Owner, Insured & Beneficiary

A life insurance contract consists of many rights and the person who can exercise those rights during the lifetime of the insured is the Owner of the policy. Some of the most common rights are: designation of beneficiary, select settlement options, assign policy benefits, transfer ownership, make policy loans and cash surrender policy.
QUESTION:Isn’t the insured also the owner of the policy?

ANSWER: Usually, but in many instances ownership may be someone other than the insured. Prime examples include: parent insuring a minor child, business insuring a key employee, a trust insuring an estate or a spouse insuring a spouse. In any event, if the applicant/owner insures the life of another person, he/she must have an insurable interest in the person being insured at the time the application is completed.

QUESTION:What is an insurable interest?

ANSWER: The owner/applicant must have a close family relationship or substantial economic interest in the life of the person insured.

QUESTION:I was named as the beneficiary to a policy that my grandmother took out on herself several years ago. She recently passed away and the insurance company will not give me any information or pay the claim. How can they do this?

ANSWER: It sounds like your grandmother changed the beneficiary which was her prerogative as the owner/insured of the policy. In this circumstance, you would no longer have any right to any information about proceeds from the insurance policy.

QUESTION:Who receives the proceeds of the policy if the beneficiary is dead at the time of insured’s death?

ANSWER: The policy proceeds will be paid to the insured’s estate or to the probate court to determine how the proceeds will be distributed.

QUESTION:Can there be more than one beneficiary?

ANSWER: Yes. The proceeds can be divided according to the dictates of the policy Owner.

Universal Life (Flexible Premium Adjustable Life)

Universal Life is an interest sensitive policy that allows you to pay varied premium amounts subject to certain minimums and maximums and to adjust the amount of insurance downward or upward, subject to underwriting if the amount of insurance is adjusted upward. The insurance component of universal life policy is an annual renewable term policy that increases in cost each year. The higher the attained age of the insured, the higher the cost of insurance. If the rate of return is not as high as projected or in effect at the time the application was submitted, the amount paid into the policy may be inadequate to fund the insurance for the period you intended.
QUESTION: I took out a universal life policy 10 years ago and have paid the premium amount indicated as the planned premium on my contract. I just received a letter from the insurance advising that if I don’t pay considerably more that my insurance will lapse. How can this happen?

ANSWER: More money may be required to fund your policy for several reasons, all stemming from the fact that the assumptions originally made by the agent when the policy was sold have not been realized. The rate of return on the cash accumulation may not have been as good as expected and the cost of the insurance increased dramatically due to attained age and loss/overhead expense factors. You may have taken a loan or withdrew money from the cash fund, thereby, depleting the funds available to pay for the increasing cost of insurance.

QUESTION:The agent guaranteed that the money paid into the universal life policy would be more than adequate to keep the insurance in force for the rest of my life. I just received a notice from the insurance company that my policy will lapse if more premium is not paid. How can this happen?

ANSWER: Always read the fine print on life insurance projections. Projections are used by an agent to give you an idea what your policy will look like in the future in terms of premium cost, cash value and amount of insurance. The projection, however, is based on assumptions and is not a guarantee. Always request a projection based on the guaranteed rate of return and base your decision accordingly.

QUESTION:Can I terminate a universal policy at any time and receive the cash fund?

ANSWER: You can terminate at any time, however, the cash proceeds will most likely be subject to a Surrender Charge. The amount of the surrender charge and the number of years that the surrender charge applies, will vary based on the type of policy purchased.

Life & Health Guaranty Association

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Vanishing Premium

Many dividend paying Whole Life insurance policies and Universal Life policies were sold based on financial assumptions that if realized would eliminate the need for premium payments after a specified period of time, e.g. 10 years. These policies were commonly referred to as “vanishing premium” contracts. Others may have referred to these contracts as being “paid up” after a certain number of years. These policies, however, may not perform as assumed and it is imperative that the applicant understand that the assumptions are just assumptions and not guarantees.

QUESTION:When I purchased my Whole Life insurance policy 8 years ago, I was given an illustration by the agent that showed if I paid the annual premium for 8 years, the accumulated cash value and dividend payments would be enough to pay the premium on the policy for the rest of my life. I have been told by the company, that I must continue paying the required annual premium to avoid a lapse. Shouldn’t the insurance company have to consider my policy paid up?

ANSWER: Unfortunately, the rate of return and payment of dividends did not occur as projected. The insurer’s obligation is limited to the “guaranteed” return provided in the contract. In addition, payment of dividends is not guaranteed.

QUESTION:I want to purchase a life insurance policy that will only require premium payments for 10 years. What kind of life insurance policy should I purchase?

ANSWER: Purchase a Limited-Payment Life insurance policy, specifically, a 10-Pay Life Insurance policy. These policies require a higher premium outlay with more emphasis on savings rather than life insurance protection.

QUESTION:How can insurers present illustrations for Whole Life and Universal Life policies projecting future premium payments and cash values that are not accurate?

ANSWER: Illustrations project premium requirements and cash values based upon different rates of interest and dividend payments. The illustration must include the minimum “guaranteed” projection of premium payments and cash value accumulation. Projections that utilize financial variables other than what is guaranteed are speculative at best. In addition, the illustration must contain wording that projections based on interest rates other than the guaranteed minimum are not guaranteed.

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