A life insurance policyowner does not have the right to

Life Insurance Policy Ownership Rights

Life and Health Insurance FIN 3660

Chapter 9

Life Insurance Policy Ownership Rights

An insurance policy is a contract between the insurer and the policyowner and is subject to the rules of contract law.

Property – a bundle of rights a person has with respect to something.

Real Property – land and whatever is growing on or attached to the land.

Personal Property – all property other than real property.

Tangible Property – property that has physical form, such as automobiles, jewelry, or clothing.

Intangible Property – property that represents ownership of a legal right, such as a contractual right.

Ownership of Property – the sum of all the legal rights that exist in that property.

2

Naming the Beneficiary

Class designation – a beneficiary designation that identifies a certain group of persons, rather than naming each person.

Primary and Contingent Beneficiaries

Primary (first) Beneficiary – the party designated to receive the policy proceeds following the death of the insured.

Contingent (second or successor) Beneficiary – receives the policy proceeds only if all designated primary beneficiaries have predeceased the insured.

Insurers usually prefer that policyowners name at least a primary and a contingent beneficiary.

3

Naming the Beneficiary

Changing the Beneficiary

Right of revocation – the right to change the beneficiary designation.

Revocable beneficiary – a beneficiary designation is said to be revocable if the policyowner has the unrestricted right to change the designation during the life of the insured.

Vast majority of beneficiaries of life insurance policies are revocable beneficiaries.

Can only be made during the insured’s lifetime.

Vested interest – a property right that has taken effect and cannot be altered or changed without the consent of the person who owns the right.

Irrevocable beneficiary – a beneficiary designation is said to be irrevocable if the policyowner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.

Policyowner may at any time designate a beneficiary as an irrevocable beneficiary.

Under certain circumstances, a policyowner may be able to name a new beneficiary, even if the original beneficiary designation is irrevocable.

4

Mode of Premium Payment

Most individual life insurance policyowners pay periodic renewal premiums to keep their policies in force.

Premium payment mode – the frequency at which renewal premiums are payable.

Renewal premiums for an individual life insurance policy generally are stated as an annual premium amount due.

Insurers seek to keep their administrative costs down by requiring scheduled renewal premium payments to be at least equal to a stated minimum amount.

5

Policy Dividends

Participating policy: (par policy) is a type of policy under which the policyowner shares in the insurance company’s divisible surplus.

Nonparticipating policy: (nonpar policy) is a type of policy under which the policyowner does not share in the insurer’s surplus.

Divisible surplus: a portion of an insurance company’s surplus set aside specifically for distribution to owners of participating policies.

Policy dividend: a policyowner’s share of the divisible surplus.

Dividend options: specified methods by which the owner of a participating life insurance policy or participating annuity may receive policy dividends.

Automatic dividend option: a specified policy dividend option that the insurer will apply if a policyowner does not choose an option.

6

Policy Dividends

Cash Dividend Option – the insurance company sends the policyowner a check in the amount of the policy dividend that was declared.

Premium Reduction Dividend Option – the insurer applies policy dividends toward the payment of renewal premiums. Unless a policy has been in force for many years, the annual policy dividend usually is not large enough to pay an entire annual renewal premium.

Policy Loan Repayment Dividend Option – the insurer applies policy dividends toward the repayment of an outstanding policy loan. The amount of the policy dividend usually is applied first to repay any outstanding interest on the loan and then to repay the loan principal.

7

Policy Dividends

Accumulation at Interest Dividend Option – the policy dividends are left on deposit with the insurer to accumulate at interest.

Paid-up Additional Insurance Dividend Option – the insurer uses any declared policy dividend to purchase paid-up additional insurance on the insured’s life.

Additional Term Insurance Dividend Option – the insurer uses each policy dividend to purchase one-year term insurance on the insured’s life.

Insurers often limit to the amount of the policy’s cash value the maximum amount of one-year term insurance that can be purchased each year.

Before a policyowner is permitted to change from another dividend option to the additional term insurance option, insurers usually require evidence of the insured’s insurability.

8

Transfer of Policy Ownership

If the owner of a life insurance policy has contractual capacity, then she has the right to transfer ownership of some or all of her rights in the policy.

Transfer of Ownership by Assignment

Assignment: an agreement under which the policyowner transfers some or all of his ownership rights in the policy to another party.

To make a valid assignment of an insurance policy, the policyowner must have contractual capacity.

May not infringe on the vested rights of an irrevocable beneficiary.

An assignment that is made for illegal purposes, such as speculating on a life, is invalid.

9

Transfer of Policy Ownership

Types of Assignment – an assignment may take one of two forms:

Absolute Assignment: an assignment under which a policyowner transfers all of his policy ownership rights to the assignee.

Collateral Assignment: a temporary assignment of the monetary value of a life insurance policy as collateral—or security—for a loan.

The collateral assignee’s rights are limited to those ownership rights that directly concern the monetary value of the policy.

The collateral assignee has a vested right to the policy’s monetary values, but that right is limited.

The collateral assignee’s rights to the policy values are temporary.

Assignment Provision – describes the roles of the insurer and the policyowner when the policy is assigned.

10

Transfer of Policy Ownership

Transfer of Ownership by Endorsement

Many life insurance policies issued today specify a simple, direct method of transferring all the policy’s ownership rights.

Endorsement method – policy ownership is completely transferred without requiring the policyowner to enter into a separate assignment agreement.

The right to change the policy’s owner is generally specified in the change of ownership provision in the policy.

11

Right to Receive Policy Proceeds

Upon an insured’s death, the beneficiary has a vested right to receive the policy proceeds.

Identifying Who is Entitled to Policy Proceeds

No Surviving Beneficiary : if no beneficiary has been named or none of the named beneficiaries is living when the insured dies, then the policy proceeds typically are paid to the policyowner, if the policyowner is living. If the policyowner is deceased, then the proceeds are paid to the policyowner’s estate.

-- preference beneficiary clause (succession beneficiary clause): states that if the policyowner does not name a beneficiary, then the insurer will pay the policy proceeds in a stated order of preference.

Insured and Beneficiary Die in a Common Disaster

-- common disaster: the insurer and the beneficiary die in the same accident; the accident or disaster was common to more than one person.

12

Right to Receive Policy Proceeds

Insured and Beneficiary Die in a Common Disaster

-- Simultaneous death act: governs how insurance companies are to evaluate common-disaster situations.

-- Survivorship clause: states that the beneficiary must survive the insured by a specified period, usually 30 or 60 days, to be entitled to receive the policy proceeds.

Beneficiary Wrongfully Kills the Insured

-- Permitting someone to profit from the wrongful killing of another person is not in the public interest.

-- Laws in many countries disqualify a beneficiary from receiving the policy proceeds if the beneficiary wrongfully and intentionally killed the insured.

13

Calculating the Amount of the Benefit Payable

The insurer first adds together the following items:

Basic death benefit payable – the policy’s face amount. However, if the policy was in force under the reduced paid-up insurance nonforfeiture option when the insured died, then the amount of the basic death benefit payable is less than the face amount.

The amount of any accidental death benefits payable

The amount of any declared but unpaid policy dividends

The amount of any accumulated policy dividends, including interest, left on deposit with the insurer

The face amount of any paid-up additions

The amount of any unearned premiums paid in advance. Policyowners sometimes pay premiums before those premiums are due.

14

Calculating the Amount of the Benefit Payable

After totaling the amount of the foregoing items, the insurer then subtracts the following items from that total:

The amount of any outstanding policy loans, including any unpaid interest.

The amount of any premium due and unpaid at the time of the insured’s death. This item appears when the insured dies during the policy’s grace period before the premium due has been paid.

15

Paying Policy Benefits Under a Settlement Option

Settlement option (optional modes of settlement) – alternative methods that the owner or beneficiary of a life insurance policy can elect for receiving payment of the policy proceeds.

Settlement option provision – grants a policyowner or a beneficiary several choices as to how the insurance company will distribute the proceeds of a life insurance policy.

Payee – the person or party who is to receive the policy proceeds under a settlement option.

Contingent payee (successor payee) – receives any proceeds still payable at the time of the payee’s death.

16

Paying Policy Benefits Under a Settlement Option

Interest Option

A settlement option under which the insurance company invests the policy proceeds and periodically pays interest on those proceeds to the payee.

Fixed Period Option

A settlement option under which the insurance company agrees to pay policy proceeds in equal installments to the payee for a specified period of time.

Fixed Amount Option

A settlement option under which the insurance company pays equal installments of a stated amount until the policy proceeds, plus the interest earned, are exhausted.

Life Income Option

A settlement option under which the insurance company agrees to pay the policy proceeds in periodic installments over the payee’s lifetime.

Life annuity: an annuity that provides periodic income payments for at least the lifetime of a named individual.

17

Interest Option

Interest Option

A settlement option under which the insurance company invests the policy proceeds and periodically pays interest on those proceeds to the payee

The payee generally has the right to withdraw all or part of the policy proceeds at any time or to place all of the proceeds under another settlement option.

18

Fixed Period Option

Fixed Period Option

A settlement option under which the insurance company agrees to pay policy proceeds in equal installments to the payee for a specified period of time.

The amount of each installment paid under the fixed period option depends primarily on the amount of the policy proceeds, the interest rate, and the length of the payment period that the policyowner or beneficiary chooses.

19

Fixed Amount Option

Fixed Amount Option

A settlement option under which the insurance company pays equal installments of a stated amount until the policy proceeds, plus interest earned, are exhausted.

The number of installments that the insurer will pay depends on the amount of the policy proceeds, the interest rate, and the fixed amount selected.

20

Life Income Option

Life Income Option

A settlement option under which the insurance company agrees to pay the policy proceeds in periodic installments over the payee’s lifetime.

Life Annuity

An annuity that provides periodic income payments for at least the lifetime of a named individual.

21