MD Insurance Chapter 4

1. Settlement Options are used when the insured lives to the endowment date or at the insured’s death.

2. Benefits are usually paid lump sum, unless the recipient chooses an optional mode of settlement.

3. The policyowner may select one of the options while living; however, if none was chosen the beneficiary
may choose an option at time of claim. If the owner had chosen an option prior to death it cannot be
changed by anyone.

4. A policyowner may revise the option before receiving any of the living benefits.

5. Principal payments after an insured’s death are not taxable as income. However, any interest received
is taxed as ordinary income.

payments are paid at least annually and are interest only (temporary).

The principal does not decrease and interest may not accumulate.

The income generated is taxed as ordinary income.

This method of providing income is known as capital conservation.

The principal (capital) is left with the insurer at interest, conserving the capital.

payments are a specified dollar amount until the benefits are exhausted.

payments are guaranteed for a specified period of time, regardless of who may
receive the payments, policyowner or beneficiary.

payments are guaranteed for the lifetime of the recipient.

payments are guaranteed for the lifetime of the recipient or a
specified period of time, whichever is longer.

payments are guaranteed for the lifetime of two or more recipients.

Upon the death of the first recipient, payment continues to the survivor(s).

payments are guaranteed to two or more recipients until the first recipient dies, then all
payments cease.

1. These options are found in policies that accumulate cash values and protect the policyowner against
total loss of benefits if the policy should lapse or be canceled.

2. The three nonforfeiture options add flexibility to a cash value policy.

withdraw the cash value and surrender the policy.

Policyowner receives the
total cash value less any outstanding loans and accrued interest.

present cash value is used to buy a single premium, permanent paid-up policy
of a reduced face amount. The longest period of coverage provided by a nonforfeiture option.

present cash value is used to buy a single premium term policy of the same face
amount for as long a period as it will buy. This option provides the most protection and is sometimes referred to as the Automatic Option.

1. Dividends are declared under participating policies and are paid as declared and are never guaranteed.

2. Dividends are a return of excess premiums paid and are not taxable as income.

3. Interest earned on dividends is taxable.

4. Should the total accumulation of dividends exceed the accumulated premiums paid, the exceeding
amount is taxable as normal income.

5. Dividends are the property of the policyowner and may be withdrawn anytime there is an accumulation.

6. If dividends are designated for any option other than cash and all current accumulations are withdrawn, the option will begin again at the next
declared dividend.

the policyowner receives the declared dividends on or near each policy anniversary;

however, the cash surrender of the complete policy is not a dividend option.

dividends are applied toward the next premium due. The same could be accomplished if the policyowner received the dividends in cash and remitted the full premium.

If the declared dividends equal or exceed the premium, the premium payment may be suspended.

the dividends are retained by the insurer and the interest rate paid the policyowner is compounded annually

purchases single premium, additional permanent benefits at the insured’s attained
age.

The additional insurance is added to the face amount and generates cash value and dividends as if the paid-up additional benefit was part of the original policy.

purchases a single premium, one-year term policy, normally for an amount equal
to the cash value.

Premiums are calculated at the insured’s attained age; (fifth dividend option).

pays off policy more quickly than scheduled. If the company’s investment performance declines, premiums may have to be resumed.

reduces the time period for the policy to endow.

1. Any outstanding loans not paid upon the insured’s death (or at policy surrender) will be deducted from the face amount (or cash value) along with any interest due.

2. The policyowner may obtain a loan once there is a cash value in the policy.

3. The company may defer loans up to six months unless the loan was intended to repay any premium.

4. Interest charged but unpaid will be added to the loan.

5. Interest may be fixed or variable. Variable interest is computed using Moody’s corporate bond yield,
averaged monthly. This must be accomplished at least annually, but not more frequently than quarterly.

6. Failing to repay a loan or interest will not void the policy until the total amount of loan and interest
equals the total cash value.

This provision enables the insurer to automatically borrow from the cash value to cover a premium payment to prevent the contract from lapsing.

1. This provision becomes effective at the end of a grace period.

2. The APL loan is treated as all other loans.

3. The APL is available on cash value policies only and with no additional premium.

1. A partial withdrawal of cash value is permitted when the policy is a Universal, Variable or a Variable
Universal Life policy (Flexible Policies).

2. In addition to withdrawals, a partial or full surrender is allowed.

3. In the early years of a policy, an insurer may apply a surrender charge (also referred to as a back-end
load) against the cash amount being surrendered. This provides a means for the
insurer to reduce or recapture expenses.