IIQE Paper 3 English Quiz 20

The term “reinstatement”, however, in this context concerns the right of the policyowner to have a lapsed policy brought back into force. The usual policy provisions which apply to this are:
• There is a time limit within which this may be demanded
• That period during which the right can be exercised may vary between insurers, but 5 years is quite representative
• The right normally applies only to lapsed (not surrendered) policies
• The reinstatement may be subject to some conditions

The reinstatement may be subject to any of the following conditions:
• Evidence of continued insurability (good health)
• Repayment of any outstanding loan (inclusive of interests)
• Payment of back premiums, plus interests thereon to be charged at a prescribed rate
• Payment of a reinstatement fee
• A further contestable period from the reinstatement date
• A further suicide exclusion period from the reinstatement date

A different age or sex from that indicated when the insurance was arranged can have a significant impact on the policy premium and/or benefit. The customary provisions in these circumstances are:
• If the error is discovered after a claim has arisen, the amount of the benefit payable is adjusted (up or down) to reflect the amount payable had the correct age/sex been given and the same premium paid.
• If the error is discovered before a claim arises, the policyowner is usually given the choice of leaving the face amount unchanged and either receiving a refund premium or paying an extra premium after calculating the correct premium that should have been paid.
• If the error is discovered before a claim arises, the policyowner is usually given the choice of adjusting the face amount of the policy to the amount which the premium paid would have purchased at the correct age or sex.

Cash dividends
A cash dividend is a payment made by a company out of its earnings to investors in the form of cash (check or electronic transfer). This transfers economic value from the company to the shareholders instead of the company using the money for operations.

The policy normally presents some options in respect of cash dividends, so that they may be:
• Paid in cash at once
• Applied towards future premiums of the policy
• Left with the insurer to earn interest
• Used to buy paid-up additional insurance
• Used to purchase one-year term insurance.

Participating policies (known in the U.K. as with-profit policies), in due time, should qualify for dividends, which are distributed in three ways: cash dividend, reversionary bonus, and terminal bonus.

Cash dividends become payable to the participating policyowner immediately. However, the policy normally presents some options in respect of cash dividends, so that they may be:
• Paid in cash at once
• Applied towards future premiums of the policy
• Left with the insurer to earn interest
• Used to buy paid-up additional insurance, which will generate dividends as well
• Used to purchase one-year term insurance

Automatic dividend option
If the policyowner makes no selection from the available options, most policies make provision for what is known as an automatic dividend option to apply. It applies in the event that the policy owner does not choose an option.

There are certain features of assignment arising from policy provisions. It includes:
• An assignment is valid from the date of notice given to the insurer.
• The assignee inherits from the assignor all his rights and remedies upon a valid assignment.
• The laws do not allow a person to assign to another person an obligation that he owes to a third person without the third person’s consent.

Rights of the assignee
The assignee inherits from the assignor all his rights and remedies upon a valid assignment. However, the assignee cannot recover more than the assignor, so that where an assignor has purchased insurance by fraud or misrepresentation, the insurer can set up a defense against the assignee.

Net policy proceeds
When any policy benefit is payable to the assignee any overdue premiums from the assignor and outstanding policy loans to the assignor together with interests thereon will be deducted from the benefit, in which case the assignee is said to receive the net policy proceeds.

Limitations on assignment
• An assignment must not violate any vested right of any beneficiary
• An assignment must not be for illegal purposes
• An assignment may be restricted to involve only a lump sum payment of policy benefit to the assignee

Revocable beneficiary designation
It is important to note that through a revocable beneficiary designation, what the designated beneficiary will acquire is a mere expectation to receive benefit, as opposed to a vested right or interest. Most life insurance policies name revocable beneficiaries. Policy owners reserve the right to make changes to who receives payment, change the terms of the policy, or terminate the policy without the need of revocable beneficiary consent.

An absolute assignment is the act of complete transfer of the ownership (all rights, benefits, and liabilities) of the policy completely to other parties without any terms and conditions. The person who transfers the rights is called the Assignor and the person to whom the rights are being transferred is called the Assignee.

A collateral assignment of life insurance is a conditional assignment appointing a lender as the primary beneficiary of a death benefit to use as collateral for a loan. If the borrower is unable to pay, the lender can cash in the life insurance policy and recover what is owed.

When the policy benefit becomes payable, the beneficiary and/or policyowner may choose between several alternative methods of receiving the proceeds. It includes:
• Lump-sum settlement
• Interest option
• Fixed period option
• Fixed amount option
• Life income option

Interest option
In the interest option, the policy proceeds are left with the insurer, who pays interest annually or at agreed more frequent intervals. It is also an option that a life insurance beneficiary may select as a settlement by which policy death proceeds are left on deposit with the insurance company to accrue interest; the interest is paid out to the beneficiary on some regular basis, such as annually.

Fixed period option
It is a life insurance option that may be selected as a settlement under which the policy proceeds are left on deposit with the insurance company to accrue interest and are paid to the beneficiary in equal payments for a specific number of years. The policy proceeds (and interests) are paid in installments of equal amounts over an agreed period of time – effectively this is an option of purchasing an annuity certain with the policy proceeds as a single premium.

Life income option
In the life income option, the policy proceeds (and interests) are paid in agreed installments over the payee’s lifetime – effectively this is an option of purchasing a life annuity with the policy proceeds as a single premium. Under this method, the payee should expect smaller installment payments than would be available under the fixed period or fixed amount option.

Certain safeguards against the effecting of life insurance with suicide in mind are perfectly reasonable. The usual provisions are:
• Suicide is excluded for an initial period of the policy.
• That period may vary with insurers, but 1 year after the date the policy is issued is very representative.
• Should suicide occur after that period, the death benefit is payable as normal.
• Should suicide occur during that period, the death benefit is not payable, but it is normal for the policy to state that premiums paid (less any outstanding loan and interests) are refunded.

Mutual insurance companies
It is a mutual insurance company that has no shareholders. Legally, it is owned by its participating policyholders, and controlled by its Board of Directors and senior management. The sole purpose of a mutual insurance company is to provide insurance coverage for its members and policyholders, and its members are given the right to select management.

Since company structures cover a great number of inter-related activities and there is no set pattern to follow. It includes:
• Accounts department
• Actuarial department
• Agency training and control
• Claims
• Client service
• Marketing
• Underwriting

Agency training and control
The majority of individual life insurance plans are sold through insurance agents. They at one and the same time represent almost the “lifeblood” of the company, and a major responsibility regarding their appointment, training, and discipline.

Standard functions of the Accounts Department include:
• Receipts: monitoring and recording all payments due to the company, by way of premiums, reinsurance recoveries, loan repayments, etc.
• Payments: monitoring and recording all payments to be made by the company, including claims, salaries, agency commissions, purchases, etc.
• Financial returns: every insurer must submit audited accounts each year, as required by the Insurance Ordinance. This is a major function and responsibility of the Accounts department.

Actuarial department
Company structures cover a great number of inter-related activities and there is no set pattern to follow. It includes the actuarial department. Life insurance is profoundly involved with mathematical calculations and projections. The actuarial department, therefore, has a key role in company operations.

The actuarial department, therefore, has a key role in company operations. It includes:
• Product pricing
• Valuation
• Claims and reinsurance
• Management reporting

Management reporting
This could be within the area of the company accounting staff, but whoever performs the function, is a critical one. Unless top management is supplied with reliable data on reserves, surpluses, and other key matters, effectively the company cannot operate.

Client service (also known as policyowner service) involves a variety of functions, including:
• Changes to policies: these may relate to financial or non-financial changes, all of which are important to efficiency.
• Communication: this will involve both correspondence and telephone/personal inquiries, and complaints.
• Documentation: policy duplicates (with all attendant checks and inquiries) and other document requests.

Valuation
A core function, required by statute, valuation consists of the calculation of the values of assets and liabilities. The way this is done is critical to the solvency margin of the company and the determination of the divisible surplus, from which dividends or bonuses can be declared.

Marketing is a general term that can signify many things. It usually includes:
• Product research
• Promotions/publicity
• Advertising
• Public relations
• Market research