Topic 1: Types of Life Insurance Policies

The IC exam tests your understanding of the major policy types and their distinguishing features.

• Term Life Insurance — Pure protection for a specified period. No cash value. If the insured dies within the term, the death benefit is paid. If they survive, coverage ends with no value. Types include: yearly renewable term (YRT), level term (5, 10, 20-year), decreasing term.
• Whole Life Insurance — Permanent coverage with guaranteed cash value. Two payment modes: Continuous-premium (straight life) — premiums paid for life, lower annual cost, more coverage per peso; Limited-payment whole life — premiums paid over a shorter period (e.g., 20-pay), higher premiums but fully paid-up earlier.
• Endowment Policy — Pays the face amount either upon death within the period OR upon survival to the maturity date. Combines savings and protection. Higher premiums than whole life.
• Universal Life — Flexible premiums, adjustable death benefit, cash value grows at a credited interest rate tied to market performance.

Key comparison: Both term and endowment policies provide protection for only a specified period. Whole life covers the insured’s entire lifetime.

Topic 2: Policy Provisions and Clauses

Standard mandatory provisions required by the Insurance Code of the Philippines:

• Grace Period — Usually 31 days after the premium due date. Policy stays in force. If the insured dies during the grace period with premium unpaid, the insurer pays the death benefit MINUS the unpaid premium.
• Incontestability Clause — After 2 years, the insurer CANNOT contest the policy or deny a claim based on misrepresentation or concealment — except for proven fraud.
• Misstatement of Age Clause — If age was misstated, the death benefit is adjusted to what the premium paid would have purchased at the correct age. The policy is NOT voided.
• Reinstatement Provision — Allows a lapsed policy to be restored. Requirements: (1) evidence of insurability, (2) payment of all overdue premiums with interest, (3) repayment of outstanding loans.

Note: The “entire contract clause” and “automatic premium loan clause” are OPTIONAL provisions — not mandated by the IC.

Topic 3: Non-Forfeiture Options

When a policyowner stops paying premiums on a cash-value (permanent) policy, they must elect a non-forfeiture option to preserve accumulated value:

• Cash Surrender Value — Terminate the policy and receive the cash value in a lump sum.
• Extended Term Insurance — Uses cash value as a single premium to buy TERM insurance for the FULL original face amount for as long as the cash value supports. Premiums stop; full coverage continues for a defined period.
• Reduced Paid-Up Insurance — Uses cash value to purchase a REDUCED face amount of PERMANENT (whole life) insurance. No more premiums required.

Trigger: Non-forfeiture options are selected when a policyowner DISCONTINUES PREMIUM PAYMENTS on a whole life or endowment policy.

Topic 4: Settlement Options

The four basic ways a beneficiary can receive life insurance proceeds:

• Interest Option — Proceeds remain with the insurer; only interest is paid to the beneficiary. The principal is preserved indefinitely. Best for: ongoing charitable donations, long-term income needs.
• Fixed Period Option — Proceeds plus interest are paid out over a set number of years.
• Fixed Amount Option — A set payment amount is paid until the proceeds are exhausted.
• Life Income Option — Payments for the beneficiary’s entire lifetime, regardless of how long they live.

Topic 5: Riders and Supplementary Benefits

• Riders — Additional provisions (supplementary benefits) attached to a base policy that add coverage for an extra premium. Examples: Accidental Death Benefit (ADB), Disability Waiver of Premium, Term Rider.
• Disability Waiver of Premium Rider — Waives premium payments if the insured becomes totally disabled (after an elimination period, typically 6 months). The insured does NOT have to die — only be totally disabled. FALSE statement: “insured must die while disabled.”
• Supplemental Term Rider — Adds a large amount of term insurance on top of a base permanent policy. Greatly increases total death benefit coverage at lower cost.

Topic 6: Beneficiaries and Policy Ownership

• Revocable Beneficiary — Policyowner retains all rights: can change beneficiaries, add new ones, take policy loans, surrender the policy — WITHOUT the beneficiary’s consent.
• Irrevocable Beneficiary — Has a vested interest. The policyowner CANNOT change the beneficiary, take loans, or surrender without the irrevocable beneficiary’s consent. However, the irrevocable beneficiary CAN discontinue premium payments.
• Absolute Assignment — Transfers ALL ownership rights. Useful for estate planning: proceeds paid to an absolute assignee are excluded from the insured’s taxable estate.
• Insurable Interest — Must exist at time of application. Exists automatically for: self, spouse, children/parents, business partners, employer-key employee, creditor-debtor. Does NOT exist for: mistress/lover (no legal relationship).

Topic 7: Underwriting and Applications

• Application purpose — Requests coverage, provides applicant information, states coverage amount. It does NOT cover non-forfeiture options (those are selected after policy issue).
• Largest application content — Information relating to the insurability of the applicant (medical history, occupation, lifestyle, habits).
• Medical evidence required — Determined by the applicant’s AGE and the PROPOSED SUM to be insured. Higher amounts and older ages require more extensive medical evidence.
• Binding Receipt — Provides immediate interim insurance from the date of application, regardless of underwriting outcome, until the policy is issued or declined.
• Sources of underwriting info — Application, agent’s report, medical exam, Attending Physician’s Statement (APS), inspection reports. Government tax records are NOT accessible to insurers.

Topic 8: Policy Loans and Indebtedness

• Policy loans can be taken against the cash value without evidence of insurability.
• If loan interest is unpaid at the policy anniversary, the insurer ADDS the interest to the loan balance (capitalizes it). The policy only lapses if total debt exceeds cash value after notice.
• If the insured dies with an outstanding loan, the death benefit is reduced by the loan amount plus interest.
• Policy loans do NOT reduce dividends (dividends are declared independently).

Topic 9: Premium Concepts

• Premium is the legal consideration needed to put a life insurance policy into effect.
• The grace period (31 days) allows premium to be paid in various ways — NOT necessarily cash only. A policy loan (automatic premium loan) can cover the premium. FALSE: “cash is required for all premiums paid in the grace period.”
• Premiums paid less frequently (quarterly, semi-annual) result in HIGHER total annual cost than annual payments (due to interest and administrative fees).
• Yearly renewable term — premiums INCREASE each renewal because the insured is older. No evidence of insurability required. No cash value.

Topic 10: The Insurance Profession and Regulation

• Agent licensing — Primary reasons: protect the public, ensure minimum knowledge, protect insurers from misrepresentation. Government revenue is the LEAST important reason.
• Total needs selling — Agent determines the client’s complete financial needs before recommending coverage.
• Conservation of policies — Keeping policies in force. Involves understanding lapse reasons, replacing unsuitable policies, maintaining client records. Pressure selling HARMS conservation.
• Interpleader — When multiple parties claim the same proceeds, the insurer deposits funds with the court and the court decides the rightful claimant.
• Life insurance’s social contribution — Accumulates capital for investment in commerce and industry; relieves community of caring for dependents; encourages provision for the future. (All of the above.)