5

Man @ Work, Money @ Work

So you see, just working for your money is not a good plan. The risk is too great and the future of your
family is at stake.

You need to make sure that aside from working for your money, you have to make your money work for
you by setting aside a certain amount of your income and acquiring a preservation tool in the form of
life insurance.

This tool will act as a safety net to mitigate the risks to your income by the four threats you learned. It
can provide money for your family in case you are taken out of the picture. It can provide you money for
your retirement or through its supplemental benefits, provide disability income or pay for your medical
bills in case you get sick.

That's why we can say that Life Insurance protects your income against all ODDS!

Human Economic Value

As mentioned, Life Insurance contains the solutions to the problem of protecting human life values
against inevitable economic loss.

The key concept that illustrates this is the HUMAN ECONOMIC VALUE. It states that every human life can
be expressed as a monetary valuation.

This amount can be determined from the total value of the individual's assets and any future earnings
derived therefrom.
Human Economic Value is an important tool in Life Insurance since it provides a measurement of how
much financial protection a family may need and is also the basis for the needs analysis forms you will
learn to use as an advisor.

Concept of Risk-Sharing

Life insurance provides for the uncertainties in life such as untimely death. It works by using the concept
of Risk-Sharing.

RISK-SHARING is a system designed to protect people against financial hardship in the event of a loss.
This is done when a group of people places a fund together in preparation for an uncertain event.
Everyone is prepared to accept a small loss to compensate the unfortunate from the effect of a larger
loss. Thus, life insurance is a RISK-SHARING BUSINESS.

Types of Risk

Now that you have working knowledge of the concept of risk-sharing, let us explain it further by defining
what risk is.

RISK is present if there is a chance of loss and it exists if there is uncertainty about the future.

Given this, there are two types of risks involved in relation to Life Insurance.

1) SPECULATIVE RISK - is a risk that involves three possible outcomes: Loss, Gain, or No Change. An
example of a speculative risk is gambling. If you decide to play games of chance, you may win money,
lose money or just break even. The risk you run is speculative in nature. This type of risk cannot be
insured.

2) PURE RISK - is a risk that involves no possibility of gain. There is either a loss or none at all. The
possibility of economic loss without the possibility of gain is the ONLY kind of risk that can be insured.
The primary purpose of insurance is to compensate for financial loss and not to provide opportunity for
financial gain.

Law of Probability, Law of Large Numbers

In determining the level of risk to a person's life expectancy, life insurance companies use 2 laws:

First, is the LAW OF PROBABILITY that shows the likelihood that a given event will occur in the future.
This is used in determining the number of people dying and living at a particular age within the given
period.

Second, insurance companies also use the LAW OF LARGE NUMBERS, which states that the more
frequent a particular event is observed, the more likely that the observed results will approximate the
true probability of the event happening. An example of this is a coin toss. We know that there is a 50%
probability of yielding heads and another 50% probability yielding tails. If you toss the coin just 3 times,
it is likely that you may yield 2 heads and 1 tail or the other way around. But if you continue to toss the
coin 10, 100 or 1000 times, you will notice that the more figures there are to study, the more the figures
approach the true probability of the event.

This relates to life insurance as a risk-sharing business since life insurance companies need to effectively
determine the mortality or the probability of the incidence of death among a given group of people.

10

Risk Selection

We did mention that life insurance is a sharing or pooling of risks. In order to provide insurance
coverage on an equitable basis, insurance companies charge each person insured an amount that
corresponds to the risk that the individual presents to the company.

Factors in Risk Selection

In Risk Selection, life insurance companies analyze different risk factors. To remember these factors,
keep in mind the acronym POFMAR.

P stands for Physical or the person's health condition.

Since most deaths occur due to natural causes, health is a primary factor in assessing life expectancy.

O stands for Occupation.

Occupation is a risk factor since there are many hazardous occupations that present a higher risk to the
life of an individual. This may be due to hazardous duties that may expose the person to injury,
unhealthy working conditions that expose him to illness, or other social hazards. Examples include
members of the police, military and firefighters to name a few. For those without gainful employment,
such as the case of a housewife, the adequacy of the breadwinner's insurance coverage is examined.

F stands for Financial or the individual's financial status in relation to the amount of insurance he/she
seeks to purchase.

This is a risk factor since we do not want to sell more life insurance than is warranted by a person's
income. This may result in the individual not being able to continue the policy and losing the protection
it provides.

M stands for Moral. This includes lifestyle choices and habits.

Take note that we do not judge whether the actions of the person are moral or immoral. Rather, we
judge whether an individual's preferences and decisions negatively impact the longevity of his life.

A stands for Avocation.

Avocation on the other hand, refers to the hobbies that may also present certain risks. Examples of
which include those who engage in mountain climbing, sky diving and the like. These hobbies, though
thrilling, present a higher risk to the individual's life.

R stands for Residence or Travel.

Since there are some areas that may be considered high risk due to the peace and order situation or
other similar reasons, we also analyze the area where the individual resides. We may also take into
account if he plans to travel and the safety of the area he/she seeks to visit.

11

Underwriting

The process of risk selection is called UNDERWRITING. It's a process wherein an applicant's anticipated
mortality and morbidity is evaluated.

The Underwriting process is carried out in three stages.

1) It begins with the Field Underwriter, usually an advisor or agent of a life insurance company. The duty
of the advisor is to observe the applicant for any physical signs of disease and ask questions from the
Application Form. In most life insurance Application Forms, the largest amount of data requested relates
to the insurability of the applicant.

2) The second stage is done by an accredited Medical Examiner.

3) The last stage is done by the Head Office Underwriter. Life insurance companies usually have an
Underwriting Department to carry out this last stage.
The main purpose for evaluating is to come up with an Underwriting Decision of whether the applicant
is acceptable or what we call insurable or unacceptable or what we call uninsurable. Underwriting is also
done to determine to which risk classification an applicant should be assigned to and finally the price to
charge the person for the insurance coverage.

Proper underwriting is also necessary to prevent ANTI-SELECTION, which is the high pre-disposition for
those with impairments to purchase life insurance. This makes life insurance a speculative purchase and
if it persists, can wreck havoc on a life insurance company's business.

Sources of Information

In each stage of underwriting, information is collected that would aid in the appraisal or assessment of
the risk of the applicant. Here are some samples of sources of information:

APPLICATION FORM - This is filled out with the details of the applicant.

MEDICAL EXAM REPORT - This is accomplished by the accredited Medical Examiner.

AGENT'S CONFIDENTIAL REPORT - This is accomplished by the advisor, answering questions pertaining
to the applicant to provide additional information. All information the advisor knows to be material to
the application for insurance should be included in this report.

MEDICAL IMPAIRMENT BUREAU (MIB)- This is a database that contains applicants that have been
previously declined or rated from any life insurance company in the Philippines. It is regulated by the
Philippine Life Insurance Association (PLIA).

These are just some examples of the sources of information. There are still many other sources such as
financial statements, inspection reports, medical records and the like. These sources of information
would depend on the circumstances of the application and not all sources are required from all
applicants.
12

Classification of Risk

RISK CLASSIFICATION

Using these sources of information, life insurance companies are able to classify the type of risk an
applicant presents.

1) STANDARD RISK - The applicant may be classified as Standard Rate. This is used to describe individuals
whose life expectancies or mortality are regarded as average.

2) SUBSTANDARD (RATED) RISK - In the case of applicants with higher than average chance of dying
prematurely due to varying degrees of impairments or due to occupational or medical findings, they
may still be allowed to purchase life insurance but as a Substandard or Rated risk. Applicants who fall
under this category will be charged higher-than-usual premium rates.

3) DECLINED - There is also a possibility that the person applying for life insurance is not acceptable or
uninsurable. This may be due to extremely poor health or an extremely hazardous occupation or
avocation. In these cases, the application is Declined.

13

Mind Maze: Basic Insurance Terms

In this next part of the module, we will be providing definitions to the Basic Insurance Terms that you
will encounter in the succeeding modules.

To get the definitions for each insurance term, let's go through the Mind Maze!

INSTRUCTION: Navigate the maze to pass through each of the barriers before heading for your would-be
client. To open each barrier you need to gain enough knowledge regarding life insurance. This
knowledge will also prepare you to be able to close sales once you become a Sun Life Advisor.
Click on NEXT to learn these basic insurance terms.

Basic Services of Life Insurance

Based on what we have learned, Life Insurance can protect your income against all ODDS, through the
basic services it provides:

It can protect you against the threat of untimely death by providing family protection through the Death
Benefit.

It provides for those who live too long and experience old age by providing Retirement Income through
the Maturity Benefit.

It can also provide ready cash during times of emergencies or when faced with disabilities or illnesses by
offering guaranteed savings through the Cash Values.

CREFALEER

C is for Clean-up fund. Life Insurance can be used as a fund to pay for hospital bills, funeral expenses,
and taxes which become due upon the death of the insured.

Re is for Readjustment Fund. Life Insurance can be used as a fund to cushion immediate lifestyle
adjustment that the family must make if the insured dies.

Fa is for Family Dependency Income. Life Insurance can be used to create a fund to provide for the
family's needs during the critical years or critical period when the children are still dependent.

L is for Life Income for Widow. Life Insurance can be used as a lifetime fund for the widow.
E is for Educational Fund. Life Insurance can be used to ensure the education of the children even if the
breadwinner is taken out of the picture.

The second E stands for Emergency Fund. Life Insurance is designed to provide financial back-up for
unexpected circumstances.

Lastly, R is for Retirement Income. Life Insurance gives security and peace of mind for those who have
outlived their earning years.

SUMMARY

As you have seen, there are many different uses of Life Insurance, to protect against the different
uncertainties and threats. Buying Life Insurance is buying peace of mind.

Premium, Basic Plans and Riders

Insurance Concepts Review

Premiums

One way for you to earn credits in The Sun Garage is by servicing the cars in the shop, you can start by
changing the oil. You will be able to change the oil by learning the basic definition of Premiums.

To ensure that the Policyowner receives the protection provided by the insurance policy, the initial
premiums must be paid. This puts the policy in force. Keeping it in force is contingent on the payment of
subsequent premiums.

Subsequent premiums are also called renewal premiums. These may be paid on the Annual, Semi-
Annual, Quarterly or in some cases Monthly modes. However, since interest is lost by not having the full
premium in advance the total of 12 monthly premiums, 4 quarterly premiums or 2 semi-annual
premiums are higher than that of the annual premium.
Good Job! You have succesfully changed the oil, you receive 500 credits

BASIC FACTOR THAT AFFECT PREMIUMS

Mortality

Life Insurance is based on the accurate prediction of mortality and this is what we call the mortality
factor. Through the use of Mortality tables which are firmly rooted in the Law of Large Numbers and Law
of Probability. Life Insurance companies project mortality or life expectancy of an individual, the general
rule is the higher the age, the lower the life expectancy. This affects premiums in such a way that a
higher age usually means higher premiums.

In developing a life insurance policy, the insurer also must accumulatefrom premium payments a fund
required to meet the contract obligations. This fund is called policy reserves.

Interest.

When a premium is paid, it is combined with other premiums and it is invested to earn interest. Since
the company expects to earn this interest, it passes this along to the policyowner thus reducing the
premium.

Expense

There are a number of operating expenses involved in the business of life insurance, Office Space,
Utilities, Administrative Costs, Sales Contests, Promo's and Marketing Expenses, Salaries of employees,
Commissions of advisors and the like. Thus non-productive advisors in a company can negatively affect
the Expense component of the premium.

Each individual premium has to carry a small portion of these normal costs so that the factor of expense
is computed and built into the policy owner's premium rate. The expense factor is also called loading. In
some cases companies add a safety margin requirement to the expense factor to handle uncommon
events that may increase mortality experience such as natural disasters or calamities.

Gross Premium vs. Net Premium

The Premiums to be charged are then computed using the statistics related to mortality, the interest
rates on investments and the projected costs of expenses using Actuarial Science by Actuaries involved
in the development of Insurance Products and computation of premium rates.
From the different factors Actuaries compute the Net Premium, which is equal to Mortality plus
Interest. From the Net Premium Actuaries can derive the Gross Premium, by adding the net premium
plus the expense, which may include other factors such as the safety margin requirement. This Gross
premium is the amount of money charged to the applicant.

Good Job! You have succesfully repaired the engine of the racecar you receive 500 credits

Mortality + Interest = NET PREMIUM

Net Premium + Expense = GROSS PREMIUM

2 Types of Premium

You have 1,000 credits so far, you need to earn 500 credits more, you can earn this by replacing the tires
on the race cars. To do this you need to learn the two types of premiums, Natural and Level premiums.

Natural Premiums are premiums which increase yearly with the rising rate of mortality. If insurance is to
continue, it must be renewed every year, this type of premium may be relatively inexpensive at the
onset however the mortality in later years results in very high premiums

Level Premiums on the other hand remain at a constant level from the beginning to the end of the policy
in effect for a number of years.

Depending on the type of plan, life insurance companies may offer products with natural premiums and
level premiums.

Good Job! You have succesfully replaced the tires of the racecar you receive 500 credits

Great Work!

Great work! Because of the hours you put in, helping around in the garage, you have succesfully earned
1,500 credits! These credits can get you in the Motorama races if you buy a car you can use.

Your 1,500 credits can buy you any of the Class C racing cars, please select the car of your choice.
Basic Plans

Classification.

Nature

Participation

Coverage

Classification according to Nature

The car you have chosen is ready to go. You can join the Class C racing class, this is the entry-level circuit
for the beginners in Motorama racing. This race is fairly easy, to win it all you have to do is learn the
types of basic plans classified according to nature.

According to the nature of their features, life insurance plans can be classified either as Temporary, also
known as Term plans, or Permanent Plans

Temporary or Term Plan

Temporary Insurance more commonly known as Term insurance provides protection only as death
benefit. It does not offer living benefits because it has no savings or cash values.

Just as some people prefer to rent a house or apartment rather than buy a home, some individuals
choose to have temporary life insurance protection. The key point is, term insurance covers only
temporary needs. It covers the insured usually for a short term, or a specified period of time, in most
cases 1 year or 5 years. These type of plans have the most affordable premiums.

Term plans are RENEWABLE and CONVERTIBLE

They can be renewed after their coverage period, if the plan is for 1year or a yearly renewable term the
policyowner may choose to extend the coverage for another year for a higher premium, since term
plans have Natural Premiums.Usually the renewal can be done continuously up to a specified age. Since
the renewal of term life plans present an increased possibility of Antiselection it is customary for the
company to charge higher rates for renewable plans than those that are not renewable.
Term plans are also convertible, which means it can be converted to any permanent plan, anytime while
the policy is in force.

The benefit of a term plan's renewability and convertibility is that it can be done without showing any
proof of insurability.

Due to its short-term nature, term plans are commonly used to secure loan against risk of death.

Types of Term Plan

There are two basic types of term plans, Level Term and Decreasing Term.

Level Term is a type of term plan in which the death benefit remains constant over the term of the
coverage.

Decreasing Term is a type of term plan in which the death benefit starts at the set face amount and then
decreases over the term of the coverage, by the end of the term period the death benefit is reduced to
zero.

Permanent Plan

Permanent Plans of Insurance are called such since they offer longer period of protection, even lifetime
protection. This plan combines protection and savings, which is made possible by the build-up of cash
values. When the owner of a permanent life insurance policy pays a premium, part of it goes to the build
up of cash values.

Permanent Plans use the Level Premium system, which means the premiums do not increase over time
but remain at the same level for which it was purchased at inception. This enables permanent plans,
specifically Whole Life Plans to offer protection at the least annual cost over the period of protection.

Types of Permanent Plans include Whole Life Plans and Endowment Plans

Whole Life Plan & Limited Pay Plan

The most basic form of permanent life insurance is the Whole Life or Ordinary Policy It has three
distinguishing characteristics:

Lifetime insurance protection, it provides protection up to age 100

Lifetime premium payment, premiums are payable up to age 100

Maturity at age 100, the cash values equal the face amount at age 100 making the maturity benefit
available.

Endowment Plan

Endowment policies are ideal for those who want their life insurance cash values to grow very rapidly to
build a fund that will be available at a certain time for a definite purpose - retirement, for example, or at
a time a child enters college or when an obligation becomes due.

Endowment policies provide protection in the form of the death benefit for a limited period, but also
offer the highest form of savings in a specified period.

Endowment plans have premiums that are generally higher than that of Term, Whole Life and Limited
Pay Life Plans

Types of Endowment Plan

Regular Endowment

There are many different types of Endowment Plans, Regular Endowment, Pure Endowment and
Anticipated endowment, just to name a few.

Regular Endowment provides protection in the form of the death benefit and matures either after a
specified number of years, what we call term-based, for example 20 year endowment, or it may mature
at a specific age of the insured, what we call age-based, for example endowment at age 65

Pure Endowment

A Pure Endowment is a type of endowment which promises to pay the face amount only if the insured
survives up to the end of the specified period, and nothing will be paid if death occurs before the end of
the period.

Anticipated Endowment

In an anticipated endowment, the policyowner does not have to wait for the maturity date of the
endowment before he receives a portion of the face amount.
For example, the policyowner may receive 20% of the face amount 15 years before the maturity date,
another 20% 10 years before and another 20% 5 years before. At Maturity, 40% of the face amount
becomes payable

Special Anticipated Endowments or SAE will give you 100% at the maturity aside from three payouts of
20% each

Congratulations!

This race is challenging, to win it all you have to do is learn the types of basic plans classified according
to participation.

Insurance policies sold are either Participating or Non-participating

Participating

Participating policies are sold by both stock and mutual companies, which may also sell non-
participating policies.

In participating policies the policyowner shares in the dividends or the surplus for distribution. Due to
this, premiums of participating policies are higher than that of a non-participating policy.

Non-participating

Life insurance companies may also sell plans which do not participate in the share of the dividends.
These plans are called non-participating

This race is extremely challenging, but you have the driving skills to win it all you need to do is learn
basic plans classified according to coverage

In this classification the focus is the number of lives covered under the life insurance policy.

Individual

The first type of plan classified according to coverage is the individual policy, these policies provide
protection to one person hence the name There is only one Insured in this type of plan.

Individual policies are also called Ordinary insurance since these are payable annually, semi-annually or
quarterly basis
Individual policies may also be paid on a monthly basis through payroll deduction in the form of Salary
Savings insurance.

Joint

The second type of plan classified according to coverage is called joint life insurance. Joint Life plans
provide protection to two or more persons, allowing a single plan to have 2 or more Insureds.

The basic joint life plan pays the death benefit to the beneficiaries at first death, which means upon the
death of any of the insureds, after proceeds are paid out the policy terminates.

Joint and Last Survivor insurance on the other hand extends coverage until the last person being
covered in the policy dies.

Group

The third type of classification according to coverage is the Group Life plan. This type of plan provide
protection to a group of people, such as employees of a company.

In this case the policyowner is the company and the insured are the employees of that company, and
most group policies pay dividends to the employer. A Group policy covers death due to natural or
accidental causes whether during office hours and in the place of employment or outside the job.

A single master policy covers the entire group, and the group members do not receive a policy but
receive individual insurance certificates.

A covered employee who terminates his employment continues to be covered for 31 days after the
termination date during this period he can exercise his conversion privilege and convert his coverage to
an individual policy without evidence of insurability.

In most companies, the agent's role in marketing group life insurance is limited to securing the
necessary appointment for the home office group marketing people.

Contributory vs. Non-contributory

Group policies may either be contributory or non-contributory

In a contributory group policy, the employer and employees share in the premium payment. At least
75% of the group members must be included in the plan.

In a non-contributory group policy, the employer pays for the entire premium. 100% of the group
members must be included in the plan.

In either case it is assumed every member of the group is insurable provided that, every member is
working a minimum number of hours usually 30 hours a week.

Riders

In your quest to win the Motorama Cup, you need to upgrade your vehicle. Although you selected a fast
machine, you need to upgrade it with accessories to give you an advantage in the race.

These accessories will improve the performance of your vehicle and you will use your winnings from the
last race to purchase them.

Much like how these accessories enhance the features of your race car, Riders enhance the features of
the Basic Plans, and in the same way that accessories would be useless unless you have a vehicle, Riders
cannot be purchased on their own unless attached to a Basic Plan.

Riders are supplemental benefits attached to the Basic Plan to expand the features of the plan at a
minimal additional cost. These can cover uncertainties that basic plans cannot cover on their own, like
accidents, disability, hospitalization and illnesses to name a few.

Accidental Death Benefit

One of the things that will improve the performance of your race car is a set of racing wheels and tires,
this provide greater stability and grip in cornering around the Motorama track.

To add a new set of racing wheels to your vehicle, you need to learn about the Accidental Death Benefit
The Accidental Death Benefit or ADB pays an additional amount which in most cases is equal to the
basic plans face amount in case the cause of the insured's death is accidental in nature.

This is commonly referred to as double indemnity and requires that the death occurs within 90 days
from the date of the accident and is caused by external, violent and accidental means.

Good Job! Now that you understand what the Accidental Death Benefit does, you can have your pit
crew replace your wheels and tires. This will surely make a difference during the race.

Waiver of Premium due to Disability

Spoilers are accessories that affect the performance of your race car by improving the aerodynamics,
which translates to faster lap times, and allows your car to travel at higher speeds.

To add spoilers to your vehicle, you need to learn about the Waiver of Premium due to Disability or WPD

Waiver of Premium due to Disability is a rider which waives the premiums payable under the policy in
case the insured becomes totally and permanently disabled.

To be totally and permanently disabled means uninterrupted disability for not less than 6 months which
prevents the insured from engaging in any occupation, employment or business for which he is suited by
education or experience. If this is the case of the insured the life insurance company will no longer
require him to pay premiums for as long as the disability lasts. During the period when premium
payments are being waived under this benefit, the cash value of the policy will increase and the policy
will continue to earn dividiends if participating.

Good Job! Now that you understand what the Waiver of Premium due to Disability is, you can have your
pit crew install the spoilers. This will surely make a difference during the race.

Payor's Benefit
A good exhaust system for your car, improves the flow of air, allowing the engine to breath and expel
the exhaust fumes and prevent clogging of your engine

To upgrade the exhaust system of your vehicle you need to learn the Payor's Benefit

The Payor's benefit is attached to a juvenile policy and is a type of Waiver of Premium rider. When the
Policyowner or Payor dies or becomes totally and permanently disabled the premiums of the policy will
be waived until the child reaches a specified age when he can earn and pay for the premiums of the
policy on his own.

Good Job! Now that you understand the Payor's Rider you can have your pit crew upgrade your car's
exhaust system. This will surely make a difference during the race.

Guaranteed Insurability Option

Aside from being able to accelerate rapidly, race cars also need to be able to stop and slow down
efficiently, this can be done better if you have racing brakes.

To upgrade the brakes of your vehicle you need to learn about the Guaranteed Insurability Option.

The Guaranteed Insurability Option of GIO provides an opportunity for people to buy specific amounts
of additional life insurance coverage at stated future intervals without the need to show evidence of
insurability This means that the insured will automatically pay the standard rate since there would be
minimal underwriting requirements.

Good Job! Now that you understand the Guaranteed Insurability Option your pit crew will upgrade your
car's brakes. This will surelymake a difference during the race.

Term Insurance Rider

To maximize the performance of you vehicle, engine upgrades are necessary, biger engines provide,
bigger horsepower and make you go faster around the track.
To upgrade the engine of your vehicle you need to learn about the Term Insurance Rider also known as
the Supplemental Term Rider

The Term Insurance Rider provides an additional amount of coverage for a minimal cost, the rider has its
own face amount separate from the coverage of the basic policy. Upon the death of the insured the face
amount of the basic and the face amount of the term rider will be payable.

Good Job! Now that you understand the Term Insurance Rider your pit crew will upgrade your car's
engine. This will surely make a difference during the race.

Family Income Rider

Now that your race car has been upgraded, one last modification will make it the fastest during the race.
Nitrous Oxide is an extra boost of fuel that will increase your acceleration and speed with the push of a
button

To install Nitrous Oxide tanks to your vehicle you need to understand the Family Income Rider

The Family Income Rider is a type of decreasing term insurance that may be attached as a rider to a
permanent plan. It generally provides a monthly allowance in addition to the face amount up to the end
of the decreasing term period.

Good Job! Now that you understand the Family Income Rider your pit crew will add Nitrous Oxide
tanks. Now it's time for the moment you have been waiting for, start your engines, this is the final race
to win the Motorama Cup

Click on NEXT to race!

1st Yellow Flag - Entire Contract Clause

You are at your First Yellow Flag called the Entire Contract Clause!This clause states that:
First - The policyowner is assured that every word of the contract is contained in the contract. The
contract is made up of the policy and the attached application including a report of physical condition.
The contract cannot be affected by later changes, since all the company's obligations and the
policyowner's rights have already been written.

Second - The company accepts the applicant's statements as representation. This means that, to the
best of the applicant's knowledge, the statements are true. Even if the statements are found to be
untrue, the contract may still hold. The company would have to prove that it relied so heavily on an
untrue statement that it otherwise would not have issued the policy, or would have issued it with
modifications.

2nd Yellow Flag - Ownership Provision

You are at the Second Yellow Flag called Ownership Provision

This provision states that policyowners have valuable rights under their insurance contracts. In this
provision, policyowners have the right to assign, transfer, or have their policies amended. They can also
change their beneficiaries and exercise every option and privilege provided in their contracts or allowed
by company practice.

They also have full right to cash values and dividends, if any, under their policies. They may also transfer
these rights to others if they so desire.

3rd Yellow Flag - Premium Payment

You are at the Third Yellow Flag called Premium Payment

The Premium Payment clause tells that premiums may be paid either annually, semi-annually and
quarterly.

After the contract becomes binding with the payment of the first premium, the payment of the
subsequent premiums is entirely dependent on the will of the insured. Therefore, as long as the
policyowner keeps on paying the premiums, the company is bound to carry out its part of the contract,
whatever the future may be.

4th Yellow Flag - Grace Period

You are at the Fourth Yellow Flag called Grace Period

The Grace Period Provision occurs when the policyowner neglects to pay premiums on the due date of
the policy. This provision protects the policy from lapsing.
The insured is given a period, normally 30 days, to pay for his premium after the due date. In this
scenario, the policy is still in-force and has not lapsed yet. If the insured passes away within this period,
the proceeds of the policy will be deducted by the unpaid premium due.

5th Yellow Flag - Policy Loan

You are at the Fifth Yellow Flag called Policy Loan

One of the privileges the insured can take advantage of during the lifetime of the policy is the right to
loan against its cash value. Within prescribed limits, policyowners may borrow money against their
policies if they wish.

However, the amount should not exceed the cash value of the policy. These loans may not be called by
the company and the policyowners may repay the loans at any time but be careful for interest on the
loans will be charged to the policyowner.

If the loan is unpaid at the time of death of the insurred, loan balances and any interest due are
deducted from the proceeds of the policy at the time of claim settlement.

6th Yellow Flag – Assignment

You are at the Sixth Yellow Flag called Assignment

A life insurance policy is an asset. Since it is their property, policyowners have the right to transfer or
assign them.

If they wish to secure loans, they, as assignors can assign their policies temporarily to the lenders as
security for the loan. The policy is said to be assigned.

The assignment clause sets forth the procedure of assigning one's policy. Because a life insurance
company is involved, the policyowner must notify the company in writing, of any assignment and the
company will accept the validity of the assignment without question.
The recipient of a policy is called the assignee.

7th Yellow Flag - Dividend Options

You are at the Seventh Yellow Flag called Dividend Options

Dividends are paid on participating policies. At the end of the year, the company issuing participating
policies looks over the year's operations. If there were fewer claims than anticipated, investment
earnings were better than expected and expenses were less than estimated, then a surplus results. The
company can return a part of the policyowner's premium in the form of dividends.

Dividends vary from year to year and generally start to build up after the second year.

To get your dividends, there are 5 options to choose from. Policyowners may:

1. Choose to have their dividends paid in cash

2. Use them to help reduce premium payments

3. Leave them with the company to accumulate and earn interest

4. Use them to purchase paid-up insurance or paid-up additions

5. Use them to buy Yearly Renewable Term insurance with any extra cash remaining on deposit with the
company and earning interest at a rate to be declared by the company from time to time.

TIP: Don't forget the order of these dividend options. To make it easier to remember, use the acronym
CRIPY.
C - Cash

R - Reduce Premium Payments

I - Interest

P - Paid-up Additions

Y - Yearly Renewable Term insurance

1st Blue Flag - Misstatement of Age

You are at the First Blue Flag called Misstatement of Age

The age of the insured is very important to determine the correct premium rate for life insurance. If
there has been a misunderstanding about the applicant's age, the company would be acting on wrong
information in setting the premium rate for the policy. Thus, whenever the company learns, after the
policy has been issued, that the wrong age was used to establish the premium, an adjustment must be
made in the amount of insurance protection proceeds the policyowner may receive upon death.

Whether the insured be older or younger than his true age, the amount of insurance proceeds will be
adjusted to the amount the premium would have bought at the correct age.

2nd Blue Flag – Incontestability

Through this clause, the company is given two years to contest the validity of the policy by reason of
concealment or misrepresentation of the insured. The incontestable period will not begin until the
policy has been in force for two years during the lifetime of the insured.

The company has the right to question the statements in any application and the incontestable clause
sets that limit to the length of time that the company holds that right. After a period of two years of the
policy being in force and the company did not raise any objection during that period, there can be no
objections about the payment of proceeds at the insured's death.
3rd Blue Flag – Suicide

For the protection of the company and its policyowners, a suicide clause is necessary to discourage
financially desperate people from purchasing policies with suicide already in mind.

If an insured takes his own life within two years of the policy being in force, the company will pay the
beneficiary a refund of all the premiums paid by the policyowner. However, if the suicide takes place
after two years, the company will pay the full proceeds as if the reason for death was of natural cause.

4th Blue Flag – Beneficiary

Since the policyowner's purpose in purchasing insurance is to provide for the security of the
beneficiaries, it is very important to identify them clearly. Beneficiaries are the ones who will receive the
proceeds of the policy.

In designating beneficiaries, the first person in line to receive the death proceeds is called the primary
beneficiary. Since the primary beneficiary may die before the company begins or completes paying out
the death proceeds, the policyowner usually names a substitute beneficiary.

The person next in line to receive the proceeds in case of death of the primary beneficiary is called the
secondary beneficiary.

Policyowners can name more than one beneficiary in any category and specify how much of death
proceeds each one will receive.

5th Blue Flag – Settlement

Previously, claims were paid out in lump sum. However, some beneficiaries made unwise investments or
mismanaged the money and the proceeds were quickly used up. This does not solve the main problem
that life insurance covers which is protection for the deceased's family against financial loss. Now, there
are various ways that death proceeds may be paid out to beneficiaries.
Settlement options are ways wherein the company can hold in trust the proceeds of the policy. The
company guarantees the absolute safety of funds and keeps them profitably invested so that they will
earn a fair rate of interest.

Continuation of 5th Blue Flag – Settlement

The different ways to settle policy proceeds are as follows:

Interest Option

- The company holds the proceeds for a specified period. Interest earnings will be paid out regularly and
are not accumulated. The proceeds of the policy also remains the same.

Fixed Period Option

- In this option, the company pays the beneficiary equal amounts at regular intervals over a specified
period of years. Both the principal amount and interest earnings are paid out. The amount of each
installment is determined by the length of desired period of income.

Fixed Income Option

- If this option is selected, the policy proceeds are used to pay out a specified amount of income as long
as the proceeds last. It pays out both the principal proceeds and earnings from interest.

Life Income Option

- Under this option, the beneficiary receives a guaranteed regular income, not for a specified period of
years, not as long as the proceeds last but for the primary beneficiary's entire lifetime, no matter how
long he lives. The principal and the interest are paid out with the amount of payment calculated to last a
lifetime.

1st Red Flag - Non-Forfeiture Options

As long as policyowners keep on paying for their premiums, the company is compelled to carry out its
promise. But what if the policyowner decides to quit paying premiums because of unavoidable
circumstances? The policyowner has options to choose from when they want to quit paying for their
premiums.

Cash Surrender Value

Reduced Paid-Up

Extended Term Insurance

Automatic Premium Loan

Continuation of 1st Red Flag - Cash Surrender Value

The Cash Surrender Value option gives the policyowner the right to exchange the policy for its
equivalent cash value. The cash value is the savings element of permanent life insurance policies. This
option is drastic and final. The policyowner can claim an immediate payment of cash but when this
option is applied, the contract stops completely.

There are other Non-Forfeiture options that keep part of their policies alive.

Continuation of 1st Red Flag - Reduced Paid-Up

The Reduced Paid-Up option can also be referred to as Paid-Up Insurance.

In this option, when the policyowner is unable to make premium payments but still needs life insurance
protection, the option will take the cash value built up to purchase paid-up insurance. This means that
because the policyowner will stop paying premiums, the new face amount of the client will be smaller
but his life insurance protection will still continue until age 100.

Continuation of 1st Red Flag - Extended Term Insurance

In the Extended Term Insurance option, when the policyowner is unable to continue premium
payments, the company will continue to protect him for the original face amount but only until a
specified period. In this option, the cash value is used to buy a term insurance contract which extends
the period of protection even though no more premiums are being paid.

When there is no non-forfeiture option selected, Extended Term Insurance, usually takes effect.

Continuation of 1st Red Flag - Automatic Premium Loan

In the Automatic Premium Loan option, the company lends to the insured such an amount from the cash
value to pay for overdue premiums. This can be done as long as there is sufficient cash value to keep the
policy active.The policy will also remain in force for only such period. After the cash value has been
exhausted, the policy will lapse unless premium payments are resumed and loans are paid.

2nd Red Flag – Reinstatement

This is a provision that may revive or save a policy even when it has already lapsed. Unless certain
conditions apply, the policyowner has the right to reinstate the lapsed policy and bring its value up-to-
date. However, the reinstatement provision does not apply to policies that have been surrendered
already for their equivalent cash value.
The policyowner also has a limited period of time to reinstate a policy. The period is three years. This
means that after three years of lapsation, the policyowner cannot revive his policy anymore. In some
companies, reinstatement can be done even when the policyhas lapsed for five years.

There are two ways to reinstate the policy:

Pure Reinstatement and Redating

Continuation of 2nd Red Flag - Pure Reinstatement and Redating

With Pure Reinstatement, the policyowner pays back all past due premiums plus interest on these
premiums. The policyowner would also have to pay all outstanding loans plus interest due and even
prove insurability. The contestable period and suicide clause starts all over.

With Redating, a new premium would be charged to the policyowner based on the policyowner's new
attained age and a new contestable period and suicide clause starts over. The premiums that were paid
will be applied to thelapsed policy years and a new policy effectivity date take effect.

A contract may either be a VALUED CONTRACT or a CONTRACT OF INDEMNITY.

TRIVIA: Did you know that the only instance when a Life Insurance contract is treated primarily as an
indemnity agreement is when a creditor insures the life of a debtor to protect himself?