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Guaranteed purchase option.

At the time a life insurance policy is issued it is often possible to purchase an option that provides the policyowner with the right to purchase, without evidence of insurability, additional amounts of permanent insurance at stated intervals or upon stated events. This option is usually issued as a rider to the basic policy and terminates at a specified policy anniversary. Some options provide an overall limit on the amount of additional insurance that may be purchased. Premiums for the option are based upon the insured's attained age and are payable until the rider terminates. Guaranteed purchase options are also referred to as "insurability options." Use of a guaranteed purchase option is particularly attractive when insurance is issued on the life of a child (see the discussion of children's life insurance on page 376).

When the option is exercised the insurance purchased does not have to be the same plan as the basic policy. Premiums for the additional insurance are at standard rates. For example, a typical rider might provide for the option to purchase $20,000 of additional insurance every 3 years until the policy anniversary nearest the insured's age 40. Additional option dates might also include the insured's marriage and the birth of each of the insured's children.

Other forms of guaranteed purchase options offer guaranteed insurance under cost-of-living adjustments that are tied to increases in an economic inflation indicator, such as the Consumer Price Index. Another variation, known as a "beneficiary purchase option," allows the beneficiary, upon the death of the insured, to elect to use part or all of the proceeds to purchase insurance without evidence of insurability. However, at the time the underlying policy is issued the beneficiary must prove insurability. This option is used as a substitute for survivorship life insurance and may offer greater flexibility (i.e., the surviving spouse uses some of the proceeds to pay estate taxes at the first death and the remaining proceeds to exercise the "last to die" option). Still another variation, known as a "surviving spouse option," is used with survivorship insurance (see the discussion of survivorship life insurance on page 552). This option allows the policy-owner to purchase an additional amount of insurance on the primary insured following the death of his or her spouse.

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Title Annotation:Terms & Concepts
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
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