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What are some of the typical provisions
found in a life insurance policy? |
Entire Contract
Clause
Provides that the policy itself, the application
and any attached riders constitute the entire contract between
the policyowner and the insurer.
Ownership Rights
The policyowner typically has the following
ownership rights:
- The right to designate and change
the Beneficiary of the policy death proceeds.
The beneficiary is the person or entity that
the policyowner has selected to receive any death benefit
payable upon the insured's death.
- The right to select a Settlement
Option, which is how the death proceeds will be
paid to the named beneficiary.
Beneficiaries can receive life insurance proceeds in a number
of different ways aside from the common method of a lump
sum distribution. Usual settlement options are: interest
only, fixed period of years installments, fixed amount and
life income.
Interest Only
All or a portion of the policy proceeds
are left on deposit with the company for a defined period
of time, and only the interest is paid to the beneficiary.
The proceeds are credited with interest at a rate declared
by the company yearly, but the rate of interest will not
be less than the guaranteed minimum rate.
Fixed Period of Years Installments
Provides for the payment of the policy
proceeds in installments over a definite period of time, typically
not longer than 30 years. The amount of each installment is
determined by the amount of the proceeds, the period of time,
interest rates and the frequency of payments.
Fixed Amount
The proceeds are paid in regular installments
of a fixed amount. Payments continue until the principal amount
and interest earnings are exhausted.
Life Income
Proceeds are used to buy an annuity with
payments made to a payee for life. Typically the policy provides
for a guaranteed payment period of 10 or 20 years. If the
payee dies within the guaranteed payment period, a beneficiary
can be named to receive the remainder of the specified benefits.
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- The right to select a
Nonforfeiture Option.
Nonforfeiture Values
Policy values such as loans, cash, reduced
paid-up insurance and extended term insurance which are
not lost for nonpayment of premiums.
Cash Option
The policy is surrendered and the company
issues a check to the policyowner for the policy's cash
value.
Reduced Paid-up Option
A nonforfeiture option found in most
life insurance policies that allows the policyowner to have
the cash surrender value of the policy used to purchase
a paid-up policy for a reduced amount of insurance.
Extended Term Insurance Option
A nonforfeiture option that provides
for the cash value to be used as a net single premium to
purchase term insurance for the face amount of the policy
at the insured's then attained age. The term insurance will
continue for as long as possible, but not beyond the term
of the original policy.
- The right to take out a
Policy Loan, provided that a loan value
exists.
The policyowner can borrow money (subject to some limitations)
from the insurer at a stated rate of interest by using the
policy's cash value as collateral. Any loan balance outstanding
at the insured's death would be deducted from any life insurance
death proceeds payable.
Automatic premium loan
If elected by the policyowner, the loan value of the policy
is used to pay a premium that has not been paid before the
end of the grace period.
- If the policy is participating, the
right to receive Dividends and
apply them under one of the available dividend options.
Dividend
In a mutual company, or company that issues a participating
policy, it is a share of the surplus earned by the Company
and reflects the difference between the premium charged
and the actual expense of the policy. Dividends and/or values
based on dividends should not be construed as guarantees
or even as estimates of dividends to be paid in the future.
Dividends will depend on the company's investment earnings,
claims experience and expenses in the future.
Dividend Options
The different ways in which the policyowner of a participating
insurer may elect to receive dividends, for example: in
cash, to reduce premium, to purchase additional paid-up
life insurance, left on deposit with the insurer at interest,
to purchase one-year term insurance and to increase cash
value.
- The right to assign Ownership
to someone else.
The policyowner may typically assign the ownership of the
policy. An absolute policy assignment will make the assignee
the owner. A collateral assignment will not cause an ownership
change, however, the rights of any owner, beneficiary, or
other payee will be subject to the terms of the collateral
assignment. The company is not responsible for the validity,
effect or sufficiency of an assignment.
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Free Look—Right
to Examine Policy
Generally, a life insurance policy may
be canceled for any reason within 10 days after it is received
by the policyowner by delivering or mailing it to the agent
through whom it was purchased or the home office of the company.
Upon cancellation, the company will refund any premium paid.
The policy will be considered void from its inception.
Grace Period
A grace period of 31 days after the premium
due date is generally granted for the payment of each premium
due after the first. During this period, the policy remains
in effect. If the insured dies during the grace period and
the premium has not been paid, any death proceeds will be
reduced by the premium amount due.
Reinstatement
If any premium is not paid before the
grace period ends, or with respect to universal life insurance
and current assumption whole life insurance policies, if the
policy's cash value is not sufficient to pay the monthly mortality
and expense charges, the policy will lapse. Typically the
policy may be reinstated within 5 years after lapse if:
- The policy has not been surrendered for cash.
- The insured is alive.
- Evidence of insurability satisfactory to
the company is given.
- All overdue premiums, or with respect to
universal life, overdue monthly deductions, are paid with
interest from the due date of each premium.
- Any policy indebtedness existing on the due
date of the unpaid premium is paid or reinstated with interest
from that date.
Incontestable
Clause
This provision provides that after a specified
period of time, usually 2 years from the policy issue date,
the company may not generally contest the policy.
Suicide Clause
If the cause of death of the insured is
by suicide within 1 or sometimes 2 years from the policy issue
date, the policy proceeds generally will be limited to the
premiums paid, reduced by the amount of any dividends paid
in cash, dividends applied in reduction of premium and any
outstanding loans with loan interest to date of death.
Misstatement of
Age or Sex
If the insured's age or sex is incorrectly
stated on the application, the amount payable will be the
amount which the premiums paid would have purchased for the
correct age and sex. Upon receipt of due proof, the company
will adjust the age and sex of the insured at any time.
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