Life Insurance 101: Common Provisions


[This is part 6 of a 9-part series. For a full overview of topics, see the Life Insurance Basics page.]

A life insurance policy is a legal document, and as such it can be somewhat intimidating. However, the life insurance industry is highly regulated and policies contain many standard provisions. In this chapter, we will discuss some of the more common ones. Let's start with the parties involved in the policy: the insurer, the insured, the owner, and the beneficiaries.

 - The insurer is the company who underwrites the policy and promises to pay the death benefit upon the death of the insured.

 - The insured is the person whose life is insured under the policy. In some cases a policy can be written on more than one person such as in a second-to-die policy, which is used for estate planning.

 - The owner of the policy is often the insured, but does not have to be. The owner retains all the rights in the policy including the right to surrender the policy, to borrow from the cash value, to designate/change beneficiaries, and to assign ownership to another party.

 - The beneficiary receives the death benefit upon death of the insured. The primary beneficiary is the "first in line" to receive the benefit. A contingent beneficiary can be designated to receive the benefit if the primary beneficiary is deceased. The owner can designate multiple primary and contingent beneficiaries and specify a share for each. Beneficiaries are normally people, but trusts can also be designated. Some companies have a standard beneficiary designation which has the spouse as primary, then children as contingent, then parents, siblings, etc.

The following are other common provisions:

 - Free Look Provision. This gives the policy owner a period of time to return the policy after acceptance and receive all premiums paid. Ten days is common.

 - Grace Period. This grants the policy owner an additional period of time to pay the premium after it has become due. Thirty-one days is common.

 - Suicide Clause. Generally, insurers will not cover a death caused by a suicide that occurs during the first two years of the policy.

 - Incontestable Clause. This provision makes the life insurance policy incontestable by the insurance company after the policy has been in force for a certain period of time. Two years is the norm. There are a few permitted exceptions, so read this clause carefully.

 - Reinstatement. This provision allows a policy owner to reacquire coverage under a policy that has lapsed due to failure to pay premiums. Normally, new proof of insurability and payment of all missed premiums will be required and three years is the normal window available.

 - Policy Loan. The ability to borrow from the cash value is required by law. This section of the policy provides the requirements for taking out a policy loan. Most insurers include an "Automatic Policy Loan" provision which permits them to borrow money from the policy's cash value to pay any unpaid premiums. This protects the insured from losing their coverage if a payment is inadvertently missed.

 - Settlement Options. This provision details the various options for paying out the death benefit to the beneficiaries. Chapter 8 in this series will discuss Settlement Options in greater detail.

 - Accelerated Benefits (Optional). Many insurers include a provision that permits an early withdrawal of death benefits if the insured becomes terminally ill. Less than 24 months to live is the normal provision.

 - War Clause (Optional). Insurers may include a provision that will not cover a death if it is caused by an act of war. Servicemembers should be aware of this provision when buying life insurance.

The provisions above are some of the more important ones that will be found in a life insurance policy. As with any legal document, it is important to read it over carefully and to ask the insurer questions if you have any concerns. This is especially important if there are any exclusions such as a war or terrorism clause. In the next chapter, we will discuss the common riders that can be added to a policy.

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