Life Insurance Principles and Policy Provisions
Underwriting and insurable interest
Insurable interest must exist at policy issue, not at death. Underwriting classifies risk by age, sex, health, occupation, and avocations into preferred/standard/substandard, with representations on the application (not warranties) forming the basis of the contract.
Mandatory provisions to master
- Entire contract - policy plus attached application.
- Incontestability - after two years the insurer cannot rescind for misrepresentation (fraud in some states excepted); it never bars a claim for nonpayment of premium.
- Grace period - typically 30 or 31 days; coverage continues and unpaid premium is deducted from proceeds.
- Reinstatement - usually within 3–5 years with evidence of insurability and back premiums with interest; a new contestability and suicide period generally begins.
- Misstatement of age/sex - benefits are adjusted, not voided.
- Suicide clause - typically two years, during which only premiums are refunded.
Ownership, beneficiaries, options
Owner controls the policy, may assign it, borrow against it, or change a revocable beneficiary. Know primary/contingent, per stirpes vs. per capita, and the simultaneous death rule. Nonforfeiture options: cash surrender, reduced paid-up, extended term. Dividend options and settlement options (lump sum, life income, fixed period, interest only) appear in calculation questions.
Policy types and riders
Term, whole life, universal life, variable products; riders for waiver of premium, disability income, accidental death, guaranteed insurability, accelerated death benefit, and long-term care.
Worked rule of thumb
If the insured dies in year three after omitting a health condition, the insurer pays: the two-year contestability window has closed. If death occurs in year one from suicide, expect a premium refund only.
Traps
Reinstatement restarting contestability; incontestability not covering nonpayment; misstatement adjusting rather than voiding.