Common Characteristics of Life Insurance Concepts
Common Characteristics of Life Insurance Concepts covers the policy contract itself: provisions, riders, nonforfeiture and dividend options, settlement options, and beneficiary designations. This is the highest-yield memorization area because nearly every question reduces to "which clause applies?"
Contract provisions
- Entire contract - the policy plus attached application (and riders) is the whole agreement.
- Incontestability - after two years the insurer cannot contest for misrepresentation; nonpayment and misstatement of age remain actionable.
- Grace period - 30 or 31 days; coverage continues and any unpaid premium is deducted from proceeds.
- Reinstatement - typically within 3–5 years with back premiums plus interest and evidence of insurability.
- Misstatement of age/sex - the benefit is adjusted to what the premium would have purchased; the policy is not voided.
- Assignment (absolute or collateral), policy loan up to cash value, automatic premium loan, free look.
Riders
Waiver of premium, disability income, accidental death (double indemnity), guaranteed insurability, child term, accelerated death benefit, long-term care, return of premium.
Nonforfeiture, dividends, settlement
Nonforfeiture: cash surrender, reduced paid-up, extended term. Dividends: cash, reduce premium, accumulate at interest, paid-up additions, one-year term. Settlement: lump sum, interest only, fixed period, fixed amount, life income (straight life, life with period certain, joint and survivor).
Worked example
A $150,000 policy names two children as primary beneficiaries. One dies before the insured, leaving two children. Under per stirpes, the surviving child takes $75,000 and each grandchild $37,500. Under per capita, the surviving child takes the entire $150,000. A common disaster clause delays distribution briefly so the contingent beneficiary can be identified.
Traps
Thinking incontestability blocks a claim for unpaid premium; voiding a policy for misstated age instead of adjusting the benefit; confusing reduced paid-up (smaller face, same endowment age) with extended term (same face, limited term); forgetting an irrevocable beneficiary must consent to changes; and assuming divorce automatically removes a named beneficiary - it generally does not unless the decree or state law says so.