Life Insurance Policy Provisions, Options and Riders
Core contract provisions
Entire contract - the policy plus the application constitute the whole agreement; only an authorized officer may change it. Free look - usually 10 days after delivery to return for a full refund. Grace period - typically 30 or 31 days after the due date; the policy stays in force and overdue premium may be deducted from proceeds. Incontestability - after two years the insurer cannot rescind for material misstatement (fraud and nonpayment of premium are different matters). Suicide clause - typically two years; after that, the death benefit is payable.
Misstatement of age/sex - the death benefit is adjusted to what the premium would have purchased at the correct age. Reinstatement - usually within 3 to 5 years, requiring evidence of insurability and payment of overdue premiums with interest; a new contestable period may apply to the reinstated policy.
Ownership, beneficiaries, settlement
The owner controls all rights; a collateral assignment pledges the policy to a lender, an absolute assignment transfers all rights. Beneficiaries: primary, contingent, revocable vs irrevocable (irrevocable requires consent to change). Per stirpes divides a deceased child's share among that child's heirs; per capita splits only among living beneficiaries. A common disaster clause sets the order of death if insured and beneficiary die together.
Riders
Waiver of premium, disability income, accidental death (pays a multiple, not a substitute for base coverage), guaranteed insurability, cost-of-living, child term, term rider, return of premium, and accelerated death benefit (living benefits often triggered by terminal illness).
Nonforfeiture, dividend, and settlement options
Nonforfeiture: cash surrender, reduced paid-up, extended term. Dividend options: cash, reduce premium, accumulate at interest, paid-up additions, one-year term. Settlement options: lump sum, interest only, fixed period, fixed amount, life income (with period certain or refund).
Trap: incontestability does not protect against nonpayment of premium, and a policy loan not repaid is deducted from proceeds.
Rule of thumb: two years covers both incontestability and suicide in most states.