Life Insurance Policy Provisions, Options and Riders
Contract mechanics
Life policies contain standard provisions that set the rules for claims and changes. The entire contract clause limits the agreement to the policy and attached application. Incontestability generally prevents the insurer from contesting the policy after a stated period, often two years, for misstatements except nonpayment. The grace period allows premium payment after the due date. Reinstatement may restore a lapsed policy after evidence of insurability and payment of overdue premiums. Misstatement of age or sex adjusts benefits rather than voiding the contract. Suicide clauses limit payment during an early period, usually returning premiums. Policy loans are available from cash value and reduce proceeds if unpaid.
Nonforfeiture options apply when a cash-value policy is surrendered: cash surrender, reduced paid-up, or extended term. Dividend options include cash, premium reduction, accumulation at interest, paid-up additions, and one-year term. Settlement options determine how proceeds are paid: lump sum, interest only, fixed period, fixed amount, or life income. Riders add benefits such as waiver of premium, disability income, accidental death, child term, guaranteed insurability, long-term care, and return of premium.
Traps
Incontestability does not excuse nonpayment of premium. A policy loan is not taxable while the policy remains in force, but unpaid loans reduce the death benefit. Reinstatement can restart contestability for statements in the reinstatement application.
Worked rule
If the insured dies with an unpaid loan and interest, the insurer deducts the debt from the death benefit. The beneficiary receives the net amount, not the full face amount.