Life Insurance Products and Features
This domain tests the main life insurance structures and the contractual features that determine whether and how a death benefit is paid. Expect questions on term, whole life, universal life, annuities, beneficiaries, riders, incontestability, suicide clauses, grace periods, reinstatement, nonforfeiture, policy loans, and dividends.
Core rules
- Term insurance provides pure death protection for a stated period and generally has no cash value.
- Whole life uses level premiums and builds guaranteed cash value; universal life separates the insurance and savings elements and allows flexible premiums subject to cost-of-insurance charges.
- Annuities address longevity risk by converting capital into income; they are not primarily death-benefit products.
- The beneficiary designation controls proceeds and generally overrides a will. A revocable beneficiary may be changed by the owner; an irrevocable beneficiary generally cannot.
- Incontestability limits the insurer's right to contest a policy for misrepresentation after a stated period, commonly two years. Suicide exclusions also commonly run for two years.
- Grace periods protect against accidental lapse. Reinstatement may require evidence of insurability and payment of overdue premiums.
- Policy loans accrue interest and reduce cash value and death benefit if unpaid. Dividends are not guaranteed unless the contract says so.
Worked example
An applicant omits a heart condition. The insured dies in year three after the contestability period has expired. In most jurisdictions the insurer generally must pay, subject to limited exceptions such as fraud or nonpayment. If death had occurred in year one, the insurer could contest the policy and potentially rescind it. The reasoning is that the contestability clause creates a time limit on avoidance for material misrepresentation.
Traps that cost marks
- Confusing cash value with the death benefit.
- Assuming a will overrides a beneficiary designation.
- Forgetting that term insurance usually has no cash value.
- Ignoring policy-loan interest and repayment effects.