Life Insurance Fundamentals and Policy Provisions
Domain 1: Life Insurance Fundamentals and Policy Provisions
This domain tests how a life insurance contract is formed, what the insurer promises, and how standard provisions allocate risk among insurer, owner, and beneficiary. Expect questions on insurable interest, contract characteristics, required policy provisions, beneficiary designations, and settlement options.
Core rules
- Life insurance is a valued contract: the insurer pays the face amount, not reimbursement of loss. Insurable interest must exist at policy inception, not at death.
- The contract is unilateral, aleatory, and one of adhesion: the insurer drafts it, and ambiguity is construed against the insurer.
- Standard provisions include entire contract; incontestability after two years; grace period; reinstatement within three years; misstatement of age or sex adjusting the benefit; suicide exclusion typically two years; and a free-look period.
- Ownership rights belong to the policyowner: change a revocable beneficiary, assign, borrow, surrender, and choose settlement options. An irrevocable beneficiary must consent to changes.
- Nonforfeiture options on cash-value policies are cash surrender, reduced paid-up, and extended term. Dividend options are not guaranteed.
- Settlement options include lump sum, interest only, fixed period, fixed amount, life income, and joint and survivor.
Worked example
A 45-year-old buys a $500,000 policy and names a revocable beneficiary. The insured dies by suicide 18 months later. Because the suicide clause is still in force, the insurer typically returns premiums paid rather than paying the face amount. Had death occurred after the clause expired, the face amount would be payable, subject to the incontestability provision.
Traps that cost marks
Do not confuse incontestability with the suicide clause; they are separate defenses with separate periods. Do not assume a conditional receipt always creates immediate coverage; it depends on the stated conditions. Do not change an irrevocable beneficiary without consent. Do not treat per stirpes as identical to per capita.