Life Insurance Products and Policy Provisions
Life Insurance Products and Policy Provisions tests product types and the clauses that decide what a policy pays on death, survival, surrender or lapse.
Product types
- Term assurance pays a death benefit only if death occurs within the term; it has no cash value and is the cheapest cover per unit of sum assured.
- Whole life pays on death whenever it occurs; premiums may be payable for life or a limited period, and cash values build up.
- Endowment pays a stated sum at maturity or on earlier death, combining protection and savings.
- Universal and investment-linked policies separate the protection element from an account invested in funds; the policyholder bears investment risk in unit-linked plans.
- Annuities convert capital into income: immediate or deferred, fixed-term or lifetime.
- Riders add cover: critical illness, disability, accidental death, waiver of premium. Each rider has its own terms and exclusions.
Key provisions
- Sum assured is the contractual amount; surrender value is what the insurer pays on early termination and is usually much lower.
- The free-look or cooling-off period allows cancellation for a refund, less any costs, within a short period after issue.
- A grace period allows late premium payment before the policy lapses. Lapse ends cover; reinstatement usually requires evidence of insurability and payment of arrears.
- Non-forfeiture provisions may convert a lapsed policy into reduced paid-up cover or pay a surrender value.
- Policy loans borrow against cash value; unpaid loans and interest reduce the death benefit.
- Incontestability periods limit the insurer's right to avoid a policy for misstatement after a set time, except for fraud in many regimes.
- Suicide clauses limit payment in the early years. Nomination names the person to receive the benefit; assignment transfers ownership rights.
Worked example
A whole-life policy with a 100,000 sum assured lapses after unpaid premiums. Before lapse it had a surrender value of 12,000. The insured dies two months after lapse without reinstatement. No death benefit is payable because cover ended; the insurer pays the surrender value or paid-up amount vested under the policy, according to the non-forfeiture clause.
Traps
Confusing sum assured with surrender value. Treating the nominee as the legal owner. Assuming reinstatement is automatic.