Life Insurance Policy Provisions, Riders, and Options
Core contract provisions
Entire contract (policy plus attached application), incontestability (two years), grace period (commonly 30 or 31 days), reinstatement (evidence of insurability plus back premiums with interest), misstatement of age or sex (benefit adjusted, contract not voided), and suicide clause (typically two years, premium refunded). Free look is commonly 10 days.
Nonforfeiture options
- Cash surrender - take the cash value and terminate.
- Reduced paid-up - smaller face amount, fully paid, coverage continues for life.
- Extended term - same face amount continued as term coverage for a limited period.
Dividend options
Cash, reduce premium, accumulate at interest, paid-up additions, or one-year term.
Settlement options
Lump sum, interest only, fixed period, fixed amount, and life income (life only, period certain, refund, joint and survivor). Life only pays the largest monthly check because nothing is guaranteed to survivors.
Common riders
Waiver of premium, disability income, guaranteed insurability, accidental death (double indemnity), accelerated death benefit, long-term care, child term, payor benefit, and return of premium.
Rule of thumb
Ask whether an option changes the face amount or the duration. Reduced paid-up shrinks the face and keeps the time; extended term keeps the face and shrinks the time.
Traps
Incontestability never excuses nonpayment of premium. An unpaid policy loan reduces the death benefit and can create taxable income if it exceeds cost basis. Assignment is either absolute (ownership transferred) or collateral (security for a loan).