Life Insurance Policies and Policy Provisions, Options and Riders
Life Insurance Policies and Policy Provisions
Contract provisions
A life policy is a unilateral contract: only the insurer makes an enforceable promise. Common provisions include the entire-contract clause, free-look period, grace period, incontestability clause, misstatement of age or sex, suicide clause, reinstatement, automatic premium loan, policy loans, assignment, dividends, nonforfeiture options, and settlement options.
The incontestability clause generally bars the insurer from contesting the policy after it has been in force for two years, except for nonpayment. Misstatement of age or sex adjusts the benefit rather than voiding the contract. Suicide clauses commonly return premiums if death occurs within the first two years. Reinstatement usually requires evidence of insurability and payment of overdue premiums with interest.
Nonforfeiture and settlement
If a whole life policy lapses, nonforfeiture options include cash surrender, reduced paid-up, and extended term. Settlement options include lump sum, interest only, fixed period, fixed amount, and life income.
Traps
Incontestability does not protect against nonpayment of premium. A policy loan is not taxable income while the policy remains in force. Extended term keeps the original face amount for a limited time; reduced paid-up keeps coverage for life at a lower face amount.
Worked example
An insured dies by suicide in year three of a policy with a two-year suicide clause. The insurer pays the death benefit, not merely a premium refund. Rule of thumb: contestability and suicide clauses typically run two years.
Options and Riders
Common riders
Riders customize a base policy. A waiver of premium rider waives premiums if the insured becomes totally disabled, keeping the policy in force. A disability income rider pays a monthly benefit, unlike waiver of premium. An accidental death benefit rider pays an additional amount if death results from an accident within a stated period. Guaranteed insurability riders let the owner buy additional coverage at specified ages or events without new evidence of insurability.
Other riders include term riders, family income, return of premium, long-term care, accelerated death benefit, critical illness, child term, cost-of-living, and conversion or exchange privileges. An accelerated death benefit allows part of the death benefit to be paid early on proof of a qualifying terminal or chronic condition; it reduces the eventual death benefit. Long-term care riders may pay for qualified care and can be structured as reimbursement or indemnity benefits.
Traps
Accidental death benefits are additional benefits, not a replacement for the base policy. Waiver of premium does not pay cash to the insured. Accelerated benefits reduce the death benefit and may create tax questions. Guaranteed insurability has age and amount limits.
Worked example
An insured becomes totally disabled and has waiver of premium but no disability income rider. The insurer waives premiums and keeps the policy in force, but no monthly income is paid. Rule of thumb: waiver keeps coverage alive; disability income replaces earnings.