Life Insurance Policies, Provisions, Options and Riders
Life Insurance Policies: Term, Whole Life, Universal and Variable
The contract skeleton
Every policy states the face amount, the parties (owner, insured, beneficiary, insurer), the insuring clause, the consideration clause, and the entire contract clause, plus free-look rights and signatures. The premium mode (annual, semiannual, quarterly, monthly) affects total outlay: fewer installments usually means less total cost because of interest and expense loading.
Product families
Term insurance provides pure death protection with no cash value: level, decreasing (typically mortgage protection), increasing, annually renewable, renewable (continued without new evidence of insurability to a stated age), and convertible (exchanged for permanent coverage, generally without evidence of insurability).
Whole life is permanent with level premiums, guaranteed cash value, and dividends if participating. Variants include straight life (premiums to age 100 or 121), limited-pay (20-pay, paid-up at 65), and single premium.
Universal life separates the death benefit from the cash account: the owner's payment covers the cost of insurance plus expenses, and the insurer credits current interest. Current interest and current mortality charges are not guaranteed, but the contract does guarantee a minimum interest credit and a maximum cost of insurance. Death benefit Option A is level; Option B equals face amount plus accumulated account value.
Variable life places cash value in separate-account subaccounts; the owner bears the investment risk, values are not guaranteed, and selling it requires a state insurance license plus a securities registration.
A modified endowment contract (MEC) fails the 7-pay test and loses favorable tax treatment: loans and withdrawals are taxed gain-first with a 10% penalty before age 59½.
Trap: Dividends and illustrated values are never guaranteed, and universal life does not guarantee its current interest rate or current cost of insurance.
Rule of thumb: Term = protection only. Permanent = protection plus cash value, and the products differ mainly in who carries the investment risk.
Provisions, Options and Riders: The Policy's Operating Rules
Standard provisions
The entire contract clause limits the agreement to the policy plus the attached application. The incontestability clause bars the insurer, usually after two years from issue, from contesting the policy for misrepresentation on the application - but it never bars collection of unpaid premium. A misstatement of age or sex is not contested; the death benefit is adjusted to what the premium would actually have purchased. The grace period (7 days weekly, 10 days monthly, typically 31 days for other modes) keeps coverage in force past the due date. Reinstatement is generally available within three years with evidence of insurability and payment of overdue premiums with interest. The suicide clause (usually two years) returns premiums rather than paying the face amount. The free look (commonly 10 days) allows an unconditional return for a full refund.
Policy loans accrue interest and reduce both cash value and death benefit; if loan plus interest exceeds cash value, the policy lapses and the excess becomes taxable gain.
Riders and options
Common riders: waiver of premium, disability income, accidental death and dismemberment (a multiple of face for accidental death, smaller sums for loss of limbs or sight - a rider, never the base contract), guaranteed insurability, cost-of-living, return of premium, child term, term rider, long-term-care and critical-illness riders, and accelerated death benefits.
Nonforfeiture options: cash surrender, reduced paid-up, and extended term. Dividend options: cash, reduction of premium, accumulation at interest, paid-up additions, and one-year term.
Settlement options: lump sum, interest only, fixed period, fixed amount, and life income - straight life (highest payment, nothing to survivors), life with period certain, life with refund (installment or cash), and joint and survivor.
Trap: Incontestability covers misrepresentation, not nonpayment of premium; the suicide clause pays premiums, not the face amount.
Rule of thumb: Misstate your age, and the benefit is adjusted - the policy is never voided for it.