Life Insurance Policy Provisions, Options and Riders
Contract provisions
The incontestability clause generally prevents the insurer from contesting the policy after it has been in force for two years, except for nonpayment of premium. The suicide clause limits payment if death by suicide occurs within a stated period, commonly two years. Misstatement of age or sex adjusts the benefit to what the premium would have purchased at the correct age or sex. Grace periods allow premium payment after the due date; if the insured dies during grace, unpaid premium is usually deducted. Reinstatement restores lapsed coverage, often requiring evidence of insurability and payment of overdue premiums. Policy loans accrue interest and reduce cash value and death benefit if unpaid. Nonforfeiture options-cash surrender, extended term, reduced paid-up-apply to permanent policies with cash value.
Options and riders
Settlement options determine how proceeds are paid: lump sum, interest only, fixed period, fixed amount, or life income. Dividend options include cash, premium reduction, accumulation, paid-up additions, and one-year term. Common riders include waiver of premium, disability income, accidental death, guaranteed insurability, child term, and long-term care or chronic illness riders. Beneficiary designations control proceeds; contingent and irrevocable beneficiaries have different rights.
Trap and rule
A policy loan is not taxable income while the policy remains in force, but it can cause a lapse and taxable gain. Read the trigger: after two years, most misrepresentation claims are barred, but nonpayment is still enforceable.