Life Insurance Policies, Provisions, Options, and Riders
Life Insurance Policies
Policy types and structures
Term insurance pays a death benefit for a set period and generally has no cash value. Level term keeps the face amount constant; decreasing term falls; renewable term guarantees renewal without new evidence at a higher premium; convertible term lets the owner exchange to permanent coverage without evidence of insurability. Whole life is permanent, with fixed premiums and guaranteed cash value; limited-pay and single-premium versions compress premium payments. Universal life separates mortality charges from cash value, allows flexible premiums and adjustable death benefits, and credits interest. Variable life and variable universal life invest cash value in separate accounts; they are securities and require a prospectus and appropriate securities registration. Indexed universal life credits interest by an index formula with caps, floors, and participation rates.
Dividends are paid on participating policies and are not guaranteed. Policy loans accrue interest and reduce death benefit and cash value if unpaid. Surrender charges may apply early.
Traps: ‘term builds cash value’ is false; ‘UL premiums are always guaranteed’ is false unless guaranteed UL; ‘variable products are just insurance’ ignores securities rules; ‘projected dividends are guaranteed’ is false.
Worked rule: match product to need. A 10-year mortgage need suggests term; a lifelong dependent or estate-liquidity need suggests permanent. If a UL illustration assumes premiums below the cost of insurance, the policy can lapse.
Provisions, Options, and Riders
Contract provisions, options, and riders
Life policies begin with ownership rights: the owner controls beneficiary designation, loans, surrender, and assignment. The entire-contract clause limits the contract to the policy and attached application. The free-look period lets the owner return the policy for a refund; Wyoming life policies generally provide at least 10 days. Grace period keeps coverage in force after a missed premium. Reinstatement requires evidence of insurability and payment of overdue premiums plus interest, usually within 3 years. Incontestability bars the insurer from contesting material misrepresentation after 2 years, but not nonpayment. The suicide clause typically limits payment to premiums returned if death occurs within 2 years. Misstatement of age or sex adjusts the benefit to what the premium would have bought.
Nonforfeiture options: cash surrender, reduced paid-up, extended term. Dividend options include cash, reduce premium, accumulate at interest, and paid-up additions. Settlement options include lump sum, interest only, fixed period, fixed amount, and life income. Beneficiary forms include primary/contingent, revocable/irrevocable, and per stirpes/per capita.
Riders: waiver of premium, disability income, accidental death, guaranteed insurability, child term, long-term care, and return of premium.
Traps: incontestability does not excuse premium nonpayment; ADB pays only for accidental death; waiver of premium usually has a waiting period; an irrevocable beneficiary must consent to changes.
Example: death by suicide 18 months after issue under a 2-year suicide clause: the insurer refunds premiums rather than paying the face amount.