Life Insurance Lesson 5

Misstatement of Age or Sex Provision

In the event that a misstatement of age or sex occurs on the application for life insurance, the insurer will adjust the amount of future premiums and request payment of the additional premium that the policyowner should have paid. If a misstatement of age or sex is found by the insurer upon the insured's death, the death benefit will be adjusted to reflect premiums paid corresponding with the correct age or sex of the insured.

Entire Contract Provision

Located at the beginning of an insurance contract, it will detail the policy's documents, include the application that the prospect originally completed for the policy and attach any riders that may be included on the plan. Also, it prevents both the insurer and insured from making any changes to the contract whether by outside documents or by oral statements (parol evidence rule)., ***Found at the beginning of the policy, saying that the policy cannot refer to any outside documents as being part of the contract and prohibiting the insurer from making any changes to the policy after it has been issued. (can only make good changes not bad)

Assignment Provision

The process of transferring or assigning ownership of a life insurance policy from one policyowner to another

Insuring Clause

Written into all life insurance policies, the insuring clause states that an insurance company will honor its obligation to pay benefits in the event of an insured's death.

Ownership Clause

A life insurance policy is not a 'personal contract' between the insurance company and the insured individual. Life insurance is considered legal property of the policyowner and the policyowner has the right to designate the policy's beneficiary and any contingents, decide the revocable or irrevocable status of the beneficiary.

Suicide Clause

A provision stating that if the insured dies by suicide during the first two years the policy is in force, the death benefit will equal the amount of the premium paid If the insured commits suicide after the first 2 years, the insurer is obligated to pay the death benefit to the designated beneficiary.

Incontestable Clause

After a specific period of time (usually 2 years, but in some states only 1 year), as long as a policy remains in force, an insurance company cannot contest the validity of a policy and must pay its death benefit, even in the event that a policyowner intentionally concealed material facts or committed other forms of fraud, with the exception of the following: - Impersonation: If an insurance plan is completed by one applicant but signed by another. - No insurable interest at time of application: In order for an insurance contract to be valid, insurable interest must be present at the time of application. - Intent to murder: The life contract would not have legal purpose; therefore it would be considered to be a void contract.

Automatic Premium Loan Provision

In the event that a premium is not paid after the policy's grace period has ended, this provision will automatically take the required premium amount from the policy's cash value in order to prevent the policy from lapsing.

Free-Look Provision

Specifies a period of time in which a policyowner has the right to review and reject his or her insurance policy if not completely satisfied with its coverage. Although it varies based on each states' laws, this period extends 10-14 days from the date of receiving a new policy from the insurer.

Consideration Clause

Specifies the premium amount and frequency that payments must be made to maintain the policy. A policyowner can pay on a monthly, quarterly, semi-annual, or annual basis depending on his or her ability to afford such payments.

Reinstatement Provision

If a life insurance policy does lapse, either by accident or on purpose, the policyowner has, within a specified amount of time, the right to reinstate his or her contract as of the date that the policy lapsed. Under policy 'reinstatement,' once the policy is reinstated by the insurer, the original provisions of the life insurance contract continue to apply as if coverage never lapsed. Although the policyowner is responsible for fulfilling certain requirements in order to reinstate a lapsed policy, it is often wiser to reinstate a long-term policy than to purchase a new policy. In the case of a long-term life policy, one benefit of policy reinstatement is that a policy issued years ago, or at a younger age, would generally be issued at a lower premium rate than what would be available for a similar policy purchased today. Maintaining the original policy's lower interest rate on policy loans may also be beneficial in comparison to current rates associated with a new policy. In the case of a policy issued recently that has lapsed, it might prove to be more beneficial to attain a new policy if a lower premium rate is offered in comparison to the original lapsed policy's rate; however, it is never advised to repeatedly allow life policies to lapse as the underwriting and issuance of a life insurance policy is costly to the insurer.

Collateral Assignment

the policyowner assigns his or her policy to a creditor as collateral for a debt. This approach is often taken in the event that the policyowner or insured dies. The debt owed to the creditor can be paid from the policy's death benefit proceeds. Any death benefit proceeds remaining after the creditor's debt is paid are then paid out to the policy's beneficiary.

Absolute Assignment

the assignee gains full control of the policy and acquires all rights of the policy upon transfer. This approach prohibits the assignor from any further control after such transfer.

Grace Period Provision

If a policyowner fails to pay his or her life insurance policy's premium by the date stated in the contract, the policy's grace period will prevent the policy from lapsing. Typically, a life insurance policy grace period extends for either 30 or 31 days after the date in which the premium is normally due.

Policy Loan Provision

Cash value life insurance policies include a provision allowing the policyowner to borrow against the policy's cash value in the form of a loan from the life insurer, or use it as collateral on a loan, after it has been in force for a period of time, typically 3-5 years after policy issuance. Loans made against a policy's cash value cannot exceed the amount accumulated and is not intended to be taken out in order to pay the policy's premiums. Although the insurer charges interest on loans taken by the policyowner, unlike a typical bank loan, the policyowner is not required by law or by the insurer to pay back the loan to the insurer. Instead, the loan is considered to be an advance on the policy's cash value which is ultimately paid out to the policyowner upon surrender, or to the policy's beneficiary upon the death of the policyowner, or named insured, if not the same individual.