Life Policy Provisions

General Exclusions in a Life Contract

Life insurance policies also included provisions and exclusions to protect the insurer in the event of likely death or illegal activity that might affect a life insurance policy's proceeds.

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 date on which payments must be received to maintain the life policy. A policyowner can pay on a monthly, quarterly, semi-annual, or annual basis.

Incontestable Clause Exceptions

-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.

Assignment Provision

A life insurance policy is the property of the policyowner, and as such, he or she can 'assign,' or transfer, ownership to another individual in which the policyowner chooses. The process of transferring ownership of a life insurance policy from one policyowner to another is known as policy Assignment. The transferring policyowner is referred to as an 'assignor,' and the individual receiving the policy is known as the 'assignee.'

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

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.

Absolute Assignment

In an 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.

Ownership Clause

A life insurance policy is a legal document that creates ownership for the policy's owner as long as insurable interest exists at the time of application between the policy's owner and the insured individual for which the policy is underwritten, whether it be the same person or two different people. 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, as well as decide the revocable or irrevocable status of the beneficiary.

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's grace period extends for either 30 or 31 days after the date in which the premium is normally due.

Collateral Assignment

In a 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.

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, this provision details the policy's documents, including the policy application and any attached riders that may have been added to the policy. This provision also prohibits the insurer and the insured from making any changes to the contract, whether by outside documents or by oral statements (parol evidence rule)

The Uniform Simultaneous Death Act

This Act, established under the U.S. Uniform Probate Code and adopted by most states, defines the outcome of a life policy's proceed distribution in the event that both the policy's insured and primary beneficiary die in the same accident and no proof exists of who lived longer. As defined by the Act, in the event that it is unclear who out lived the other, the courts will decide that the insured has outlived the primary beneficiary, and if a contingent beneficiary is named, he or she will receive the death benefit proceeds. If no contingent beneficiary is named in the policy, the death benefit proceeds will be paid to the policyowner's estate.

Common Disaster Clause

To further define who receives death benefits in the event of the simultaneous or nearly simultaneous death of both the insured and primary beneficiary, a policyowner can include a common disaster clause to the life policy.

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.

In order to reinstate a lapsed policy, the policyowner must satisfy the following requirements:

-Any missed premiums must be paid with interest -Any outstanding loan(s) must be paid back to the insurer -Evidence of insurability is often required to reinstate a life policy -A time limit is enforced when reinstating a policy of 3 to 7 years depending on the insurer -If the reinstated policy has already satisfied the original contract's incontestability period, it can only be contested on fraud or misrepresentation of material facts relative to the reinstated policy -The suicide provision associated with the original policy is maintained, but no additional exclusionary time is added when reinstating a life policy

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.

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

Spendthrift Clause

If established by the policyowner, this life policy clause protects the proceeds of a life insurance policy from the beneficiary's spending habits or any redirection of proceeds to any of the beneficiary's creditors. Under this clause, the beneficiary cannot receive a lump sum benefit or assign proceeds directly to a creditor, nor can a beneficiary surrender benefits for a present value lump sum. Essentially, this clause ensures that the intentions of the policyowner are carried out when the policy's death benefit is distributed to the policy's beneficiary.

Suicide Clause

This clause is designed to deter potential suicide contemplation and usually extends for the first 2 years after policy issuance. If the insured commits suicide within the first 2 years, the insurer will refund the premium paid to the policyowner, or to the designated beneficiary if the insured and policyowner are the same individual. If the insured commits suicide after the first 2 years, the insurer is obligated to pay the death benefit to the designated beneficiary.

common life policy exclusions

-False pretense or information provided on the application for life insurance with the intent to deceive and defraud the insurer -If the policyowner dies as a result of a felonious act, death benefits will not be given to a beneficiary -Private aviation (flying a private airplane) is often excluded due to the elevated risk level associated with such profession or hobby. This exclusion normally pertains to private aviation, and not if death occurs during commercial aviation, such as being a passenger on a commercial airline -Hazardous occupations or hobbies that are considered dangerous, such as structural metal workers, miners, heavy-equipment operators, stuntmen, race car drivers and other 'hazardous' occupations or hobbies are usually excluded from applying for coverage, though employers of these occupations often provide special protection for their employees -Death resulting from military service is typically excluded from coverage. Death benefits will not be paid if the policyowner's death is the result of participation in war. Military personnel receive governmental coverage under the rules and regulations of the U.S. military