Life insurance policies contain numerous contractual provisions. This section discusses the major contractual provisions that life consumers should understand.
Ownership Clause; The owner of a life insurance policy can be the insured, the beneficiary a trust or another party. In most cases, the applicant, insured and owner are the same person. Under the ownership clause, the policyholder possesses all contractual rights in the policy while the insured is living. These rights include naming and changing the beneficiary, surrendering the policy for its cash value, borrowing the cash value, receiving dividends and electing settlement options. These right generally can be exercised without the beneficiary’s consent. The policy also provides for a change of owner ship. The policyholder can designate a new owner by filling an appropriate form with the company.
Entire Contract Clause; The entire contract clause states that the life insurance policy and attached application constitute the entire contract between the parties. All statements in the application are considered to be representations rather than warranties. No statement can be used by the insurer to void the policy unless it is a material misrepresentation and is part of the application. In addition, the insurer cannot change the policy terms unless the policyholder consents to the change.
Incontestable Clause; The incontestable clause states that the insurer cannot contest the policy after it has been in force two years during the insured’s lifetime. After the policy has been in force for two years during the insured’s lifetime, the insurer cannot later contest a death claim on the basis of a material misrepresentation, concealment or fraud when the policy was first issued. The insurer has two years in which to discover any irregularities in the contract. For example, if Tony age is 25 and he applies for a life insurance policy, conceals the fact that he has high blood pressure and dies within the two year period the insurer could contest the claim on the basis of a material concealment. But if he dies after expiration of the period, the insurer must pay the claim.
Suicide Clause; Most life insurance policies contain a suicide clause. The suicide clause states that if the insured commits suicide within two years after the policy is issued the face amount of insurance will not be paid. In some life insurance will not be paid there is only a refund of the premiums paid. In some life insurance policies, suicide is excluded for only one year. If the insured commits suicide after the period expires, the policy proceeds are paid just like any other claim.
Grace Period; A life insurance policy also contains a race period during which the policyholder has a period of 31 days to pay an overdue premium. Universal life and other flexible premium policies have longer grace periods such as 61 days. The insurance remains in force during the grace period the overdue premium is deducted from the policy proceeds.
Reinstatement Clause; A policy may lapse if the premium has not been paid by the end of the grace period, or if an automatic premium loan provision is is not in effect. The reinstatement provision permits the owner to reinstate a lapsed policy.
The following requirements must be fulfilled to reinstate a lapsed policy;
- Evidence of insurability is required.
- All overdue premiums plus interest must be paid from their respective due dates.
- Any policy loan must be must be repaid or reinstated with interest from the due date of the overdue premium.
- The policy must not have been surrendered for it’s cash value.
- The policy must be reinstated within a certain period, typically three or five years from the date of lapse.
So all these are the Life Insurance Contractual Provisions.
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