Policy Features and Clauses of Life Insurance

Policy features of Life insurance

• Effective Date of policy: Effective date of policy is the date that is given in the policy document with some of below details  

1. Complete protection that takes effect as of the policy effective date.
2. The Incontestability Clause’s contestable period begins.
3. The suicide clause begins.

• Backdating Policies

1. Backdating is the practice of allowing the policy effective date to be set in the past.
2. The maximum number of months for backdating a policy is six.
3. For most companies, backdating is good for sales. For instance, reducing the age of the proposed insured by a month can result in lower premiums. 
4. It can also allow applicants into the acceptable age range for policies that have age limits. 
5. Furthermore, by aligning with the policy owner’s income pattern or dates, it can make payments convenient. 

• Policy Provisions: Policy provisions act as contractual provisions defining the limits of a certain life insurance policy.

• Policy Clauses 

1. Ownership Clause: According to the ownership clause, the policy owner possesses all contractual
2. rights in the policy while the insured is still alive. Such rights include:
3. Selection of a settlement option  Naming and changing of the beneficiary designation  Assigning ownership of the policy to someone else  Selection of dividend options  Canceling the policy and selecting the non-forfeiture option
4. Taking out a policy loan

• Entire Contract Clause

1. According to the Entire Contract Clause, the Life Insurance document, the attached application, and riders constitute the complete contract between the insurer and policy owner.

Important Points: 

• To exercise these rights, the policy owner typically does not need the beneficiary's consent.
• No statement can be used by the insurer to void the policy unless the statement is a material misrepresentation and is part of the application. In addition, any officer of the company cannot change the terms of the policy unless the policy owner agrees to the change.

Incontestability Clause

Under the Incontestability Clause, the company is given a specific period of time, usually one to two years, to find out any cause for contesting the policy. After the contestable period has expired, the insurer cannot contest the policy. 

Suicide Clause

A typical Suicide Clause states that the face amount of the policy will not be paid if the insured commits suicide within a specific period of time, usually one to two years,after the policy is issued. The only payment is a refund of the premiums

Reinstatement Clause

If the premium is not paid during the grace period, a life insurance policy may lapse for nonpayment of premiums. The Reinstatement Clause allows the policy owner the right to reinstatement of a lapsed policy under certain conditions. The conditions are:

• The insured must provide evidence of insurability, a condition that insurers often waive for lapses of less than two months.

• All overdue premiums plus interest must be paid.

• A policy loan must be repaid or reinstated.

• The policy has not been surrendered for its cash value.

• The lapsed policy must be reinstated within a certain period, usually three to

seven years.

If the policy owner wishes to continue the same type of life insurance coverage, it usually is more economical to reinstate a policy than to buy a new one. This is because a new policy is likely to have a higher premium, since it will be issued

when the insured is older.

Misstatement Clause

The insured's age may be misstated in the application. Under the Misstatement Clause, the amount paid is the amount of life insurance that the premium would

have purchased at the insured's correct age.

EXAMPLE: 

• Assume that Mary's correct age is thirty but is incorrectly recorded in the application as age twenty-nine. Assume that the premium for an ordinary life application at age twenty-nine is $20.00 per $1,000.00 and $21.00 per $1,000.00 at age thirty.

• If Mary has $15,000.00 of Ordinary Life Insurance and dies, only 20/21 the of the proceeds will be paid, or $14,286.00.

Beneficiary Designations

The beneficiary is the person or party named in the policy to receive the policy proceeds. There are numerous Beneficiary Designations in life insurance. They include

the following:

The Primary Beneficiary – is the first party who is entitled to receive the proceeds at the insured's death.

The Contingent (Secondary) Beneficiary – is the beneficiary entitled to the policy proceeds if the primary beneficiary is not alive.

A Revocable Beneficiary – designation means that the policy owner has the right to change the Beneficiary Designation without the beneficiary's consent. An Irrevocable Beneficiary designation means that the policy owner cannot change the beneficiary without the irrevocable beneficiary's consent.

A Specific Beneficiary – designation means that the beneficiary is named and can be identified. For example, Martha Smith may be specifically named to

receive the policy proceeds if her husband should die.

A Class Beneficiary – designation means that a specific individual is not named but is a member of a group to whom the proceeds are paid.  One example of a

Class Beneficiary Designation would be "children of the insured”

Change of Plan Provision

The Change of Plan Provision allows the policy owner to exchange the present policy for a different one. If the change is to a higher premium plan, such as exchanging an ordinary life policy for an endowment at age sixty-five, the policy owner must pay the

difference in cash values between the two contracts plus interest at a stipulated rate.

Important Points 

• If the net amount at risk is reduced, evidence of insurability is not required. 

• If the net amount at risk is increased, evidence of insurability is required.