FIN 4320 Risk Management & Insurance - Chapter 12: Life Insurance Contractual Provisions

Life Insurance Contractual Provisions
  • What is a Provision?
    • According to Insuranceopedia Dictionary "The Insurance Business,"
    • Policy provisions are clauses within an insurance contract that precisely define the conditions under which coverage is provided, the specific amounts covered, and any applicable exclusions or other restrictions.
Key Contractual Provisions

  • Ownership Clause

    • The policyowner possesses all contractual rights while the insured is alive.
    • These rights include:
      • Naming the beneficiary.
      • Deciding the method of how proceeds will be paid.
      • Assigning the policy (an absolute assignment is permanent and irrevocable).
      • Determining the payment schedule (mode).
      • Deciding how dividends, if any, will be used.
      • Deciding whether the policy should be converted.

  • Entire-Contract Clause

    • This clause stipulates that the insurance policy and the application, when attached, constitute the complete and sole contract.
    • No other documents or verbal agreements are considered part of the contract.
    • Neither the insurer nor the insured can alter the policy without the other's mutual consent.
    • Any changes to the policy necessitate the signature of an authorized officer of the insurance company.
    • Riders are specific amendments or additions that can be used to make changes or add provisions to the policy.

  • Incontestable Clause

    • This provision prevents the insurer from voiding the policy after it has been in force for a specific period, typically two years, starting from the policy's issue date.
    • Exception: This clause does not apply in cases of non-payment of premiums.
    • Purpose: The primary goal is to protect the beneficiary, especially since the insured is deceased and cannot defend against allegations made by the insurer.
    • Can Contest 'Outrageous' Fraud: Despite the clause, an insurer can contest the policy in cases of severe or 'outrageous' fraud, such as:
      • Murder committed to collect the proceeds.
      • Lack of insurable interest at the policy's inception.
      • Fraudulent impersonation of the applicant during the medical exam and application process.

  • Suicide Clause

    • Life insurance policies generally do not cover death by suicide if it occurs within a specified period from the policy's effective date, usually two years.
    • The insurer bears the burden of proving that suicide was the cause of death.
    • If suicide is proven to be the cause of death within the non-coverage period, the beneficiary typically receives only the total amount of premiums paid, without any interest.

  • Grace Period

    • This is a limited time frame allowed for the policyowner to make a late premium payment before the policy lapses.
    • The standard grace period is usually 3131 days.
    • During the grace period, the life insurance protection remains active.
    • The provision is designed to accommodate temporary financial shortages or unintentional oversights in premium payment.

  • Reinstatement Clause

    • This clause outlines the specific requirements that must be met to reinstate a lapsed policy.
    • Requirements for Reinstatement:
      • The insured must provide satisfactory proof of insurability to the insurer.
      • All overdue premiums, plus any accumulated interest, must be paid in full.
      • All outstanding policy loans (money borrowed against the policy's cash value), plus accrued interest, must be repaid.
      • The request for reinstatement typically must be made within a specified timeframe, commonly 33 years from the lapse date.
    • Limitation: Policies that have been surrendered for their cash value cannot be reinstated.
    • New Incontestable Period: A new incontestable period, usually 22 years, begins for any statements made on the reinstatement application.
    • Benefits of Reinstating:
      • The old policy might contain more generous or liberal provisions.
      • It may offer lower interest rates on policy loans.
      • The original suicide clause may have expired.
      • Potentially lower premiums compared to purchasing a new policy at the insured's current age.
    • Disadvantages of Reinstating:
      • May require a substantial cash outlay to cover back premiums and loan repayments.
      • In some cases, a new policy might offer a lower premium based on current market conditions or the insured's improved health profile, negating the premium advantage of the old policy.

  • Misstatement of Age or Sex Clause

    • This clause addresses situations where the insured's age or sex has been incorrectly stated on the application, regardless of whether it was intentional or unintentional.
    • If the Insured is Alive: The insurer will adjust future premium payments and may request back payments for any underpaid premiums, including interest.
    • If the Insured is Dead: The insurer will adjust the death benefit payable to the beneficiary to the amount that the premiums paid would have purchased at the correct age or sex.