required povisions part 3 chpt4

Standard Policy Provisions in Life Insurance

Incontestability Clause

  • Definition: The incontestability clause is a provision that protects an insurance policy from being contested by the insurer after a certain period.
  • Duration: Effective for the first two years of a life insurance policy.
  • Implications:
    • During this two-year period, if an insurance company discovers misrepresentations made by the insured on the application (e.g., material misrepresentations or concealed information), it has the right to void the contract and is not obligated to pay any claims.
    • This provision helps the insurance company in mitigating adverse selection by eliminating bad risks—individuals who seek coverage by providing false information.

Post-Incontestability Period

  • After two years: The insurer cannot use material misrepresentation as a defense to deny coverage.
  • Exceptions:
    • Statements regarding the age or gender of the insured may still be contested after this period. This is because age and gender are critical factors in the underwriting process.
  • Non-Payment of Premiums: The incontestability clause does not protect against claims resulting from non-payment of premiums. If the premium is not paid within the grace period, the policy may lapse.

Misstatement of Age or Gender

  • Provision Details:
    • If a proposed insured misrepresents their age, gender, or identity, the insurance company may not discover this until a claim is made (e.g., when the death certificate reveals that the insured was older than stated on the application).
    • The insurance company operates under the assumption of the insured's longevity based on reported age and may charge a lower premium as a result.
  • Adjustment of Death Benefit:
    • Upon discovery of the misstatement, the insurer cannot void the policy outright but can adjust the death benefit according to what the insured would have acquired if the correct information had been reported.

Reinstatement Provision

  • Definition: Reinstatement involves putting a lapsed insurance policy back into force.
  • Time Limit: There is typically a specified time limit for reinstatement, generally up to three years after the lapse.
  • Reasons for Reinstatement:
    • Policyholders may prefer to reinstate rather than purchase a new policy to benefit from terms based on the original issue age. Insurers may know more about their underwriting conditions and features that may not be offered in newer policies.
  • Insurer’s Requirements:
    • The insurer is not obligated to reinstate a lapsed policy; they can establish conditions that must be satisfied for reinstatement, which may include:
    • Repayment of loans taken out against the policy with interest.
    • Proof of insurability through answering medical questions or undergoing physical examinations.
    • Note: If a policy has been surrendered, reinstatement is not possible.

Recap of Standard Policy Provisions

  • Standards Established By: The National Association of Insurance Commissioners (NAIC). Provisions may vary by state.
  • Purpose of Provisions: Designed to protect either the insurance company or the insured.
  • Key Provisions Include:
    • Owner's rights
    • Assignment
    • Entire contract
    • Insuring clause
    • Free look period
    • Consideration
    • Incontestability period
    • Misstatement of age or gender
    • Payment of premiums
  • Additional Provisions: Students should review their course materials for additional provisions relevant to their state's legal requirements.