Life Insurance Contracts: What Provisions Are Required?

Life insurance contracts, like most contracts, have common provisions. While some provisions may vary from policy to policy and company to company, there are certain provisions that are required by law to be included in every life insurance policy. These provisions uphold the foundation upon which life insurance is built. This article will explore the various mandatory provisions within a life insurance contract, shedding light on the rights and responsibilities of both the insured and the insurer. Understanding these provisions is crucial for individuals seeking to protect their loved ones and secure their financial future.

Grace periods

A grace period in a life insurance contract is a set amount of time after your premium is due, during which policyholders may make a premium payment without their coverage lapsing. It acts as a cushion and can be useful if you're unable to pay your premium on time for any reason. The grace period typically lasts between 28 and 31 days, but it can depend on the insurance company and the type of policy you have. It is mandated by every single state in the United States.

During the grace period, the policy remains in force, and the insurance company will cover any services the policyholder receives. If the insured dies during the grace period, the insurance company may deduct any premium due from the death benefit. It's important to note that grace periods are not the same as late remittance offers, which are made at the insurer's discretion and do not extend coverage.

If you don't make a premium payment by the end of the grace period, your policy will lapse, and your beneficiaries will not be entitled to a death benefit. However, a lapsed policy can often be reinstated, but it may involve fulfilling certain requirements set by your insurance company, such as a reinstatement application, paying missed premiums, or undergoing a medical exam.

To avoid missing premium payments, you can set up automatic payments or use electronic funds transfer. Additionally, it's a good idea to review your insurance contract to understand the specific grace period, terms, and conditions of your policy.

Late remittance offers

A late remittance offer is when an insurance company accepts an overdue premium payment after the grace period has passed and reinstates the policy without requiring the policyholder to complete a reinstatement application. It is important to note that this is not an extension of the grace period, and coverage is not continued as a result of the offer. These offers are made to encourage the policyholder to reinstate the policy.

The specifics of late remittance offers can vary among insurance companies and policies. Some insurers may require evidence of insurability before considering reinstating a policy that has lapsed due to non-payment of premiums. Policyholders should be aware that if they exceed the allotted grace period, the insurance company may terminate their policy. Therefore, it is crucial to understand the terms and conditions of your policy to avoid potential consequences.

To prevent losing your life insurance coverage due to non-payment, consider setting up automatic payments or quarterly/annual premium payments. Another option is to add a Waiver of Premium Policy Rider, which waives premium payments during prolonged periods of unemployment due to qualifying illnesses or disabilities. Additionally, selecting the automatic premium loan provision allows for a loan to be taken against the cash value of your policy to pay overdue premiums, provided there is sufficient cash value built up.

In summary, late remittance offers are a discretionary measure by insurance companies to accept overdue premium payments and reinstate policies without requiring a formal application process. These offers are intended to encourage policyholders to get back on track with their payments, but they do not extend coverage. Policyholders should be mindful of their payment deadlines and explore available options to maintain their life insurance coverage in case of unexpected circumstances.

Incontestable clause

An incontestability clause is a provision in a life or disability insurance policy that prevents the insurance company from cancelling the policy based on misstatements in the policy application after the insurance has been in effect for a certain period of time, usually two years. This clause is designed to protect the insured from insurance companies attempting to avoid paying benefits in the event of a claim.

Most life insurance policies include an incontestability clause, which is one of the strongest protections for a policyholder or beneficiary. While many other legal rules for insurance favour the insurance companies, this rule is notably and strongly on the side of the consumer.

The incontestability clause forbids insurance companies from voiding coverage if the insured misstates information after a contestability period, typically of two or three years. This period begins the moment the life insurance policy is purchased. After this time, the insurance company cannot contest the validity of the policy for any reason other than failure to pay the premiums.

The purpose of incontestability clauses is to encourage insurance companies to underwrite policies before their issuance, and not after a claim is submitted. They also give insureds peace of mind that once their coverage has been in effect for more than two years, an inadvertent misstatement or omission on their policy application cannot be used to defeat coverage unless the insurance company can prove the error was deliberate and made with the intent to deceive.

However, it is important to note that the incontestability clause does not protect against outright fraud. If a statement is found to be fraudulent, the insurance company can still cancel the coverage or pursue criminal charges.

Misstatement of age or sex

The Misstatement of Age or Sex provision allows the insurer to adjust the benefit payable if the age or sex of the insured was incorrectly stated when the application for the policy was made. This is an important provision because age and sex are critical factors in determining an applicant's insurance premium.

If the insured's age or sex is misstated, the insurer will adjust all benefits payable under the policy to reflect what the premiums paid would have been at the correct age or sex. This is because a life insurance policy's premiums are largely based on age and sex. If the policyholder had been paying lower premium rates due to incorrect information, the policy's proceeds would need to be adjusted accordingly. The difference between what the individual should have been paying and what was actually paid would be deducted from the death benefit paid to the beneficiary.

The Misstatement of Age or Sex provision is an exception to the Time Limit on Certain Defenses provision, as it will be affected whenever the error is discovered, even beyond two years.

> "If the age or sex of the insured has been misstated, we will adjust all benefits payable under this policy to that which the premiums paid would have been purchased at the correct age or sex."

It is important to note that the exact rules and laws regarding the Misstatement of Age or Sex provision may vary by state and insurance company.

If you discover that your life insurance policy has your incorrect age or sex, you should first check the actual policy and application to confirm the error. You may then want to contact your state insurance regulator to understand any specific laws or regulations that may apply in your state. Finally, you should reach out to the insurance company and explain the situation to understand your options.

Non-forfeiture provisions

There are typically three standard non-forfeiture options:

• Cash Surrender Value: The policyholder receives the cash value of the policy as a lump sum, and the policy is then cancelled and cannot be reinstated.
• Extended-Term Option: The policyholder uses the cash value of the policy to purchase term insurance, which allows them to stop paying premiums while still retaining the equity of their policy. The length of the extended term depends on the cash value of the policy.
• Reduced Paid-Up Insurance: The policy's cash value is used to buy a paid-up policy of the same type, with a reduced death benefit but retaining a cash value that continues to grow at a reduced rate.

In addition to these standard options, there are other non-forfeiture choices that may be available depending on the insurance company. These include:

• Single-Premium, Immediate Annuity: The policy is converted into an annuity that pays the policyholder a regular amount based on the cash value of the policy and the policyholder's age.
• Automatic Premium Loan: The insurance company automatically deducts the overdue premium amount from the policy's cash value, essentially making a loan against the policy's cash value to cover the missed payment.

It is important to note that non-forfeiture options may have adverse effects on coverage, such as reducing the face amount or cancelling the policy completely. Policyholders should carefully consider their options and seek guidance from their insurance agent to make an informed decision.

Frequently asked questions