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Imagine you've just purchased a new life insurance policy. The agent hands you a thick document filled with provisions, clauses, and riders. While it might seem overwhelming at first, understanding these elements is crucial to making the most of your coverage.
Life insurance policies are carefully structured contracts that balance the interests of both the insurance company and the policy owner. The provisions within these contracts establish the rules of engagement — what's covered, what's not, and what rights each party has throughout the life of the policy.
In this chapter, we'll explore the standard provisions found in virtually all life insurance contracts. These provisions aren't just legal jargon; they're important safeguards that protect the policy owner and the insurance company. For example, the incontestable clause prevents an insurer from denying a claim after a certain period, even if there were misstatements on the application. Meanwhile, the suicide clause protects insurers from individuals who might purchase a policy with the intent of taking their own life shortly afterward.
We'll also examine the various options that make life insurance policies flexible financial tools. From policy loans that allow access to cash value to dividend options that can enhance coverage or reduce premiums, these features give policyholders significant control over their policies.
Finally, we'll look at riders — optional add-ons that can customize a policy to meet specific needs. Whether it's providing income during disability, guaranteeing the ability to purchase additional insurance in the future, or covering family members, riders can significantly enhance the value of a basic policy.
By understanding these provisions, options, and riders, you'll be better equipped to help clients select appropriate coverage and explain how their policies work in various situations — knowledge that will be essential for your licensing exam and your future career in insurance.
This chapter is broken into the following sections:
Prior to reading this chapter, please review the following keywords. An understanding of their basic definitions will improve your comprehension of the chapter content.
Most states require the same set of provisions to be included in all life insurance contracts. These standard or usual provisions are almost identical in wording regardless of the insurance company or the locale where the policy is issued.
These "standard provisions" found in all life insurance policies identify the duties, obligations, and rights of the parties to the contract. A provision may also be referred to as a policy clause. In general, provisions are intended to protect the policy owner.
The entire contract clause or provision is found at the beginning of the policy and states that the entire contract consists of all included policy documents, the attached photocopy of the original application, and any attached riders or endorsements. Nothing may be incorporated by reference, meaning that the policy cannot refer to any outside documents as being part of the contract. Therefore, the insurer cannot deny a claim in the future by stating that it did not provide the policy owner with the entire contract.
Additionally, the entire contract provision prohibits the insurer (including the agent) from making any changes to the policy, either through policy revisions or changes in the company's bylaws, after the policy has been issued. Naturally, the policy owner or insured is also prohibited from making any changes to the policy.
The insurer has issued the policy in consideration of the application and payment of the premium. A copy of the application is attached and is part of the policy. The policy with the application makes up the entire contract. All statements made by or for the insured will be considered representations, rather than warranties. This insurer will not use any statements in defense of a claim unless it is made in the application, and a copy of the application is attached to the policy when issued.
This clause does not prevent a mutually agreed change to the policy if it expressly provides a mechanism for modifying the contract after it has been issued. Changes or additions to a life insurance contract are referred to as endorsements, riders, or amendments. Only authorized company officers may modify or amend an insurance contract, and the policy owners must agree to any changes before they take effect. Examples of mutually agreeable changes may include the policy owner changing the face amount of an adjustable life policy or adding additional coverage through a rider.
The execution clause states that the insurance contract will be executed when both parties (the insurer and the policy owner) have satisfied the conditions of the contract. In other words, when both parties have fulfilled their responsibilities, the contract will be executed.
This provision, which may be listed separately from the entire contract provision, states that any changes made to the contract must be in writing and endorsed or attached to the policy. It also states that only an executive officer of the insurer or authorized home office personnel has the authority to make any changes or modifications, or to waive a policy provision. A producer or agent is not required to countersign any such modification.
The privilege of change clause — also known as the policy change provision or conversion option — outlines the conditions under which the company allows the policy owner to change the policy's coverage. If the premium is increasing, but the face value remains the same, the insured will not be required to prove insurability. However, the insured must prove insurability if premiums are decreasing or the face value is increasing, as this could lead to adverse selection.
The insuring agreement, sometimes called a provision or clause, sets forth the company's fundamental promise to pay the policy benefits upon the insured's death or as otherwise defined in the insurance contract. This provision appears on the first page of the policy, which is also referred to as the policy face or cover page. Typically, the president and secretary of the insurance company undersign the insuring clause.
This agreement has been made between the policy owner and the insurer. It provides a coverage limit of $100,000 payable to the primary or other beneficiaries in the event of the insured's death. The annual premium is $400 to be paid in the method or mode selected by the policy owner. Further, the Company agrees to pay the surrender value to the policy owner if the insured is alive on the maturity date.
As previously described, there must be an exchange of value between the two parties for the contract to be legally enforceable. Consideration is the value given in exchange for a contractual promise. In an insurance policy, the consideration clause states that the policy owner's consideration consists of completing the application and paying the initial premium. The consideration clause or provision in an insurance policy also specifies the amount and frequency of premium payments that the policy owner must make to keep the insurance in force. The material statements of the applicant must be true. Therefore, the policy owner's consideration in a life insurance contract is the premium paid and their representations regarding health history which appear in the application. Again, the insurer's consideration in this life insurance agreement is its promise to pay a legitimate death claim once it receives a completed proof of loss (i.e., claim form) accompanied by a notarized death certificate.
If, for some reason, the consideration is not complete on the part of the policy owner, the contract will be void. Void means that there was never a valid contract and coverage was never in effect.
For example, if the policy owner's check bounces or is returned for insufficient funds, there's no coverage because there's no consideration. If the check clears the bank, but the insurer later discovers that the applicant engaged in material misrepresentations concerning their health, there will still be no coverage since there's no valid consideration. In this latter instance, the insurer will void or cancel the policy and return the premiums to the policy owner.