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The concept of incontestability limits insurance companies' ability to void policies based on misstatements made by the insured on an application. The statements in question misrepresent the underlying level of risk involved in providing coverage to the insured. Misstatements of age, on the other hand, misstate the cost of coverage without misstating the underlying level of risk. The two types of misstatements affect the policy in unrelated ways.
The incontestable clause or provision specifies that, after a certain period has elapsed (usually two years from the issue date), the insurer no longer has the right to contest the validity of the insurance policy as long as the contract continues in force. Therefore, after the policy has been in force for the specified term, the company cannot contest a death claim or refuse payment of the proceeds even based on fraud, a material misstatement, or concealment.
The incontestable clause applies to the policy face amount plus any additional riders that are payable at death. Although the incontestable clause applies to death benefits, it generally doesn't apply to accidental death benefits or disability provisions if they're part of the policy. Because conditions relating to accidents vary and are often uncertain, the right to investigate them is typically reserved by the company.
The insurance company can only contest a claim during the policy's contestable period. Claims outside this period are generally incontestable. However, there are three exceptions where the incontestable clause does not apply, allowing the insurer to void the policy at any time:
A company can always void or cancel a policy for non-payment of premiums.
This provision states that if the insured's age is "misstated" on the application, the policy will not be voided or canceled. However, the amount of insurance will be adjusted to the amount that would have been purchased at the premium paid had the correct age been known. In other words, the amount of death proceeds will be adjusted (up or down) to reflect the appropriate benefit that the premium paid would have purchased at the correct age.
A death benefit adjustment is involved, whether the age was misstated higher or lower. This means that, even if applicants lie intentionally about their age to save premium dollars, the insurer would not cancel or void the policy and would not deny death claims when it discovers an incorrect age. Instead, it will simply adjust the death benefit or the death claim amount. Therefore, if the insured's age is understated on the application, the insurer will pay a lower death benefit; if the insured's age is overstated, the insurer will pay a higher or additional face amount at death. If the insured's sex is misstated, the insurer will adjust the face amount as well. Again, the insurer will not cancel the policy due to these inaccuracies but will adjust the policy benefit.
For example, Dave, a 35-year-old insured, purchased a $10,000 policy for $100 and, at his death, it's determined that his actual age at the time of application was 40. The premium should have been $125. Therefore, since his age was misstated, the insurer will adjust the death benefit and pay 100/125, or 4/5, of the original death benefit (i.e., $8,000).
The owner's provision states that the policy owner possesses all of the rights contained in the policy. In any insurance policy or contract, the policy owner may name or change the beneficiary, borrow against the cash value (if applicable), and select the frequency of premium payments (i.e., the premium mode, such as annual, monthly, etc.). The owner may also choose to transfer one or more of these rights to another party. The transfer of policy ownership rights is referred to as "policy assignment." Additionally, if the contract is participating, the policy owner has the right to receive any dividends (also referred to as excess interest credits) payable and to vote to elect the company's board of directors.
More often than not, the policy owner, the policy payor, the applicant, and the insured are all the same person. However, as described previously, this is not always the case.
For example, in the case of a juvenile policy, the parent or guardian is the owner, the payor, and the applicant, whereas the child is the insured. Children do not possess any ownership rights until ownership is transferred to them.
An additional example could involve a divorce in which, as part of an alimony judgment, a spouse is required to be the insured and payor of an insurance policy, with the other (ex)spouse listed as the policy owner.
If a proposed insured is under the age of majority (i.e., a minor), a parent or guardian is typically the applicant and the policy owner. When this occurs, the parent may have a provision inserted into the contract that provides them with full control of the policy until the minor reaches a specific age. Since the applicant is designated as the person in control of the policy, the provision is most often named "the applicant control clause."
| Primary Rights of a Policy Owner |
|---|
| The right to assign and change the policy's beneficiaries |
| The right to determine how proceeds will be paid (i.e., settlement options) |
| The right to terminate the policy and select a non-forfeiture option |
| The right to determine and change the premium payment schedule |
| The right to assign ownership of the policy to another person |
| The right to decide what happens with dividends that are paid out from a participating policy |
| The right to convert or renew a term policy if such option exists within the contract |
| The right to exercise any other applicable policy options |
Primary Rights of a Policy Owner
Individuals who purchase life insurance policies are commonly referred to as policy owners, rather than policyholders, because they own their insurance policies and may do with them as they wish. The assignment provision reiterates one of the policy owner's rights, as stated in the contract. It enables the policy owner to transfer any or all of their policy rights to another person. This transfer of rights or ownership is referred to as policy assignment. The previous owner is considered the assignor, and the new owner is considered the assignee.
Although the policy owner doesn't need the insurer's permission to assign a policy, the assignment provision outlines the procedure required for the policy owner to transfer or assign ownership rights. Generally, the policy owner must provide the insurance company with written notification of any assignment. The company will then accept the transfer's validity without question. Additionally, insurable interest is not required to exist between the insured and the assignee.
The policy owner may assign this policy. The insurer will not be responsible for the validity of an assignment. The insurer will not be liable for any payments it makes or any actions it takes before notice of the assignment is provided to it from the policy owner.
An absolute or complete assignment occurs when the policy owner transfers all policy (ownership) rights. In this case, the entire contract has been transferred to another party. An absolute assignment involves a complete transfer of the policy to another person. The assignor (original policy owner) typically cannot recover an absolute assignment. An absolute assignment may also be referred to as a voluntary or complete assignment.
Collateral or conditional assignment occurs when the policy owner assigns one or some of the ownership rights to another party but doesn't assign all of the policy ownership rights. As such, a collateral (or conditional) assignment is a partial and temporary transfer of policy rights to another person.
A conditional assignment in life insurance occurs when a policyholder uses their whole life policy's cash value as loan collateral. The assignee (typically a bank) becomes a primary beneficiary only to the extent of the outstanding loan amount. Upon the insured's death, the death benefit is proportionally distributed between the assignee (for the remaining loan balance) and the original primary beneficiary (for the excess amount). This arrangement, known as a collateral assignment, effectively protects both the lender's financial interest and the beneficiary's right to the remaining proceeds.
Although a more detailed review of beneficiaries will be provided in a later chapter, let's now focus on examining the provisions related to this topic.
The inclusion of the revocable beneficiary provision means that policy owners may modify, alter, or change the beneficiary at any time and at their discretion. This is one of the owner's rights as provided by the policy. If the owner wants to change the beneficiary, the owner may simply request a "change of beneficiary form," complete it, and return it to the insurer.
With an irrevocable beneficiary provision, the policy owner or a court of law may designate an irrevocable beneficiary. In this case, the beneficiary designation cannot be changed or modified without the permission or consent of the named beneficiary. If a policy owner names an irrevocable beneficiary, the policy owner must obtain the irrevocable beneficiary's agreement prior to any assignment. Furthermore, an assignee typically does not have the ability to change an irrevocable beneficiary designation. However, the assignee could change a revocable beneficiary.
An irrevocable beneficiary may be able to assign a portion (or all) of the proceeds in a similar fashion as the policy owner. However, in general, if the beneficiary dies prior to the insured, any assignments made by that beneficiary are no longer valid unless the policy owner also agreed to the assignment in writing.