Policy provisions come up as definitions and, more often, as short scenarios: something happens, and you pick the provision that decides the outcome. State law sets the exact time periods, so learn your own state's numbers from its outline; the concepts below are the same everywhere.
Who controls the policy
The policyowner controls the rights and privileges of the policy, including naming and changing the beneficiary and choosing how the death proceeds will be paid. The insured and the owner are often the same person, but they do not have to be.
Beneficiaries
- A contingent beneficiary takes only if no primary beneficiary survives.
- An irrevocable beneficiary must consent before the owner can change the designation.
- If no beneficiary is living, the proceeds usually go to the insured's estate.
Settlement options
While the insured is living, the owner may choose how the proceeds will be paid; if the owner never chose, the beneficiary may choose after the death.
- Lump sum: the whole benefit at once.
- Fixed period: equal installments over a set number of years.
- Fixed amount: installments of a set dollar amount until the proceeds and interest run out.
The standard provisions
- Entire contract: the policy and the attached application are the whole agreement. Absent fraud, the insured's statements are representations, not warranties.
- Incontestability: after a set period the insurer can no longer contest the policy over misstatements in the application. In California, for example, it is two years.
- Misstatement of age: the policy is not voided; the benefit is adjusted to what the premium paid would have bought at the correct age.
- Grace period: coverage continues for a short period after a missed premium. If the insured dies during it, the benefit is paid minus the premium owed.
- Suicide: during an initial period, commonly the first two policy years, the insurer usually returns the premiums instead of paying the death benefit.
Nonforfeiture options
If the owner stops paying premiums on a policy with cash value, that value is not lost. The options are cash surrender, extended term insurance, or reduced paid-up insurance (the same plan for a smaller amount, with no more premiums). An automatic premium loan, if the owner elected it, pays a missed premium from the cash value at the end of the grace period.
Common riders
- Waiver of premium: premiums are waived while the insured is totally disabled as the rider defines it.
- Guaranteed insurability: buy more coverage at set dates without proof of insurability, at the insured's attained age.
- Accidental death (double indemnity): pays an extra amount for an accidental death; death from sickness is excluded.