Important Part, Life Insurance Policy Clauses!

Do you have a life insurance policy? How many times have you gone through your policy document? Once or maybe twice, right? And do these important clauses like incontestable clause, spendthrift clause or reinstatement clause mean anything to you? If you are totally clueless about terms like these, don’t worry, this is the right article for you.

Introduction

All contracts have clauses and guidelines that establish what is paid for, how and why certain rules are put in place, and if there are exclusions. With life insurance contracts, there are many guidelines as well, and these can be revised repeatedly through riders.

A rider is an additional revision of a clause or provision that changes the original intention or coverage of a policy. A good example would be the suicide clause, which states that life insurance will not pay out if the person dies due to self-inflicted wounds.

However, a rider can be added stating that suicide will be covered after the first year of premiums are paid.

Clauses

The following are some of the standard provisions and clauses found in life insurance policies:

  • Beneficiary Clause. The main aim of life insurance is to transfer wealth to your heirs or to provide liquidity to your family. For that reason, you need to name a beneficiary who will receive the life insurance proceeds after your death. This beneficiary can be your spouse, children or relatives. You also can change the recipient anytime during the term of the policy.

  • Entire Contract Clause. – This simple clause means that the contract is the contract. The insurer cannot have additional paperwork not included in the original contract that would change the insurance or provisions for the insured. This clause keeps all parties honest.
  • Preference Beneficiary Clause. If you have not nominated a beneficiary in your policy, your insurance company will disburse the life insurance money to the individuals listed in your policy. Presume that the order of priority in your policy is: 1) your spouse, 2) your children, 3) your parents. If the proceeds are distributed, they will go the first living individual which, in most cases, will be your spouse.

  • Policy Loan. This provision allows the insured to take out a loan on the money value of their life insurance policy. This is very similar to a 401K, where you can take a loan out of the money in your account and then pay it back over time. This is non-negotiable because it is required by law. However, a policy loan will usually will lessen the value of the life insurance payout until the loan is paid back in full.
  • Survivorship Clause. According to this clause, after your death, the policy proceeds will go to the beneficiary – for example, your wife – but only if the beneficiary survives you by a stated number of days.

  • Grace Period. This is usually a 31 day timeframe allowing an insured (i.e. A person having insurance) to make the monthly payment for their life insurance policy. The payment will need to be paid in full, not partial. Another common time frame for a grace period is 15 days.
  • Aviation Clause. According to this clause, your insurer will not pay compensation to your surviving family due to death on an airplane. However, if you are an airline employee, you can buy aviation insurance by paying higher premiums.

  • Free Look. This is a unique provision that allows an insured to have a policy for a certain period of time, but then terminate the policy and get back the money they have invested if they decide they no longer want the policy. For life insurance, this time period is usually only 10 days, though some companies will allow up to 90 days.