Reading and understanding your Life Insurance Policy
Reading the fine print of a Life Insurance policy is not most people’s idea of a fun Saturday. However, for the benefit of you and your loved ones it is important to set aside the time to read through your policy and make sure you have a firm grasp of your rights and obligations under the contract.
The Parts Of A Life Insurance Policy
- A cover page which lists the type of insurance plan (see Types of Life Insurance) and the name of the company issuing the policy. The page is signed by an officer representing the insurance company.
- A schedule of benefits and specifications page which lists the named insured, the beneficiaries, the issue date, the policy number, the amount of benefits, and the premium and additional charges.
- Tables showing future premium projections or stated cash values, depending on the insurance plan chosen (see Types of Life Insurance).
- A section that defines policy terms.
- A section that explains your rights and obligations under the contract.
- A settlement section that explains how to make a claim and the options your beneficiaries have regarding settlement of the death benefit.
- Riders and Endorsements – any alterations or additions to the standard policy may be added.
Common Policy Provisions
Entire Contract – By law in most states there must be a clause inserted that the policy and the application combined make up the entire contract between you and the insurance company. This clause is beneficial to you because it prevents the insurance company from using outside evidence to void a contract.
Incontestability – This provision prevents the insurance company from contesting a contract that has been in effect for at least 24 months. This protects the insured in the case that the insurance company claims misrepresentation after 24 months. It also protects the insurance company for the first 24 months of the policy.
Misstatement of age – Is an exception to the incontestability provision. This provision applies when the insured has misrepresented their age. Many insureds are tempted to understate their age when applying for a life insurance policy in order to pay a lesser premium. However the misstatement of age provision protects the insurance company so that when the insured passes the death benefit is reduced proportionate to the reduction in premium.
Grace Period - The policy specifies the due date of premiums. However if you miss the due date then the grace period is the amount of time you have to pay your premium without the policy lapsing - usually defined as 31 days. For instance if your premium was due on January 15 and you did not pay on time you would have until February 15 to pay the premium before the policy would lapse. If you passed away on January 20 the death benefit would still be paid, minus the amount of premium in default. This clause is required by law in most states.
Suicide - The majority of life insurance policies exclude suicide during a specified period after the policy is issued – usually two years. The reason for this is obvious as insurance companies do not want people purchasing life insurance shortly before they plan on committing suicide. In the event of a suicide within two years of the policy issue date the insurance company is responsible only for paying back the premium paid.