Life Insurance Clauses Determine Your Coverage

By Pooja Dave AAA

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.

Life insurance is a wealth-generating tool - it eases your surviving family's financial burdens in your absence and also provides periodic income, which takes care of temporary needs like mortgage repayments, education etc. However, in order to make sure that your life insurance policy will provide for you family when you can't, you need to understand the product you are buying. Here we'll cover some sections of life insurance policies that you need to be aware of. (To learn more, see How Much Life Insurance Should You Carry?, Buying Life Insurance: Term Versus Permanent and A Look At Single-Premium Life Insurance.)

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.

However, if you still have not nominated a beneficiary, then your family is going to be in some trouble. The insurance money will go to your estate and the probate fees needed to settle your estate can dig a big hole in your surviving family's liquid assets. (For related reading, see Update Your Beneficiaries, The Importance Of State And Contingency Planning and Getting Started On Your Estate Plan.)

Therefore, it is always practical to have a primary and a contingent (secondary) beneficiary in your policy. For example, you can choose your wife as a primary beneficiary and your children as contingent beneficiaries. That way, in case your spouse also dies, your children will qualify for the insurance money.

You pass through various phases in your life: marriage, divorce, a new business, the birth of your child and more. Consequently, you need to stay with the changing times by updating your beneficiaries to adjust for those events.

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 parentts. If the proceeds are distributed, they will go the first living individual which, in most cases, will be your spouse. (To learn more about changes to beneficiary status, see Problematic Beneficiary Designations - Part 1, Part 2 and The Importance Of Sept 30 For Multiple Beneficiaries.)

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.

Misstatement of Age Clause
Your age plays an important role in determining adequate life insurance coverage. The older you are, the higher the premium that is charged. Therefore, if you lie about your real age to reduce your premiums you may to pay a huge price for it. In this situation, your insurer may choose to cancel your policy entirely, increase your premiums or adjust your policy amount. (To learn more about your duty to disclose the truth to your insurer, see Exploring Advanced Insurance Contract Fundamentals.)

Incontestable Clause
Your insurance company is entitled, usually during the first two years of the policy, to challenge the validity of your policy on the basis that you held back material information. If you are found guilty of concealment, your insurer will void the policy and return the premiums.

For instance, if you concealed the important fact that you are a heavy drinker in order to get a lower premium and your insurer finds out about this lie, it will not pay the claim on your death if it occurs during the first two years of the policy.

However, after the two-year period, your insurer cannot revoke the policy and has to pay the insurance money to your family without any opposition.

Despite this clause, there are exceptions in which the insurance company will not have to pay the claim, such as in cases of deliberate fraud, where your insurer may opt to contest your policy even after the two-year period.

This is the most important clause of your life insurance policy and, therefore, you should make sure that this clause is included in your policy and that you are familiar with the specified time limit.

Spendthrift Clause
If you have named your gambler son as a beneficiary, there is a chance that upon your death, your son's creditor may pounce on your life insurance proceeds. The spendthrift clause gives the insurer the right to hold back the proceeds and protect them from creditors. In this case, your insurer may prefer to pay the insurance money in installments to your son.

Suicide Clause
The suicide clause in your policy specifies that the insurance company will not pay the money if the insured attempts or commits suicide within a specified period from the beginning of the coverage. If the insured's death is a result of suicide, an insurer will only return previously paid premiums to the family.

War Clause
Normally, insurance companies do not compensate for death due to war or war-related developments. As per this clause, if you are a victim of war, your insurer will not pay out the benefits to you. In its place, your insurer will reimburse the previously paid premiums to your family.

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 Period/Free Examination Period
If you are not satisfied with the terms and conditions of the policy, you can return the policy within a specified period after receiving it and your premiums will be fully refunded. Here, the time frame will vary depending your insurer.

Grace Period Clause
There are times when you cannot pay the premiums as a result of financial troubles. In these circumstances, the "grace period" provision works in your favor. Your insurance company will provide a grace period within which you can make the necessary monetary arrangements and pay your premiums. During this time, you will continue to be covered by your insurance policy. If you still do not pay your premiums, your policy may be cancelled.

If you die within the grace period, your insurer will pay the insurance money after subtracting the unpaid premium from that money.

Reinstatement Clause
If your policy has lapsed due to non-payment of premium, you can revive it by paying all the past outstanding premiums along with interest. However, you need to prove to your insurer that you continue to enjoy good health to qualify for this provision.

Conclusion
If you haven't yet taken the time to understand your insurance policy, you should do so as soon as possible. Life insurance is an asset if you know how to make the most of it, but many choose not to bother with insurance jargon and instead blindly follow their insurance advisors and this choice can have serious consequences for you and your family. Your knowledge of the insurance clauses described above can give you an upper hand when purchasing life insurance and can help you ensure that your insurance coverage works in the best interests of your family.

For more basic insurance terminology, see Understand Your Insurance Contract.

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