Life Insurance - Contractual Provisions
Contact provisions are important in life insurance policies. They are provisions that insurance policies are required to follow and are state regulated. Some of the following are standard provisions, which are apparent in all life insurance policies.
1. Entire contract - The policy and attachments are the entire contract
2. Incontestable clause - After two years the insurer cannot contest the policy because of "false" information from the insured.
3. Suicide clause - Policy does not pay death benefit if insured commits suicide within two years of policy issue.
4. Grace period - Policy remains in force, however, insured has 31 days to pay overdue premium.
5. Reinstatement clause - Permits a policy owner to be reinstated in case of policy lapse.
6. Misstatement of sex or age - The amount of life insurance payable will be adjusted to the amount the premiums paid would have purchased at the correct sex or age.
7. Assignment clause - A life insurance contract is freely assignable to anyone.
8. Policy loan provisions -
- Policy owners can borrow cash value
- Policy owners can determine the amount and frequency of the loan repayments
9. Automatic premium loan provision - Authorizes insurance companies to automatically pay an outstanding premium at the end of grace period and charge the amount as a policy loan. Prevents policy owners from having their policy canceled because of missed premiums. This feature is not available on all policies
Mr. Tom Sanders bought a $1,000,000 whole life conditional policy on his own life on March 1st of last year. Tom paid monthly premiums of $1,000 on schedule on the 15th of every month. Ten days after his 14th premium payment, he committed suicide. How much will Tom's beneficiary receive assuming that all fourteen premium payments were paid on time?
C. $14,000 plus interest
The two-year suicide clause will prevent payment of the full $1,000,000 face of the policy. The insurance company will return all premiums paid to Tom's beneficiary usually without interest.14 payments @ $1,000 each = $14,000 Dividend and Non-Forfeiture Options