Critical Clauses and Provisions

Suicide Clause

Insurers will not pay death benefits if the cause of death was suicide within the first 2 policy years after issuance of a life insurance policy. Suicide after the first 2 years is covered. If suicide is the cause of death during the first 2 years, the insurer will return all the premiums paid up to the date of death to the insured’s estate.

Incontestable Clause

This clause states that the contract cannot be declared invalid for any reason (even outright fraud) once it has been in force for 2 years.

Misstatement of Age

If an insured misstated his/her age on the application, the policy will not be voided, but the insurer will adjust the face amount to properly reflect what the paid premiums would have purchased at the insured’s correct age. This adjusted face amount is the benefit paid to the beneficiary and may also be referred to as the death benefit in this context.

Reinstatement Clause

If a policy lapses, the policy owner may apply to have the policy reinstated. The insured must provide evidence of insurability and pay past-due premiums, any outstanding policy loans, and interest on the outstanding loan and past-due premiums. Reinstatement must be applied for within 3 years.

Grace Period

The grace period is a period of time, after the premium is due, during which the policy owner can make the past due premium payment and avoid cancellation of the policy. Grace periods vary by product:

• Industrial life 28 days
• Group life 31 days
• All other types of life insurance, 30 days

During the grace period, the insurance remains in force. If the insured dies during this period, the insurer will deduct the amount of the premium due from the death benefit paid to the beneficiary.

Aviation Limitation Clause

This clause originally prevented payment of a policy benefit for anyone who died as a result of an airplane crash. Today, it is much less restrictive and typically addresses student pilots. Fare-paying passengers on regularly scheduled commercial airlines are no longer excluded.

War Limitation Clause

This clause limits the liability of the insurer in the event the insured loses his/her life at war. A results clause prevents payment only if the insured dies as a direct result of war injuries, while a status clause prevents benefit payments to any insured who dies while listed as active duty status during times of war, regardless of cause of death.

Change of Beneficiary Provision

This provision allows the owner of the policy to change beneficiaries throughout the life of the policy (except for irrevocable beneficiary designations).

Policy Loan Provision

If the policy accrues cash value, it is required that the cash value be available via policy loan to the owner. Insurers charge a nominal rate of interest on policy loans; the maximum rate is regulated by state law.

Automatic Premium Loan

If a policy is going to lapse, this provision automatically directs the insurer to take out a loan from the cash value of the policy to pay the required premium. Typically, there is no charge for the APL provision, but it must be elected by the policy owner.

Lesson Summary

Life insurance policies contain several important clauses and provisions that dictate how the policy functions under certain circumstances:

• Suicide Clause: Insurers do not pay death benefits if the insured commits suicide within the first 2 policy years. However, after this period, suicide is a covered cause of death.

• Incontestable Clause: After 2 years, the policy cannot be invalidated for any reason, even fraud.

• Misstatement of Age: If the insured misstates their age, the policy remains valid. However, the face amount, which may also be referred to as the death benefit, will be adjusted to reflect the proper premium based on the correct age.

• Reinstatement Clause: If a policy lapses, the owner can apply for reinstatement within 3 years. Evidence of insurability is required.

• Grace Period: Policyholders have a period after the premium is due to make payment before the policy is canceled. Grace periods vary by policy type, lasting 28 to 31 days, during which the insurance remains in force.

• Aviation Limitation Clause: This clause, originally strict about deaths related to airplane crashes, now typically addresses student pilots.

• War Limitation Clause: This limits liability if the insured dies at war, with results clauses and status clauses specifying conditions.

• Change of Beneficiary Provision: Policy owners can change beneficiaries except for irrevocable designations.

• Policy Loan Provision: Cash value must be accessible via a policy loan to the owner.

• Automatic Premium Loan: If a policy is at risk of lapsing, the insurer can take out a loan from the policy’s cash value to pay the premium.

Chapter Vocabulary