Michigan Life Policy Provisions
Chapter 40 of the Michigan Insurance Code, MCL 500.4000 to 500.4073, decides what an individual life insurance policy sold here must say, may say and may not say. You already know what a grace period or a nonforfeiture option is. This page gives you Michigan’s version: the exact periods, their conditions, and the places where the statute is narrower than people assume.
Where Chapter 40 Applies
Chapter 40 covers life insurance policies other than reinsurance, group life, group annuities and industrial life, though eight named sections also reach industrial life (MCL 500.4000(1)). Annuity contracts come under it only through sections 4070, 4072 and 4073 (MCL 500.4000(2)). Variable life is included, and the Director may modify certain sections for it by rule (MCL 500.4000(3)). Older sections of the code say “commissioner.” The Director of the Department of Insurance and Financial Services (DIFS) holds that authority now (MCL 500.102(a)).
A life policy cannot be issued in Michigan unless it contains the provisions in sections 4010 through 4036 (MCL 500.4008(1)). Premium provisions that do not fit a single premium policy are left out (MCL 500.4008(2)).
Required Provisions
Premiums and the Grace Period
Premiums are payable in advance, at the home office or to an agent, on delivery of a receipt signed by an officer named in the policy (MCL 500.4010).
Every policy gives a grace period of 1 month for each premium after the first year, and the insurance stays in force during that month (MCL 500.4012(a)). The premium may carry an interest charge, and the policy may stipulate that the overdue premium is deducted from the settlement if the insured dies during that month.
The insurer must also send written notice to the policyowner’s last known address at least 30 days before coverage terminates (MCL 500.4012(b)). The one exception is an insurer that collects a majority of its annual premium in person. Remind clients to report a move, because the notice goes to the last address the insurer has.
The Contract and the Application
The policy must contain the entire contract. Nothing can be brought in by reference to bylaws, rules, an application or any other writing unless it is endorsed on or attached to the policy when issued (MCL 500.4004). The policy, together with a copy of the application endorsed on or attached to it, is the entire contract between the parties (MCL 500.4014).
In the absence of fraud, the insured’s statements are representations, not warranties. A statement cannot avoid the policy unless it appears in a written application and a copy of that application is endorsed on or attached to the policy (MCL 500.4016(1)). An application taken electronically counts, and its information must be attached or endorsed the same way (MCL 500.4016(2)).
For you, the application is the record. Write down each answer exactly as the client gives it.
Incontestability
The policy must be incontestable after it has been in force during the lifetime of the insured for 2 years from its date (MCL 500.4014). The lifetime language matters: the insured has to survive the period for it to run out.
Two grounds stay open: non-payment of premiums, and violations of the policy relating to naval and military service in time of war. At the company’s option, provisions for total and permanent disability benefits and for additional insurance against accidental death may also be excepted. Section 4014 lists no other exception, so a misstated health history found after those 2 years have run is not on the list.
The Free Look
A notice on the front page of the policy tells the policyholder that, for not less than 10 days after receiving it, the policyholder may cancel and receive a prompt refund of any premium paid, including any policy fee or other charge (MCL 500.4015).
To cancel, the policyholder mails or otherwise surrenders the policy with a written request. Returning it to the home or branch office, or to the selling agent, is enough. The policy is then void from the beginning. If a client hands you the policy and a letter on day 9, it has been returned in time.
Misstatement of Age or Sex
If the policy misstates the insured’s age or sex, the amount payable is what the most recent mortality charge or premium would have purchased at the correct age or sex (MCL 500.4018). The insurer adjusts the benefit and does not void the policy. If the last premium on a $100,000 policy would have bought only $91,000 at the true age, the benefit is $91,000.
Dividends
A participating policy must provide that, beginning not later than the end of the fifth policy year, the company will determine and account for the policy’s share of divisible surplus, and that the owner may have the current dividend paid in cash. That accounting and payment must then occur at periods of not more than 5 years (MCL 500.4020).
Policy Loans
Except in term insurance, the policy must provide that after 3 full years of premiums have been paid, the company will lend on assignment of the policy, with the policy as the sole security (MCL 500.4022). The loan value is the cash surrender value at the end of the current policy year (MCL 500.4062(2)). The insurer must reserve the right to defer a loan for 6 months, unless the loan is to pay premiums (MCL 500.4062(2)).
Interest not paid when due is added to the principal and bears interest itself (MCL 500.4064). Failing to repay does not void the policy unless two things are true: total debt equals or exceeds the loan value, and 1 month has passed since the company mailed notice to the last known address of the insured and any assignee (MCL 500.4022; 500.4046(1)).
A policy sets its loan interest in one of two ways (MCL 500.4023(2)):
- A maximum rate of not more than 8% per year.
- An adjustable maximum rate of not more than 18% per year, set from time to time by the insurer.
An adjustable rate also cannot exceed the higher of two measures: the Moody’s corporate bond yield monthly average for the calendar month ending 2 months before the rate is determined, or the rate used to compute the policy’s cash surrender values plus 1% (MCL 500.4023(1)(c), (3)). It is determined at least once every 12 months but not more than once every 3 months (MCL 500.4023(4)).
The rate may rise when the formula would raise it by 1/2% or more, and it must fall when the formula would lower it by that much (MCL 500.4023(4)). The insurer states the initial rate at the loan and gives at least 30 days’ notice before a change (MCL 500.4023(5)). A rate change alone cannot end a policy during that policy year (MCL 500.4023(6)). A premium loan counts as a policy loan (MCL 500.4023(1)(b)), and the same limit applies to loans on annuity contracts (MCL 500.4022).
Nonforfeiture Values
Each life policy must contain a provision for nonforfeiture benefits and cash surrender values that meets section 4060 or, for universal life, section 4061 (MCL 500.4024). Under the standard nonforfeiture law, a policy must contain these terms in substance, or terms the Director finds at least as favorable (MCL 500.4060(2)).
| Situation | Michigan rule | Citation |
|---|---|---|
| Premium in default | On request within 60 days after the due date, the company grants the paid-up benefit stipulated in the policy, effective that due date | MCL 500.4060(2)(a) |
| Premiums paid for 3 full years (ordinary insurance) | On surrender within 60 days after the due date, the company pays a cash surrender value in place of any paid-up benefit | MCL 500.4060(2)(b) |
| No election made | The benefit named in the policy takes effect unless another available option is elected within 60 days after the due date | MCL 500.4060(2)(c) |
| Policy paid up by completing all premiums, or continued under a paid-up benefit that took effect on or after the third anniversary | On surrender within 30 days after any policy anniversary, the company pays a cash surrender value | MCL 500.4060(2)(d) |
| Demand for cash | The company must reserve the right to defer payment for 6 months | MCL 500.4060(2)(h) |
Most policies must show a table of values for the first 20 policy years or the term, whichever is shorter (MCL 500.4060(2)(e)), and of loan values and default options for at least the first 20 years. Universal life policies describe and illustrate the calculation instead (MCL 500.4026).
Section 4060’s exclusions include group insurance and a term policy of uniform amount and uniform premiums, of 20 years or less, that expires before age 71 and provides no guaranteed nonforfeiture or endowment benefits (MCL 500.4060(9)(b), (e)). Read a term policy before you mention cash value.
Reinstatement
The required reinstatement provision applies when default has caused the policy’s value to be applied to the purchase of other insurance, that insurance is still in force, and the original policy has not been surrendered and canceled. The policy may then be reinstated within 3 years from the default, on evidence of insurability satisfactory to the company and payment of arrears with interest (MCL 500.4028).
Claims and Other Items
When a policy becomes a claim by the insured’s death, settlement is made on receipt of due proof of death, or not later than 2 months after receipt (MCL 500.4030). Chapter 20 adds interest on claims not paid on a timely basis (MCL 500.2006(1)). The policy must also contain a table of the installment amounts in which proceeds may be payable (MCL 500.4032) and a title on the face and back that correctly describes it (MCL 500.4036).
What a Policy May Limit and May Not Contain
Permitted Limits and Optional Benefits
A policy may limit liability for death from aviation, other than as a fare-paying passenger on a regularly scheduled route between definitely established airports, and for military or naval service. The liability still cannot be fixed below the reserve on the policy, less any debt (MCL 500.4042).
An insurer may add protection against lapse, or a special surrender value, for an insured whom accident or disease leaves unable to pay (MCL 500.4040(1)). Accidental death and certain disability benefits may be added too, and a supplemental contract for them needs prior approval of its form (MCL 500.4040(2)).
Prohibited Provisions
A life policy may not contain any of the following (MCL 500.4046(1) to (4)):
- A benefit not essentially part of the insurance contract, or any connection between the insured and the insurer other than as policyholder.
- A time limit for bringing a lawsuit of less than 6 years after the cause of action accrues.
- A date more than 6 months before the application, if that reduces the premium below the one set by the insured’s nearest birthday when the application was made. A client who rates at 41 cannot reach the age 40 rate by dating the policy 7 months back. A contract written this way is not invalidated, but the provision is prohibited. Exchanges and conversions within the statute’s limits are outside this rule.
- A settlement at maturity worth less than the amount insured plus dividend additions, minus debt and any deductible premium. Substandard policies are excepted.
Banned Policy Types
Michigan bars issuing or delivering the following policies, though policies in force before the ban are not affected. No sales material or oral presentation may represent a policy to be one of them, and doing so also violates MCL 500.2064, which carries license revocation (MCL 500.4047(5), (6); 500.2064(3)).
Living Donors
For policies delivered or issued for delivery after December 31, 2023, an insurer may not deny, cancel or refuse coverage, set the price, or vary any term based solely on someone’s status as a living organ or tissue donor, unless there is an additional actuarial risk (MCL 500.4002(1), (2)).
Proceeds and Creditors
An insurer may hold proceeds on terms agreed in writing with the insured or beneficiary (MCL 500.4054(1)). A contract may also provide that proceeds are not subject to the claims of creditors of a beneficiary other than the insured, and that those benefits cannot be transferred, commuted or encumbered (MCL 500.4054(3)). This clause reaches a beneficiary’s own creditors. Claims by the insured’s creditors are a separate matter under MCL 500.2207.
Universal Life
Universal life is a policy in which separately identified interest credits and mortality and expense charges are made to the policy (MCL 500.4001(g)). A flexible premium version lets the owner vary premiums or the amount of insurance (MCL 500.4001(c)).
The insurer sends, without charge, at least an annual report of credits and charges, death benefit, net cash surrender value and loans, for a period ending not more than 3 months before mailing. It warns the owner if, on guaranteed factors, the policy will not stay in force to the next report (MCL 500.4037(a)). An illustrative report is sent on request (MCL 500.4037(b)). If the owner may increase coverage, the policy says whether a new contestable or suicide period applies to the increase (MCL 500.4037(e)).
The insurer must send notice at least 30 days before coverage terminates. A flexible premium policy has a grace period of at least 30 days after lapse, which occurs when net cash surrender value first equals zero or as the policy otherwise defines it (MCL 500.4037(g)).
Your own duties come from section 4038. Unless you give a statement of policy information, any statement of cost factors or benefits in advertising, solicitation or negotiation must be paired with the guaranteed figures, and any nonguaranteed benefit illustrated must be labeled so (MCL 500.4038(2)). You furnish that statement when you take the application. It shows values at a rate no higher than the current rate actually being paid and at the guaranteed rate, and higher rates may not be illustrated (MCL 500.4038(3)). If it is not given then, it must be delivered within 15 working days after the application and at least 5 days before the policy. If the policy arrives sooner than 5 days after the statement, the free look extends to 15 days (MCL 500.4038(4), (5)).
Annuities
A contract may provide both insurance and annuity benefits on one life, and the standard life provisions apply only to the insurance part (MCL 500.4070(1)).
The standard nonforfeiture law for individual deferred annuities is MCL 500.4072. It does not reach variable, investment or immediate annuities, or a deferred annuity after payments have begun (MCL 500.4072(2)). When payments stop or the owner asks in writing, the company grants a paid-up annuity. If the contract offers a lump sum, a cash surrender benefit is available at or before the start of payments (MCL 500.4072(3)). Deferring that cash for 6 months requires the Director’s written approval, unlike the life rule.
The legal floor, the minimum nonforfeiture amount, accumulates 87.5% of gross considerations at a rate no higher than 3%, less withdrawals, debt, premium tax and a $50.00 annual charge (MCL 500.4072(5), (6)). Cash surrender benefits cannot fall below it, and the death benefit under a contract with cash surrender benefits must at least equal the cash benefit (MCL 500.4072(9)). A contract without those benefits must say so prominently (MCL 500.4072(12)).
Annuity buyers get the same 10 day free look (MCL 500.4073(1)). A variable annuity refund, however, equals premiums not allocated to separate accounts plus the value of those accounts on the date the insurer or its producer receives the contract, so it can differ from what was paid (MCL 500.4073(2)). The free look does not apply to a contract funding a retirement plan when participation is a condition of employment (MCL 500.4073(3)).
Lesson summary
- Chapter 40 governs individual life policies, and annuities through sections 4070, 4072 and 4073.
- The grace period is 1 month for premiums after the first year, and the insurer gives at least 30 days’ notice before termination unless it collects most premium in person.
- The policy and the attached application are the entire contract, and only a statement in that written application can avoid the policy.
- A policy is incontestable after 2 years in force during the insured’s lifetime, with limited exceptions; the free look is at least 10 days from receipt.
- Policy loans come after 3 full years, at not more than 8% or an adjustable maximum of not more than 18%.
- Default options run 60 days from the premium due date, and cash may be deferred 6 months.
- Statutory reinstatement within 3 years has conditions, and profit sharing, charter, founders and coupon policies are banned.
- Universal life brings annual reports and your own duty to furnish a statement of policy information, and annuities have their own nonforfeiture law.