Optional Policy Provisions | Achievable Life & Health

As the name implies, optional provisions can be included or excluded from a policy at the insurer’s discretion. The 11 optional policy provisions are as follows:

Change of Occupation

A policy owner’s occupation plays a role in determining the risk the policy owner represents to the insurer. Therefore, the insurer wants to know if the policy owner changes occupations. Depending on the occupational change, the insurer may adjust the premium requirement or the level of benefits.

Cancellation

The rights of an insurer to cancel a policy are determined by the type of contract issued.
A renewable policy can be cancelled only at the policy anniversary date.
A cancellable policy can be cancelled by the insurer at any time as long as a 5-day notice is given to the policy owner. Unearned premiums must be refunded to a policy owner when a policy is cancelled midterm. A pro-rata refund is due if the insurer cancels. A short-rate refund is due if the policy owner cancels.
An optionally renewable policy gives the insurer the option of cancelling the policy, but only on the policy’s anniversary date. The insurer can also increase the premium, but only for all policies in the class.
A conditionally renewable policy allows the insurer to terminate the contract by not renewing it under certain conditions stated in the policy.
A guaranteed renewable policy cannot be cancelled by the insurer. Such policies generally have a maximum age or number of years to which this provision applies. Insurers do have the right to increase premiums on the policy anniversary date.
A non-cancellable policy is the most attractive option, from the policy owner’s perspective. A non-cancellable policy cannot be cancelled by the insurer and premiums cannot be increased.

Sidenote

Know this...

A non-cancellable policy cannot be cancelled or changed by the insurer during the policy period.

Other Insurance with the Insurer

If the policy owner has two or more policies with the same insurer, the insurer will coordinate the policies so that no more than 100% of the loss is paid. Premiums for coverage in excess of benefit paid will be refunded.

Insurance with Other Insurers

Also called the “coordination of benefits provision,” it is designed to limit the total amount paid by all insurers to 100% of the amount of the loss if the insured has multiple policies issued by different insurers.

Illegal Occupation

No coverage is provided if the claim occurs in connection with a felony or if the insured engages in an illegal occupation.

Intoxicants and Narcotics

No coverage is provided if the claim occurs while the insured is intoxicated or under the influence of drugs, unless prescribed by a physician.

Misstatement of Age

The benefits will be adjusted to what the premiums would have provided had the policy owner given the correct age on the application.

Unpaid Premiums

This provision permits the insurer to deduct from a claim settlement any premium then due. This provision is used in cases where a claim occurs during a grace period.

Conformity with State Statutes

Any policy provision that is in conflict with the statutes of the state in which the insured resides is automatically amended to conform with those statutes.

Relation of Earnings to Insurance

This provision reinforces the principle of indemnity and prevents the insurance company from paying a disability income claim in excess of the actual loss, which is the insured’s net earned income. The insurer will not issue a policy with a benefit greater than the applicant would actually earn by going to work.

Reduction of Coverage

A rarely used provision, this allows the insurer to reduce benefits in certain circumstances.

Eleven optional health policy provisions

Other General Provisions

Free Look (Right to Examine)

Under this provision, the insured may return the policy to the agent or the insurer within 10 days of delivery (30 days for LTC and Medigap policies) and receive a full refund of premiums paid.

Insuring Clause

This is customarily found on the first page of the policy. It defines the benefits and policy periods and states the insurer’s promise to pay benefits if coverage is provided by the policy and all conditions are satisfied.

Consideration Clause

The amount and frequency of premium payment and the representations made by the applicant are spelled out, as is the insurer’s obligation to pay the benefits.

Assignment of Benefits Provision

This provision defines the benefit amounts to be paid in the event of a covered loss. Many times, the beneficiary of a health reimbursement policy prefers that the insurer pay the doctor/hospital directly. If either will accept assignment of benefits, the insurer will pay them directly in the name of the insured.

Waiver of Premium

Disability income policies usually include this option, which exempts the insured from paying premiums if totally and permanently disabled. Other types of policies may also make this option available, for an additional premium.

Lesson Summary

In an insurance policy, optional provisions can be included or excluded at the discretion of the insurer.

Optional Policy Provisions:

Change of Occupation: A policy owner’s occupation affects the risk to the insurer; if it changes, premiums or benefits may be adjusted.
Cancellation: Different types of policies allow for various cancellation terms like pro-rata refunds for cancellations or short-rate refunds.
Other Insurance with the Insurer: If a policy owner has multiple policies with the same insurer, payout coordination may take place to ensure not more than 100% of the loss is paid.
Insurance with Other Insurers: Aimed to limit total payouts to 100% of the loss if the insured has policies with different insurers.
Illegal Occupation: No coverage is provided if a claim arises from a felony or illegal occupation.
Intoxicants and Narcotics: Coverage is void if a claim occurs while the insured is intoxicated or under the influence of drugs unless prescribed.
Misstatement of Age: Benefits will be adjusted based on the correct age to determine premiums.
Unpaid Premiums: Allows the insurer to deduct due premiums from a claim settlement during a grace period.
Conformity with State Statutes: Conflicts with state statutes are automatically amended to comply.
Relation of Earnings to Insurance: Ensures the insurer doesn’t pay more than the insured’s actual net income for disability claims.
Reduction of Coverage: Rarely used, it permits the insurer to reduce benefits in specific situations.
Free Look (Right to Examine): Allows a refund if the insured returns the policy within a specified time after delivery.
Insuring Clause: Defines benefits, policy periods, and the insurer’s promise to pay if conditions are met.
Consideration Clause: Details premium payments, applicant representations, and insurer obligations.
Assignment of Benefits Provision: Defines how benefits are paid, often allowing the insurer to pay providers directly.
Waiver of Premium: May exempt the insured from paying premiums if totally and permanently disabled.

Chapter Vocabulary

Definitions

Cancellable Policy: A policy that may be terminated either by the insured or the insurance company by notification to the other party in accordance with the terms of the policy.
Cancellation: Short rate cancellation is utilized when an insured decides to cancel an insurance contract, and pro-rata is used when an insurer cancels the contract.
Coordination of Benefits (COB): The method of determining which company pays as primary insurer and which company pays as secondary or excess insurer when a working couple or their dependents have a claim covered by more than one insurance contract.
Free-Look Period: A period of time during which the purchaser of an insurance policy or annuity can cancel the contract with no penalty. The number of days varies by product.
Guaranteed Renewable: The option of renewal to a specified age, or for a lifetime, vested solely in the insured. However, the insurance company has the right to increase the premiums applicable to an entire class of policyholders.
Insuring Clause: The provision of an insurance policy containing the insurance company’s promise. It established the obligation of the company to provide the insurance coverage as stated in the policy.
Noncancellable: A policy that an insurance company is not permitted to terminate or amend during its term (except for non-payment of a premium).
Optionally Renewable: Policies that are renewable at the option of the insurance company.
Other Insurance Clause: A provision found in many life and health insurance policies, stating the disposition of claims when any other insurance contract covers the same events as the policy in which the provision is contained.
Pro-rata Cancellation: When a policy is canceled midterm, unearned premiums must be refunded to the policy owner. A pro-rata refund is due if the insurer cancels.
Pro-rata (proportional) Reinsurance: Portion of the losses and premium reinsurer shares with the ceding entity.
Reduction of Benefits: Automatic reduction in coverage under certain specified conditions (i.e., after the insured has reached age 60).
Relation of Earnings to Insurance: A provision in the policy that permits the insurance company to reduce the monthly income disability benefits payable if the insured’s total income from benefits exceeds either his/her current monthly earnings or his/her average monthly earnings during the 2 year period immediately preceding the disability.
Unearned Premium: Amount of premium for which payment has been made by the policyholder but coverage has not yet been provided.