Optional Policy Provisions

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 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.

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 principal 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.

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 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 adjust 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