YOU ASK:

What are the basic life insurance contract provisions?

WE ANSWER:

The life insurance contract is a legally enforceable agreement, therefore it is important to read and comprehend its terms and conditions. The life insurance contractual provisions bestow certain rights and privileges, and impose duties on the policy owner and the beneficiary.

There are four parties in a life insurance contract: the insurer, the insured, the policy-owner and the beneficiary. In most cases, the applicant, the owner and the insurer are the same person. But sometimes the policy owner can be the beneficiary, a trust or a third party. The owner has all the rights while the insured is alive and they can be exercised without the beneficiary's consent.

Entire-Contract Clause

This part of the life insurance policy contract holds that "the life insurance policy and attached application constitute the entire contract between the parties". The clause aims at protecting the owner and the beneficiary from potential further amendments by the insurer.

Incontestable Clause

After the policy has been in force for two years, the insurer is barred from contesting the validity of the contract.

For example, if a 36-year-old man hides from the insurance company the fact he is a chain-smoker and dies within the two-year period, the insurer could contest the claim. However, if he dies after expiration of the period, the insurer is under an obligation to pay the claim.

Suicide Clause

If the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid, but the beneficiary can get a refund of the premiums paid. If the insured commits suicide after the period expires, the proceeds are paid to the beneficiary.

Grace Period for Premium Payments

This flexible clause allows the policy owner to pay an overdue premium within 31 days of the premium due date. The idea behind the grace period is not to allow suspension of a policy due to temporary shortage of funds or other adverse circumstances.

Policy Lapse and Reinstatement Clause

When premiums are not paid within the grace period, a policy lapses. The reinstatement clause permits the owner to "resuscitate" an expired policy after meeting certain requirements.

Misstatement of Age and Sex Clause

This clause states that if the insured's sex or age is misstated, the amount payable is the amount that the premiums paid would have purchased at the insured's correct age.

Assignment Clause

This clause provides the freedom to assign a policy to another party. Under a collateral assignment, the owner temporarily transfers a policy to a creditor as collateral for a loan. Under an absolute assignment, all ownership rights are assigned to a new owner.

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