Reading Policies




Most life insurance policies are filled with fine print, legalese, and technical insurance jargon. However, if you can find the time and muster the patience, it's probably a good idea to sit down and read through your policy. If you do, you'll understand your policy better and gain an understanding of your rights and obligations under the contract.

Here are some common provisions to look for when you read your policy:

Entire contract clause
When your life insurance policy takes effect, the application for insurance that you filled out is incorporated into the contract. The statements you made on the application become contractual provisions and can be used as evidence in a dispute over the contract's validity. Typically, states require that a clause be inserted in your policy stating that the policy and the application attached to it together form the entire contract between you and the insurer. This clause is beneficial to you because if your insurer accuses you of misrepresentation and seeks to void the contract, they're prevented from using other evidence outside of the contract. They can only void the contract if you made false statements on your application.

Ownership clause
A life insurance policy is a piece of property. The owner of the policy may be the individual whose life is insured under the contract, it may be the beneficiary, or it may be someone else. In all likelihood, if you are the insured, you are also the owner of the policy. As the owner, you have certain privileges of ownership, including the right to transfer or assign the policy, the right to change the beneficiary, the right to receive the cash value and dividends (if applicable), and the right to borrow against the cash value (again, if applicable).

Beneficiary clause
The beneficiary clause allows you to name the person who will receive the policy's death benefit proceeds upon your death. The designation of your beneficiary is an important decision, enabling you to control the disposition of the insurance money. While you may designate yourself as beneficiary under certain types of retirement income policies, the beneficiary under a traditional policy will generally be either your estate or an individual. It's usually not advisable to name your estate, however, because then the proceeds will have to pass through probate and payment of them will be held up. If you name a specific individual, the proceeds will be paid directly to him or her upon your death without delay. A beneficiary designation may be revocable (can be changed by you at any time) or irrevocable (can't be changed). In addition, a beneficiary may be primary or contingent. Basically, the primary beneficiary is the person first entitled to the policy proceeds at your death. If the primary beneficiary dies before you (and thus before any proceeds are paid), the contingent beneficiary takes his or her place.

Incontestable clause
This is an clause that is required in most life insurance policies. Typically, it states that the validity of the contract cannot be questioned or challenged for any reason whatsoever after the policy has been in force for a period of two years during your (the insured's) lifetime. The reason for this clause lies in the long-term nature of the life insurance contract. Its purpose is to give the insurer ample time to review the contract while providing you and your beneficiary with some assurance that you will not be harassed by lawsuits long after the policy was originally bought. 

Misstatement of age clause
This is somewhat of an exception to the incontestable clause. The incontestable clause does not apply when you, the insured, misrepresent your age. The reason is simple. Because age is a key factor in determining whether a company offers you life insurance and in setting premiums, some applicants are tempted to understate their age in order to pay a lower premium. Understandably, insurers wish to avoid this. The misstatement of age clause provides that if you have misrepresented your age, the insurer will lower the face amount of the policy to the amount of insurance that the premium paid would have purchased at the correct age.

Grace period
Your policy specifies the due date for premiums (e.g., monthly, quarterly, semiannually). Whatever the due date, you generally must pay your premiums on or before that date. If you fail to do so, you will be in default and technically the policy will lapse. This rule is subject to a disclaimer, however, in the form of a grace period during which the policy still remains in force if a premium hasn't been paid on time.  For example, if you have a premium due on January 1 and don't pay it by that date, you might have until February 1 to make the payment before the policy would lapse. If you died on January 15, the death benefit proceeds would still be paid, but minus the amount of the premium in default.

Reinstatement clause
Many life insurance contracts contain a clause allowing you to reinstate or reactivate a lapsed policy (i.e., one for which you stopped paying the premiums). However, reinstatement is not your unconditional right. If available, it will be subject to a number of very specific requirements on your part. First, if it's a cash value policy, reinstatement will be possible only if at the time of the policy's lapse you did not withdraw its cash surrender value. Second, reinstatement must be accomplished within a specified time period, normally five years after the lapse. Third, you must resubmit proper evidence of your insurability. Not only must your health still be satisfactory to the insurer, but other factors such as your income and personal habits must not have changed greatly either. Finally, an insurer will generally only permit reinstatement if you pay all the overdue premiums (plus interest) and if you pay (again, with interest) or reinstate any indebtedness from loans that may have existed at the time of lapse.

Suicide clause
Almost all life insurance policies exclude suicide during a specified period after the policy is issued. Under this clause, the typical period during which coverage for suicide will be denied is two years (although some policies limit it to one year). Assuming you are the insured, this means that if you commit suicide (whether by insanity or not) within two years after purchasing your policy, the insurer will not pay any death benefits to your beneficiary. The insurer would be responsible for refunding the premiums paid by you, but that would be the extent of their financial obligation under these circumstances.

Aviation exclusion
At one time, almost all life insurance policies excluded death resulting from aviation. Today, most policies will provide coverage if you die in an airplane accident, although you may have to pay an extra premium to cover the heightened risk if you're a private or commercial pilot (or a crewmember).

War clause
During war time or when a war seems likely to occur, insurance companies may insert a war clause into their policies. This clause usually states that if you (the insured) die in a war, the insurer does not have to pay the death benefit proceeds that would ordinarily be payable under the policy. Instead, all they have to do is return the premiums you paid plus interest.

Special provisions, riders and options
Note that the provisions described here are only the ones that are more or less common to all life insurance contracts. In most cases, you have the choice of purchasing riders and optional coverages that allow you to expand your coverage and tailor the policy to your needs. In addition, certain types of policies may have special provisions of their own. Cash value policies, for example, generally include provisions relating to policy loans and the surrender of all or part of the cash value.

Learn More...

Life Insurance Overview | Understanding The Basics | Term & Cash Value
Coverage Amounts | Reading Policies | Planning Concerns | Life Calculator | Life Glossary

Please Note: The information contained in this Web site is provided solely as a source of general  information and resource.  It is a not a statement of contract and coverage may not apply in all areas or circumstances.  For a complete description of coverages, always read the insurance policy, including all endorsements.