Examining Terms and Understanding Exclusions
As with any other kind of insurance, there are limits to what you can and cannot do with the policy. These are limits are called provisions and exclusions, and control how you use your policy. There are several common provisions in life insurance policies, including an ownership clause, an incontestability clause, a grace period provision, a reinstatement clause, and a change of plan provision.
Ownership Clause
The ownership clause states that the policyholder owns all contractual rights in the policy as long as they are alive. These privileges can include the right to designate beneficiaries to receive the benefits of the policy, and the right to make decisions concerning the cash value account in such policies.
Incontestability Clause
The incontestability clause protects the policyholder from having any of their benefits contested by the insurance company due to misrepresentation or false information. For example, if you have had a heart attack but did not disclose it to the company and they discover it, once a certain amount of time has passed, usually two years, they cannot change your benefits or premiums. This is why they are usually very stringent about health exams and medical history.
Grace Period Provision
The grace period provision states that the policyholder will have a grace period to provide payment of the premium beyond the due date, usually 30 or 31 days. The policy is still good during the grace period, and will pay benefits if the policyholder dies, removing the cost of the late premium from the benefits.
If the policyholder is unable to pay the premium during the grace period, the reinstatement clause comes in. The reinstatement clause allows the policyholder to reinstate their policy under certain conditions. These conditions include providing proof of eligibility (unless the lapse period is less than two months), the payment of all overdue premiums and repayment of any policy loans (on whole life policies and their various forms), and a lapse period of less than five years.
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Change of Plan Provision
The change of plan provision allows the policyholder to exchange their current policy for a different one of higher or lower coverage. This is especially useful as insurance needs often change, and the amount of insurance you need one year can vary greatly from the next.
Exclusions
In addition to the above provisions, there are also several common exclusions in life insurance policies. These exclusions include a suicide clause, an aviation exclusion, dangerous lifestyle/activity exclusion, and a war exclusion.
- Suicide Clause: The suicide clause usually states that the company will not pay the face amount of the policy if the policyholder commits suicide within two years of purchase. In these cases, the only payment is a refund of premiums paid. This is to prevent someone from purchasing a policy and committing suicide with the intent of clearing their debts and removing themselves from a difficult financial situation.
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Aviation Exclusion: The aviation exclusion usually states that the policy will not pay if the policyholder dies in a private plane crash and not as a passenger on a commercial flight. Likewise, the war exclusion states that the policy will not pay in the event that the policyholder’s death occurs as the result of a war.
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Dangerous Activity Exclusion: The dangerous activity exclusion states that there will be no payment if the policyholder dies while participating in a certain activity, such as hang-gliding, rock-climbing, or auto racing. These exclusions are a little more rare, however, as most companies will cover you at a higher rate if you regularly participate in these types of activities.
Summary
It is always best to look over every aspect of your insurance policy before you sign anything and agree to pay for it. Making sure that your policy includes these beneficial provisions can save you both money and aggravation.
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