Within each life insurance contract certain provisions may vary from policy-to-policy and company-to-company, but there are certain provisions which are required by law to be in every life insurance policy. These provisions enforce the foundation that life insurance was built upon.
Below is a brief description of these required provisions. The scope of each provision may vary among policy types but every policy should contain some aspects of the following provisions.
A very useful feature, whose inclusion in every life insurance policy is mandated by every single state in the United States, grants the policyholder a window of time to pay a missed premium that is past due without having the policy lapse. The minimum grace period varies by state law but the typical range is 28 to 31 days.
The period officially begins the day the missed premium payment is due and ends at the close of business after the prescribed number of days have passed.
Late Remittance Offers
It is important to make a distinction between the grace period rules and a late remittance offer; they are not the same. For starters, grace periods are mandatory while late remittance offers are solely based on the insurer’s discretion.
A late remittance offer is when an insurance company accepts an overdue premium payment after the grace period has passed and reinstates the policy without requiring the policyholder to complete a reinstatement application.
Keep in mind that this is not an extension of the grace period and coverage is not continued as a result of the offer. These offers are intended to encourage the policyholder to reinstate the policy; they do not extend coverage.
By law, an insurance company must allow the policyholder to take out a loan against the policy’s cash surrender value or death benefit if the policy generates a cash value. The policy loan is secured by a policy’s cash value and cannot exceed the cash value.
With the incontestable clause provision, the insurance company may not contest any claims following a specific period of time from the initiation of the policy, but this does not include fraud. The discovery of any fraudulent activity will lead the company to contest any claims and possible pursue criminal charges.
While this only applies to participating policies, an insurer is required to determine and apportion any divisible surplus among other participating policies at frequent intervals.
Below is an example of a typical divisible surplus provision, according to McGill’s Life Insurance.
“While this policy is in force, except as extended term insurance, it will be entitled to the share, if any, of the divisible surplus that we shall annually determine and apportion to it. This share is payable as a dividend on the policy anniversary,” quoted in McGill.
A standard insurance contract provision that limits the agreement between the insured and the insurer to the provisions contained in the contract and primary function is to protect the insured.
If premiums were not paid in a timely fashion and the policy lapses, it may be reinstated within a specific period of time if the policyholder remains insurable. Reinstating the policy may include changes in premium costs and resetting the required provisions for contestability and suicide.
Misstatement of Age or Sex
Since the age and sex are important factors in determining an applicant’s insurance premium, relying on inaccurate information could result in the insurance company readjusting the benefits to fit the correct information. Rather than voiding the contract in its entirety, the typical practice is to adjust the policy premium to reflect the truth.
McGill highlights what a sample provision may look like:
“If the age or sex of the insured has been misstated, we will adjust all benefits payable under this policy to that which the premiums paid would have been purchased at the correct age or sex,” quoted in McGill.
A clause in an insurance policy that allows for the insured to receive all or a portion of the benefit or a partial refund of the premiums paid if the insured misses premiums payments, causing the policy to lapse. It may only be in effect for a limited period of time, and may only kick in after the policy has been active for several years.