There are several life insurance provisions and riders that a contract has in order to protect the insured, insurer and the beneficiary. It could involve policies, clauses or riders. Riders are extra benefits that a policy holder can add to amend the terms of a basic insurance policy. Riders are purely optional and aim to help customize the insurance policy to fit one’s needs. Below are common provisions and riders.
Life Insurance Provisions
Grace Period
This is the period of time after the due date of a premium payment. The grace period is usually 30 days. After 30 days have passed, the insurance policy is said to have “lapsed” and will be cancelled. There are ways to reinstate it. Grace period is one of the most valued life insurance provisions as lapses could accidentally happen from time to time.
Reinstatement Provision
If a policy lapses due to non payment of premiums, there are processes in which a life insurance company would follow in order to reinstate the policy. Reinstatement could depend on providing evidence of insurability and payment of any premiums due.
Incontestable Clause
An incontestable clause can be found in most life insurance policies which prevent the insurance company from cancelling the contract due to misstatements on the application, after a certain period of time has passed. This period is usually two years but could vary.
Suicide Clause
One of life insurance provisions that you will see in most policies is the suicide clause. Policies have a suicide clause that will prevent the beneficiary from receiving a lump sum if the insured commits suicide within a specified period. This period is usually two years. If so, the beneficiary is entitled to only “return of premiums”.
Ownership Clause
The ownership clause gives the right to the policyholder to state the beneficiary on the policy. The beneficiaries can be named individuals or estate. To name a beneficiary, the policyholder must have a vested interest in the life insured such as a business partner, wife, husband, children, etc
Loan Provisions
Insurance companies may have loan provisions regarding policy loans. Policy loans are loans by the insurance company to the policy holder based on the cash value of the policy (CSV).
Settlement Provisions
The beneficiary of a life insurance company may have several settlement options regarding how the funds are to be paid out. It could be in cash, receiving payments over time, receiving an annuity, etc.
Non-Forfeiture Options
Life insurance policies have provisions in place that try to prevent the lapse of the policy. This is true for policies with accumulated cash value. The individual can use this cash value for “reduced paid-up insurance”, “extended term insurance” or use the cash value against the premium also known as an automatic premium loan.
Dividend Clause
Dividends are yearly distributions paid by the insurance company. The dividends are not guaranteed but depend on factors such as mortality rate, morbidity experience, investment earnings, expenses, etc. If the company has strong year end financial results and lower-than-expected number of claims, a policyholder dividend may be paid out.
Conversion Clause
Life insurance contracts may have conversion clauses which allow the policy holder to convert the policy. For example, an individual converting term to permanent. Premiums at conversion could be increased due to renewal at attained age or stay the same as conversion could happen at “original age”. This clause may not be included in every life insurance policy. Keep a close eye on the various life insurance provisions that your policy may have.
Renewable Term Life Insurance Provisions
A policyholder may be able to renew their term policy for extended number of years but the rates will be at insured’s attained age. The coverage term will be extended without having to re-quality for new coverage but renew is contingent on the policy being up to date.
Beneficiary Designations
A beneficiary is the recipient of the death benefit. More than one beneficiary may be named and the final proceeds would be split in accordance to designated percentage. Beneficiaries could be primary beneficiaries, secondary beneficiaries or tertiary beneficiaries.
Misstatement of Age
A major factor in determining the premium is age. Life insurance companies have policies in place that they could undertake if they determine the applicant misstated their age during the underwriting process. The misstatement of age provision allows insurance companies to adjust the premiums to reflect your age.
Life Insurance Provisions: Policy Riders
Waiver of Premiums
Certain life insurance policies have waiver of premium riders which permit the policyholder to stop paying the premium after they’ve been disabled for a specified period of time, usually 6 months.
Accidental Death Rider
Accidental death benefit is an additional payment provided to the beneficiary when death of the policyholder occurs by accidental means. In addition to the death benefit, there could be an additional payment.
Critical Illness Rider
With a critical illness rider, a lump sum would be paid out if the policyholder is diagnosed with either cancer, heart attack, stroke, kidney failure, etc.
Cost of Living Rider
This rider will provide an increase in benefits due to changes in the cost of living. The increases are based on changes in the Consumer Price Index.
Guaranteed Insurability
This rider allows the insured to obtain additional insurance without providing evidence of insurability.
Family Riders
Family riders allow you to purchase additional coverage for a spouse or a child.
Spousal Term Rider
Spousal Term rider provides the policyholder with the option to obtain insurance coverage for their spouse. This coverage ends when the policyholder turns 65 years old.
Child Term Rider
Child Term Rider provides the policyholder’s children with coverage until they’re age 25. These type of riders give the policyholder the option to add additional life insurance to their policy.
To recap, life insurance companies have various provisions and riders in place to protect themselves and to allow the policyholder to enhance the coverage of their policy.
Above were the most common life insurance provisions and riders that you could add to your insurance policy in order to offer your family extra protection. However, the availability of life insurance provisions and riders may different from insurance providers.
The bottom line is that insurance policies have life insurance provisions and riders. We’ve listed some of the common ones that you may run into. It’s important to read your life insurance documents in full so you understand what’s covered and what is not.