4.1 Standard Provisions – Individual Policies Only
Contractual provisions describe the components of the insurance contract, outline the rights and responsibilities of the parties involved, and explain how the policy operates. These provisions define the terms of the agreement between the policyowner and the insurance company. Unlike riders, provisions and clauses are included in the policy at no additional cost.
Entire Contract Clause
This provision defines the components that make up the life insurance contract. The entire contract includes the policy itself, any riders or endorsements, amendments, and a copy of the application. Statements made in the application are considered representations rather than warranties, provided there is no fraud involved. All parts of the contract must be in writing and physically attached to the policy, and no document may be incorporated into the contract by reference.
Incontestability Clause
The incontestability clause allows the insurer to challenge a claim and potentially void the policy during the first two years if it can prove a material misrepresentation or fraud in the application. A material misrepresentation is a statement that would have influenced the insurer's decision to issue the policy had the correct information been known. After the policy has been in force for the specified contestability period—typically two years from the issue date—the insurer can no longer contest the policy based on misstatements, except in cases involving nonpayment of premiums.
Insuring Clause (Proof of Death)
The insuring clause appears on the first page of the policy and is considered the core provision of the contract. It identifies the parties to the agreement and specifies the conditions under which the insurer agrees to pay benefits. This clause represents the insurer's promise to pay the stated death benefit to the designated beneficiary once satisfactory proof of the insured's death is received, provided the policy was in force at the time of death.
Consideration Clause
The consideration clause outlines the policyowner's obligation to pay premiums, including the amount due and the frequency of payment. It represents the exchange of value within the insurance contract: the policyowner agrees to pay the required premiums, and in return, the insurer agrees to provide coverage according to the terms of the insuring clause.
Changes (Modifications)
Any modification to the policy must be made in writing and signed by an authorized officer of the insurance company. The change must also be accepted by the policyowner and made part of the entire contract. Insurance producers do not have the authority to alter, amend, or waive any policy provisions.
Suicide Clause
If the insured dies by suicide—whether sane or insane—within the first two years after the policy is issued, the insurer's liability is typically limited to returning the premiums that have been paid. If the suicide occurs after the two-year period has passed, the insurer must pay the full death benefit to the designated beneficiary. This provision is intended to discourage individuals from purchasing life insurance with the intention of committing suicide soon after obtaining coverage.
Owner's Rights (Ownership Provision)
The ownership provision establishes that the policyowner holds all contractual rights under the policy. If the insured and the policyowner are different individuals, the insured generally does not possess policy rights. The policyowner has the authority to name or change revocable beneficiaries, borrow against the policy's cash value, access available living benefits, receive dividends and choose among available dividend options, and assign the policy either absolutely or as collateral. The policyowner is also responsible for paying the required premiums. Beneficiaries do not have ownership rights in the policy unless such rights are specifically granted.
Assignment
Assignment refers to the transfer of certain ownership rights in a life insurance policy. There are two primary types of assignments: absolute assignment and collateral assignment.
An absolute assignment involves the complete transfer of ownership from the current owner, known as the assignor, to a new owner, known as the assignee. Because ownership rights are permanently transferred, the assignee becomes the new policyowner and gains full control of the policy. This type of assignment is considered a permanent transfer of ownership.
A collateral assignment, on the other hand, does not permanently transfer ownership. Instead, it temporarily assigns specific rights in the policy to a creditor as security for a loan. In this arrangement, the original owner remains the assignor, while the creditor becomes the assignee. The assignment remains in effect until the debt is fully repaid. Because the creditor has priority over the policy proceeds, the assignee's claim must be satisfied first if the insured dies while the assignment is in effect, which may reduce the amount payable to the beneficiary.
For an assignment to be recognized by the insurer, it must be made in writing and submitted to the insurer's home office. The insurer is not responsible for verifying the legal validity of the assignment.
Examples
If the owner of a juvenile life insurance policy wishes to transfer ownership of the policy to the insured child once the child reaches age 18, the policyowner may execute an absolute assignment. In this case, ownership rights are permanently transferred to the child.
In another situation, a policyowner may obtain a loan and use an existing life insurance policy as collateral to secure the debt. The policy may be temporarily assigned to the creditor so that, if the insured dies before the loan is repaid, the creditor has the right to recover the outstanding balance from the policy proceeds. This approach is often less expensive than purchasing a separate insurance policy to cover the debt. Because the creditor's claim has priority, the beneficiary may receive a reduced death benefit if the insured dies before the loan is fully repaid. Once the loan is satisfied, the collateral assignment is removed and full rights to the policy are restored to the policyowner.
Misstatement of Age or Gender
If the insured's age or gender is incorrectly stated in the policy application, the policy benefits will be adjusted to reflect the correct age or gender based on the premium rates in effect at the time the policy was issued.
If the premiums paid were higher than required for the insured's correct age or gender, the insurer will refund the excess premiums. If the premiums paid were lower than required, the insurer will adjust the policy benefits accordingly. For example, if the premiums paid were 50% less than what should have been paid, the death benefit will typically be reduced by 50%.
There is no time limit for discovering a misstatement of age or gender, and this provision does not void or cancel the policy. The incontestability clause does not apply in this situation, since age and gender are used only to determine the correct premium and benefit amounts rather than to invalidate coverage.
Free Look (Right to Examine Period)
The free look provision gives the policyowner a specified period after receiving the policy to review its terms and conditions. If the policyowner is dissatisfied for any reason during this period, the policy may be returned to the insurer for a full refund of any premiums paid.
The free look period is typically 10 days, unless a different timeframe is required by state law. When applicable, additional details regarding this provision may be addressed in the state law chapter.
The free look period begins on the date the policy is delivered to the policyowner. For this reason, it is important for the producer to obtain a delivery receipt when the policy is delivered, documenting the start of the free look period.
Exclusions
Exclusions are specific conditions outlined in the insurance contract under which the insurer will not provide coverage. Once a policy has been issued, the insurer cannot add to or modify these exclusions. Common exclusions found in life insurance policies include the following:
- Aviation: Coverage is typically excluded for individuals engaged in certain aviation activities, such as student pilots or pilots with limited flight experience. This exclusion generally does not apply to individuals traveling as fare-paying passengers on regularly scheduled commercial airline flights.
- Status Clause: Coverage may be excluded for individuals serving in the military, as these individuals often receive life insurance protection through government programs.
- Results Clause (War Clause): Coverage is excluded if death results from acts of war, whether declared or undeclared. If death occurs during wartime due to such causes, the insurer typically refunds the premiums paid rather than paying the death benefit.
- Hazardous Occupation: Coverage may be excluded if death results from participation in a hazardous occupation specified in the policy, such as professional stunt driving or auto racing.
- Hazardous Hobbies or Avocations: Coverage may also be excluded if death occurs while engaging in hazardous recreational activities listed in the policy, such as skydiving or hot air ballooning.
- Suicide: Death resulting from suicide within the first two years of the policy is excluded from coverage under the suicide clause.
Quiz
1. Which statement best describes the Entire Contract Clause in a life insurance policy?
A. It allows the insurer to change the policy terms at any time
B. It states that the policy, riders, amendments, and application together form the complete contract
C. It allows verbal agreements to become part of the policy
D. It allows outside documents to be incorporated by reference
Correct Answer: B
Rationale: The Entire Contract Clause establishes that the complete contract consists only of the policy, riders or endorsements, amendments, and the application. All parts must be in writing and attached to the policy. External documents or verbal statements cannot be incorporated into the contract.
2. Under the Incontestability Clause, when may an insurer typically contest a policy for material misrepresentation?
A. At any time during the life of the policy
B. Only during the first two years after the policy is issued
C. Only if the insured dies within one year
D. Only if the beneficiary files a claim
Correct Answer: B
Rationale: The incontestability clause allows the insurer to challenge the policy for material misrepresentation during the contestability period, which is typically two years from the policy issue date. After this period, the policy generally cannot be contested except for nonpayment of premiums.
3. What is the primary purpose of the Consideration Clause?
A. To identify the beneficiary of the policy
B. To explain how policy dividends are distributed
C. To describe the exchange of value between the policyowner and the insurer
D. To outline exclusions in the policy
Correct Answer: C
Rationale: The consideration clause outlines the policyowner's obligation to pay premiums and the insurer's promise to provide coverage. It represents the exchange of value that forms the basis of the insurance contract.
4. Which type of assignment temporarily transfers certain rights in a policy to a creditor as security for a loan?
A. Absolute assignment
B. Conditional assignment
C. Collateral assignment
D. Beneficiary assignment
Correct Answer: C
Rationale: A collateral assignment temporarily transfers certain policy rights to a creditor as loan collateral. The creditor has priority over the policy proceeds until the debt is repaid, after which the assignment is removed and full rights revert to the policyowner.
5. If the insured's age was misstated on the application and discovered later, what will the insurer typically do?
A. Cancel the policy immediately
B. Pay the full death benefit regardless of the error
C. Adjust the benefits or premiums based on the correct age
D. Deny all claims under the policy
Correct Answer: C
Rationale: The Misstatement of Age or Gender provision allows the insurer to adjust policy benefits or premiums according to the correct age or gender. The policy remains valid and is not voided, and the incontestability clause does not apply to this adjustment.