Can you explain the different life policy provisions?

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Asked December 20, 2011

1 Answer


Policy Types - There are three primary types of life insurance: Whole or permanent life, term life, and final expense insurance. Whole life insurance will follow you throughout your life as long as the premiums are up to date, term life is only valid for the specified term of the policy, and final expense coverage is typically contracted for payment to the funeral home or the company which handles your burial and other costs.

Face Value - The face value of a policy is the amount the policy is written for. If the policy is written for $100,000, then that is the face value of the policy.

Cash Value - Cash value is a term used to describe permanent life insurance. Cash value is the amount of money you have accrued in a whole life insurance policy. Cash value is based on the amount you have actually paid, plus any interest the policy has earned. If you borrow against you whole life policy, it is the cash value that you borrow against, not the face value of the policy.

Length of Coverage - Length of coverage is the term of a term life policy. If you take out a ten year term life policy, for example, then the length of coverage is 10 years, after which you must either renew the policy, convert it to permanent insurance, or forfeit the money that has been paid on the policy.

Policy Loan - A policy loan is the amount you borrow against a whole life policy's cash value. This type of loan is essentially loaning money to yourself, which means that you do not have to have good credit or provide collateral, but you cannot borrow more than the amount of money you have paid in, plus any interest the policy may have earned.

Nonforfeiture Options - A policy with nonforfeiture options provides a specified time period under which the policy can be forfeited due to misrepresentation, suicide or other typical exclusions. It can be considered as an insurance policy for the insurance policy, and may even be worded in such a way that the cash value of the policy can be used to make premiums payments, thereby making the policy safe from even financial hardships.

Dividends - In a permanent life insurance policy with investment options, the dividends are the amount of money paid out on the gains of the policy investments. Dividends can be paid to the policyholder or used to provide premium payments. Dividends that are not paid out can also be applied as accrued cash in the policy, and then reinvested.

Incontestability Provision - A policy with an incontestability option means that after the defined time period has passed, the insurance company forfeits the right to contest the insured person's death, regardless of the circumstances of their death. Most life insurance policies have an incontestability provision of 1 to 2 years, but this provision can be any length of time agreed on by the insurance company and the insured person.

Riders - Insurance riders are special policy provisions that are written into your basic policy. In most cases, a rider is a policy of its own, added to the regular policy and subject to the terms of the primary policy.

Accelerated Benefit Riders - Most life insurance policies include a provision that allows accelerated death benefits if the insured person is diagnosed with a terminal condition. This allows the beneficiaries to receive a portion of the death benefits prior to the insured person's demise.

Misstatement Of Age And/Or Sex - This term could also be written into your policy as misrepresentation or even fraud. Giving false information, even accidentally, could be grounds for terminating the policy, but the insurance must catch the error within a period of time specified in the policy.

Suicide Clause - This is a clause that is written into most life insurance policies which allows the insurance company to deny death benefits for someone who commits suicide. Like fraud, most policies have a specific period of time where suicide is a reason to deny the claim, but some companies make this clause an indefinite clause that lasts for the entire length of the policy.

Settlement Options - This term is used to define the payout provisions of a life insurance policy. Settlement options can be a lump sum payout, or payout through a trust fund, among other options. It is also possible to leave the money with the insurance company to accrue additional interest, withdrawing all or part of the money as it is needed.

Answered December 20, 2011 by Anonymous

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