Life insurance plans have a simple dynamic: you take out a plan and pay the monthly premiums. In exchange, if you die while the policy is in effect, the company pays an indemnity to your beneficiaries. Beyond this general premise, policies include various types of clauses that can make things more complicated.
Prior to signing a life insurance plan, it is very important that you carefully read the clauses in your policy. This is the only way to be certain about what is included in your plan and what is excluded. Here we list and explain the most common clauses in a life insurance plan regardless or whether you choose a term or whole life plan. Read below to find out more.
About the most common life insurance plans: Article contents
What Clauses Does a Life Insurance Policy Contain?
If you are going to take out a life insurance plan, you are probably already aware that insurance policies include all types of clauses that modify the basic structure of the policy. Clauses are articles that are incorporated into the policy and impose conditions.
There can be many clauses, making it important for you to read them all carefully so you can understand their implications. Remember, if you don’t agree with the modification the clause implies, you can ask for it to be changed or even removed.
Many plans tend to combine the most common and well-known clauses with others that are rare and more problematic for the insured. This is why you need to study and review them occasionally to correctly remember what they say and how they affect how the plan evolves and operates.
In general, the clauses propose conditions upon the general purpose of an insurance policy. In other words, they stipulate what will happen with the policy if certain circumstances occur. The insurance company uses these clauses to protect itself from excessive risks, extraordinary situations, or possible fraud or misrepresentation by policy-holders.
If one of these conditional circumstances occurs, the insurance company can execute the clause containing it and penalize the policy-holder. On occasion, this penalization can mean the cancellation of the policy, or even the withholding of payment of the death benefit.
There are various types of clauses, but they can be divided into two main categories: exclusions or limitations, and coverage conditions. Let’s take a look at what these types of clauses contain.
Types of Clauses Included in Life Insurance Policies
In the past it was very common for insurance policies to contain clauses that excluded coverage for people who participated in acts of war, served in the military, worked in aviation, or had dangerous hobbies, like skydiving or scuba diving. However, the philosophy of insurance companies has slowly shifted to a more inclusive stance, and today these types of clauses have nearly disappeared. Despite this, there are still other types of articles upon which the insurance companies make the payment of indemnities, and even the validity of the policy, conditional. The two main types of clauses are:
- Exclusions and limitations. Clauses that impose limits on policies are the most well-known. They list the situations in which the company reserves the right not to pay the indemnity. The most frequent one is a suicide clause, which states that if a policy-holder dies by suicide prior to a certain period of time passing, then the company is not required to pay the death benefit. This means that exclusion and limitation clauses determine what events are excluded from coverage, and consequently, the policy-holders and beneficiaries lose their rights.
- Coverage determination. These clauses are designed to modify coverage in such a way that the insurance company makes it clear, for example, how the indemnity is paid, to whom, and the order of the beneficiaries (learn more about how to choose beneficiaries for a life insurance plan.)
These clauses also stipulate how other aspects of the policy function, such as savings components associated with some types of life insurance, or the conditions under which the policy-holder can borrow the cash value of their policy. They also lay out, in many cases, the amounts of monthly premiums, as well as the expenses that can be derived from maintaining the policy. They can even include certain pre-determined penalties for the policy holder’s behavior.
By combining different clauses, policies can become more tedious to understand than we’d like, which is why we recommend that you carefully study what each clause means and know which ones are included in your policy and how they affect you. Some are rare, but many others are almost always included.
Exclusion and Limitations Clauses in Life Insurance Policies
Each of the two main types of clauses we have seen includes a broad subcategory of articles and conditions. The most frequent exclusion and limitation clauses are the following:
- Suicide clause. This is possibly the most well-known and common of the limitation and exclusion clauses. It stipulates that if a policy-holder commits suicide prior to a certain period of time passing from the date they took out the policy, then the company is not required to pay the death benefit. The time frame for this varies. In some states it is a year, but for most, at least two years must pass before suicide is authorized as a cause of death with the right to receive indemnity.
In order for the insurance company to consider that the insured’s cause of death was suicide, first a medical report must be done, and consequently, a court ruling must be issued to this effect. If the judge does not deem it was suicide, then the insurance company will not accept it as such.
Within the different classifications of suicide is a drug overdose. If the insurance clauses do not state that overdose is considered as suicide, then the insurance company will have to pay the indemnity.
- Dangerous activities. Though less and less common, there are still policies that include clauses regarding dangerous activities. This is a way for the insurance companies to take precautions for very dangerous hobbies or jobs. This includes, for example, people who like scuba diving, climbing, car racing or other high-risk sports. They also usually include high-risk activities like being an airplane pilot (or any other activity carried out on a plane). But now, with improved air safety, these aviation clauses only apply now to very specific types of pilots. For example, they apply only to the very elderly who want to continue flying their planes.
- Illegal activities. Some insurance policies include clauses that exclude the collection of the death benefit to beneficiaries of people who have died doing any activity that is against the law. This can include a traffic accident that happens when you are speeding, something that is a serious crime in many parts of the United States.
- Misrepresentation of age. A frequent exclusion clause stipulates that the policy can be voided if the insurance company finds out that the insured lied about their age to obtain lower premiums. In some states, the law prohibits insurance companies from cancelling policies of people who lie about their age, but they are allowed to modify the policy to adjust the final indemnity to the insured’s actual age.
- Lies and misrepresentations. If the policy-holder hides any important information about their health, financial, or family situation, the company can void the policy or refuse to pay the indemnity as soon as they find out about it. It is common for policy-holders to lie about information including hereditary family illnesses (especially certain types of cancer), addictions to alcohol, tobacco or drugs, and other matters that can result in the insurance company denying them coverage in the first place. Remember that lying during the qualification process can even result in criminal charges.
- Incontestability clause. The incontestability clause is not technically an exclusion, but serves a similar purpose. These clauses establish that the insurance company has a certain period of time to determine if the policy-holder lied during the qualification process when they were asked about their health condition, lifestyle and habits. During this process, it is best not to hide anything, because if the insurance company finds out about it, they can use this clause to void the policy or enforce penalties. In general, the period for contesting or disputing is around two years from the time the policy entered into effect.
Clauses that Determine a Policy’s Coverage
Beyond the exclusions and limitations, there are a lot of other clauses that can be included in an insurance policy. They are used to determine your coverage and the most common are:
- Insuring clause. This is one of the most important clauses. It determines what the insurance company covers and what its obligations are. It outlines the insurance company’s commitment to pay an indemnity to the insured’s beneficiaries when they pass away.
- Beneficiary clause. This is the clause where the insured stipulates to whom the death benefit from their policy will be paid to. You can name people or entities as beneficiaries, and in addition, you can modify them as many times as you like throughout the life of the policy. Furthermore, it is important to name secondary beneficiaries (they take the place of the principal beneficiaries in the event of their death), and in some cases, even tertiary beneficiaries.
- Preference beneficiary clause. These clauses establish the order in which the indemnity will be paid out if the insured does not name a sole beneficiary.
- Survivorship clause. In most cases, the survivorship clause stipulates a minimum amount of time that the beneficiary of the indemnity must live before they can receive it. For example, if the money is supposed to be paid to a very elderly person, the company requires that they survive the insured by a minimum number of days before it will pay the benefit.
- Spendthrift clause. Some plans offer you the ability to protect the indemnity against creditors. For example, if the beneficiary is a frequent gambler, or has creditors, the company can withhold the payment of the death benefit and disburse it in payments.
- Grace period clause. In general, insurance policies contain a clause that gives the insured a grace period for paying their premiums. The term is generally one month. During this time, coverage will remain in effect.
- Reinstatement clause. Some policies include a clause that allows the insured to reinstate their policy after it has been cancelled due to the non-payment of premiums. They will simply have to pay the unpaid premiums, in addition to interest, and the policy will go back into effect.
- Free look period. This clause allows policy holders a term during which they can cancel the policy if they do not agree with the conditions imposed by the insurance company.
- Disability clause. Some policies include clauses that grants special benefits to policy holders who are affected by a disability.
As you can see, there are many clauses that can alter or modify your policy, or even void it. Regardless of the life insurance policy you choose, don’t forget to carefully read the clauses imposed by the insurance company. This will help you avoid making any serious mistakes with your life insurance policy. If you have questions, don’t hesitate to reach out to an insurance agent, who will be more than happy to provide you with detailed information.