May 01, 2023
Most people hate the thought of reading a life insurance policy (or any insurance policy, for that matter). However, if you can find the time and muster the patience, it’s probably a good idea to read through your policy. If you do, you’ll understand your policy better and gain an understanding of your rights and obligations under the contract.
A life insurance policy contains the following parts:
Most states require that a clause be inserted in your policy stating that the policy and the application attached to it together form the entire contract between you and the insurer. This clause is beneficial to you because if your insurer accuses you of misrepresentation and seeks to void the contract, it’s prevented from using other evidence outside of the contract. It can void the contract only if you made false statements on your application.
This provision states that the contract cannot be contested, except for nonpayment of premiums, after the policy has been in force during the insured’s lifetime for a period of two years from the date of issue. This provision allows the insured to (eventually) be secure in the fact that the beneficiaries will not have to prove that statements made on the application were true to collect the policy benefits. It also gives the insurance company a period in which it can contest a policy for fraudulent statements made on the application.
This is somewhat of an exception to the incontestability provision. The incontestability provision does not apply when you, the insured, misrepresent your age. The reason is simple. Because age is a key factor in determining whether a company offers you life insurance and in setting premiums, some applicants are tempted to understate their age in order to pay a lower premium.
Understandably, insurers want to avoid this. The misstatement of age clause provides that if you have misrepresented your age, the insurer will lower the face amount of the policy to the amount of insurance that the premium paid would have purchased at the correct age.
Your policy specifies the due date for premiums (e.g., monthly, quarterly, semiannually, annually). Whatever the due date, you generally must pay your premiums on or before that date. If you fail to do so, however, you may still pay the premium during the grace period. The grace period is required by most state laws and typically lasts for 31 days. For example, if you have a premium due on January 1 and don’t pay it by that date, you would have until February 1 to make the payment before the policy would lapse. If you died on January 15, the death benefit proceeds would still be paid, but minus the amount of the premium in default.
Most life insurance contracts contain a clause that allows you to reinstate or reactivate a lapsed policy (i.e., one for which you did not pay the premium due by the end of the grace period). However, reinstatement is not your unconditional right. If available, it will be subject to a number of very specific requirements on your part. First, if you had a cash value policy, reinstatement will be possible only if, at the time of the policy’s lapse, you did not withdraw its cash surrender value. Second, reinstatement must be accomplished within a specified time period, normally five years after the lapse. Third, you must resubmit proper evidence of your insurability as if you were applying for the insurance all over again. Finally, an insurer will generally permit reinstatement only if you pay all of the overdue premiums (plus interest) and any indebtedness from loans that may have existed at the time of lapse (plus interest).
Almost all life insurance policies exclude suicide during a specified period after the policy is issued. Under this clause, the typical period during which coverage for suicide will be denied is two years (although some policies limit it to one year). If the insured commits suicide (whether sane or insane) within two years after the issue date of the policy, the insurer will not pay any death benefits to the beneficiary. The insurer would be responsible for refunding only the premiums paid on the policy.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This article was prepared by Broadridge.
LPL Tracking #1-183482
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
The LPL Financial registered representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AL, AK, AZ, CA, DC, FL, GA, IN, KY, LA, MI, MO, MS, NC, NV, NY, OH, SC, TN, TX, VA, WA, WI.