Most life insurance policies have several pages of clauses and jargon that are difficult to read or understand. After reviewing the document, you may wonder if it is covered and, if so, to what extent and under what circumstances. Perhaps you stumbled upon the undisputed clause, the waste clause, or the refund clause and were completely confused as to what they mean and whether they apply to your coverage.
- Understanding the terms of your life insurance policy is important to understanding the scope of your coverage.
- These key parts of your policy will ensure that your family is covered.
- Understanding the clauses can give you a sense of security, the confidence that you are covered for any eventuality.
Life insurance is a wealth-building tool. It alleviates the financial burdens on your surviving family in your absence and can also provide periodic income. This temporary source of funds can meet needs such as mortgage payments, medical emergencies, and educational needs. However, to make sure your life insurance policy will cover your family when you can’t, you need to understand the product you are buying.
Read on to better understand the clauses in most life insurance policies and find out what they mean for your coverage.
The main purpose of life insurance is to transfer wealth to your heirs or to provide liquidity to your family. For that reason, you must name a beneficiary who will receive the life insurance proceeds after your death. This beneficiary can be your spouse, children or relatives. You can also change the recipient at any time during the life of the policy.
However, if you have not designated a beneficiary, your family will have problems when the winnings are paid. The insurance money will go into your estate, and the probate fees necessary to liquidate your estate can dig a hole in your surviving family’s savings.
Therefore, it is always practical to have a primary beneficiary and a contingent (secondary) beneficiary on your policy. For example, you can choose your spouse as the primary beneficiary and your children as contingent beneficiaries. That way, in the event that your spouse also dies, your children will qualify for the insurance money.
You go through various phases in your life: marriage, divorce, a new business, the birth of your child, and more. Consequently, you should regularly update your grantees to accommodate those events.
Preferential Beneficiary Clause
If you have not designated a beneficiary on your policy, your insurance company will disburse the life insurance money to the people listed on your policy. Assume the order of priority in your policy is as follows:
- Your wife
- Your children
- Your parents.
If the proceeds are distributed, they will go to the first person alive who, in most cases, will be your spouse.
According to this clause, after your death, the policy proceeds will go to the beneficiary, for example his wife, but only if the beneficiary survives him for a specified number of days.
Misstatement of the age clause
Your age plays an important role in determining adequate life insurance coverage. The older your age, the higher the premium charged. So if you lie about your actual age to lower your premiums, you may pay a huge price for it. In this situation, your insurer may choose to cancel your policy entirely, increase your premiums, or adjust your policy amount.
Your insurance company has the right, generally during the first two years of the policy, to question the validity of your policy on the basis that you withheld important information. If you are found guilty of concealment, your insurer will void the policy and return the premiums.
For example, if you hid the important fact that you are a heavy drinker in order to get a lower premium and your insurer finds out about this deception, it will not pay the claim for your death if it occurs during the first two years of the policy.
However, after the two-year period, your insurer cannot revoke the policy and you have to pay the insurance money to your family without any opposition.
Despite this clause, there are exceptions where the insurance company will not have to pay the claim. Such cases include deliberate fraud, in which your insurer may choose to challenge your policy even after the two-year period.
The uncontested clause is one of the most important clauses in your life insurance policy.
If you have named your child gambler as a beneficiary, there is a possibility that after your death your child’s creditor will take advantage of your life insurance proceeds. The wasteful clause gives the insurer the right to withhold income and protect funds from creditors. In this case, your insurer may prefer to pay your child the insurance money in installments rather than pay a lump sum.
The suicide clause in your policy specifies that the insurance company will not pay the benefit if the insured attempts, or commits, suicide within a specified period from the start of coverage. If the death of the insured is the result of suicide, an insurer will only return previously paid premiums to the family.
Normally, insurance companies do not compensate for death due to war or war-related events. According to this clause, if you are a victim of war, your insurer will not pay you benefits. Instead, your insurer will reimburse your family for previously paid premiums.
Under this clause, your insurer will not pay compensation to your surviving family due to death due to air travel or while on an airplane. However, if you are an airline employee, you can purchase aviation insurance by paying higher premiums.
Free Exam Period
If you are not satisfied with the terms and conditions of the policy, you can return the policy within a specified period of receipt and your premiums will be fully refunded. Here, the time frame will vary depending on your insurer.
Grace period clause
There are times when you cannot pay your premiums as a result of financial problems. In these circumstances, the “grace period” provision works in your favor. Your insurance company will provide you with a grace period within which you can make the necessary monetary arrangements and pay your premiums. During this time, you will continue to be covered by your insurance policy. If you still don’t pay your premiums, your policy may be canceled.
If you die within the grace period, your insurer will pay the insurance money after subtracting the unpaid premium from that money.
If your policy has expired due to non-payment of premium, you can reactivate it by paying all previous outstanding premiums along with interest. However, you must show your insurer that you are still in good health to qualify for this provision.
What are life insurance clauses?
The clauses are sections of the insurance policy. They define the insurer’s responsibilities to the insured, the circumstances under which claims will and may not be paid, as well as the insured’s responsibilities. Sometimes called exclusions, they are designed to help the customer and the business.
Why Should Consumers Care About Clauses?
Being familiar with them will help the covered person understand the product they are buying. Insurance policies are full of jargon, and since the devil is in the details, understanding them will protect the consumer at critical times.
If you haven’t taken the time to understand your insurance policy yet, you should do so as soon as possible. Life insurance is an asset if you know how to get the most out of it, but many choose not to bother with the insurance jargon and instead blindly follow their insurance advisers and this choice can have serious consequences for you and your family. . Your knowledge of the insurance provisions described above can give you a head start when shopping for life insurance and can help you ensure that your insurance coverage works in the best interest of your family.