A life insurance policy is the written contract that formalizes the agreement between the life insurance company and the policyowner. The insurance company is the only party to the contract that makes an enforceable promise. While it is true that the policyowner must pay the premiums as they come due to keep the policy in force, no promises are made to continue paying those premiums. The option to stop paying at any time and allow the policy to lapse always exists.
Most life insurance policies are drafted as adhesion contracts—meaning they are non-negotiable. The policyowner must “adhere” to the terms of the policy as set forth by the insurance company. The contract describes the insurer’s obligations and the details under which the insurer will be bound to perform. It is the policyowner’s choice to accept (and adhere to) the agreement or not.
The contract is made up of provisions, options, riders, and endorsements. Provisions describe or explain features, benefits, conditions, or requirements of the contract. Options are features of the agreement that require the policyowner to make a choice regarding some aspect of coverage. Riders are additional coverage offered by the insurer at the time of application and they are added to the standard agreement in return for an additional premium. Endorsements are attachments to the life insurance contract that modify the original provisions.
Provisions
Some states mandate the inclusion of certain contract provisions. These provisions are designed to protect the policyowner. For example, most states require insurers to include a grace period clause in all insurance contracts. This clause allows additional time, after the regular payment due date, for premiums to be paid.
Other provisions describe features and requirements of the contract. For example, the beneficiary designation clause sets forth the procedures the policyowner must follow when naming or changing a beneficiary. Still other provisions limit the insurer’s liability (e.g., exclusions in case of suicide) to perform under certain circumstances. An insurance contract may contain dozens of individual provisions. Even though there is no opportunity to negotiate the provisions of the contract, policyowners should become familiar with them so that they understand the policy.
Options
Options in an insurance contract require the policyowner to make a choice regarding coverage. In the case of a dividend option, the policyowner would be required to choose what the insurer does with any dividends paid by the policy. Some options include having the dividends: paid in cash, applied to reduce the premiums, used to buy extra insurance, or treated in some other manner. Generally, the policyowner makes an election at the time of application, but in most cases the choice can be changed once the policy is in force. The policy will usually specify a default option if no election is made.
Riders
Typically, riders provide additional coverage above and beyond what is included in the basic life insurance contract. The insurer may offer such additional coverage, but it generally requires an additional premium. For example, accidental death benefit and waiver of premium in the event of disability riders are very common and may be purchased and attached to the basic contract. Riders help to customize a policy’s benefits so that it better fits the needs of the policyowner.
Endorsements
Because policy forms are general in nature, insurance companies often attach endorsements to the contract. The endorsement, which may be specific to the individual insured or affect all policy owners, modifies the basic contract provisions. As an example, a change in a state’s law that affects the policy after it was issued would result in the company issuing an endorsement to the policy which would change some aspect of the existing policy to bring it into compliance with the new state law.
If you have questions or need assistance, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
