A life insurance policy can be long and complex, with over-lawyered details in a small font. You may rely on your life insurance agent to steer you toward a good policy and tell you the crucial details. But an agent might not touch on everything you should know.
Here are 10 things you may not notice about your life insurance policy but should pay attention to.
No. 1: The free look period
Life insurance policies include a free look period. It’s required to be at least 10 days, and can extend to 30 days, depending on your state and age. During the free look period, you can cancel the policy for any reason and receive a full refund of any premiums paid. This is an opportunity to review the terms and conditions of the policy to ensure they meet your expectations.
No. 2 : Incontestability clause
Life insurance policies include an incontestability clause. This section allows life insurance companies to void the policy and/or deny a death benefit payout in the event of fraud or misstatement. Typically these clauses stay in effect for the first one to two years of a policy. If an insurance company invokes the incontestability clause, it will refund the premiums paid.
There is a fine line between misrepresentation and fraud on an application.
Misrepresentation is when you fail to disclose information. If a misrepresentation is discovered on an application after the policy has been issued, and during the contestability period, the insurance company could still pay a claim based on the coverage amount that you would have had if you had paid the correct premium from the start.
After the incontestability period ends, the insurance company will pay a death benefit.
Fraud is when you lie on your application. The insurance company can deny a claim when there is fraud.
No. 3: Suicide clause
The suicide clause says there will be no payment of the death benefit if the insured person commits suicide within the first two years of the policy. In those cases, the insurance company will refund the premium to the policy’s beneficiaries.
After two years, the company will pay the claim if cause of death is by suicide. Insurance companies have this provision to protect themselves against individuals who purchase the policy when they are planning to commit suicide.
No. 4: Premium payment options
Life insurance policies allow you to choose how often you pay premiums. This is referred to as the mode of premium payment.
Expect service charges if you pay semi-annually, quarterly or monthly. For example, if the quarterly premium is 27% of the annual premium, then you are paying an additional 8% per year over what you would be paying annually.
You can often save a significant amount by changing your premium mode and paying less often.
No. 5: Grace period for payment
Life insurance companies will accept a late payment during the grace period, which is typically 31 days. During this time, the insurance company will accept payment and coverage will remain in force.
No. 6: Reinstatement of a lapsed policy
Did you fail to send in a premium payment even after the grace period? Most life insurance policies include a reinstatement provision so that you can get your coverage back.
The reinstatement period starts after the end of the grace period, at which time the policy lapses. During the first few days of the reinstatement period (typically 21 to 30 days), the life insurance company will accept the premium and place the policy back in force. After a longer period, the insurance company will allow you to apply for reinstatement, which requires providing evidence of insurability.
Having your policy reinstated will typically trigger a new incontestability provision.
No. 7: Life Insurance riders
Life insurance riders add extra coverage to your policy. Riders could be free or you may be paying for them.
It’s important to understand these riders and determine whether they are helpful for you and if they are worth the cost.
Insurance companies may retroactively add free riders to existing life insurance policies. For example, many life insurance companies have added an accelerated death benefit rider to existing life insurance policies. This rider gives you access to a portion of your own death benefit if you become terminally ill. The money can be used by the policyholder to pay medical bills.
No. 8: Policy loan interest
Cash value life insurance policies generally provide the option to take out loans against the policy—assuming you’ve built up enough cash value.
But these loans are not free. Loan interest is charged for any borrowed amount. The insurance company will continue to credit interest or dividends on the amount borrowed, but it is almost always lower than the interest paid on cash value that’s not borrowed.
The policy loan terms and interest rate can be found in the policy. The amount borrowed can impact the long-term performance of your life insurance policy. Learn more about the dangers of life insurance policy loans.
No. 9: Death benefit settlement options
All life insurance policies include life insurance payout options, which are choices for how the death benefit will be paid out.
The most common option is the lump sum payout. Other options include:
- Leaving the funds in an account with the insurance company. With this option, the insurance company is required to pay interest after 30 days and typically provides a checkbook to the beneficiary.
- Receiving payouts similar to an annuity. This could include lifetime income for the beneficiary, payout for a specific time period or interest-only payments. The lifetime income settlement option is useful if you are concerned about leaving your beneficiary with a large lump sum of money.
No. 10: Conversion privilege
A term life insurance policy may contain a conversion privilege that allows you to convert it to a permanent life insurance policy.
If you decide to convert your term life policy, you may be offered only one conversion option. For example, the choice may be only one type of universal life insurance. In other words, you may not be able to choose from the company’s full line of products.
The policy might not specify whether you have a choice. There will also be a deadline for converting, so make sure you know when you’d have to decide.
As with any financial service or product, it’s important to understand what you are buying. This is especially true for life insurance because it’s hard to reverse course after buying a policy. If you discover years later that you’re not happy with your purchase, you’ll have to apply for a new policy based on your older age and any new health conditions, which can dramatically increase the price.