A life insurance contract would seem to be a straightforward document whereby you pay the premiums in exchange for a death benefit paid to beneficiaries. But if you’ve ever looked at your life insurance policy, you’d be surprised at the length of the document.
When you first purchase life insurance, you have, by law, a free-look period which is often 10 or more days depending on the state and insurance carrier. This is the time to review the contract to be sure you understand and agree to all aspects of it.
Here are some of the most important aspects that you need to know when reading your life insurance policy.
The declarations page is one of the most important aspects of your life insurance policy because this page is what customizes the policy to your family’s needs. It’s usually the first page of the contract and has key details about the policy for your review. You’ll want to look everything over closely to make sure there are no errors on the declarations page.
The declarations page includes the following information:
- Personal information
- Benefit amount
- Policy type
- Premium amount
- Policy issue date
- Policy number
- Risk class
- Attached riders
- Named insured
- Policyowners name
- Selected riders
While most of the information is self-explanatory, there are a couple of areas that people aren’t always familiar with. The risk class defines how you were rated by the insurance carrier. For example, you could be a smoker or someone who has a history of high blood pressure. These factors affect the rating and ultimately determine your risk class for price consideration.
You can have more than one beneficiary on a life insurance policy. Make sure that their names are spelled correctly and be sure to properly allocate how much or what percentage each beneficiary gets. You may also name contingent beneficiaries in the event that your primary beneficiary does not outlive the named insured.
There are four parties to the insurance contract: the insurance company, the insured, the policy owner, and the named beneficiaries. The insured and policy owner can be the same person but don’t need to be. Often, a spouse will be the owner of the policy that names the other as the insured. You can also have a trust own the policy or a business in the case of key man insurance.
The policy illustration is a sample of how the policy can perform. It’s an illustration and not a guarantee though things like whole life insurance may have a minimum guaranteed growth column. Take a look at the illustration to make sure that you understand when premiums are collects, what the death benefit is and how it might grow in some policies, and what the cash value is projected to be and how it might grow under certain circumstances.
Reading the Policy Terms and Conditions
Once you’re past the policy’s declarations page and the policy illustration, you’ll get into the meat and potatoes of how the policy works. There are some key concepts to be on the lookout for and understand how they affect you.
Important concepts to review include:
- Contestability period: This is the time the insurer has to confirm the details of your application and contest the validity of the policy based on inaccurate application information. The contestability period is frequently two years from the policy issue date.
- Riders: The riders section will define what each individual rider offers in additional coverage. Riders add coverage or benefits to your policy, often for an additional premium.
- Exclusions: This tells you what the policy won’t pay a death benefit for. Common exclusions would be something like suicide or paying benefits based on an accidental death performing an excluding activity such as sky diving.
- Invalidation clauses: The policy can be voided if you misstate information on your application. For example, if you said you didn’t have cancer at the time of the application but actually did, the insurance carrier can invalidate the policy based on fraudulent information or misstatements of facts.
- Loan provisions: If your policy allows for loans, you’ll have a section that defines how much can be borrowed and how that process works.
Use the free look period to ask your insurance agent any questions that you have regarding the policy. If you are uncomfortable with anything you find in the policy, the free look period is the time to cancel the policy and get all of your premiums back.