Important Provisions to Know

Accidental Death Benefit: An optional provision that provides an additional payment for loss of life due to an accident that was the direct cause of death. If the additional amount equals the face amount of the policy, this provision is frequently called a "double indemnity" provision. some companies issue "ADB" in multiples of two or three times the face amount. (See also: double indemnity.)

Beneficiary: The recipient of life insurance proceeds at the death of the insured is the policy's beneficiary. A primary beneficiary is first in line to receive that money. A secondary beneficiary is entitled to payment only if no primary beneficiary is alive when the insured dies. Final beneficiaries are those entitled to proceeds if no primary or secondary beneficiaries are alive at the death of the insured. These "backup" beneficiaries are often called "alternate" or "contingent" beneficiaries, since their claims are contingent on the deaths of everyone in the higher class of primary beneficiaries.

Cash Surrender Value: Cash surrender value is the amount available to the policyowner when a life insurance policy is surrendered. It is also the amount upon which a policy loan is based. In the first 8 to ten years after a policy is issued, the cash value is typically the insurer's reserve to meet future liabilities reduced by a surrender charge that enables the insurer to recover expenses incurred in setting up the policy. If a policy is surrendered in later years, the cash surrender value usually equals or closely approximates the reserve value of the policy.

Collateral Assignment: When a life insurance contract is transferred to an individual or other party as security for a debt, this usually temporary assignment does not transfer all policy rights. Under a collateral assignment, the creditor is entitled to be reimbursed only to the extent "his interest may appear," i.e., policy proceeds will be payable only for the amount owed by the policyowner at that time. Any death benefit in excess of the debt owed by the policyowner to the creditor is paid to the policy's beneficiary. (For comparison, see: absolute assignment.)

Contestable Clause: Sometimes called the incontestable clause. The provision in the insurance contract that states the time (called the contestable period) the insurer has to contest and the grounds under which the policy may be contested or voided by the insurer. By law, the maximum contestable period is two years, but many policies limit the period to one year.

Contract of Insurance: A legally binding agreement in which an insurer agrees to pay a death benefit upon the death of the insured in return for the consideration of the policyowner's payment of an initial premium and the policy application. Once the insurer issues the contract, the policyowner pays premiums as a condition that precedes the insurer's duty to pay the death benefit upon the demise of the insured. This legally enforceable agreement comprises more than just the policy. The application and any attached supplements, riders, or endorsements form the entire contract.

Disability Premium Waiver Insurance: This is an important option or rider in a life insurance policy that provides that if an insured becomes totally disabled for six months or longer, no further premiums will be due and the policy will be continued in full force until death or recovery occurs. Upon recovery, the policyowner does not have to repay premium payments made by the insurer on behalf of the policyowner during the disability period. (WARNING): THIS IS A POPULAR PROVISION AND IT CAN PROVIDE A TREMENDOUS BENEFIT IF STRUCTURED PROPERLY. THE PROBLEM HERE IS THERE ARE DOZENS OF DIFFERENT DIFINITIONS FOR DISABILITY. EXAMPLE: GAINFUL EMPLOYMENT, ANY OCCUPATION FOR COMPENSATION, YOUR REGULAR OCCUPATION, YOUR OCCUPATION AT TIME OF DISABILITY, ETC. AS YOU CAN SEE SOME OF THE WORDING IN THESE DIFINITIONS CAN MAKE IT VERY DIFFICULT TO QUALIFY FOR A BENEFIT, HENCE YOU PAY A PREMIUM FOR A BENEFIT YOU MOST LIKELY COULDN'T QUALIFY FOR. THE BEST DIFINITION IS "YOUR OCCUPATION" OR "THE MATERIAL AND SUBSTANTIAL DUTIES OF YOUR REGULAR OCCUPATION. THIS DIFINITION USUALLY APPLIES FOR 2 YEARS AND A FEW COMPANIES HAVE A 5 YEAR PERIOD WHICH WOULD BE MORE PREFERRABLE. AFTER THE 2 OR 5 YR INITIAL PERIOD THEN THE BEST I'VE SEEN WOULD BE AN "OCCUPATION FITTED BY EDUCATION TRAINING AND EXPERIENCE. ALSO BE AWARE THAT THIS BENEFIT IS TOTALLY DIFFERENT IN UNIVERSAL LIFE AND VARIABLE TYPE PRODUCTS. GET A FULL EXPLAINATION BEFORE YOU BUY. THE TERM "WAIVER OF PREMIUM" HAS MANY DIFFERENT MEANINGS. ('BEWARE!")

Extended Term Option: A nonforfeiture option that provides that the net cash surrender value of a policy may be used as a net single premium at the attained age of the insured to purchase term insurance at the face amount of the original policy for as long a period as possible.

Free-Look Provision: A provision in life insurance policies that gives the policyowner a stated amount of time (usually ten days) to review a new policy. It can be returned within this time for a 100 percent refund of premiums paid, but cancellation of coverage is effective from date of issue.

Grace Period: Most life insurance contracts provide that premiums may be paid at any time within a period of generally 30 or 31 days following the premium due date, during which time the policy remains in full force. If death occurs during the grace period, the insurer will pay the face amount less the amount of the earned but unpaid premium (and any outstanding loan). Generally, an insurer will not charge interest on overdue premiums if they are paid before the end of the grace period.

Nonforfeiture Values: Those values or benefits in a life insurance policy that by law, the policyowner doe not forfeit, even if he or she chooses to discontinue payment of premiums. It usually includes cash value, loan vale, paid-up insurance value, and extended term insurance value.

Suicide Provision: Life insurance policies include a provision that if the insured commits suicide within a specified period, usually one or two years after date of issue, the company is not liable to pay the face amount of coverage. Generally, liability is limited to a return of premiums paid.