Understanding life insurance exclusions and clauses
You’re committed to providing for your family. Life insurance policies are designed to offer that financial peace of mind, protecting your interests while making it clear what the company’s obligations are.
Life insurance is a legal contract between you and your insurer. You make regular payments, and they agree to pay a certain amount to your beneficiary when you die. Like any legal document, however, policies come with some fine print.
Life insurance clauses are important, but shouldn’t be something to worry about. Still, it’s important to know what they are and how they work, so you can make sure your family gets the payout they need.
Table of contents
- What are the most common life insurance clauses?
- What life insurance clauses help protect you?
- What clauses help protect the life insurance company?
- What is the contestability period?
- Still have questions about life insurance clauses?
Common life insurance clauses
Life insurance policies generally include two types of clauses, or exclusions: clauses designed to protect you as the policyholder and ones that set forth the life insurance company’s obligations. The goal is to make sure the policy contract is carried out as agreed and that everyone gets a fair deal. Depending on your policy, the life insurance exclusions included in your individual plan may vary.
Clauses that help protect you include:
- Free look period. Policyowners can return their policy for a full refund within a specific period of time – typically 30 days.
- Grace period clause. This keeps the policy active for a certain period, usually 31 days (varies by state), giving policyowners extra time to pay premiums. If the grace period ends with no payments made, the policy can be terminated.
- Beneficiary clause. Policyowners have the right to decide who receives the death benefit. Your policy may also include a survivorship clause, where you can require that beneficiaries outlive you for a certain period before getting a payout.
- Spendthrift clause. If a policyowner’s beneficiary is in debt, this clause protects the policy payout from being claimed by creditors before the beneficiary actually receives the benefit.
Clauses that help protect the life insurance company include:
- Entire contract clause. If policyowners make any false statements on the application, the insurer can terminate the contract and deny coverage.
- Misstatement of age clause. If policyowners lie about their age during the application process, the insurer can increase premiums, adjust the benefit amount, or terminate the policy.
- Suicide clause. This clause states that insurers do not have to pay out if the policyowner dies by suicide, sometimes within a specified period. Instead, the insurer usually returns all premiums paid to the policy owner’s family.
- Reinstatement clause. If a policy is terminated due to the policyowner falling behind on payments, the owner can reactivate by paying all outstanding premiums owed, plus interest. However, the policyowner may have to prove their insurability first.
What is the contestability period?
If you die soon after taking out a policy, your insurance company has the right to review your claim. If your cause of death is suspect, or the insurer discovers an undisclosed medical condition, they can potentially deny your claim or reduce the payout amount your beneficiaries will receive. This clause, known as the contestability period, lasts one to two years after you purchase the policy.
For example, if you fail to mention a known heart condition when you apply for term life insurance coverage and then die of a heart attack, your insurer could reject your claim. The misrepresentation also doesn’t have to be related to your cause of death: You could get hit by a car and still be denied if the insurer discovers an undisclosed heart condition.
That’s why it’s always best to be upfront during the application process. Contestability is the insurer’s way of preventing fraud and not meant to punish you for making a simple mistake.
Some policies contain an incontestability clause that prevents insurers from investigating any claims after the contestability period has ended; this serves to protect beneficiaries. Be sure to check your contract, as this isn’t the case with every life insurance policy.
Still have questions about life insurance clauses?
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At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.