Term Life Insurance Fine Print
What is a term life insurance policy, term life mechanics?
What does it provide, what does it do for you?
Let us turn some of the legal language into simple, easily understood language.
Let us look deeply into what a term life insurance policy does.
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Term Life Insurance Policy Provisions
- A Term Life Insurance Contract
A term life insurance policy is a contract between you and a life insurance company which states that upon death a certain sum of money will be payable to your beneficiaries.
The duration is for a predetermined, specified, period, for example 10 years or 20 years. The policy will stay in effect as long as you maintain your side of the arrangement which is to pay the agreed upon premiums.
Incontestability Of Your Term Policy
Your term life insurance policy contract includes a clause referred to as the incontestability clause which states that if you initially had given the life insurance company any incorrect information they can contest and withdraw the policy within a specified period, usually 1 or 2 years.
In addition, if the insured were to die within the aforementioned period the company can contest the claim and limit payment to premiums paid plus interest.
After the specified period the policy becomes incontestable. It cannot be ever withdrawn and the amount for which one is insured must be paid upon death.
If an insured should die by suicide within a specified period, determined by the contract, the life insurance company can refuse to pay the claim. If one commits suicide after the specified period the company must pay the claim. The specified period is usually 2 years.
Misstatement of Age
If an applicant for a term life insurance policy should misstate his or her age the amount of insurance paid upon death would be whatever the premium would have bought had the correct age be given at the time of application.
- Ownership Of The Policy
The applicant of the policy is usually the owner and the insured. The applicant has all rights to the policy. There are certain circumstances when the applicant is not the insured. A parent may purchase a policy on a minor child.
A husband may purchase a policy on his wife and a wife may purchase a policy on her husband. Business partners may purchase policies on the lives of other partners.
Stockholders may purchase policies on other key stockholders. A corporation may purchase life insurance on key employees.
- Premiums, Lapse, And Reinstatement
The owner of the term life insurance policy has an obligation to pay the premium on the agreed upon time. There is usually a grace period allowed in case of late payments.
Premiums can be paid monthly, quarterly, semi-annually or yearly. If upon death the life insurance company finds that an excessive amount has been paid the difference will be refunded. Let us say you paid an annual premium today and died after one month.
The life insurance company would pay the death benefit of the policy plus an amount that approximates 11 months unused premiums. If you miss a term life insurance premium payment the policy will go into a state of lapse.
If you choose you may reinstate the policy by paying the back premiums and providing new evidence of insure-ability. Depending on your age and the size of the policy this may mean a few questions or a medical examination.
- Policy Changes Change Of Plan
The owner of a term life insurance policy may change, or convert, it to any permanent type policy. This has to be agreed to by the owner and the company.
There are set time periods within which a policy may be converted without evidence of insure-ability. Evidence of insure-ability would include a medical examination and possibly an inspection report.
There are three levels of beneficiaries of a life insurance policy.
The primary beneficiary or beneficiaries receives payment upon the death of the insured. This beneficiary is sometimes referred to as the direct beneficiary.
If more than one primary beneficiary is named on a policy and one should die before payment is complete the other beneficiaries will share equally in the portion that should have gone to the deceased beneficiary.
If one primary beneficiary is named and s/he should die, or if all the primary beneficiaries should die payment of the proceeds of the term life insurance policy will go to the contingent beneficiary, or beneficiaries.
If there is more than one contingent the proceeds will be distributed in equal shares.
Upon the death of all the contingent beneficiaries payment will be made to further payees upon the death of the insured or if the proceeds were being paid out using payment plans.
- Payment Of Term Life Proceeds
Upon the death of an insured person the proceeds of the policy can be paid out in one lump sum or in the form of an income.
There are several choices available when income is selected. See the page on life insurance settlement options for details.
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