What are Policy Provisions?
Life insurance policy provisions are components of your policy that outline specific benefits, terms, conditions, or other important features. The policy provisions can affect when coverage applies and in what amount.
Understanding policy provisions
When you buy a life insurance policy, you always choose two things. First, you decide who the insured will be (i.e., you buy life insurance on yourself or on someone else in whom you have an insurable interest). Secondly, you choose a death benefit, or the amount the policy will pay out to named individuals if the insured passes away while the policy is in effect.
That doesn’t mean that all life insurance policies function identically, though. And that’s largely because different policies come with different provisions that impact how the coverage functions.
Whenever you shop for life insurance, it’s important to understand not just the basic policy terms, but also the provisions. Certain provisions can add clauses to the policy that would impact the amount your beneficiaries receive. It’s relatively common for life insurance policies to include a provision called a suicide clause, for example, which voids the policy if you die by suicide within the first two years of coverage.
Ultimately, your policy provisions make a big difference in the way your life insurance coverage functions. Read them carefully and ask questions as needed to ensure you understand how they impact you.
Common policy provisions
Again, different policies come with different provisions. But there are some relatively widespread ones, including a:
This provision, also called a free look period, stipulates a certain amount of time after which your policy goes into effect. During that free look period, you can cancel your policy without any penalties like surrender charges. These provisions usually last a relatively short amount of time, like ten days.
With this provision, you have the option to reinstate your policy after a lapse. The lapse occurs when you miss a premium payment and the grace period for missed premiums expires. Without a reinstatement provision, your policy would be nullified at that point. With this provision, however, you have the option to reactivate your policy. Generally, reinstatement provisions come with specific terms. You’ll usually need to make up the missed premium plus interest, for example, and provide new evidence of insurability.
This provision allows the insurance provider to delay issuing money to the policy owner — like the surrender value or loan proceeds against the policy’s cash value — for a specific amount of time (e.g., several months). This provision exists in order to protect insurers from excess losses in challenging economic times, keeping them solvent.
Automatic premium loan provision
These provisions can help to protect you from policy lapses in the event of a missed premium payment. If your life insurance policy includes this provision and has accumulated cash value, the provision allows the insurer to take your premium payment from the cash value as a loan. Be advised that this loan can come with interest and continuing to use your cash value in this way comes with a specific risk. If you use up all of your cash value, your policy will lapse.