Be Aware of these Life Insurance Clauses

In the field of life insurance there really aren't any 'standard' policies per se; each agreement can vary significantly in order to meet the individual needs of the person insured. However, many states have provisions that are required of all life insurance policies so that they have become, for all intents and purposes, standard inclusions in such policies. Several of the more notable ones are outlined here.

The free look provision allows a new policyholder an opportunity to review the entire insurance contract in order to reevaluate his or her purchase decision. Most states mandate that no individual life insurance policy may legally be issued or delivered unless it includes a notice or attachment stating in essence that during a period of ten days (some insurance companies give twenty) from the date that the policy is delivered to the policyholder, it may be surrendered back to the insurer along with a written request for cancellation; and in such an event the policy will become void from the beginning and the insurer must refund any premium paid.

The incontestability clause states that after the policy -- whether it be term or whole life -- has been in force for a certain length of time, the company can no longer contest or void it except for nonpayment of premiums. This length of time is typically two years (although it's one year in a handful of states).

If the insurance company discovers any grounds to void the policy during the contestable period, it's allowed to take such action. But once the policy has been in force for the specified period -- even if fraud is discovered -- the company can no longer void the policy. The policy therefore becomes incontestable after the mandated period of time. This provision makes the insurance contract somewhat different from other types of contracts. As a general rule, contract law specifies that if a fraudulent contract has been initiated, it can be voided or cancelled at any time; but after the expiration of the incontestable period this is specifically prohibited with regard to life contracts.

The suicide clause is designed to prevent people who are contemplating taking their own lives from obtaining life insurance. To accomplish this, the clause states that if the insured commits suicide within a specified period of time, the policy will automatically be voided. The amount of time varies, but it's usually the same length as the incontestable period: one or two years. The clause applies whether the insured is sane or insane at the time of the act.

Once the mandated period of time has elapsed, the insurance company must pay the claim even if the insured commits suicide. However, if suicide occurs while the time limit is still in effect, the company will usually only refund any premiums that the policy-owner has paid for the coverage. Accrued interest on the premiums typically won't be refunded, as the company will use it to offset part of its costs in initially setting up the policy.

Although some states may not specifically mention the suicide clause in their laws, insurance companies generally use the silence as tacit permission to include the clause in their policies.