Contract Language – Details That Matter
A life insurance policy is a contract with certain standardized clauses. Regulations require several clauses to be included with most individual life insurance contracts. Here are a few to be aware of:
Suicide Exclusion: If the Insured takes his or her own life within two years from the Date of Issue, we will limit the Death Benefit to the gross premiums paid.
Incontestability: We can contest this policy during the Insured’s lifetime for two years from the Date of Issue solely on the basis of a material misrepresentation furnished in the application for this policy.
When choosing term insurance, an important clause to be aware of is the Right to Convert. Conversion options are not standardized as the suicide and incontestability clauses are. A term contract does not have to offer convertibility. Below are three very different clauses:
- Right to Convert: You may convert this contract to a new contract of life insurance on the Insured’s life. You will not have to prove that the Insured is insurable. The Incontestability and Suicide Exclusion provisions of the new contract will be measured from the issue date of the original policy. The new contract may be ANY policy we regularly offer.
- Right to Convert: For the first 5 years, you can convert up to the Face Amount of this Policy, without evidence of insurability, to any single life individual permanent life insurance policy we offer for sale at the time of conversion. Thereafter, and for the remainder of the conversion period, you may elect to convert to any single life permanent plan offered for conversion by the company at time of election.
- Right to Convert: You may convert this policy to any permanent life plan which we, at our sole discretion, make available for conversion and, for the amount converted, we customarily issue on the date of conversion to applicants with the Insured’s rating classification; with premiums based on our rates for the rating classification and plan of insurance on the date of conversion.
Conversion privileges differ in length and quality. Term is generally convertible during the level rate stage but is capped at a certain age; often age 70. For carriers to have lower term prices, they may limit the conversion period or require you to add an extension rider to extend it. Any conversion option is better than none to avoid sentencing your client to term for life.
The product(s) you are allowed to convert to is most important.
Option 1 (above) is the BEST option as it allows the client to buy ANY product the carrier is currently selling when they convert.
Option 2 (above) reflects a carrier allowing the good stuff for the first 5 years and then any policy they allow after that.
Option 3 (above) has a “special” conversion only option from day one. For clients who may want permanent insurance later, it is best to avoid reverse selection and have a quality conversion plan like option 1.