War and Peace. A birthday card with money in it. The terms and conditions of literally any app or piece of software you’ve ever used.
I’ll take, "Things I’ve never read," for $1,000, Alex.
I get it. There are enough things out there that you want to read that it seems like you never get to the things you’re supposed to read. But you know what absolutely has to be on your "to read" list?
Your life insurance policy.
I know, not the most exciting thing in the world. But think about it: Over the term of your life insurance policy, you’ll have paid likely thousands of dollars into it. If you pass away and the death benefit gets paid out, your loved ones are expecting potentially hundreds of thousands of dollars.
It’s worth at least a skim, don’t you think?
Life insurance policies can seem intimidating, but the information inside is pretty self-explanatory, especially if you’re already familiar with the terms and concepts of life insurance. Let’s take a look at the kind of information a standard life insurance policy will have in it.
Inside your life insurance policy
Keep in mind that what, specifically, your policy says will depend on the carrier and the individual policy itself. That’s why you should read your own policy – like you, it is unique and wonderful and specific to your life. But every policy will have the same type of information, so this rundown will give you the basics of what you can expect.
Your policy specifications are basically your policy at a glance. Information such as your name, age, and sex, along with your policy number, issue date, rate class, and term length, will all be found near the beginning of your policy.
You’ll also find short descriptions of riders (your policy will have more on this later. So will we!) and a schedule of benefits showing your premium totals over the life of the policy.
The general provisions is basically the definitions section of your policy. It’s sort of the legalese of your policy; don’t know what "The Contract" is as it applies to statements throughout your policy? You’ll find the definition in the general provisions section. Don’t know what constitutes a policy year? That’ll be listed here, too.
Many of the words and terms you’ll find in the general provisions sections will be expanded upon throughout your policy, but it’s good to go through it to make sure you have a solid foundation for what will follow.
Premium and payment information
We’ve all missed a bill payment or two in our lives. Usually, it’s not a big deal. But what about when it comes to your life insurance policy – which you’re paying to keep in-force?
Luckily, life insurance companies are flexible. Policies have a grace period, typically of 31 days, during which your policy will remain in-force and you can pay the premium. If you don’t pay within 31 days, your policy will lapse.
Luckily, a reinstatement guide will also be listed in your policy. Your policy can be reinstated with payment of the overdue premium, but after a certain amount of time (usually 15 days after the end of the grace period) there will be limitations to your policy reinstatement, so this is a crucial section to read. Of course, you can avoid all of this by paying your premiums on time, but you’ll want to know your avenue of recourse in case something comes up.
It’s in this section that you’ll also probably find information on exclusions, like the suicide exclusion. A life insurance company won’t pay the full death benefit if a policyholder commits suicide within two years of the issue date, and the payout will only be a refund of the premiums already paid.
Ownership and conversion rights
You bought your term life insurance policy. That means that it’s yours forever and ever, right?
Not necessarily! You might decide that you no longer want or need your life insurance policy. If that’s the case, you can transfer ownership of it by selling it to a third party. You should be careful if you do this – you don’t want to lose protection you actually need, and money you receive from selling your policy is subject to taxation – but your policy will outline the process behind it if you opt to transfer your policy at some point.
And it doesn’t even have to always be a term life insurance policy, either. If you decide that, at the end of your policy’s term, you still need some life insurance protection, most policies will allow you to convert your term life policy to a permanent life policy and keep it going for as long as you pay the premiums. The main benefit of this is that you’ll be older when you decide to do this, and if you were to buy a new policy it would cost you a lot. By converting your existing policy you won’t need proof of insurability, meaning you won’t have to medically re-qualify for coverage. (And if you convert your policy, that means you get another policy to read through! Yay!)
This is what it’s all about, isn’t it? After all, if you don’t have anyone to leave your life insurance death benefit to, there’s not really a point in having a life insurance policy.
You’ll set up your beneficiary, or beneficiaries, when you first get your policy. You can change your beneficiaries at any time, and you should when it’s necessary – for instance, in the case of a beneficiary dying, or if it was originally your spouse but you’ve since gotten divorced.
If you haven’t updated your beneficiaries and there’s some conflict as to who should receive the death benefit, that can hold up the money from getting to who needs it (and who it should legally go to). That’s why your policy will also go through the beneficiary succession – who receives what, and when. This can save a lot of headache if there’s confusion in regards to your policy beneficiaries, so it’ll be important to you and your loved ones to have it worked out.
This section will also go over payment details. Your beneficiaries can choose to receive the death benefit as a lump sum, or in installments. There may be tax implications if they receive the death benefit in installments, so it’s important that your beneficiaries know what their options are when it comes to receiving the money.
While earlier sections will have information on riders applied to your policy – they’ll affect how your death benefit is paid out and how much your policy costs, and what additional benefits are available to you – you’ll also find them detailed elsewhere in their own sections.
Each rider will be outlined with basic definitions, exceptions, and guidelines. There will be some crossover between riders, but a lot of the information you’ll find will be specific to the rider; for instance, a waiver of disability rider will have rules on what is considered a total disability, the notice and proof of disability needed, and so on. Those obviously wouldn’t apply to a child protection rider, so if that rider is on your policy it’ll have different information in it.
If you have any questions about the specifics of your policy, don’t be afraid to ask your agent or broker. After all, they’re the expert. But you should understand the basics of what goes into your policy. You went through the effort of getting a policy and making sure your family is protected, so it’s worth taking an hour to know what that protection entails.