State laws mandate certain provisions appear in all life insurance policies. These fall into two categories:

Mandatory Provisions

Must be included exactly as specified by law:
- Grace period
- Incontestability
- Misstatement of age or sex
- Policy loan provisions (for cash value policies)
- Reinstatement

Permissive Provisions

May be included at insurer's option:
- Suicide clause
- Aviation exclusions
- War exclusion
- Hazardous occupation exclusion

Purpose

Provides extra time to pay premiums after the due date without policy lapse.

Duration

• Life insurance: Minimum 30 days (31 days in most states)
• Universal life: 61 days (longer due to monthly deductions)
• Starts: Day after premium due date

Coverage During Grace Period

• Policy remains in force: Full death benefit coverage continues
• Death claim: If insured dies during grace period:
• Full death benefit paid
• Minus unpaid premium: Deducted from death benefit
• Beneficiary receives net amount

Lapse After Grace Period

• Policy lapses: If premium not paid by end of grace period
• Coverage ends: No death benefit if insured dies after grace period expires
• Reinstatement possible: May be able to reinstate within certain time frame

Example:

Premium due: January 1
Grace period: 31 days (through January 31)
Death occurs: January 20
Death benefit: $250,000
Unpaid premium: $500
Beneficiary receives: $249,500

If death occurs February 2 and premium still not paid:
Beneficiary receives: $0 (policy lapsed)

Purpose

Limits insurer's right to contest (cancel) a policy based on misrepresentations in the application.

Time Period

• 2 years: Standard contestability period from policy issue date
• 3 years: Some states for disability income policies
• Starts: From policy issue date (or reinstatement date for reinstated policies)

During Contestability Period (First 2 Years)

Insurer can contest and void policy if:
- Material misrepresentation: False statement that affected underwriting decision
- Concealment: Intentionally hiding important health or lifestyle information
- Fraud: Intentional deception to obtain coverage

After Contestability Period

Insurer cannot contest policy except for:
- Non-payment of premiums: Can always cancel for non-payment
- Lack of insurable interest: If beneficiary had no insurable interest at issue
- Imposter fraud: Someone other than insured took medical exam

Important Points

• Protects beneficiaries: Ensures claims paid after 2 years regardless of application errors
• Innocent mistakes protected: After 2 years, even material misrepresentations don't void policy
• Burden on insurer: Insurer must discover issues within 2 years
• Reinstatement resets clock: New 2-year period starts from reinstatement date

Example:

Policy issued: January 1, 2023
Incontestable date: January 1, 2025

Insured dies: March 2024 (within 2 years)
Insurer discovers insured failed to disclose diabetes diagnosis
Misrepresentation was material (would have declined or rated)
Result: Insurer can void policy, return premiums paid

Insured dies: March 2026 (after 2 years)
Insurer discovers same misrepresentation
Result: Insurer MUST pay claim despite misrepresentation

Purpose

Provides remedy when insured's age or sex incorrectly stated in application.

Premium Impact

• Age/sex affects premium: Younger = lower premium; older = higher premium
• Women live longer: Typically pay lower premiums than men same age

Correction Procedure

If age or sex misstated:

Age Understated (Insured Older Than Stated)

• Higher premium should have been charged
• Death benefit reduced: To amount premium would have purchased at correct age
• OR premium adjustment: Charge back premium for difference

Age Overstated (Insured Younger Than Stated)

• Lower premium should have been charged
• Refund excess premium: Return overpayment with interest
• OR death benefit increased: To amount premium purchases at correct age

Calculation Formula

Adjusted death benefit = 
  (Stated death benefit × Premium paid) ÷ Premium that should have been paid

Example 1: Age Understated

Stated age: 35 (actual age: 40)
Annual premium paid: $500 (for age 35)
Correct premium for age 40: $750
Death benefit: $100,000

Adjusted death benefit = ($100,000 × $500) ÷ $750 = $66,667
Beneficiary receives: $66,667 (not $100,000)

Example 2: Age Overstated

Stated age: 45 (actual age: 40)
Annual premium paid: $750 (for age 45)
Correct premium for age 40: $500
Years premiums paid: 10 years

Overpayment: ($750 - $500) × 10 years = $2,500
Refund: $2,500 + interest

No Contestability Impact

• Always correctable: Can correct age/sex misstatement even after 2-year incontestability period
• Not fraud: Simple mistakes, not intentional deception
• No policy voidance: Policy remains in force, just benefits/premiums adjusted

Purpose

Limits insurer's liability for suicide deaths during early policy years.

Standard Terms

• 2-year exclusion: Most common period
• 1-year exclusion: Some states/policies
• From issue date: Starts when policy issued (or reinstated)

If Suicide During Exclusion Period

• No death benefit: Insurer does NOT pay face amount
• Return of premiums: Insurer refunds all premiums paid (without interest)
• Beneficiary receives: Only premium refund, not death benefit

After Exclusion Period

• Full death benefit paid: Suicide treated like any other death
• No exclusion: Beneficiary receives full face amount

Important Points

• Permissive provision: Not required by law, but nearly all policies include it
• Anti-selection: Prevents people from buying insurance with intent to commit suicide
• Burden of proof: Insurer must prove death was suicide
• Reinstatement resets: New 2-year period from reinstatement date

Example:

Policy issued: January 1, 2023
Face amount: $250,000
Total premiums paid: $5,000
Suicide exclusion: 2 years (expires January 1, 2025)

Death by suicide: June 2024 (within 2 years)
Beneficiary receives: $5,000 (premiums refunded)

Death by suicide: June 2026 (after 2 years)
Beneficiary receives: $250,000 (full death benefit)

Purpose

Allows policyowner to restore lapsed policy to active status.

Requirements

To reinstate a lapsed policy:

1. Application for reinstatement: Must apply in writing
2. Evidence of insurability: Provide proof of good health
3. May require medical exam
4. May require medical records
5. Underwriting standards similar to new policy
6. Pay back premiums: Pay all overdue premiums
7. Usually without interest (some insurers charge interest)
8. Repay policy loans: Pay outstanding loans plus interest
9. Time limit: Must apply within specific period:
10. Typically 3-5 years from lapse date
11. Some policies: 7 years
12. After time expires: Cannot reinstate

Reinstatement Effects

• Original policy restored: Same policy number, issue date, provisions
• Original premium rate: Pay premium based on original age (big advantage)
• New contestability period: 2-year incontestability period starts over
• New suicide exclusion: 2-year suicide clause starts over (if applicable)
• Coverage date: Usually effective immediately upon approval
• Waiting period for suicide/contestability: New 2-year periods begin

Advantages of Reinstatement

1. Lower premium: Keep original issue age (could be much younger)
2. Original policy terms: Keep beneficial features
3. Avoid new underwriting: Easier than getting new policy if health declined slightly
4. No new acquisition costs: Avoid sales loads on new policy

Disadvantages

1. Evidence of insurability required: Must prove good health
2. May be declined: If health deteriorated significantly
3. Must pay back premiums: Can be substantial if lapsed long ago
4. New contestability period: Insurer can contest for another 2 years
5. New suicide exclusion: Suicide exclusion starts over

Example:

Original policy issued: Age 30 (2010)
Policy lapsed: 2023 (age 43)
Seeks reinstatement: 2024 (age 44)

Reinstatement advantages:
- Keep age 30 premium rate (much lower than age 44 rate)
- Original policy provisions

Reinstatement requirements:
- Pass medical underwriting
- Pay $6,000 back premiums (2023-2024)
- New 2-year contestability (expires 2026)
- New 2-year suicide exclusion (expires 2026)

Availability

• Cash value policies only: Whole life, universal life, variable life
• Not on term insurance: No cash value to borrow against
• Required provision: Mandated for cash value policies

Terms

Loan Amount

• Maximum: Typically 90-95% of cash surrender value
• No credit check: Guaranteed right to borrow
• No approval needed: Automatic right (not at insurer's discretion)

Interest Rate

• Fixed rate: Specified in policy (e.g., 5-8%)
• Variable rate: Tied to index (e.g., Moody's rate + 1%)
• Charged annually: Interest accrues and compounds

Repayment

• No required schedule: Can repay anytime or never
• Partial repayment: Can pay interest only or principal + interest
• Interest compounds: Unpaid interest added to loan balance

Effects of Policy Loan

On Death Benefit

• Loan deducted: Outstanding loan + accrued interest subtracted from death benefit
• Beneficiary receives: Net amount after loan repayment

On Cash Value

• Remains as collateral: Cash value stays in policy
• Continues to grow: Still earns interest (though netted against loan interest)

On Policy Status

• Risk of lapse: If loan + interest exceeds cash value, policy lapses
• Warning notices: Insurer sends notices when loan balance approaches cash value

Tax Treatment

• Not taxable: Policy loans are not taxable income
• Exception: If policy lapses or surrenders with outstanding loan, gain may be taxable

Example:

Cash value: $50,000
Maximum loan: $47,500 (95%)
Loan taken: $40,000
Loan interest rate: 6%
Years outstanding: 5

Accrued interest: ~$13,500 (compounded)
Total loan balance: $53,500

If insured dies:
Death benefit: $250,000
Less loan: -$53,500
Beneficiary receives: $196,500

Purpose

Defines what constitutes the complete contract between insurer and insured.

Components of Contract

1. Policy itself: The insurance policy document
2. Application: Attached copy of application
3. Any riders/amendments: Modifications or additions

Protection Provided

• No oral modifications: Changes must be in writing
• No additional documents: Insurer cannot later claim other documents are part of contract
• Application part of contract: Statements in application are part of contract (copy attached)
• Protects policyowner: Cannot add requirements after issue

Typical Wording:
"This policy, including the application attached hereto, and any riders or amendments, constitutes the entire contract between the parties."

Free Look Period

• 10-30 days: Examine policy without obligation (varies by state, usually 10 days)
• Full refund: Can return policy for complete premium refund
• No questions asked: Don't need reason to cancel
• Longer for seniors: Some states require 30 days for buyers age 65+

Assignment Provision

• Absolute assignment: Transfer all ownership rights permanently
• Collateral assignment: Temporary transfer as loan collateral
• Notice to insurer: Must notify insurer of assignment
• Beneficiary rights affected: Assignment may supersede beneficiary rights

Modification Clause

• Written changes only: All changes must be in writing
• Executive officer signature: Must be signed by company officer
• Agent cannot modify: Agents have no authority to change policy terms

Payment of Claims

• Time limit: Must pay death claims promptly (e.g., within 60 days)
• Proof of death: Beneficiary must provide death certificate
• To designated beneficiary: Payment made according to beneficiary designation

Conversion Privilege (Term Policies)

• Convert to permanent: Right to convert term to whole life or universal life
• No evidence of insurability: No medical exam required
• Time limit: Usually must convert before term expires or by certain age
• Premium based on attained age: New premium based on age at conversion

• Grace period: Minimum 30 days (31 days most states); 61 days for universal life
• Death during grace period: Benefit paid minus unpaid premium
• Incontestability: 2 years from issue; insurer cannot contest after except for fraud/non-payment
• Misstatement of age: Always correctable; benefits adjusted to what premium would have bought
• Suicide clause: 2 years most common; only premiums returned if suicide during exclusion
• Reinstatement: Requires application, evidence of insurability, back premiums, within 3-5 years
• Reinstatement resets: New 2-year incontestability and suicide periods
• Policy loans: 90-95% of cash value; no approval needed; interest charged
• Entire contract: Policy + application + riders = complete contract
• Free look: 10-30 days to examine and return for full refund
• Assignment: Transfer of ownership rights (absolute or collateral)
• Conversion privilege: Convert term to permanent without evidence of insurability