When you buy life insurance, the insurer will offer you a formal contract. This document lays out all the features, rules and conditions behind your policy. Although each insurer uses their own formats, they typically include similar sections.
To help you understand your coverage, here's what you should know about the different parts of a life insurance contract.
The first page of your life insurance contact should be the declarations page, a one-page summary of your policy. It should list information such as:
- The policy owner's name: It's likely yours if you bought it.
- The policy number: You can use this to look up the policy with the insurer.
- The death benefit: This is the amount the policy pays when the insured person passes away.
- The type of policy: The policy may be temporary term coverage or permanent coverage such as whole life.
- The term length: For term policies, this states how long the coverage lasts — five years, 20 years, etc.
- The issue date: This is the day the insurer created your contract.
- The effective date: This lists when the life insurance coverage started.
- Your premium class: The premium — the amount you pay for coverage — may depend on the insured person's health and whether they smoke. The class shows the health rating, such as preferred for a health discount, standard for a normal rate or substandard for health issues. It also lists smoking versus nonsmoking.
Contract Values and Illustrations
After the declarations page, your insurance contact will present a more in-depth explanation of the contract values and details. It will list:
- The insured person's information, including whose life the policy insures as well as their age, gender and Social Security Number.
- The exact premium you'll need to pay for the coverage.
- The due date for premiums and the frequency (monthly, quarterly, annually).
- Whether there's a penalty if you are late on a premium.
- Whether your policy has cash value. Some permanent cash value policies allow you to take money out of the policy while alive through a withdrawal or loan.
The insurance contract might also include an illustration that shows how the key values behind your policy will change over time. The illustration could show:
- Your premium each year and whether it changes.
- Your death benefit and whether it goes up and down over time.
- Your policy's cash value and how it will grow over time.
To buy life insurance on a person's life, you must have insurable interest. This means that you would face some type of financial loss if they died. You could buy life insurance on a family member or a business partner — but not a stranger. You could also buy insurance on your own life. Your contract may include a page explaining this rule as well as describing the relationship you have with the insured for insurable interest (such as their spouse, child or business partner).
Insurance can be an indemnity or a nonindemnity contract depending on the type of coverage you want.
Indemnity contracts measure the dollar value of a loss; auto and home insurance are common examples, because you can calculate the cost to rebuild or replace this property. On some policies, the size of the payout depends on the market value of your property when you make the claim. For example, an auto insurance policy may pay more to replace a car when it's new versus when it's five years old.
Nonindemnity contracts insure something that doesn't have a market value. Life insurance is one example — you can't put a dollar value on a person's life; it's not a product that's bought or sold. Instead, you pick a death benefit when you sign up. Your insurance payout doesn't change based on the indemnity rules of property insurance.
Your life insurance contract could include a page saying whether it's a nonindemnity contract and explaining what this means for your policy.
Your beneficiary is the person or organization that you pick to receive the death benefit from your life insurance if the insured passes away while covered. Your life insurance contract will have a beneficiary page listing this information, including the name of the beneficiary. It could also list their relationship to the insured, such as if they are your spouse or child.
It's possible to have more than one beneficiary. For example, you could split the death benefit 50/50 with your two children. Your beneficiary page list all the beneficiaries and the desired split. You could also name a backup, contingent beneficiary in the contract. This person receives the death benefit if the first beneficiary is no longer alive.
A rider is an extra benefit you can set up for your life insurance policy, usually for an extra charge. Some common riders offer extra coverage for accidental death, including life insurance for your spouse and young children, and a disability waiver of premium, where the insurer pays your premium if you end up disabled.
If your policy includes riders, there should be a section explaining how they work, what they cost and what they offer.
Life insurance policies cover most causes of death, but they won't cover everything. Your insurance contract will include a page laying out scenarios that would not qualify for the death benefit. Common exclusions include death caused during a criminal act or from suicide during the first two years after you buy the policy.
A policy also may deny a claim if an applicant wasn't honest during their insurance application — for instance, if they hid a serious medical problem that caused them to die. The exclusion part of your contract will explain how and when it could exclude a claim. For example, insurers can only deny claims from lies on the application if the insured dies within two years after the coverage starts.
If something is not listed as an exclusion on your policy, then it should be a covered cause of death.
Your insurance contract may include a glossary that defines key terms within your policy. It could explain common insurance terms such as the death benefit, cash value and beneficiary for policyholders.
Free Look Period
State governments require life insurance companies to give you a free look period as you review your contract. Depending on where you live, you have somewhere between 10 and 30 days to change your mind and return the contract for a refund of your premium payment. This gives you time to carefully read through every part of the contract.
Changing Contract Details
It's possible to change your contract terms after you sign up, although some parts are easier to change than others. For example, most policies let you change the beneficiary any time you want. It is also usually simple to cancel optional riders to lower how much you pay per month.
Other features are harder to change, such as the death benefit or coverage type. However, your contract may have clauses or riders that let you make changes. For example, a conversion rider lets you swap a term policy for whole life without a medical exam. Other policies will not let you change; it depends on the contract terms and conditions. If you change the policy, make sure your heirs know and can find that information. Consider putting any letters or forms showing the new details in the same place as your original contract.
For more help understanding your contract, contact your insurer's customer support line or ask to meet with one of their agents. They can thoroughly explain the details behind your policy as you make your decision.