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Reading the Contract
What to look for in the fine print of an insurance policy

An insurance policy is a contract between the insurance company and you, the insured party. The insurance company is obligated to pay a sum of money (called the “benefit amount”) to the insured’s beneficiary(s), but it is important to know that the contract could be made void if information has been omitted or if false statements have been made.

The following, while by no means exhaustive, is meant to provide an overview of some of the more important terms.

+ Grace Period 
+ Reinstatement 
If you have allowed your insurance policy to lapse, you can reinstate it by paying all outstanding premiums, plus interest, and providing new medical evidence. So long as you pass the medical, it will be as if the policy had never been out of force (ie there is no new policy fee or new premium scale). You have two years in which to reinstate a lapsed policy, although some companies may offer longer period in their contracts.

+ Incontestability 
Once a life insurance policy has been in force for more than two years, the insurance company cannot revoke coverage. If the owner has misrepresented information on the contract, the insurer can only refuse to pay if they can prove that the insured made the misrepresentation (e.g. failed to disclose a medical problem) with fraudulent intent.

Here’s an example: in one court case an insurer attempted to deny a claim on the grounds that the client was an alcoholic and failed to disclose it when asked if she had received “treatments for illness over the previous five years”. The court ruled that the client wouldn’t have regarded her drinking as an illness, since denial is a part of alcoholism. The insurer had to pay the claim.

+ Renewability
This provision, which specifies the conditions under which a term policy may be renewed after the initial term is up, can vary from insurer to insurer. Most companies offer “guaranteed renewable” term, meaning that the contract can be renewed at a specific rate and without submitting new medical evidence. Some policies however, may require you to re-qualify at renewal – meaning that if your health has changed, you may have to pay higher premiums, or you may be unable to obtain coverage at all.

+ Right of Rescission 
Having received the contract, you usually have a 10-day period to examine the policy. Should the terms prove to be unacceptable, you may rescind the policy – return it to the insurer in exchange for a full refund of premium.  

+ Suicide 
In order to discourage individuals from purchasing life insurance prior to committing suicide, insurers insert a clause into the contract that only provides a refund of premiums should the insured party take his or her life during the first two years that the policy is in force. After two years have elapsed however, the insured’s beneficiary will receive the full face value even if the death is a result of suicide.
 

 

 

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