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Understanding your insurance contract

By Finbar Garcia, LUTCF, FSS, MFA

It is no secret; many persons believe that insurance contracts carry “fine print”. This is because of the legal jargon that appears to confuse persons. I would now explain the important parts.

Let’s look at a typical Life Insurance contract. The main purpose is in the event of your death, a fixed Sum Assured is paid either to your named Beneficiary, Estate or Assigns.

The policy contract carries general conditions and clauses. The duration of the contract will depend on the type of policy you applied for, its either a Whole Life to age 100 or a Term policy for a specific period, between 5 to 20 years or age like 65, 75 or 85.

Some whole life policies are called Universal Life policies that will mature at ages between 65 to 100.  However, these carry certain investment risk that you need to know.

Application Form – This forms part of your policy contract, so all information given should be correct and accurate and may be subjected to further medical test before approval. If you deliberately withhold information to have the application approved faster, this can backfire if an early claim is made, thereby depriving your loved ones of the much-needed income to live.

Premiums – A First Premium is needed with the application and you must continue to pay monthly, as you are entering into an agreement with the insurance company. So, if while the application is being underwritten, you died, the insurance company may be liable to pay the sum assured. This of course will be based on the cause of death and their underwriting guidelines and investigations.

Contestability Period – This is a period whereby the policy contract can be contestable if there appears to be any fraudulent statements or statements erroneous to age or sex. This period is usually two years from date of issue of the contract. Any party can use this period to contest the contract.

Death Benefit – The policy will cover you for death as the main coverage. This will be officially from the date of issue up to either the expiration or surrender of the contract. Once death occurs in the first five years, it is then considered an early claim, so in-depth investigations will be done to determine if the life assured had any underlying medical issues that was not disclosed in the application, or if death was suicide or accidental. Once the cause of death satisfies the terms and conditions outlined, the claim will be paid.

Suicide – If the life assured dies from his/her own act, whether sane or insane and within two years of the policy or any reinstatement, the liability of the company shall be limited to premiums paid to the company. In other words, no benefit is paid except a refund of premiums.

Reinstatement/Redate – This is an option that you can use if in the event of non-payment of premiums, your policy was moved from an active status to a lapsed status. You will now have no coverage until you either reinstate or redate the policy.

Reinstatement means you are prepared to repay all outstanding premiums and any additional fees to have the policy active again and maintain the original issue date, suicide clause and contestable period.

On the other hand, if you redate the policy, you may be required to pay only two premiums and any additional fees, and your original issue date will now be brought forward. This could affect the suicide and contestable period. Also, there may be medicals to be completed again at your expense.

Loans – Most policies allow you to either withdraw money from the Cash Values or borrow from it. Either way it’s an option that allows the policy owner to access cash in time of an urgent need, not a casual want. Unnecessary withdrawals will have negative growth to your cash values in the future. While you can repay the loan as an option, many persons don’t. This can affect the payout in the event of your death based on the type of policy you have.

Non-Forfeiture Benefits – With most whole life policies, over time the policy will create a Cash Value. This is done after all monthly charges and fees comes off from the premiums. This allows the policy to sustain itself and becomes an increased asset for the policy owner.

Based on the policy owner’s objectives, they can either surrender the policy and take the cash values bringing an end to the contract, or they can apply for a paid-up policy.

Paid-up policy – After your policy builds up sufficient cash values and depending on the type of whole life policy you have, you can apply for a paid-up policy. This is usually done at age 65.

What this does is either one of two things. You are telling the insurance company you want to stop paying premiums and maintain the existing coverage. They will now use the cash value to calculate how many years the policy can continue with the proposed cash value. This could be for several years beyond your current age.

The other paid-up option is maintaining the policy contract age to 100 but reducing the sum assured. Again, the cash values and the actuaries will determine the outcome.

Assignment – Most life policies are designed to be used as security/collateral at a bank. This depends on the loan agreed upon. If it’s a mortgage, then the bank looks at the Coverage as security; if it’s a small consumer loan, the bank will look at both the sum assured and the cash values, because if you are in default of your loan, they can apply for the cash values to liquidate the loan or part thereof. Once the policy is assigned, your beneficiaries or estate don’t have first call on the proceeds.

Beneficiaries – It is your right to leave the policy proceeds to whom you wish. However, there are certain laws that protect the spouse and children under the Married Persons Act. Naming a beneficiary from inception under the Act and more so a minor, binds the contract and may cause some problems in the future, based on its intended purpose.

In my next column, we will discuss the Critical Illness policy contract.

“What you deny or ignore, you delay…what you accept and face, you conquer.” —Robert Tew

 

Call me for more information on planning your financial future. Send your questions to myfinancialadvisor2020@gmail.com or call 620-1185.