This article provide an overview of some of the general principles governing life insurance as a legally enforceable contract and examine the terms and conditions under which life insurance is sold.1 This is not meant to be a legal treatise and will only provide a basic survey of general life insurance principles. Each state’s law may (and often does) differ from another state’s law. And, each court’s interpretations of a general principle may vary (from slightly to radically) when compared with the conclusions of courts in another state. This will not cover life insurance contract formation because the legal aspects of the contract will depend on the insurer’s policies and contract terminology in addition to state law.
While reading this, planners should consider the documentation necessary to create a “paper trail” of evidence as to what happened, who said and who did what, and when and how each step of the contractual process occurred. Careful record keeping can prove invaluable for tax purposes as well as in the event of a dispute among the parties.
A more thorough understanding of the legal safeguards and peculiarities of the life insurance contract with respect to the few duties it imposes on the policyowner or his or her beneficiaries, as well as the multitude of privileges, powers, and rights it bestows will enhance the planner’s appreciation for this unique and incredibly useful product.
Here are the 15 important legal aspects:
1. parties to the contract;
2. requirement of insurable interest;
3. legal form and contents of the contract;
4. one-month grace period for premium payments;
5. incontestable clause;
6. suicide clause;
7. misstatement of age adjustment clause;
8. dividend clause;
9. nonforfeiture provisions (cash surrender, extended term and paid-up insurance);
10. policy lapse and reinstatement clause;
11. naming and changing the beneficiary;
12. modes of settlement;
13. policy loans;
14. assignments of a life insurance policy; and
15. waiver and estoppel.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM