The five parties in a policy
- Insurer: the insurance company issuing the contract.
- Owner: the person or entity controlling policy rights.
- Insured: the person whose life is covered.
- Beneficiary: the person or entity designated to receive the death benefit.
- Payor: the person or entity making premium payments; this may or may not be the owner.
Death benefit, face amount, and cash value
The face amount is the stated coverage. The death benefit is the amount payable under the contract after adjustments for loans, riders, or other provisions. Cash value is an ownership value in certain permanent policies. It is not automatically paid in addition to the death benefit.
Beneficiary designations
Primary beneficiaries receive proceeds first. Contingent beneficiaries receive proceeds if no primary beneficiary survives or qualifies. Per stirpes and per capita designations can produce different results. Minor beneficiaries, trusts, estates, divorce orders, and special-needs planning require legal advice.
Contestability and suicide provisions
Policies usually include a contestability period, commonly two years, during which the carrier may investigate material application statements after a claim. A suicide provision commonly limits the benefit during a stated early period. These provisions do not mean every early claim is denied; they define the carrier's rights and the policy's benefit.
Underwriting classes
Carriers may use preferred, standard, rated, graded, modified, or decline decisions. Class names are not identical across companies. A "standard" offer from one carrier can be less expensive than a "preferred" label from another, so compare actual contract and premium rather than labels alone.
Riders
- Accelerated death benefit for qualifying terminal illness.
- Chronic or critical illness benefits under specific definitions.
- Waiver of premium for qualifying disability.
- Child or spouse term riders.
- Accidental death benefit.
- Guaranteed insurability or paid-up additions riders.
Riders may cost extra, reduce the death benefit when used, or require additional underwriting. Read definitions, exclusions, and waiting periods.
Policy delivery and free look
Delivery is the time to verify names, dates, benefit, premium, benefit classification, and riders. The free-look period allows return of a newly delivered policy according to state and contract requirements. Keep proof of any cancellation request.
Lapse, grace period, and reinstatement
A grace period provides limited time after a missed premium before lapse. Permanent policies may use cash value to cover charges, which can hide an underfunding problem. Reinstatement may require back premiums, interest, and new evidence of insurability.
Replacement
Replacing a policy can restart surrender charges, contestability, and suicide periods. It may also lose guarantees, favorable underwriting, riders, or tax status. A replacement should be documented and compared side by side.
Claims
Beneficiaries typically contact the carrier, submit a claim form and certified death certificate, and provide identity and payment instructions. The carrier may request additional documentation. Keep policy numbers and carrier contact information accessible.
Tax basics
Life insurance death proceeds paid by reason of death are generally excluded from federal gross income, but interest paid on proceeds is generally taxable. Transfers for value, employer arrangements, estate ownership, policy surrender, loans, and modified endowment contracts can change tax treatment. Use qualified tax and legal professionals.