What Exactly Is in a Life Insurance Contract? A Walk-Through

Life insurance can feel tricky to define because people view it as a type of financial resource (i.e., a death benefit if you pass away), but it’s not money in the bank. It’s a product you purchase and make premium payments for, but once the term ends, you may not have anything tangible to show. 

A life insurance policy, at its core, is a legal contract. You promise to represent yourself faithfully on your application and make premium payments. The insurance company promises to pay your beneficiaries a death benefit if you pass away while the policy is active. With your premium payments, you’re paying for the security of knowing your loved ones can rely on a death benefit to help cover your financial contribution to your family, even if you pass away.

A life insurance contract can look complex or have some industry terms, but you’ve totally got this. This step-by-step walk-through can help you feel more confident about what your contract means and what you get by signing.

Before the Contract

When you receive your contract, you may need to do some page-turning (or scrolling) before you get to the contract itself. 

The first thing you may see is a notice explaining how the insurance company uses your personal information. A life insurance application requires a lot of personal information about your health, financial details, driving record and lifestyle. The company discloses how they share and use your information, and you may have the option to limit certain forms of information sharing (e.g., with affiliate companies for marketing).

Your contract generally includes a copy of the policy application, with your responses. “We’re memorializing the answers we received, and that becomes the official part of the contract,” says Spencer Bader, General Manager of Insurance at Fabric. 

If the company needs to check on any information, such as when they’re processing a claim, they’ll use this version of your application. It’s worth giving your responses one last check to make sure all looks right. If you notice any errors or inaccurate information, some companies might allow you to resubmit an application to correct the information (varies by carrier). If a life insurance company investigates a claim and finds a discrepancy in the information you provided, that can retroactively affect your premium rates or coverage, or void the coverage and return premium versus updating premium rates (varies by carrier).

If everything looks good, though, it’s time to move on to the details of the contract itself.

What to Expect on a Life Insurance Contract

A life insurance policy is a legal agreement, so it’s important to review it carefully. Contract details can help you understand what the company promises to do and what’s expected on your end to make sure your coverage is there for your loved ones if they need it.

Here’s what you might see on your life insurance contract, with explanations for what some insurance-specific ideas mean. We are basing the below information on a contract for term life insurance through Fabric.

Policy Schedule

The policy schedule lays out the specifics of what kind of policy you have. You’ll see information like:

• Name of insured and owner: Generally, these will be the same. You own the policy, and you insure your own life. Some companies let you take out a policy on behalf of someone else, under certain circumstances. 

• Death benefit: This is your coverage amount, what the insurance company would pay out to your beneficiary if you pass away.

• Type of policy: Some policies change premium payments or coverage over time, whereas others hold steady. “Level Term” means your premiums and death benefit stay the same over time.

• Term length: You can choose different term lengths to fit your needs, and you may be able to renew the policy on a year-by-year basis after the initial term ends.

• Policy start and end date: Your policy starts when you’ve signed the contract and made your first premium payment, and the contract shows an official record of your policy’s start and end dates.

• Premium class: Your risk level determines your classification and what rates you get offered.

• Reinstatement premium interest rate: If you’re late paying your premium, you typically have about a 30-day grace period, and then the policy will lapse. You typically have a certain amount of time after a policy lapses when you can reinstate the policy (i.e., make it active again) by paying any missed premiums, plus interest at the rate on your contract.

Maximum Renewal Premium Rate Chart

Term life insurance, by definition, is set up to last for a specific length of time and then end — but it doesn’t have to. You can choose to renew the policy on a year-by-year basis, but your premiums may go up each year. The maximum renewal premium rate chart lists the maximum monthly rate you’ll pay.

Several “experience factors” can affect what premium you’d actually pay if you choose to renew. The list could include straightforward items like taxes (depending how taxes change, the company may charge higher premiums), and harder-to-understand factors like “mortality” or “persistency.” 

“Mortality” has to do with death rates in a particular demographic, not as an individual (you don’t need to get medically underwritten again to renew, and your personal health won’t impact your premiums). If new statistics show people in your demographic (e.g., sex, age, tobacco use) live longer, you’ll pay lower premiums than people in a higher-risk category. 

“Persistency” has to do with the other policies the insurance company opened around the same time as yours. An insurance company may expect that out of 1,000 policies they open, about 900 will stay active after a certain number of years. If the insurance company ends up with fewer active policies than they expected (lower persistency), they make less money on premiums and may charge higher premiums on policy renewals to compensate.

You might notice the premium rates on the chart jump considerably from what you pay in your initial term, and become very expensive as the years go on. It’s good to keep in mind these are maximum rates, not necessarily what you’d actually pay. Even so, it may be worthwhile to seek out a new policy with steady premiums after your old policy ends. 

Bader says, “For most people, it’s going to be more cost-effective to get a new policy. For people whose health has deteriorated significantly or even have a terminal illness, renewal can be a good option.” You’re guaranteed coverage if you renew your policy and don’t need to get medically underwritten again, so if you suspect your health would put most insurance out of reach, this can be a way to continue coverage.

Info on Riders

If life insurance is a pizza, life insurance riders are the sides and extra toppings that can customize what you’re getting exactly to your taste. Riders usually come with added cost, but they can give you extra options and benefits that aren’t part of the basic policy.

Your policy contract would have details about whichever riders (if any) you’ve chosen to add to your policy. For example, an accelerated death benefit rider allows you to claim a portion of your death benefit early if you’re diagnosed with a terminal illness. The policy contract would get into specifics about what benefit amount you can claim and what’s considered “terminal” (usually in terms of life expectancy). 

Some things to note: Benefits paid under this rider may be taxable.  You should consult your personal tax advisor to assess the impact of this benefit. Receipt of Accelerated Benefit payments may adversely affect the recipient’s eligibility for Medicaid or other government benefits or entitlements.

Defining Terms

Life insurance terms can have unexpected meanings, so your policy may explain some insurance-specific language. For example, your life insurance contract may use your “Issue Age” rather than your actual age. Your issue age is the age you’ll be on your closest birthday — meaning if it’s September and your birthday is in December, you could be “28” on your policy contract even if you’re still 27. This doesn’t mean you need to turn 28 before your coverage can start. Your “insurance age” may also matter if you end up renewing a policy for a long time, because the insurance company may offer coverage until the policy anniversary closest to your 80th or 85th birthday, which could mean months before or months after, depending on when the dates fall. (Please note: Issue age varies by company, some "Are nearest birthday" as described above and some use "actual age")

You may also see language defining when your policy is in force, such as, “Your policy is not In Force until You receive it and pay the first premium while the Insured is alive and in the same state of health described in the application.” If there are inaccuracies or misrepresentations of your health on your application, that could affect premiums after the fact or give the insurance company reason to contest a claim.

Information on Paying Premiums

Paying your premiums is your end of the deal to keep the policy active. Your contract gives details on how to make sure you’re meeting your commitment. You’ll see information like:

• Payment schedule (e.g., monthly)

• Grace period (e.g., 31 days to pay a premium late before interest kicks in or the policy lapses)

• How to reinstate a lapsed policy

Reinstating a lapsed policy can restart the suicide and contestability clauses of your policy.

Benefits

This is where the contract explains what you need to provide in order to claim a death benefit (e.g., proof of death like a death certificate) and what money the insurance company will pay your beneficiary:

• Policy benefit

• Applicable interest or benefits on in-force riders

• The company may return certain premiums — if you paid premiums in advance (e.g., quarterly or annually), the company will return premiums for time that extends beyond the month of the insured person’s death

Owner and Beneficiaries

The insured person is typically the owner of the policy. Some policy contracts allow you to make changes for someone other than the insured person to be the owner, while others don’t offer this option.

Your beneficiary is the person or entity who will receive the benefits if you pass away. You can choose a person or entity with an insurable interest in your life (ie, the beneficiary will suffer a financial loss upon the insured’s death) to be beneficiary, or split the death benefit between multiple beneficiaries. An important distinction to know is primary beneficiary versus contingent beneficiary. Contingent beneficiaries will only receive the death benefit if all primary beneficiaries have passed away.

You can change your life insurance beneficiary anytime you want, and your contract should have information on how to do that, as well.

Other Things to Know About Your Policy

Your contract aims to answer questions and explain details about your policy. You may see a section that lists other clauses or information to know about how your policy works.

• Misstating age and gender: Some life insurance policy applications have made progress to be increasingly inclusive about gender. Others still follow a gender binary in ways that can be confusing for some applicants across the gender spectrum. If you are not cisgender, it can be worth checking with a life insurance agent about which gender you should select for the purposes of assessing your application. If the gender you selected doesn’t match how the underwriters review your health profile (or you blanked and put down the wrong birthdate), the company will often adjust the policy to reflect updated age or gender information (and potentially apply retroactive premiums accordingly).

• Incontestability and suicide clauses: The contestability clause gives the insurance company the option to contest or adjust coverage if there are discrepancies on your application. The suicide clause states that the insurer will return premiums but not pay a death benefit if the insured person dies by suicide with two years of opening the policy. This is a safety measure to help avoid insurance becoming part of preparations to self-harm.

• Making changes to your policy: Policies typically allow you to decrease your death benefit (which means lowering premiums as well). The contract will specify if you can decrease or increase a death benefit, and state what minimum or maximum coverage limits would apply. The contract may also flag considerations to keep in mind, like how receiving an Accelerated Benefit could impact taxes or your eligibility for Medicaid.

Notice Concerning Unclaimed Property Law

Life insurance companies have an obligation to follow up on unclaimed life insurance benefits. They request contact information for each of your beneficiaries to help ensure your loved ones get a benefit in a timely manner.

Notice of Guarantee Protection

Life insurance companies take their contracts very seriously. They need to meet various regulations, including demonstrating that they have financial resources to pay the benefits they promise. In the highly unlikely event that a life insurance company goes through enough financial trouble that they can’t meet their obligations to policyholders, there are state guaranty funds that pay up to a certain benefit. 

Your beneficiaries might not receive the full face value, but this is an important measure to ensure that they get some of the benefit of your coverage, even if something disastrous happens to the insurance company. Your contract can contain information about what benefit would be available in this unlikely worst-case scenario.

Information on How to Surrender a Policy

If you have a policy with a cash value component, like whole life insurance, it may be possible for you to do a cash surrender of the policy. This means ending your coverage and collecting the cash value component, minus any debts, premiums or fees you owe. (Please note:  Please contact a tax advisor to assess the impact.)

Information About Third-Party Administrators

In some cases, you purchase life insurance from the company directly. In other cases, the life insurance provider may work with a third-party administrator that handles various services for your policy (e.g., when you purchase a policy through Fabric). This section explains who’s who in the case of your own policy.

One Final Note

If you realize you don’t need the policy after all, the contract usually has a short period (e.g., 10 days) during which you can return it for a full refund. But otherwise, signing your policy means entering your agreement with the insurance company to start your coverage. When you understand the ins and outs of your contract, you’ll feel more secure that you’ve got the policy you need to help protect your family.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature, is not financial advice, and all products or services discussed may not be offered by Fabric by Gerber Life  (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Consult an attorney or tax advisor regarding your specific legal or tax situation. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. The views and opinions of third-party content providers are solely those of the author and not Fabric by Gerber Life.