Life Policy Provisions, Riders, Options and Exclusions
10% of the exam
The contract mechanics of a Florida life policy: who holds the rights, how coverage lapses and comes back, what the cash value can do, and what the insurer can still refuse to pay. Worth about 10% of the exam — roughly 15 of the 150 scored questions.
The contract skeleton and who owns it
Three clauses open every policy. The insuring clause names the parties and promises the face amount on proof of death. Consideration is the application plus the first premium. The entire contract clause makes the policy plus any attached application the whole agreement, and application statements are representations, not warranties, absent fraud (s. 627.454, F.S.). No agent may waive, change, or alter any term or condition of the policy. Terms change only by an endorsement or rider signed by a duly authorized officer of the insurer (s. 627.460, F.S.). The owner, not the insured and not the beneficiary, holds every right: name and change beneficiaries, borrow, surrender, assign, elect settlement options. Florida free look: 14 days on life, 21 days on annuities (s. 626.99(4), F.S.). What comes back differs by product. Life: an unconditional refund. Fixed annuity: all premiums paid, including any contract fees or charges. Variable or market-value annuity: the cash surrender value plus any fees or charges deducted, or a refund of all premiums paid.
Beneficiary designations — rank, revocability, and Florida's overlays
Rank first. The primary collects. The contingent collects only if every primary predeceases. If all die first, proceeds fall to the estate, become part of the estate for all purposes, and lose the creditor exemption of s. 222.13, F.S. Revocable is the default. An irrevocable beneficiary must consent to a change, loan, surrender, or assignment. A class designation ("my children") splits per capita among survivors unless per stirpes is stated, which pushes a deceased child's share down to that child's children. Florida overlays three rules: dissolution or judicial invalidation of the marriage voids an ex-spouse designation and treats the ex as having predeceased, subject to listed exceptions such as a redesignation signed after the divorce or a designation required by the divorce decree (s. 732.703, F.S.); a beneficiary who unlawfully and intentionally kills the insured is treated as predeceased (s. 732.802, F.S.); in a common disaster with insufficient evidence that the two died other than simultaneously, proceeds pass as if the insured survived the beneficiary (s. 732.601, F.S.). Minors cannot take directly — use a custodian under ch. 710, F.S., or a trust.
Premium modes, grace period, automatic premium loan, reinstatement
Annual mode costs the least in total. The more often you pay, the more you pay overall — modal factors load for interest and expense. Florida requires a grace period of not less than 30 days for premiums after the first. Coverage stays in full force during grace; if death occurs, the overdue premium plus interest not in excess of 8% a year is deducted from the settlement (s. 627.453, F.S.). Automatic premium loan borrows the premium from cash value when grace ends. In Florida, if the application for an individual life policy offers APL, it is deemed elected unless the applicant makes an affirmative election not to include it (s. 627.4556, F.S.). Already lapsed? Reinstate within 3 years after the date of default (s. 627.459, F.S.): written application, evidence of insurability satisfactory to the insurer, all overdue premiums, and payment or reinstatement of any other indebtedness with interest. Two bars are absolute. The policy must not have been surrendered for its cash value, and any paid-up term insurance must not have expired. And note what reinstatement is: the original contract is restored, not replaced. The original issue age and premium schedule come back, so the insurer cannot reprice the policy.
Living values: policy loans, nonforfeiture options, dividends
Cash value reaches the owner three ways. Loan. Loan value must at least equal the cash surrender value at the end of the then-current policy year. The insurer may defer a loan 6 months — but never a loan taken to pay a premium to that insurer (s. 627.458, F.S.). If total indebtedness with accrued interest equals or exceeds the loan value, the policy terminates, but only after at least 30 days' notice mailed by the insurer. Any unpaid loan plus interest reduces the death benefit. For policies issued on or after October 1, 1981, fixed loan interest is capped at 10% a year, or the policy may use an adjustable maximum (s. 627.4585, F.S.). Nonforfeiture on lapse: cash surrender, reduced paid-up, or extended term. Florida's default is the paid-up nonforfeiture benefit specified in the policy unless another option is elected within 60 days after the due date of the premium in default (s. 627.476, F.S.). Payment of a cash surrender value may be deferred 6 months after demand and surrender of the policy. Dividends exist only on participating policies, apportioned beginning not later than the end of the third policy year and annually thereafter (s. 627.457, F.S.). The policy must state which option operates automatically if the owner elects none, and where other options are offered the owner gets at least 30 days from the dividend due date to elect. The five standard dividend options: cash; reduce the next premium; accumulate at interest, where the interest is taxable; paid-up additions; and one-year term, the "fifth dividend option."
Protective provisions and exclusions
Incontestability: after the policy has been in force during the insured's lifetime for 2 years from its date of issue, the insurer cannot contest it, except for nonpayment of premiums and, at the insurer's option, as to provisions relative to benefits in event of disability and provisions granting additional insurance specifically against death by accident or accidental means (s. 627.455, F.S.). Critical limit: an incontestability clause precludes only a contest of the validity of the policy. Defenses based on provisions that exclude or restrict coverage may be asserted at any time, whether or not those exclusions are excepted in the clause (s. 627.463, F.S.). Reinstatement opens a fresh contest window only on account of fraud or misrepresentation of facts material to the reinstatement, for the same period and on the same conditions as contestability after original issuance (s. 627.472, F.S.). Misstatement of age or sex adjusts the benefit to what the premium paid would have purchased according to the correct age or sex — the claim is not denied (s. 627.456, F.S.). Suicide is customarily excluded by the policy for 2 years, with premiums refunded. Other common exclusions: war and military service, aviation other than as a fare-paying passenger, and hazardous occupations or avocations.
Riders, accelerated benefits, and settlement options
Riders that add insured lives: term rider on the insured, spouse or other-insured, children's term, family rider. Riders that add benefits: accidental death (double indemnity, accident only, typically requiring death within 90 days of the accident), guaranteed insurability (buy more at set ages or life events with no underwriting, priced at attained age), return of premium, cost of living, chronic-illness or long-term-care. Riders that protect premiums: waiver of premium after a disability elimination period, commonly 6 months; waiver of monthly deduction on universal life; payor benefit, which waives premium on a juvenile policy if the premium-paying adult dies or becomes disabled. Accelerated death benefit: the insurer advances part of the face amount for terminal or other qualifying illness and reduces the death benefit. Do not confuse it with a viatical settlement — a sale of the policy to a licensed third party, regulated under the Viatical Settlement Act, ss. 626.991–626.99295, F.S. Settlement options: lump sum, interest only, fixed period, fixed amount, life income (straight, period certain, refund, joint and survivor). Straight life income pays the most per month because nothing is guaranteed beyond the annuitant's life; every guarantee added reduces the payment.
Where people lose points
✗ Free look vs. grace period vs. reinstatement — three different clocks students blur together.
✓ Free look is at the front of the contract: 14 days on life, 21 days on annuities, return it for a refund (s. 626.99(4), F.S.). Grace period prevents a lapse: not less than 30 days after a missed premium, coverage still in force, unpaid premium plus interest not in excess of 8% deducted from any claim (s. 627.453, F.S.). Reinstatement repairs a lapse that already happened: within 3 years after default, with evidence of insurability and back premiums (s. 627.459, F.S.).
✗ Incontestability vs. exclusions — believing that after two years the insurer must pay every claim.
✓ Incontestability ends contests after the policy has been in force 2 years during the insured's lifetime (s. 627.455, F.S.). It does not touch exclusions. Florida says so expressly: an incontestability clause precludes only a contest of the validity of the policy and does not preclude asserting, at any time, defenses based on provisions that exclude or restrict coverage (s. 627.463, F.S.). A war exclusion or aviation exclusion is still good in policy year twenty.
✗ Misstatement of age vs. material misrepresentation — treating both as grounds to deny.
✓ Misstatement of age or sex is never a denial. The benefit is recalculated to what the premium actually paid would have purchased according to the correct age or sex, and the claim is paid at that adjusted amount (s. 627.456, F.S.). A material misrepresentation about health or habits is different: it can void the contract, but only if the insurer contests within the 2-year contestable period (s. 627.455, F.S.).
✗ Automatic premium loan vs. extended term insurance — both involve a missed premium, but they sit on opposite sides of the lapse.
✓ APL happens before lapse. At the end of grace the insurer borrows the premium from cash value and the entire policy — riders, cash value growth, everything — stays in force. In Florida it is deemed elected if the application offered it, unless the applicant made an affirmative election not to include it (s. 627.4556, F.S.). Extended term happens after lapse. It is a nonforfeiture option: the full face amount continues, but only for a fixed term, with no further premiums and no further cash value growth.
✗ Reduced paid-up vs. extended term — which one keeps the face amount and which one keeps the duration.
✓ Reduced paid-up keeps the duration: permanent coverage for life, but at a smaller face amount, and the cash value keeps growing. Extended term keeps the face amount: the original face continues in full, but only until a stated date, and cash value stops growing. Neither requires further premiums. In Florida, if the owner elects nothing, the paid-up nonforfeiture benefit specified in the policy takes effect unless another option is elected within 60 days after the due date of the premium in default (s. 627.476, F.S.).
✗ Accelerated death benefit vs. viatical settlement — both turn a death benefit into cash while alive.
✓ An accelerated death benefit comes from your own insurer under your own policy. You stay the owner, you keep paying premium, and whatever is advanced reduces the death benefit paid to your beneficiary. A viatical settlement is a sale: a licensed third party buys the policy, becomes owner and beneficiary, pays the premiums, and collects the full face at death. Viatical settlement providers, brokers, and contracts are separately regulated in Florida under the Viatical Settlement Act, ss. 626.991–626.99295, F.S.
Numbers to memorize
| Free look — individual life | 14 days. A buyer's guide and policy summary must be given before the initial premium unless the policy provides an unconditional refund for at least 14 days (s. 626.99(4)(a), F.S.) |
| Free look — annuity | 21 days unconditional refund. Fixed: all premiums plus contract fees or charges. Variable or market-value: cash surrender value plus fees or charges deducted, or all premiums paid. Does not apply if the purchaser is an accredited investor (s. 626.99(4)(b), F.S.) |
| Grace period, individual life | Not less than 30 days for premiums after the first; interest not in excess of 8%/yr, and the overdue premium is deducted from a claim (s. 627.453, F.S.) |
| Incontestability period | 2 years from date of issue, in force during the insured's lifetime; exceptions for nonpayment of premiums and, at the insurer's option, disability and accidental-death provisions (s. 627.455, F.S.) |
| Exclusions after incontestability | Incontestability precludes only a contest of validity; exclusion and restriction defenses may be asserted at any time (s. 627.463, F.S.) |
| Contestability after reinstatement | Contestable only for fraud or misrepresentation material to the reinstatement, for the same period and conditions as after original issuance (s. 627.472, F.S.) |
| Reinstatement window | Within 3 years after default; requires written application, insurability satisfactory to the insurer, all overdue premiums, and payment or reinstatement of other indebtedness with interest; unavailable if surrendered for cash or if paid-up term insurance has expired (s. 627.459, F.S.) |
| Automatic premium loan | Deemed elected if offered in the application for an individual life policy, unless the applicant makes an affirmative election not to include it (s. 627.4556, F.S.) |
| Policy loan value and deferral | At least the cash surrender value at the end of the then-current policy year; insurer may defer 6 months, never for a loan to pay a premium to that insurer (s. 627.458, F.S.) |
| Loan indebtedness exceeding loan value | Policy terminates only after at least 30 days' notice mailed by the insurer (s. 627.458, F.S.) |
| Maximum policy loan interest | Policies issued on or after October 1, 1981: fixed maximum 10% per year, or an adjustable maximum set as permitted by law (s. 627.4585, F.S.) |
| Nonforfeiture election window | 60 days after the due date of the premium in default; otherwise the paid-up nonforfeiture benefit specified in the policy becomes effective (s. 627.476, F.S.) |
| Cash surrender value deferral | Insurer may defer payment 6 months after demand with surrender of the policy (s. 627.476, F.S.) |
| Dividend apportionment | Participating policies only; beginning not later than the end of the 3rd policy year, annually thereafter (s. 627.457, F.S.) |
| Dividend option election period | Policy must name the automatic option; where other options are offered, at least 30 days from the dividend due date to elect (s. 627.457, F.S.) |
| Secondary notice before lapse | Insured 64 years of age or older, policy in force at least 1 year: notice at least 21 days before the effective date of lapse (s. 627.4555, F.S.) |
| Suicide exclusion | A contract term, not a Florida statutory period — customarily 2 years, with premiums refunded. Florida preserves exclusion defenses at any time (s. 627.463, F.S.) |
| Interest on death claim payments | Lump-sum death proceeds must include interest, accruing from the date the insurer receives written proof of death (s. 627.4615, F.S.) |
| Insurable interest — timing | Must exist at the time the contract is made; need not exist after the inception date of coverage (s. 627.404, F.S.) |
| Consent of the insured | The insured, having legal capacity, must apply for or consent in writing; exception for a minor younger than 15 insured by a person with insurable interest or on whom the minor depends for support (s. 627.404, F.S.) |
| Divorce and beneficiary designations | Ex-spouse designation void on dissolution or judicial invalidation; treated as predeceasing, subject to listed exceptions (s. 732.703, F.S.) |
| Common disaster / simultaneous death | Insufficient evidence they died other than simultaneously: proceeds distributed as if the insured survived the beneficiary (s. 732.601, F.S.) |
| Beneficiary who kills the insured | Unlawful and intentional killing: payable as though the killer predeceased; a final murder conviction is conclusive, otherwise proved by the greater weight of the evidence (s. 732.802, F.S.) |
| Creditor protection of proceeds | Exempt from the claims of creditors of the insured unless the policy or a valid assignment provides otherwise; if payable to the estate, proceeds become part of the estate for all purposes (s. 222.13, F.S.) |
| Minor beneficiaries | Use a custodian under the Florida Uniform Transfers to Minors Act, ch. 710, F.S., or a trust. Custodianship generally ends at 21, and the transferor may instead set termination at 25 (s. 710.123, F.S.) |
| Entire contract and application statements | Policy plus the application, if endorsed on or attached to the policy, is the entire contract; statements are representations, not warranties, absent fraud (s. 627.454, F.S.) |
| Authority to alter the contract | No agent may waive, change, or alter terms; changes only by endorsement or rider signed by a duly authorized officer of the insurer (s. 627.460, F.S.) |
| Recommendation to surrender | Agent must give written information on surrender charges, loss of minimum interest rate guarantees, tax consequences, forfeited death benefits, and other lost guarantees, and keep a copy with the date it was provided (s. 627.4553, F.S.) |
| Viatical settlements | Sale of the policy to a licensed third party; regulated by the Viatical Settlement Act (ss. 626.991–626.99295, F.S.) |
Test yourself
No answers here on purpose — retrieving them is the practice. Drill this domain if any of these stall you.
- State the Florida free-look period for an individual life policy and for an annuity, and say what the applicant gets back in each case.
- The insured dies during the grace period with one premium unpaid. Does the beneficiary get anything, and if so, how much and under which statute?
- List the three nonforfeiture options, say what each preserves and what each gives up, and name Florida's default when the owner elects nothing.
- A policy is in year seven. The insurer discovers the insured concealed a heart condition on the application. What are the insurer's options?
- Explain the difference between an irrevocable beneficiary and a revocable one in terms of four specific owner rights.
- Which Florida provision is deemed elected unless the applicant affirmatively opts out, and what does it do at the end of the grace period?
- Distinguish an accelerated death benefit from a viatical settlement on four points: who pays, who owns the policy afterward, who pays future premiums, and who receives the death benefit.
- Name the settlement option that produces the highest monthly payment, and explain why adding a period certain or refund feature lowers it.
- Two bars make reinstatement impossible even inside the three-year window. Name both.
- Name the five standard dividend options, and say which one produces taxable income.