Dividends, incontestability, assignment, suicide, and accelerated death benefits

Two provisions that expire, three rights that do not

Five provisions sit at the centre of every life contract, and they divide cleanly in two. Incontestability and the suicide clause are about the insurer's power to resist a claim, and both run on a clock that starts at the date of issue and then stops. Dividends, assignment and the accelerated death benefit are things the policyowner may do, and they are available for as long as the policy is in force.

Dividends are a refund, not a return on investment

A participating policy is one whose owner shares in the insurer's divisible surplus. When actual mortality, expenses and investment results beat the conservative assumptions priced into the premium, the excess is apportioned back to participating policyowners as a dividend. That is why a dividend is legally a return of premium the owner overpaid rather than income, and why it is not taxable to the owner. Interest credited on dividends left with the insurer to accumulate is taxable.

A dividend is never guaranteed, and a producer may not present illustrated dividends as though it were. The owner elects how to take it:

• Cash — paid out directly.
• Premium reduction — applied against the next premium due.
• Accumulate at interest — left with the insurer, withdrawable, the interest taxable.
• Paid-up additions — buys small single-premium amounts of permanent insurance at the insured's attained age, with no evidence of insurability.
• One-year term — the fifth dividend option, buying one-year term insurance, commonly in an amount equal to the cash value.

Incontestability closes the door after two years

Once the policy has been in force during the insured's lifetime for two years from the date of issue, the insurer may no longer contest it because of a misstatement in the application. Not for an innocent error, and in the ordinary case not for a deliberate one either: after the period runs, the contract stands on its face. What survives is nonpayment of premium, which is not a contest at all.

Two things that look like exceptions are not. A misstatement of age or sex is corrected by adjusting the benefit to what the premium actually paid would have purchased at the true age, and that can be done at any time — the insurer is not contesting the policy, it is repricing it. And reinstating a lapsed policy starts a new contestable period running against the statements made in the reinstatement application, though not against the original one.

Assignment transfers the owner's rights

A policy is assignable, or not, as its own terms provide. Where the beneficiary may be changed on the policyowner's sole request, the owner may assign the policy by pledge or by transfer of title, in an assignment executed by the owner alone and delivered to the insurer — the beneficiary's consent is not required unless the beneficiary is irrevocable. An absolute assignment transfers every incident of ownership permanently. A collateral assignment transfers only enough to secure a debt, so the assignee is paid ahead of the beneficiary, but only up to the balance owed.

Notice is the operative act. The insurer may deal with the assignee as owner or pledgee in accordance with the terms of the assignment until it receives written notice at its home office that the assignment has ended, or notice of some other person claiming a conflicting interest. A group insured may likewise assign incidents of ownership, including the conversion privilege and the right to name a beneficiary, and again the insurer is protected for anything it paid or issued before notice of the assignment reached it.

The suicide clause is an exclusion, not a contest

If the insured dies by suicide within the period stated in the policy — two years from issue in a standard form — the insurer's liability is limited to a refund of the premiums paid, usually less any indebtedness. After the period, suicide is treated like any other cause of death and the full face amount is payable. The clause is not defeated by incontestability: it is the insurer's own stated exclusion, enforced on its own terms, with no need to prove that anyone misrepresented anything.

Accelerated death benefits pay early, not extra

An accelerated death benefit provision or rider pays part of the face amount to the insured while living, on a qualifying event — most commonly terminal illness, certified with a life expectancy of roughly 12 to 24 months, and in broader forms chronic or critical illness. Nothing new is created: the payment is an advance against the death benefit, so the amount accelerated, plus any interest or administrative charge, reduces what the beneficiary receives. Terminal-illness acceleration is commonly included without a separate premium, with the cost taken at exercise, and amounts paid to a terminally ill insured are generally received income-tax-free.