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

Five provisions that shape what a life policy pays

This lesson covers five standard life insurance provisions: dividends, incontestability, assignment, the suicide clause, and accelerated death benefits. Each one answers a practical question about who gets paid, how much, and when.

Dividends

A participating policy lets the policyowner share in the insurer's favorable experience. When actual mortality, investment earnings, and expenses turn out better than the conservative assumptions built into the premium, the insurer has divisible surplus. The law requires the insurer to annually ascertain and apportion any divisible surplus accruing on the policy (N.Y. Ins. Law § 3203(a)(6)).

Key points for the exam:

• Dividends are not guaranteed. Illustrations may show them, but the insurer's board declares them each year.
• A dividend is treated as a return of excess premium, so it is generally not taxable income until total dividends exceed total premiums paid. Interest earned on dividends left with the insurer is taxable.
• Nonparticipating policies pay no dividends.

The usual dividend options are:

1. Cash — a check to the policyowner.
2. Reduce premium — the dividend is applied to the next premium.
3. Accumulate at interest — left with the insurer to earn interest.
4. Paid-up additions — buys small amounts of fully paid-up whole life at net single premium rates, with no evidence of insurability.
5. One-year term — buys one-year term insurance, often up to the policy's cash value.

Incontestability

After a policy has been in force during the insured's lifetime for two years from its date of issue, the insurer can no longer contest it, for example by voiding it for a misstatement in the application. The statute excepts nonpayment of premiums and certain armed-forces conditions (§ 3203(a)(3)). The clause protects beneficiaries from claims denied years later over old application answers.

If the insured dies within the two-year period, the policy has not been in force for two years during the insured's life, so the insurer may still contest it. When the policyowner later applies for a death benefit increase with evidence of insurability, a new two-year period applies to that increase only (§ 3203(a)(3)).

A misstated age is handled differently. It does not void the policy. Benefits are adjusted to what the premium would have bought at the correct age (§ 3203(a)(5)).

Assignment

The policyowner may transfer ownership rights to someone else.

• An absolute assignment transfers all ownership rights permanently, as with a sale or gift of the policy.
• A collateral assignment transfers only part of the rights, temporarily, to secure a debt. The creditor is paid first, up to the balance owed, and the beneficiary receives the rest.

The insurer is not bound by an assignment until it receives written notice, and it is not responsible for whether the assignment is valid. A policy loan works on the same principle, because the sole security for the loan is an assignment or pledge of the policy (§ 3203(a)(8)(B)).

The suicide clause

A policy may exclude suicide within two years from the date of issue (§ 3203(b)(1)(B)). If the insured dies by suicide during that period, the insurer does not pay the face amount. It generally refunds the premiums paid instead (§ 3203(b)(3)). After two years, suicide is covered like any other cause of death. As with incontestability, a later increase in coverage may carry its own new two-year suicide period (§ 3203(d)(2)).

Accelerated death benefits

An accelerated death benefit (a living benefit) lets the insured receive part of the death benefit while alive, usually after a terminal illness diagnosis or a qualifying chronic or critical condition. Whatever is paid early, plus any charges, reduces the amount later paid to the beneficiary.

The statute builds in consumer protections (§ 3230):

• The application must warn, prominently, that receiving accelerated benefits may affect eligibility for public assistance programs and may be taxable.
• The owner must state that the request is voluntary and without coercion, and the insurer must show the remaining death benefit.
• Within five days of the application, the insurer provides an illustration of the effect on cash values and loans, the death benefit payable at death versus on acceleration, and a notice that other means, such as a policy loan, may be available.
• Payment cannot be made for five days after that information is sent, and the owner may rescind the request at any time during the application process.
• Under a group policy, only the certificateholder can accelerate benefits.

Exam tip: The two big two-year clocks, incontestability and suicide, both start at the policy's date of issue. Misstatement of age is never a reason to void the policy. It is a reason to adjust the benefit.