Other provisions I: insuring clause, free look, consideration, probationary and elimination periods

Five provisions that frame the deal

Every individual health insurance policy opens with a handful of provisions that set the terms of the bargain before any benefit is paid. This lesson covers five that the exam groups together: the insuring clause, the free look, the consideration clause, the probationary period and the elimination period. The last two are both waiting periods, and the exam's favorite trick is to swap them.

The insuring clause: the insurer's promise

The insuring clause is the heart of the policy. It is the insurer's basic promise to pay benefits, and it says three things:

• who is insured and who the insurer is,
• what is covered: loss from accident, sickness, or both, and
• that the promise is subject to all the terms, conditions and exclusions of the policy.

The insuring clause is usually on the first page, often near the policy face. On health policies, wording matters. A policy that covers loss from accidental bodily injury (the results test) pays when the injury itself was unexpected, even if the act that caused it was intentional. A policy that requires injury by accidental means is narrower: the cause must also have been unintended. Results wording is broader and more favorable to the insured.

The free look: a right to examine and return

The free look (also called the right to examine or right to return) gives the policyowner a set number of days after delivery to review the policy and return it for a full refund of premium, for any reason or no reason. A policy returned in the free-look window is treated as void from the beginning, as though it had never been issued.

The period is printed on the face of the policy or in a notice attached to it. Ten days is the common standard for individual health policies, and longer windows (often 30 days) apply to products such as Medicare supplement and long-term care insurance, or where the policy replaces existing coverage. The clock starts at delivery, not at application.

The consideration clause: what each side gives

A contract needs consideration, something of value exchanged by each party. The consideration clause states that the policy is issued in return for:

1. the statements in the application, and
2. payment of the first premium.

The insurer's consideration is its promise to pay covered losses. The clause also commonly states the premium amount and how often it is due. Because only the insurer makes a legally enforceable promise, the health policy is a unilateral contract: the insured can stop paying at any time, but the insurer must perform once covered loss occurs. Remember: the application and the first premium are the insured's consideration; later premiums keep the policy in force but are not the consideration for forming it.

Probationary period versus elimination period

Probationary period

The probationary period is a short window, commonly 15 to 30 days, that starts on the policy's effective date. Sickness that begins during that window is not covered; accidents are covered immediately. Its purpose is to keep someone from buying coverage after already feeling ill. It happens once, at the start of the policy.

Elimination period

The elimination period is a waiting period that starts at the onset of a disability (or other covered loss) and must pass before benefits begin. It is best understood as a time deductible: instead of paying the first dollars of a claim, the insured absorbs the first days. It is most associated with disability income insurance, where choices like 30, 60, 90 or 180 days are typical. A longer elimination period means a lower premium, because the insured is self-insuring more of each claim. It can apply to each separate disability, not just once.

Probationary: from the effective date, sickness only, once. Elimination: from onset of disability, every claim, a time deductible.

Neither period is a pre-existing condition exclusion. Major medical coverage subject to the Affordable Care Act cannot exclude pre-existing conditions, so on the exam these waiting periods appear mainly in disability income, accident-and-sickness and other limited-benefit policies.