Understanding Life Insurance Policy Provisions: A Guide for DTE Energy Employees and Retirees

What Are Life Insurance Policy Provisions?

As DTE Energy employees we understand that you are busy and likely have not spent countless hours researching life insurance policies. Life insurance policy provisions describe or explain various features, benefits, and conditions of your life insurance policy. Provisions in your life insurance policy also stipulate the rights and obligations of both the insurer (insurance company) and the insured (you). Every life insurance policy contains numerous provisions that it's important for DTE Energy employees and retirees to be informed about. 

Most states have laws requiring certain provisions to be included in life insurance policies and prohibiting the inclusion of other provisions. Examples of provisions commonly required by law are the free look, the grace period, the incontestability clause, and the reinstatement provision. Certain provisions (such as the designation of beneficiary and entire contract clause) are found in every life insurance policy, regardless of the type of policy or the state in which it is issued. Life insurance policies also typically include an assortment of optional provisions that either you or the insurance company may choose to include in the contract. We recommend DTE Energy employees and retirees consult additional resources to determine the best combination of policy provisions, options, and riders for your specific situation.

Common Policy Provisions

Assignment Clause

An assignment shifts all or part of the rights in a life insurance policy from the policy owner to another person or institution. The assignment clause in a life insurance policy usually allows you to freely assign the policy.

Example(s):  Suppose you take out a loan at your bank and the bank wants you to use your life insurance policy as collateral. The assignment clause would allow you to assign the policy to the bank. If you die before you pay off the loan, the bank would receive enough of your life insurance policy death proceeds to cover your outstanding loan balance. The remaining death benefits would be paid to your beneficiary.

Automatic Premium Loan Provision

This clause provides that if the policyholder fails to pay the premiums on a life insurance policy, the insurance company may automatically use the accumulated cash value to pay the premiums. The primary purpose of this provision is to prevent the unintentional lapse of your policy. Money loaned to the policyholder through an automatic premium loan is treated like any other loan against the policy's cash value. This means that interest will be charged on the loan, and any outstanding loan balance will reduce the death benefit.

Aviation Exclusion

This provision restricts payment of benefits if your death results from aviation activities unless you were a paying passenger of a regularly scheduled commercial flight. If, for example, you were killed as a pilot or passenger in a private plane crash, this exclusion would apply, and your beneficiary would not receive the death proceeds of the life insurance policy. At one time, this exclusion was part of almost every life insurance policy. Today, most policies cover such losses, although additional premiums may be required to cover private pilots.

Bailout Provision

Some life insurance policies impose surrender charges if the policy is terminated before a specified period of time has passed to recover expenses incurred during the issuance of the policy. A bailout provision reduces and in many cases eliminates these surrender charges. This provision enables you to withdraw your money or terminate your policy without penalty. However, you can typically invoke your rights under the bailout provision only if the insurance company fails to meet a certain standard--for example, if its interest rate falls below market standards.

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Hazardous Occupation or Hobby Exclusion

This provision states that no death benefit will be paid if you die as a result of your dangerous career or hobby (e.g., skydiving). Although this clause is not automatically included in most modern life insurance policies, you may have to pay a higher premium if you fall into certain high-risk categories.

Incontestable Clause

Once your life insurance policy has been in force for a certain period of time (typically two years), the insurance company cannot contest or void the policy except for nonpayment of premiums. If the insurance company discovers some reason to contest or void the policy, it must take action before the end of the contestable period. Once the end of the specified period is reached, the policy generally cannot be voided.

Misstatement of Age/Sex Clause

We want to remind all DTE Energy employees and retirees how important it is to accurately state your age and sex on your life insurance agreement. Age and sex are both factors in determining the cost of any given life insurance policy. If you understated your age or lied about your sex to obtain a lower premium, the insurance company has certain rights upon discovering such a misstatement. If you are alive when the misstatement is discovered, the insurance company can adjust the amount of your future premiums and demand payment of the additional premiums you should have paid before the misstatement was discovered. If the misstatement is not discovered until after you die, the insurance company must compute the amount of insurance your premiums would have purchased for someone of your actual age or sex and pay your beneficiary that amount.

Ownership Provision

The ownership provision in a life insurance policy specifically names the owner of the policy. This is particularly important when the owner of the life insurance policy is someone other than the insured (e.g., when a wife is the owner of an insurance policy on her husband's life).

Payment of Premiums Provision

This provision states that you must pay your premiums as they come due in order to keep your policy in force. If you do not pay your premiums for your life insurance policy, this non-payment may cause your policy to lapse. If your policy lapses, the reinstatement provision may allow you to restore your policy by paying back premiums and interest.

Policy Loan Provision

Policy loans have proven to be a powerful tool for many of our DTE Energy clients. The policy loan provision stipulates the amount you can borrow against your cash value, the rate of interest, and other terms for policy loans. In the event that you die with policy loans outstanding, your insurance company will deduct the unpaid amount plus any accumulated interest from your death benefit. Policy loan provisions are found in most cash-value policies. If you own a term life insurance policy, there is no cash value to borrow. Thus, the policy loan provision does not apply.

Reinstatement Provision

A reinstatement provision requires the insurance company to reinstate a lapsed policy if you request it within a certain period. The reinstatement period is typically three years from the date of your last premium payment. Before your policy is reinstated, the insurance company can require you to pay all back premiums with interest and provide proof of insurability. This means you will probably have to take a medical examination to prove you are in good health. Even though it may be expensive, this can be an attractive option because, based on your age, you might have to pay much higher premiums for a new policy.

Renewability Provision

This clause in a term life insurance policy allows you to renew the policy without having to take a medical examination or provide proof of insurability, regardless of your physical condition at the time of renewal. However, your premiums will increase upon renewal to reflect your life expectancy at your current age.

Spendthrift Provision

A spendthrift provision is designed to protect the proceeds of the policy against the actions of an irresponsible beneficiary. The spendthrift provision provides that proceeds will not be paid in a lump sum and that money that is not immediately paid to the beneficiary will be held by the insurance company, where it will be safe from any creditors of the beneficiary. The spendthrift provision also prohibits the beneficiary from assigning the payments to a creditor or borrowing against the proceeds.

Suicide Clause

This clause stipulates that if you commit suicide within a specified time after purchasing the policy, no death benefits will be paid. The time period is typically two years from the date you purchase the policy. If you were to commit suicide during this period, no death benefits would be paid, but any premiums you had paid would typically be refunded.

War or Military Service Exclusion

This provision typically stipulates that there will be no payment of insurance policy proceeds if your death is the result of a declared war. The exclusion may also be written to restrict payment of proceeds for any death that occurs while the insured is serving in the military.

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