Once a life insurance policy is in force, its provisions spell out the rights and rules that govern it, while options let the owner decide how to use cash value and dividends and how the death benefit is paid. Riders add or customize coverage. This is one of the most heavily tested areas of the life exam because the details are precise—so read carefully and learn the standard timeframes and definitions below.

Standard policy provisions

These provisions appear in virtually every life policy (many are required by state law based on NAIC models):

• Grace period – A window (commonly 30 or 31 days) after a missed premium during which the policy stays in force. If the insured dies during the grace period, the death benefit is paid minus the premium owed.
• Incontestability – After the policy has been in force for a set period (typically 2 years), the insurer cannot contest or void it for misstatements or concealment on the application (except for specific exclusions like fraud in some states, or nonpayment). This protects beneficiaries from after-the-fact claim denials.
• Reinstatement – Lets the owner restore a lapsed policy (often within 3 years) by providing proof of insurability, paying back premiums with interest, and repaying or reinstating any loan. Reinstatement usually restores original premium rates and may start a new contestable period.
• Free look – A period after policy delivery (often 10–30 days) during which the owner can return the policy for a full refund, no questions asked.
• Misstatement of age or sex – If the insured's age or sex was stated incorrectly, the insurer adjusts the death benefit to what the premium paid would have purchased at the correct age/sex—it does not void the policy.
• Suicide clause – If the insured commits suicide within the policy's first period (typically 2 years), the insurer returns premiums paid rather than the full death benefit. After that period, suicide is fully covered.
• Entire contract – The policy plus the attached application make up the whole agreement; nothing else can be incorporated, and the insurer can't change terms unilaterally.
• Ownership and assignment – The owner holds all rights and may assign (transfer) some or all of them. An absolute assignment transfers full ownership; a collateral assignment transfers rights only up to a debt (common when a policy backs a loan).
• Policy loan provision – On cash-value policies, the owner may borrow against the cash value. Unpaid loans plus interest are deducted from the death benefit or cash value.
• Automatic premium loan (APL) – An optional feature that automatically borrows from cash value to pay a premium that would otherwise lapse.

Nonforfeiture options

When an owner stops paying premiums on a cash-value policy, nonforfeiture options guarantee they don't lose the accumulated value. The owner chooses how to take it:

• Cash surrender – Take the cash value in cash; the policy terminates. (Gains above premiums paid may be taxable.)
• Reduced paid-up insurance – Use the cash value as a single premium to buy a smaller, fully paid-up whole life policy of the same type—no more premiums due, coverage lasts for life.
• Extended term insurance – Use the cash value to buy term insurance for the same face amount, lasting as long as the cash value can fund it. This is typically the automatic/default option if none is chosen.

Dividend options

Dividends are paid on participating (par) policies—usually issued by mutual insurers—when the company's actual experience is better than assumed. Dividends are a return of excess premium and are generally not taxable income. The owner can elect to:

• Cash – Receive a check.
• Reduce premium – Apply the dividend toward the next premium.
• Accumulate at interest – Leave dividends with the insurer to earn interest (the interest is taxable).
• Paid-up additions – Buy small additional amounts of permanent coverage; a very popular option because it grows the death benefit and cash value.
• One-year term (fifth dividend) option – Buy one year of term insurance, often equal to the cash value.

Settlement options

Settlement options govern how the death benefit (or surrender value) is paid to the beneficiary—either as a lump sum or over time:

• Lump sum – The full benefit paid at once (the default and most common).
• Interest only – The insurer holds the proceeds and pays interest to the beneficiary; principal stays intact.
• Fixed period (period certain) – Pays the proceeds plus interest over a set number of years; larger payments for shorter periods.
• Fixed amount – Pays a set dollar amount each period until the proceeds plus interest run out.
• Life income – Pays the beneficiary for life (may include period-certain or refund guarantees). The amount depends on the beneficiary's life expectancy.

Beneficiary designations

The beneficiary receives the death benefit. Designations can be:

• Primary – First in line to receive proceeds.
• Contingent (secondary) – Receives proceeds if the primary dies first.
• Tertiary – Third in line.

Revocability:

• Revocable – The owner can change the beneficiary at any time (the usual default).
• Irrevocable – Cannot be changed without the beneficiary's consent.

Distribution methods when a beneficiary predeceases the insured:

• Per capita ("by the head") – Surviving named beneficiaries split the proceeds among themselves.
• Per stirpes ("by the branch") – A deceased beneficiary's share passes to their heirs/descendants.

Other rules: the common disaster provision and Uniform Simultaneous Death Act address what happens if the insured and beneficiary die at nearly the same time (the insured is presumed to have survived, so contingent/estate rules apply). The spendthrift clause protects proceeds left with the insurer from a beneficiary's creditors.

Common riders

Riders modify a base policy. Know these well:

Common exam traps

• Incontestability and the suicide clause are both typically 2 years, but they protect different parties—incontestability protects the beneficiary from contested claims; the suicide clause protects the insurer early on.
• Misstatement of age does NOT void the policy—the benefit is adjusted to what the premium would have bought at the true age.
• Extended term is usually the automatic nonforfeiture option; reduced paid-up keeps lifetime coverage but a smaller face amount.
• Free look starts at delivery, not at application.
• Dividends aren't taxable (return of premium), but interest earned on accumulated dividends is.
• Waiver of premium requires total disability and a waiting period; it pays no cash—it just keeps the policy in force.
• Per stirpes sends a deceased beneficiary's share to their descendants; per capita splits among survivors.

Quick recap

• Core provisions include the grace period, incontestability (≈2 yrs), reinstatement, free look, misstatement of age, and suicide clause (≈2 yrs).
• Nonforfeiture options—cash surrender, reduced paid-up, and extended term—protect accumulated cash value; extended term is the usual default.
• Dividend options (cash, reduce premium, accumulate at interest, paid-up additions, one-year term) apply to participating policies and are generally a tax-free return of premium.
• Settlement options (lump sum, interest only, fixed period, fixed amount, life income) control how proceeds are paid out.
• Beneficiaries can be primary/contingent/tertiary and revocable/irrevocable, distributed per capita or per stirpes.
• Common riders include waiver of premium, accidental death, accelerated death benefit, guaranteed insurability, and term/child/payor riders.