When exactly does the term life insurance effective begin? That’s a great question with far reaching implications if benefits are triggered while in the application process. Let’s take a look at effective dates and the other potential clauses that are common for life insurance policies.
To determine the effective date, we need to look at another fancy insurance term called “offer and acceptance”. Keep in mind that the application and policy itself are contracts between you and the life insurance carrier. With life insurance, offer and acceptance essentially speaks to the fact that both parties agree to the contract. The applicant confirms his/her agreement by completing the application and submitting an initial premium amount. The carrier, after completing the life underwriting process, will send formal notice of approval which is the company’s agreement to the contractual terms and obligations of the specific life insurance policy. The “offer” is the applicant’s submittal of signed and completed application plus premium. The “acceptance” occurs when the carrier agrees to the coverage and issues an approval of the terms. The carrier is accepting the applicant’s “offer”.
What if the applicant submits the application but not premium? A common question we hear with insurance is why premium needs to be submitted up front before the carrier makes a decision. It is precisely due to the offer/acceptance clause of the insurance contract described above. Without the premium submittal, there is no “offer”. In this case, the carrier makes the offer if it issues a policy and this policy is received by the applicant. “Acceptance” only occurs when the applicant sends the corresponding premium.
Why is this important in terms of the effective date? With most carriers, the effective date will not occur until the premium is received and the carrier may request a statement to confirm the applicant is in good health before issuing the policy. If health changes or an applicant passes away while in underwriting, this difference is critical (understatement). Due to this, our recommendation is to submit payment up front with the application to avoid such a situation. It does happen and you would hate to be a few days short on such a big deal as life insurance protection.
A receipt is usually generated when the application/payment is submitted. Depending on the carrier/plan, this establishes the effective date of the policy. If a receipt is not given, the effective date may be pushed out to when the policy is issued and delivered to the application. Delivery in many cases constitutes the effective date of the policy. This can be manual delivery or in today’s world of people purchasing term life insurance policies online, via emailing and/or mailing of documents. It’s important to look at your policy of choice and understand how the carrier establishes effective date.
In some cases, the term life application may ask the carrier to backdate the effective date after approval in order to get a younger age and a resulting better rate.
The effective date also affects the contestability clause (period usually of two years during which the carrier can contest the policy based on missing information or misrepresentation) and the suicide clause (usually two years). These clauses start counting from the assigned effective date.