Life Insurance Basics: Underwriting, Contract Law, Ownership, Beneficiaries
Underwriting
Underwriters classify risk as preferred, standard, substandard (table rating or flat extra), or declined. Sources include the application, paramedical exam with blood and urine, attending physician statement, MIB (a coded record of prior applications - not a credit report), consumer/inspection reports (with FCRA notice), and motor vehicle records. HIV testing requires written informed consent, and state law limits use of genetic information.
Forming the contract
The policy plus the attached application form the entire contract. A conditional receipt provides coverage only if the proposed insured meets the insurer's standard underwriting; a binding or temporary insurance agreement can cover immediately. Coverage usually begins at delivery and payment of the first premium while the insured remains in good health.
Ownership
The owner controls all rights: naming and changing beneficiaries, policy loans, surrender, assignment, and settlement elections. Beneficiary consent is needed only when the designation is irrevocable. Owner and insured need not be the same person.
Beneficiaries
Primary, contingent (secondary), and tertiary; revocable or irrevocable. Per stirpes splits a deceased child's share among that child's heirs; per capita divides equally among surviving named beneficiaries only. Minors cannot take proceeds directly - a guardian, UTMA custodian, or trust is used. Common disaster/simultaneous death clauses and spendthrift clauses protect the payout.
Worked example: $300,000 is payable "to my children, per stirpes." One child predeceases leaving two children; those grandchildren split that deceased child's share, while surviving children take equal shares. Trap: insurable interest is tested at application, and a divorce alone does not automatically remove an ex-spouse as beneficiary.