Life Insurance
Core concepts
Life insurance is a contract with three key roles: the owner controls the policy, the insured's life is measured, and the beneficiary receives the death benefit. Insurable interest must exist at application. Underwriting classifies risk and sets premiums based on mortality, expenses, interest assumptions, riders, and premium mode. Term insurance provides pure protection for a set period; permanent products include whole life, universal life, and term-to-100, some with cash values and non-forfeiture options. Standard provisions include a grace period (often 30 days), reinstatement rights (usually within two years with evidence of insurability and payment of overdue premiums), incontestability (generally two years), a suicide exclusion (generally two years), and adjustment for misstatement of age or sex.
Traps
Questions test who has rights: the owner changes the beneficiary, not the insured. An irrevocable beneficiary generally must consent in writing. A valid policy designation normally prevails over a will, and a contingent beneficiary receives only if the primary cannot. Minors cannot receive policy proceeds directly. Death benefits are generally tax-free, but interest paid on them is taxable. Creditor protection depends on designation and beneficiary class. Do not confuse lapse with cancellation, and remember that premium mode changes total cost.
Worked rule
If an insured dies from illness in year three after a material misrepresentation, the insurer generally cannot contest the claim after the two-year incontestability period. If death is by suicide in year one, the insurer typically refunds premiums rather than paying the face amount. Rule of thumb: two-year clocks for incontestability and suicide, and never rely on the will when a valid designation exists.