Introduction to Life Insurance
The Introduction to Life Insurance domain covers the machinery under every life policy: how risk is pooled, who may insure whom, how an application becomes a binding contract, and which rights follow ownership. Exam questions here are scenario-based - given facts, decide whether coverage exists, who may exercise a right, or how a claim pays.
Core rules
- Insurable interest must exist at application or issue, not at death. People may insure themselves, a spouse, a dependent, or a business partner or key employee with a demonstrable economic stake.
- Three parties. The owner holds every right - change beneficiary, surrender, borrow, assign. The insured is the life measured (often the same person). The beneficiary receives proceeds and holds no rights while the insured lives.
- Risk classification sorts applicants into preferred, standard, substandard, or declined based on age, health, occupation, avocations, and family history; substandard risks may carry a table rating or flat extra.
- Underwriting uses Part I (general and health history), Part II (paramedical or medical exam), and the agent's report. The producer is the field underwriter; the home office decides.
- Conditional receipt. If the initial premium accompanies the application, coverage can be effective retroactively to the receipt date (or exam date) provided the applicant proves insurable at standard rates.
- Delivery and free look. The policy takes effect on delivery with first premium paid and any statement of good health satisfied; the free-look period (commonly 10 days, longer on replacements) then starts.
Worked example
An applicant applies and completes a medical exam March 3, pays the first premium, and receives a conditional receipt. The insurer approves standard coverage March 20; the applicant dies March 15.
The conditional receipt controls. The premium was paid and the applicant was insurable at standard rates on March 3, so the death benefit is payable despite no physical delivery. Had the applicant been rated substandard, the receipt generally binds the insurer only if the rated premium is paid; had the company declined, there is no coverage and the premium is refunded.
Traps
- Giving the beneficiary owner rights.
- Assuming insurable interest must continue until death.
- Confusing conditional and binding receipts.
- Missing the two-year suicide clause (return of premium) and incontestability (fraud, nonpayment, and misstatement of age remain actionable).