Fundamentals of Insurance Planning
What insurance planning actually tests
Risk is uncertainty about loss; insurance transfers pure risk (loss or no loss) to a pool. Candidates must distinguish pure from speculative risk, personal from property/liability exposure, and the risk-management techniques: avoidance, retention, loss reduction, sharing, and transfer. Insurable exposures share traits - many similar units, accidental and measurable losses, determinable probability, and no catastrophic concentration.
The life insurance contract
Life insurance is a unilateral, aleatory contract of adhesion requiring utmost good faith. Know the elements (offer, acceptance, consideration, legal purpose, competent parties) and the doctrines flowing from adhesion: ambiguity is construed against the insurer. Insurable interest in one's own life or in a relative or business associate must exist at policy inception only. Representations (believed true) differ from warranties (guaranteed true); a material misrepresentation permits rescission during the contestability period.
Traps
- Insurable interest timing is tested constantly - inception, not death.
- Misstatement of age or sex is not grounds for rescission; the benefit is adjusted.
- Incontestability does not excuse nonpayment of premium; coverage ends with the grace period.
- Personal life insurance premiums are never deductible; the death benefit is generally income-tax-free under IRC §101(a).
- The transfer-for-value rule taxes proceeds when a policy is sold, except to the insured, a partner, a partnership, or a corporation in which the insured is a shareholder or employee.
Worked example
Rule of thumb: put the policy in force and calendar two years. A death in year three - even from suicide, even after a material application misstatement - is payable. The two clocks (contestability and suicide) run from issue and are the first thing to check on any claims question.