Life Insurance Basics
Insurable interest and the application
A life policy requires insurable interest at the time of application - a financial or close personal relationship that would suffer economic loss at the insured's death. Interest is needed at issue, not at death; this is why a policy proceeds to the beneficiary even if the relationship later ends. Self-insurance of one's own life is presumed.
The application has two parts: Part I (general data - name, age, occupation, beneficiary, existing insurance) and Part II (medical history and exam). The producer's report covers the agent's personal knowledge of the client's finances and habits. Answers on the application are representations, not warranties - they must be substantially true; a material misstatement allows rescission during the contestable period.
Underwriting and pricing
Underwriters may pull the MIB report, an attending physician's statement, prescription history, and a paramedical exam, subject to FCRA and HIPAA notice and authorization rules. Rate classes run from preferred (best health) through standard, substandard (table-rated, extra mortality), and declined. Premium is built from three factors: mortality (expected deaths), interest (assumed earnings), and expense (loading). Paying annually is cheapest; each step toward monthly or weekly modes adds more loading.
Issue and delivery
A conditional receipt provides coverage as of the date of the application or medical exam, provided the applicant proves insurable under the insurer's rules. A binding receipt provides immediate coverage regardless of insurability. A temporary insurance agreement is similar and short-lived. Delivery plus payment of the initial premium and completion of any delivery requirements puts the policy in force, and the free-look period begins at delivery.
Trap: STOLI/IOLI arrangements - investors with no insurable interest buying policies to sell - are unlawful wagering and are prohibited in most states.
Rule of thumb: interest at issue, delivery plus premium equals in force.