Life Insurance Basics
Who is who
Separate four roles: the owner controls the policy (premiums, beneficiary, loans, surrender); the insured is the life measured; the payer may be a third party; the beneficiary receives proceeds. The owner and insured are often the same, but not always - and problems arise when they differ (e.g., insurable interest and tax issues).
From application to delivery
The producer does field underwriting - completeness, honesty, and recognizing red flags. The application, medical information (possibly paramedical exam, APS, MIB report), and the agent's report go to the home office. The conditional receipt typically provides coverage as of the date of the completed application and required medical exam - if the proposed insured is found insurable. A temporary insurance agreement is similar; neither guarantees coverage if the applicant proves uninsurable.
Policy delivery and effective date
Coverage may be effective on the policy date, the delivery date, or the date conditions are met - read the receipt. Delivery is personal when a premium is due or a change occurred; otherwise it may be constructive (mailed). Buyer's Guide and policy summary disclosures are required, and replacements require notice and comparison.
Traps
- A material misrepresentation on the application lets the insurer rescind - but only within the incontestability period (typically two years).
- Premium mode changes total outlay: annual is cheapest; monthly modal is most expensive in total.
- The suicide clause (usually two years) limits the death benefit to a refund of premiums.
- Statements on the application are generally representations, not warranties.
Worked example
Applicant completes the application and exam March 1, pays the initial premium, and gets a conditional receipt. She dies March 10 before the policy is issued; underwriting would have approved her as standard. Result: the full face amount is payable, because the conditions of the receipt were satisfied.