Life Insurance Basics
Building a life policy
Life insurance is purchased to replace income, cover debts, fund education, pay estate costs, or provide business continuation funds. Needs analysis compares resources with obligations; human life value estimates the present value of future earnings. The application is the basis of the contract, and answers must be truthful. Underwriting evaluates age, sex, health, occupation, hobbies, and family history, then assigns a risk class. The Medical Information Bureau is an information exchange, not a denial database, and HIPAA limits disclosure of protected health information.
Key parties are the owner, insured, and beneficiary. The owner controls the policy and names the beneficiary; the insured is the person whose life is covered; the beneficiary receives proceeds. They may be different people. A revocable beneficiary can be changed by the owner; an irrevocable beneficiary generally must consent. A conditional receipt can provide temporary coverage if the premium is paid and underwriting requirements are met. Delivery and free-look rules let the owner examine the policy. Replacement rules require comparison and disclosure.
Traps
Questions often assume the insured owns the policy or that the beneficiary has ownership rights. Also watch for promises of coverage before underwriting when no premium was paid or no conditional receipt was issued.
Worked rule
If an applicant pays the initial premium and receives a conditional receipt, coverage may begin when specified underwriting conditions are satisfied. If the applicant pays nothing, a receipt is not issued, and no policy is delivered, a claim before approval is usually denied.