Life Insurance Basics
Why people buy
Personal uses include survivor protection, estate creation, cash accumulation, estate conservation and liquidity for taxes and final expenses, and charitable bequests. Business uses include key person coverage, buy-sell funding, split dollar, deferred compensation, and executive bonus (Section 162). Sizing methods: human life value (present value of future earnings), needs analysis (income replacement, debts, education, final expenses, minus existing resources), and the budget method (fit premium to cash flow).
What drives the premium
Three factors: mortality (death claims), interest (assumed earnings), and expense (sales, administration, taxes). Cash value and reserves grow from the same assumptions.
Field underwriting
The producer is the first underwriter. Complete the application accurately, record only what the applicant says, and never answer medical questions for the client. Part I is general data; Part II is medical history; Part III is the agent's report - it is not part of the contract. The insurer may order an attending physician statement, paramedical exam, or inspection report, and may check the MIB.
Issue and delivery
Risk classes run from preferred through standard to substandard (table or flat extra ratings), or declined. Coverage often begins when the application and initial premium are submitted under a conditional receipt, but only if its conditions are satisfied and stated limits are not exceeded. On delivery, verify identity, collect premium, obtain a statement of good health if required, and explain the free look.
Replacement requires notices to both insurers. STOLI arrangements - investors buying policies with no insurable interest - are prohibited.
Traps: assuming insurable interest must persist, and treating the agent's report as contractual.
Rule of thumb: the applicant signs; the agent never signs for them.