Life Insurance Basics
Insurable interest and underwriting
Insurable interest must exist at policy issue - a close family or financial relationship - but not at the time of death. That distinction separates legitimate coverage from STOLI/IOLI arrangements. Underwriting uses the application, paramedical or medical examination, attending physician's statement, MIB, inspection and consumer reports, and, where permitted, credit-based insurance scores. Field underwriting by the producer reduces adverse selection, and the producer must disclose known material facts.
Premium and reserves
Gross premium reflects mortality assumptions, interest earned on reserves, expense loading, and a margin for contingencies. Mortality cost rises with age, so a level premium overpays early and underpays later, creating reserves and, in permanent policies, cash value. Payment mode affects total cost: annual is least expensive; monthly direct bill is most expensive. Premium payment is the applicant's consideration; the insurer's promise is its consideration.
Delivery and receipts
Coverage ordinarily begins when the policy is delivered and the first premium is paid - unless a receipt says otherwise. A conditional receipt provides coverage from the application date (or medical exam date) only if the proposed insured proves insurable under the insurer's rules. A binding receipt provides coverage regardless of insurability. Trap: assuming any receipt gives immediate protection; read whether underwriting approval is a condition.
Uses
Personal needs include survivor income, estate liquidity, debt and mortgage protection, education funding, and charitable giving. Business uses include key person coverage, buy-sell funding, split-dollar plans, executive bonus arrangements, and deferred compensation. Life settlements and viatical settlements convert an existing policy into cash.
Rule of thumb
When a question involves a receipt, ask: was the applicant insurable? If yes and the receipt is conditional, coverage was retroactive.