Life Insurance Basics
Insurable interest and ownership
A person buying life insurance on another must have insurable interest at the time of application, typically a family relationship or a business or financial stake. The policyowner holds all rights: naming beneficiaries, taking loans, surrendering, and assigning. The insured is the person whose life is covered. The beneficiary receives the proceeds.
Premium and risk classification
Life premiums rest on three factors: mortality (expected deaths from a mortality table), interest (earnings on reserves), and expense (operating costs). Underwriters classify applicants as preferred, standard, substandard (table-rated), or declined. Tools include the application, paramedical exam, blood and urine tests, MIB records, and attending physician statements. Field underwriting-the producer's initial interview-helps prevent adverse selection.
Policy issue and delivery
Coverage usually begins when the policy is delivered and the first premium is paid, provided the application was approved as submitted. A conditional receipt can provide interim coverage if its conditions are met. The producer should deliver the policy personally, collect the premium, and explain the free-look right; a statement of good health may be required.
Beneficiaries
Designations may be primary or contingent, revocable or irrevocable (the latter cannot be changed without consent). Per stirpes distributes a deceased beneficiary's share to that beneficiary's heirs; per capita splits proceeds evenly among survivors. Naming the estate subjects proceeds to probate and creditors.
Traps
Insurable interest is tested at issue, not at death. Also remember that the policyowner may be, but need not be, the insured or the beneficiary.
Rule of thumb
No insurable interest at application means no valid policy, regardless of later events.