Life Insurance Basics
Contract and underwriting foundations
Life insurance is a contract of utmost good faith, adhesion, and aleatory exchange: the insurer drafts terms, the applicant answers representations, and performance is unequal and contingent. The applicant's statements are generally representations, not warranties; material misrepresentation can allow rescission, while innocent immaterial error usually cannot. Insurable interest must exist at application; consent and ownership matter. Underwriting evaluates mortality risk using age, sex where permitted, health, occupation, avocations, family history, and MIB information; field underwriting improves accuracy but does not bind the insurer. Premiums reflect mortality, interest, expenses, and persistency; cash value is not the same as face amount.
Needs analysis uses human life value or needs-based approaches: income replacement, debt, education, and final expenses. Policy ownership carries rights: naming beneficiaries, loans, surrender, and assignment. Replacement of existing coverage triggers disclosure because surrender charges and new contestability can harm the client. Traps: treating a conditional receipt as immediate unlimited coverage; assuming a lower premium always means better value; and confusing the owner, insured, and beneficiary. Worked rule: insurable interest is tested at application, not at death. Example: an adult child may insure a parent if a lawful economic interest exists; a stranger cannot.