Life Insurance Basics
Determining the need
Producers use needs analysis to size a policy: the human life value approach capitalizes future earnings, while the DIME method adds Debt, Income replacement, Mortgage, and Education. Field underwriting begins the moment the producer meets the client: gathering accurate personal, medical, and financial information prevents rescission and claim disputes.
The application and underwriting
The application has Part I (general data, beneficiary, existing coverage) and Part II (medical history). The insurer may order an MIB report (coded, not a full medical record), an attending physician statement, or a paramedical exam; HIPAA requires written authorization for medical information. Underwriting classifies the risk as preferred, standard, substandard (rated), or declined. Financial underwriting detects STOLI/IOLI arrangements that lack insurable interest.
Premium and delivery
Collecting the initial premium with the application triggers the conditional receipt: coverage begins retroactively if the applicant was insurable as a standard risk on the application date. If the premium is collected at delivery, the producer usually obtains a statement of good health. Delivery completes the contract, and the free look period (commonly 10 days, longer for replacements and annuities in many states) lets the owner return the policy for a full refund.
Ownership and beneficiaries
Policy rights belong to the owner, not the insured: naming beneficiaries, borrowing, surrendering, and assigning. Beneficiaries may be primary or contingent, revocable or irrevocable, and payable per capita or per stirpes; a common disaster clause orders payment when deaths occur close together.
Worked example: Applicant pays the first premium with the application, is approved standard, and dies before delivery. The conditional receipt makes the death benefit payable because insurability existed on the application date.