Life Insurance Basics and Policy Types
Core concepts
Insurable interest must exist when the application is signed - the owner must stand to lose financially if the insured dies. It does not have to be proven again at death. Questions love to ask when interest is required; the answer for life insurance is at application.
Premium is built from three factors: mortality, interest, and expense. A higher assumed interest rate lowers the premium; a longer life expectancy or better risk class also lowers it.
Policy types
- Term - pure protection, no cash value. Level, decreasing (mortgage protection), increasing, annually renewable term, and renewable/convertible features. Renewable guarantees the right to renew; it does not guarantee the premium.
- Whole life - level premium for life, guaranteed cash value, endows at maturity. Variants: limited-pay, single premium, modified/graded premium.
- Universal life - flexible premium, cash value credited interest, monthly cost of insurance deducted. Option A (level) or Option B (increasing) death benefit.
- Variable life / VUL - cash value in a separate account; requires a securities license plus a prospectus; the owner bears investment risk.
- Survivorship (second-to-die), juvenile, and endowment contracts.
Worked example
A UL policy has a $500,000 face amount and $60,000 cash value. With Option A the beneficiary receives $500,000; with Option B the beneficiary receives $560,000. Rule of thumb: A stays the same, B gets bigger - Option A pays the face, Option B pays face plus cash value.
Traps
Dividends are never guaranteed. Conversion is allowed without new evidence of insurability. Term has no cash value, so a question offering a surrender value on term is a distractor.