Life Insurance Basics
Pricing and products
Life insurance premiums reflect mortality, interest, and expense assumptions. Mortality is the probability of death at a given age; interest earnings reduce the premium; expenses include administration and commissions. Premium modes affect total cost: annual usually costs least, monthly modal premiums usually cost most over the year. Product types include term, whole life, universal life, variable life, indexed universal life, and limited-pay or endowment-style contracts.
Ownership and beneficiaries
The policyowner controls the contract and may change a revocable beneficiary, borrow cash value, assign the policy, or surrender it. The insured is the person whose life is measured. The beneficiary receives proceeds. A primary beneficiary is first in line; a contingent beneficiary receives if the primary is unavailable. Per stirpes divides a deceased beneficiarys share among that beneficiarys descendants; per capita divides among surviving named beneficiaries. Minors cannot receive proceeds directly, so a guardian or trust may be needed.
Traps
Questions mix up owner, insured, and beneficiary. A person may own a policy on someone else with proper insurable interest and consent. Term usually has no cash value. Variable products involve securities risk and require proper registration.
Worked example
An owner names an irrevocable beneficiary. The owner later wants to surrender the policy or take a loan; the insurer requires the irrevocable beneficiarys written consent. Rule of thumb: the owner controls the policy, the insured is the measuring life, and the beneficiary receives the death benefit.