Life Insurance Basics
Why people buy life insurance
Life insurance replaces income, funds obligations (mortgage, education, business obligations), pays estate taxes and settlement costs, and creates charitable gifts. Two classic measuring tools: human life value (present value of the insured's future earnings minus personal expenses) and the needs approach (immediate cash needs + income replacement + education + debt, minus existing resources).
Underwriting
Life underwriting classifies risk by age, gender, health, occupation, hobbies, and habits. The producer is the field underwriter - answer questions honestly and completely on the application. The MIB provides coded, factual information to member insurers; it does not make underwriting decisions (a common trap). The Fair Credit Reporting Act gives applicants the right to know if a consumer report was used and to correct errors; HIPAA governs release of medical information. Material misrepresentation on the application lets the insurer rescind within the contestable period or deny a claim if the misstatement was material and caused the loss.
When coverage begins
A conditional receipt provides coverage only if the proposed insured is insurable on the date specified (typically the date of application or medical exam). If the applicant is not insurable, no coverage exists even though money was paid. A binding receipt is broader but rare.
Insurer types and authority
Stock insurers are owned by shareholders; mutual insurers by policyowners (dividends are a return of divisible surplus, not guaranteed); fraternal societies serve a lodge membership. Producer authority is express (stated in the agency contract), implied (reasonably necessary), or apparent (what a reasonable third party believes).
Rule of thumb: dividends, interest rates on UL, and non-guaranteed elements are illustrations only - never promises.