Life Insurance Basics
Parties and insurable interest
Four roles: owner, insured, beneficiary, and payor (often the owner). Insurable interest must exist at policy issue for life insurance, not at death; that distinction is a favorite trap. Beneficiaries are primary or contingent, revocable or irrevocable. A revocable designation can be changed by the owner without the beneficiary's consent.
Underwriting
Field underwriting begins with the agent's report and the completed application, which becomes part of the contract. The insurer may order a paramedical exam, an attending physician's statement, or an inspection report, and may check the MIB. Under the Fair Credit Reporting Act, an applicant rejected for coverage has the right to learn the source of the information used. Premiums rest on three factors: mortality, interest, and expense.
Modes and effective date
Annual mode is the least expensive; monthly is the most expensive because of lost interest and added administration. Under a conditional receipt, coverage usually begins when a completed application, the initial premium, and all underwriting requirements are in, provided the insurer would have issued a standard policy. Backdating can save age but is usually limited to six months and requires premiums for the backdated period.
Uses
Personal needs (income replacement, final expenses, mortgage) and business needs (buy-sell funding, key person, split dollar, executive bonus) drive how much and what type of coverage is sold.
Traps
"Insurable interest must exist at death" is the standard wrong answer, and a conditional receipt is not a binding receipt.
Rule of thumb
Temporary insurance requires premium plus a completed application plus insurability. Missing money means no interim coverage.