Life Insurance Basics: Underwriting, Insurable Interest, and Ownership
What the underwriter measures
Life insurance pricing rests on mortality tables built on the law of large numbers; life expectancy is the average future lifetime for a person of a given age and class. Underwriting classifies applicants as preferred, standard, substandard (rated), or declined. Sources include the application (Part I personal, Part II medical), the agent's report, the Medical Information Bureau (coded data; it can never be the sole basis for declination, and the applicant must be told it exists), paramedical or medical exams, attending physician statements, and prescription or motor vehicle databases. Consumer reports carry disclosure duties under the Fair Credit Reporting Act.
Insurable interest and ownership
Insurable interest must exist at the time of application - the buyer must reasonably expect to benefit from the continued life of the insured. It is not required at death. The owner holds every right: naming and changing the beneficiary, surrendering, borrowing, assigning, and selecting settlement options. The insured need not be the owner, and the beneficiary has no rights during the insured's lifetime.
Primary beneficiaries take first; contingent beneficiaries take if no primary survives. Per stirpes splits a deceased beneficiary's share among that beneficiary's descendants; per capita divides only among living named beneficiaries. An irrevocable beneficiary must consent to any change. A common disaster clause sets the order of death when insured and beneficiary die together, and a spendthrift clause shields proceeds from a beneficiary's creditors.
Measuring the need
The human life value approach discounts the insured's future earnings; the needs approach adds income replacement, debt, education and final expenses, then subtracts existing resources.
Trap: Insurable interest is needed at application, not at death; an irrevocable beneficiary cannot be changed without consent.
Rule of thumb: Need sets the death benefit; risk class sets the premium.