Life Insurance Basics: Underwriting, Premiums, Ownership, and Beneficiaries
Underwriting
The producer is the field underwriter; the application and agent report are the first filter. Underwriters may order paramedical exams, blood and urine tests, attending physician statements, an inspection report, and check the Medical Information Bureau. Applicants are classified preferred, standard, substandard (table rating or flat extra premium), or declined. Avocation, occupation, health history, and financial underwriting (income and net worth) all limit moral hazard.
Premiums
A life premium has three components: mortality (expected claims), interest (assumed earnings on reserves, which reduce cost), and expenses (loading). Annual mode is cheapest; monthly modes add installment fees. Level premium concepts explain how reserves and cash value accumulate.
Ownership versus insured
The policyowner holds all rights: naming and changing beneficiaries, surrendering, borrowing, assigning, and selecting settlement options. The insured is only the measured life. A policy on a spouse may be owned by the other spouse; a juvenile policy is usually owned by a parent until transferred.
Beneficiaries
Designations run primary, contingent, and tertiary. Revocable designations may be changed by the owner; irrevocable ones require the beneficiary's consent. Per stirpes divides a deceased child's share among that child's heirs; per capita splits equally among survivors. Minors cannot receive proceeds, so a guardian, trust, or UTMA arrangement is used. A common disaster clause controls the order of death, and facility-of-payment clauses allow limited advance payment.
Worked example
The owner names the spouse per stirpes. The spouse predeceases; two of three children survive, and the third left two children. The estate splits into three shares, and the deceased child's share passes to his two children.
Trap
The beneficiary never owns the policy and cannot borrow against it or change the owner.