OK Life & Health: Life Insurance

Life Insurance tests how a policy is designed, owned, sold, and paid out. Oklahoma candidates should expect items on term, whole, universal, and variable products; riders; beneficiary designation; underwriting; annuities; taxation; and state replacement and marketing rules.

Core rules

• The owner controls the contract; the insured's death triggers the death benefit; the beneficiary receives it. Insurable interest is required at application, not at death.
• Term is pure death protection and builds no cash value. Whole life has a guaranteed level premium and cash value. Universal life separates mortality charges and cash value and permits premium flexibility. Variable life is a security: it requires a prospectus and securities registration.
• Standard provisions include incontestability (commonly two years), suicide exclusion (commonly two years), grace period, reinstatement, misstatement of age or sex, and free look. In Oklahoma, a replacement notice is required when a new life policy replaces existing coverage.
• Federal tax: death proceeds are generally income-tax-free under IRC §101(a). Cash value grows tax-deferred; loans are not income while the policy remains in force, but lapse or surrender can create taxable gain over basis. MEC rules can tax distributions.

Worked example

A $300,000 whole life policy has $50,000 cash value and a $20,000 outstanding loan. The insured dies. The beneficiary receives $280,000 ($300,000 death benefit minus the loan). The $280,000 is generally income-tax-free. The loan is not a separate taxable payment while the policy is in force. If the owner instead surrendered with a $50,000 cash value and $30,000 basis, the $20,000 gain would generally be taxable.

Traps

Do not say term has cash value. Incontestability does not prevent an age or sex misstatement adjustment. A revocable beneficiary can be changed without consent; an irrevocable one cannot. Variable products need both insurance and securities authority. Replacement and free-look items are counted from policy delivery, not application.