Life Insurance Basics
Why people buy it
Producers use two needs-analysis frameworks: human life value (present value of the insured's future earnings and services) and the needs approach (income replacement, mortgage and debt payoff, education, final expenses, emergency fund, less existing resources). Personal uses include income replacement and estate liquidity; business uses include key-person coverage, buy-sell funding, and executive benefits.
Anatomy of a policy
Face amount (death benefit), premium, cash value, and dividends (mutual/participating insurers only - dividends are a return of surplus, not guaranteed and not taxable until they exceed premiums paid). Premiums are built from mortality, interest, and expense assumptions; the insurer's mortality charge rises with age and is affected by health, tobacco use, occupation, and avocations.
Premium mode trap
More frequent payments mean more total outlay: annual is cheapest per year, then semiannual, quarterly, monthly (automatic bank draft is usually cheapest of the monthly options). Exam questions often ask which mode costs the most over a year - monthly direct billing, not annual.
Participating vs nonparticipating
Stock insurers issue nonparticipating policies; mutual insurers typically issue participating ones. Dividends can be taken in cash, used to reduce premium, accumulate at interest, buy paid-up additions, or buy one-year term - a favorite multiple-choice set.
Rule of thumb
Premiums are lower for younger, healthier, non-tobacco applicants buying larger face amounts on annual mode. If a question pairs a lower-risk profile with a higher premium, something in the fact pattern (occupation, aviation, hazardous hobby, substandard rating) is driving it.