Life Insurance Basics and General Insurance Concepts
Life Insurance Basics and General Insurance Concepts
This domain tests foundational risk and contract principles that underlie every life policy, including insurable interest, underwriting, premium components, and the legal characteristics of insurance contracts. Variable products add securities features, but the insurance contract still follows these basics.
Core rules
- Insurable interest must exist at policy inception; it need not continue at death, except in replacement or STOLI contexts where state rules may add requirements.
- Life insurance is not a contract of indemnity in the strict property sense; it promises a stated death benefit. Underwriting manages adverse selection through medical, financial, and lifestyle information.
- Premiums reflect mortality, interest, and expense assumptions, plus reserves and insurer loadings. Insurers hold reserves and may buy reinsurance.
- Insurance contracts are aleatory, unilateral, conditional, and contracts of adhesion. Ambiguities are generally construed against the drafter.
- Representations are believed true; warranties are strictly true. Material misrepresentation can permit rescission during the contestable period.
- Waiver and estoppel can prevent an insurer from enforcing a right it knowingly relinquished.
Worked example
Two business partners buy life insurance on each other to fund a buy-sell agreement. The insurable interest exists when the policies are issued because each partner would suffer a business loss if the other died. If the partnership later ends, the original insurable interest at inception generally supports the contract, but the policy ownership and beneficiary arrangements should be reviewed. If one partner had no financial stake at inception, the policy could be challenged as wagering.
Traps
Do not say insurable interest must exist at death in every case. Do not confuse a representation with a warranty. Do not assume reinsurance transfers the policyholder’s contract to the reinsurer; the ceding insurer remains responsible to the policyowner.