Life Insurance Basics
Why people buy life insurance
Life insurance replaces income, covers debts and final expenses, provides estate liquidity, and funds business continuation. Agents use the human life value approach (present value of the insured's future earnings) or the needs approach (debts, income replacement, education, expenses minus existing resources).
Insurable interest and underwriting
Insurable interest must exist at the time of application - not at death. A person may insure himself, a spouse, a business partner, or a key employee; an unrelated stranger may not. Underwriting classifies risk from preferred to standard to substandard (table ratings, flat extra premiums). Sources of information include the application (part I personal, part II medical), the agent's report, the MIB (which reports coded information, not medical records), paramedical exams, blood and urine tests, the attending physician's statement, and inspection reports. Field underwriting by the agent - complete, honest answers - is the first line of defense against adverse selection.
Premium factors
A life premium is built from mortality (expected deaths), interest (assumed earnings), and expense (loading). Premiums are lower with higher assumed interest and higher with a longer pay period. Annual mode is cheapest; monthly is most expensive because of lost interest and added billing cost.
Delivery and the conditional receipt
Coverage generally takes effect on policy delivery, not application, unless a conditional receipt applies. Under a conditional receipt, coverage is effective as of the date of the application or the medical exam, whichever is later, provided the proposed insured is still in good health and otherwise insurable as a standard risk. A statement of good health signed at delivery is required when the receipt is conditional.
Ownership and beneficiaries
Policy rights belong to the owner, who may be different from the insured - for example, in juvenile policies or business-owned coverage. Beneficiary designations name a primary and a contingent beneficiary, may be revocable (changeable) or irrevocable (requires consent), and may be per stirpes (by branch of family) or per capita (equally among survivors).