Life Insurance Basics
Why people buy
Producers size a need two ways: human life value (present value of future earnings) and the needs approach (income replacement, mortgage, education, final expenses, emergency fund, minus existing resources). Business uses include key person coverage, buy-sell funding, deferred compensation, and executive bonus plans.
Underwriting
The producer is the field underwriter and must record accurate information on the application, which becomes the basis of the contract. Tools include the attending physician statement, paramedical exam, MIB, inspection report, and prescription history. Fair Credit Reporting Act and HIPAA notices, plus Washington's written consent requirement before HIV testing, are testable. Risks are classified preferred, standard, substandard (table rated or flat extra), or declined.
Premium factors
Three components: mortality, interest, and expense. Mode matters; annual is generally the least expensive over a year, while monthly modes cost slightly more.
Beneficiaries
Primary and contingent. Revocable beneficiaries may be changed unilaterally; irrevocable beneficiaries must consent. Per stirpes distributes a deceased child's share to that child's descendants; per capita divides equally among survivors. Minors cannot receive proceeds directly, so designate a trustee, custodian, or guardian. With no surviving beneficiary, proceeds pass to the estate through probate.
Traps
Insurable interest is tested only at application, so an owner may later name a partner or friend. An irrevocable beneficiary must consent to a loan, surrender, or change. A class designation such as children of the insured automatically includes after-born children.
Rule of thumb: assume revocable unless the question says otherwise; when a minor is named, the correct answer usually involves a trust, custodian, or guardian.