Life Insurance Basics
Life insurance basics
Life insurance protects against the economic loss caused by premature death. Premiums reflect three main factors: mortality (the probability of death), interest (earnings on reserves), and expense (insurer operating costs). Underwriting classifies risks using age, sex, health, occupation, and lifestyle; field underwriting by the producer must be accurate because the application is part of the contract. The owner controls the policy, the insured's life is covered, and the beneficiary receives proceeds. These roles can be the same person or different people. Common personal uses include income replacement, mortgage protection, education funding, final expenses, and estate liquidity.
Traps
Do not confuse the owner with the insured or beneficiary. Policy rights-loans, surrender, beneficiary changes-belong to the owner, not the beneficiary. A named beneficiary generally takes proceeds outside probate; naming the estate can subject proceeds to creditors and probate. A conditional receipt may provide temporary coverage only if conditions are met, such as payment and insurability under the insurer's rules. Premium mode affects total cost: annual usually costs least, monthly more.
Worked example
A 35-year-old parent earns $60,000 and needs income replacement for 20 years. A simple needs estimate might be $60,000 × 10 = $600,000, then adjust for existing assets, debts, and other income. The exact multiplier is less important than matching the policy amount and duration to the need.