Life Insurance Basics
Why life insurance exists
Life insurance protects against premature death by creating an estate for dependents, covering debts, funding education, or preserving a business. Producers use human life value and needs analysis to estimate the financial gap. Human life value measures the present value of future earnings; needs analysis subtracts existing resources from projected obligations. Premiums reflect mortality, interest, and expense assumptions. Mortality is the probability of death at an age; interest earnings reduce the premium needed; expenses add to it.
Ownership and beneficiaries
The policyowner controls the contract: beneficiary designation, loans, surrenders, and assignments. The insured is the person whose life is covered. The beneficiary receives proceeds. These roles can be the same person or different people. A revocable beneficiary can be changed by the owner; an irrevocable beneficiary generally must consent. Underwriting classifies risk as standard, preferred, substandard, or declined. A conditional receipt may provide temporary coverage subject to the insurer's underwriting rules.
Traps
Questions often ask who may change the beneficiary-the owner, not the insured unless the owner is also the insured. Insurable interest is needed when the policy is purchased, not when the insured dies. Do not assume a beneficiary named in a will overrides a valid policy designation.
Rule of thumb
Identify the owner, insured, payor, and beneficiary separately. If the owner wants flexibility, avoid an irrevocable designation. If coverage is needed immediately, read the conditional receipt.
Worked example
A parent owns a policy on the parent's own life and names a child as beneficiary. The parent may change the beneficiary because the parent owns the policy. The child has no ownership rights merely by being beneficiary.