In order to understand life insurance, one must first understand some of the basics- such as the relationships, coverage options, and basic requirements that are needed to issue a policy.
RELATIONSHIPS
The insured is the person whose life is insured against on a life insurance policy.
The policyowner is the person or entity who owns the life insurance policy and has the ability to make changes on the policy. Frequently, the policyowner and the insured are the same person. However, a life insurance policy could be structured with a different policyowner and insured such as when a grandparent owns a policy on a young grandchild.
The payor is the person or entity that pays the premiums on the policy. Usually the policyowner/insured is the payor. An alternative example is a when a bank may be the payor on a life insurance policy owned by a trust.
The beneficiary is the individual(s) or entity that the policyowner has designated to receive the policy benefit when the insured dies.
COVERAGE OPTIONS
The base policy is the primary coverage that pays out upon on the death of the insured.
A rider (sometimes referred to as an endorsement) becomes a part of the insurance contract, and limits the benefits of the policy or provides additional benefits. Riders are commonly used to provide supplementary benefits, such as term insurance for additional family members.
REQUIREMENTS
The policyowner must have an insurable interest in the person whose life is being insured against. In other words, they must be in the position to suffer a loss should the insured die.
Many life insurance policies are not guaranteed issue, and therefore require underwriting. This is a process where insurance home office employees (called underwriters) review the insurance policy under two primary stages. While identifying risks, underwriters look at physical hazards that may increase the likelihood of death; such as a family history of cancer or smoking. Underwriters also review moral hazards that may affect the degree of risk a proposed insured represents. For instance, someone with a history of illegal or unethical behavior may pose a high risk for insurance fraud. During the risk classification stage, underwriters categorize proposed insureds into appropriate risk classes. These classes can range anywhere from super preferred to standard, substandard or declined.
An agent must meet with the proposed insured and an application for insurance must be completed. Other forms will be necessary based on the life insurance plan applied for, the state the transaction occurs in, and whether the insured already has other life insurance in force. Depending on the plan of insurance proposed, a life insurance illustration may be left with the client, projecting future policy values.
The policyowner/insured must also pay an initial premium in consideration for the life insurance coverage. If the premium is paid at the time of application, a premium receipt is issued, and temporary insurance coverage is provided while the insurance application is being underwritten.
