Life Insurance Basics Flashcards
Purpose of Life Insurance
Help a dependent, family member, or other survivor cope with the financial consequences of someone’s death
Life insurance creates an…
Immediate estate and no probate process
Other uses of life insurance
Estate and tax planning, forced savings via cash value, business succession planning
Insurer
Accepts the financial risk of someone’s death and pays death benefits in exchange for compensation
Policyholder/owner
Controls the policy with the insurer, decides how it will be set up and usually needs to pay premium
Insured
Person whose death will result in benefits
Can the owner and insured be the same person?
Yes
Third-Party Ownership
When the owner and insured are different
Beneficiary
Received death benefit when the insured dies
Insurable Interest
Policyholder/owner must have insurable interest in the insured person’s life at the time of application, not necessarily at time of death
Beneficiary generally doesn’t need insurable interest and is usually chosen by…
Owner
Ownership Rights: Choose the amount of insurance and…
Beneficiary
Ownership Rights: Use the life insurance policy as…
Collateral for a loan from the insurer or another lender
Ownership Rights: Withdraw money from…
Policy’s cash value (if had)
Ownership Rights: Terminate life insurance policy or…
Make changes to it
Ownership Rights: Choose the frequency of…
Required premium payments
Ownership Rights: Receive dividends from…
Insurance company
Ownership Rights: Decide whether the beneficiary will receive death benefits in a…
Lump sum or in multiple installments
Ownership Rights: Transfer all or portion of the ownership rights to…
Someone else
Death Benefits
Chosen by owner; aka face amount or face value
Assignment
Ability to transfer ownership rights to a third party
Assignment requires…
Insurer consent
Absolute Assignment
Gives all rights permanently to a third party
Collateral Assignment
Gives lenders the right to name themselves as beneficiaries until repayment
Human Life Value
Estimates amount of income a person would expect to contribute to a beneficiary’s well being over a lifetime
Analysis/Needs Approach
Estimates what a beneficiary would need in order to accomplish an important financial goal
