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Life Insurance: Providing Security for Your Survivors

Understanding Your Policy

It's All in the Application

The information on your application, as well as the medical information received by the insurance company's underwriting department, determines the actual premium you'll pay the company. When you receive a life insurance policy, you usually have a ten-day free look period. You have the right to return the policy within ten days and get a full refund of your premium (that's ten days from the day you receive it, not when it is issued) if you choose.

Most people, if they do review their policy, will look at the policy specifications page. Any errors that are found stem from the information on the application. In addition, there are things in your application that can affect how the policy is underwritten. Here are six items on the application you need to look at 1) when you buy a policy and 2) when you review your policy, plus one thing you should never do:

  1. Birth date: Some companies issue policies with your age as of your last birthday. More commonly, they are issued at the age nearest your birthday. Say you sign up for life insurance on July 2, 2005 and your birthday is January 1, 1960. If the company issues the policy age nearest birthday, you are considered age 46, since July 2 is closer to January 1, 2006. If you're a year older, your annual premium will be higher.

    SUGGESTION: You can backdate the policy up to six months. If it is term insurance, it is usually not necessary; there's no real benefit. If it is a cash-value policy, you can save yourself substantial premiums over the life of the policy.

  2. Smoking Status: There's a big difference between smoker rates and non-smoker rates. Generally, the company wants to know if you smoked any cigarettes in the last twelve months. If you have, you are considered a smoker. The company may also offer you a preferred rate (lower than the non-smoker rate) if you've never smoked or haven't had any form of tobacco in several years.

    SUGGESTION: If you have a policy that is a few years old and you were smoking at the time but have since stopped, notify your insurance agent. The company will typically lower the rate after you sign a statement and provide medical evidence.

  3. Beneficiary: See the section on Your Beneficiary below.

  4. Dividend Election: Make sure the right dividend election box is checked on the application (only applies to dividend paying policies). Don't find out several years later the dividends were left to accumulate at interest rather than buying additional insurance or reducing the premium.

  5. Sub account allocations: If you purchase a variable life policy, make sure the sub account allocations are correctly marked.

    SUGGESTION: If you have a whole life policy in which the dividends were used to accumulate at interest, consider switching future dividends to buy paid-up additions. The interest on the dividends that accumulate at interest is taxable; paid-up additions are not.

  6. Death Benefit: The death benefit must be stipulated on the application. You'll find it on the policy along with some of the other critical information already mentioned. Make sure it's the amount you planned on.

    IMPORTANT NOTE: If you have a universal life policy, make sure the correct death benefit option is selected.

  7. Riders: Most of them are actually not necessary. But, if you did elect a rider, make sure it is noted and attached to the policy. For example, you may have requested a disability waiver of premium rider. If it is not checked off on the application and you become disabled, you'll be responsible for the premium even though you told the agent you wanted the rider.
  8. Don't lie: Fraud and misrepresentation can prevent the company from paying a death benefit to your beneficiary.

If you think you can hide a medical problem, chances are it is coded with the Medical Information Bureau (MIB). The MIB is a membership organization of life insurance companies that acts as a medical information exchange. Insurance companies routinely submit medical information to the MIB that they obtain while paying claims or underwriting life insurance applications. The insurance company requires you to give them permission to check with the MIB as well as obtain your medical history records from the doctors that have treated you.

SUGGESTION: If you have a medical problem, discuss it with your insurance agent. Your agent will advise you how insurance companies view your condition and may even recommend some companies that have more liberal underwriting standards.


In most cases, you should own the insurance on your life. Depending on the purpose of the insurance, the owner can be you or your spouse, your child, a corporation, a business partner, or a trust.

While the beneficiary is entitled to receive the death proceeds from the policy, the owner is entitled to certain "rights" while the insured is alive. The owner has the right to:

  • assign or transfer the policy;
  • surrender the policy and receive the cash value;
  • borrow from the cash value;
  • elect and change the beneficiary; and
  • select among the various settlement options.

For the average individual with modest assets whose life insurance serves as a means to provide survivor income, the owner and insured should generally be one and the same. Here are some considerations relating to policy ownership:

  1. If your estate is over the estate applicable exclusion amount, consult with your estate tax attorney as to whether transferring ownership to an irrevocable life insurance trust is advisable. When this is done, the face amount of the policy is generally excluded from the insured's taxable estate.
  2. As the owner of a policy, you can assign a policy to another individual or entity. Transferring or assigning your policy to a trust is an example of absolute assignment. This means you retain absolutely no ownership interest (otherwise known as incidents of ownership). Another type of assignment is called collateral assignment. You can use this type of assignment to secure a loan. You retain certain limited rights, such as changing the beneficiary, but you do not have access to the cash value or the policy until your obligation is satisfied. Full ownership then reverts back to you.

Your Beneficiary

Your beneficiary is the person(s) or entity to whom you want the proceeds of the policy distributed upon your death. Typically, a spouse is named as the primary beneficiary. Your decision is revocable which means you can change your beneficiary as often as you want. If you are buying the policy on the life of another person, the person or entity you name as beneficiary has to have an insurable interest in the life of the insured.

Not just anyone can apply for a life insurance policy on someone else's life and name themselves beneficiary. Blood and family ties qualify for insurable interest; so do most people or entities that would incur a financial loss in the event of death. Insurable interest is necessary only at the time of application and generally does not have to remain at the time of the insured's death.

If you're single, and you're concerned that your heirs are financially immature or irresponsible, discuss with an attorney the benefits of having an inter vivos trust as beneficiary. If you've established a trust for your children, the money can go into the trust and be paid out according to the terms of the trust.

You are also asked to name a contingent beneficiary. In the event the primary beneficiary, such as your spouse, dies before all the proceeds of the policy are paid out, they will automatically go to the contingent beneficiaries, such as your children or parents.

IMPORTANT NOTE: Whenever possible, don't make yourself the beneficiary if you are the insured. The death benefit will automatically go into your estate and then be subject to probate. More importantly, the proceeds of the policy are now exposed to the claims of your creditors and they may never get distributed to the people you took out the insurance for in the first place.

SUGGESTION: It is important to let your beneficiaries know that they are listed on your insurance policy. (At least let the executor of your estate know.) Make sure you don't put the policy in a safety deposit box or other place that may not be accessible to your beneficiaries at your death. It is also a good idea to let them know they can contact the life insurance company directly to submit a claim.

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