The purpose of this chapter is to acquaint the student with personal and business uses of life insurance and methods of determining the appropriate amount of life insurance to purchase. It will also overview the classes of life insurance policies that exist, and the concept of third party ownership.
Applicant – a person making application for himself/herself or another to be insured under an insurance contract. The applicant may be the insured, owner or both. Application – a document that provides information for underwriting purposes. After the policy is issued, any unanswered questions are considered waived by the insurer. Cash value – money accumulated in a permanent policy which the policyowner may borrow as a policy loan or receive if the policy is surrendered before maturity. Surrender charges may be assessed at policy surrender. Upon maturity or endowment the cash value is paid to the policyowner. Some financial authors suggest that cash value may be a source of supplemental income. Nonparticipating policies (nonpar) – insurance policies which do not pay dividends to policyowners. Participating policies (par) – policies that may pay annual dividends to policyowners. Policyowner – the individual who has the ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily. Any changes made to a policy must be approved by the policyowner in writing with his/her signature.
Personal Uses of Life Insurance
1. There are many personal uses for life insurance: a. Survivor protection – providing funds for dependents. b. Estate creation – providing large sums of money for dependents and beneficiaries. c. Estate conservation – provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner preserving the insured’s estate. d. Cash accumulation – an amount of cash accessible to the policyowner. e. Liquidity – immediate funds available