A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent

UPDATED: Dec 13, 2016

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Don't miss these facts...

  • The difference between the insured, the beneficiary and the policy owner
  • What personal/lifestyle information you’ll need to provide
  • The importance of an accurate medical history on your application
  • The need to understand the policy specifics and payout arrangement

Applying for life insurance can be a complex process, but understanding some of the terminology and the information that you’ll need to provide beforehand can make that process run more smoothly.

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Insured

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Life insurance is a contract between the owner of a life insurance policy and the company who is providing that insurance, the insurer.

The insurer is promising to pay the agreed-upon sum to the person or persons named as beneficiaries in the event that the insured dies. Most of the focus of the life insurance application is upon the insured rather than the other persons involved in the life insurance contract.

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Beneficiaries

A beneficiary can be a person, a trust, an estate or even a business. The beneficiaries of a life insurance policy are the person or persons to whom the death benefit or payout of the policy will be paid in the event that the insured dies.

There are typically three levels of beneficiaries included in a life insurance policy.

The primary beneficiary automatically receives the death benefit when the insured dies.

The contingent or secondary beneficiary receives the benefit in the event that the primary beneficiary cannot receive the death benefit, usually because that person preceded the insured in death.

The tertiary beneficiary receives the death benefit in the event that neither the primary or secondary beneficiaries are able to receive it.

Naming the beneficiaries of a life insurance policy is extremely important because it identifies, in an orderly fashion, who will receive the death benefit.

Policy Owner

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The policy owner is the person who has the rights stipulated in the contract. Those rights include, but are not limited to:

  • Naming beneficiaries
  • Participating in dividends or death benefit payouts
  • Surrendering the policy for its cash value
  • Transferring policy ownership

In many cases, the policy owner and the insured are the same, but not always. A beneficiary can take out a life insurance policy on a particular person, as can a third party. In most cases, the policy owner is the person who pays the premiums for the policy as well.

Personal/Lifestyle Information

Life insurance applications ask for some identifying and personal information of all of the parties requesting proposed insurance, but there is a section of the life insurance application form that deals with the personal habits and lifestyle of the insured.

This information is used to determine the risk level of the insured, which in turn determines the rate of the premium and possible exclusions to the policy.

Questions in this section might include:

  • Dangerous sports the insured participates in such as hang-gliding, skydiving or bungee jumping?
  • Is an aircraft pilot?
  • Regular foreign travel?
  • Arrests and convictions for dangerous, criminal activities, including DUIs?

Being engaged in these activities can prevent the insured from being eligible for life insurance, raise the rate of premium that will be paid or cause the insurer to not be obligated to pay the death benefit under certain conditions, otherwise known as exclusions.

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Medical History

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For obvious reasons, the insurer needs to know what sort of risk they are taking by providing life insurance to the insured.

Similar to knowing a person’s lifestyle risks, eligibility, premium rates and exclusions are determined by how much risk the insurer is taking and whether or not they will pay out the death benefit before having the opportunity to cover that cost through premiums and interest earned.

An accurate medical history of the insured is required. Not providing an accurate medical history can cause a number of problems such as:

  • Refusal to insure
  • Refusal to pay the death benefit when the insured dies
  • Fraudulent information on a life insurance application is a federal crime for which a person can be prosecuted

Besides your general, physical condition, the medical history required on a life insurance policy is typically concerned with tobacco usage, critical diseases and conditions, and a familial history of critical diseases and conditions.

Policy Specifics

Life insurance policies often have specific conditions or situations that are addressed in it. Those tend to relate to two types of conditions; riders and exclusions.

A life insurance policy rider is an add-on provision that provides additional benefits at an additional cost.

In essence, it allows the policy owner to customize the policy to fit their needs.

Exclusions are those events causing the death of the insured that will not be paid by the insurer. Exclusions are compromises that are made between the owner of the policy and the insurer.

The insurer agrees to provide insurance or to provide a lower rate of premium if they will not be required to pay in the event that the insured dies from a specified cause that they have excluded.

Death Benefit Payment

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It is important to specify how the death benefit will be paid out to the beneficiary. This portion of the insurance application deals with how the death benefit will be paid out to the beneficiaries.

There are several different ways that a death benefit can be paid to the beneficiary depending upon the type of policy that is being acquired.

The death benefit can be paid out in many different ways, the most common are:

  •  A lump sum, which pays the death benefit in a single payment.
  •  A life income, which guarantees an income to the beneficiary for the rest of the beneficiary’s life.
  • A life income with a period certain, which guarantees a life income to the beneficiary for a specified number of years or until the beneficiary dies (whichever is longer).
  • Specified income, which guarantees a specific annual income until the death benefit is paid up.

There are other considerations in this section pertaining to interest and dividends that are paid out in whole life and universal life policies as well.

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Premium Payment and Authorization

The end of the policy typically lays out the payment schedule for paying the premiums for the policy. This can be a single payment or multiple installments over a period of time depending on the type of policy.

Coverage begins when all authorized signatures are obtained and the first premium payment is made.

Knowing the terms that will be used on a life insurance application form and knowing what sort of information will be required make the process much easier.

Having your beneficiaries, your personal history, your medical history and how you wish your beneficiary to receive the death benefit ready when you apply for life insurance is extremely helpful.

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References:

  1. https://www.fidelity.com/life-insurance-planning/what-is-life-insurance
  2. https://us.axa.com/life-insurance/plan/naming-beneficiaries.html
  3. http://www.investopedia.com/articles/personal-finance/121914/life-insurance-policies-how-payouts-work.asp
  4. http://www.forbes.com/sites/timmaurer/2016/01/05/10-things-you-absolutely-need-to-know-about-life-insurance/#534061403872
  5. http://www.dfs.ny.gov/consumer/que_top10/que_life.htm