Life insurance is available in two basic types: term and permanent. Term insurance covers an individual for a specific period of time meaning if the insured does not perish during the term designated in the contract, the policy expires. Permanent insurance includes whole life, universal and variable policies. Paying premiums and preventing policy lapses perpetuates the coverage provided by permanent life insurance policies until the insured’s death. Valid term and permanent life insurance policies involve the identification of a person or entity fulfilling one of three roles: policy owner, beneficiary and the insured.
The owner of a life insurance policy may be referred to as the policyholder. An individual recognized as a policyholder may be identified as the insured on the same policy. Similarly, the owner and beneficiary may be the same entity on a single policy. The responsibilities of a life insurance policyholder include paying the policy’s premiums to ensure coverage remains in place and to guard against a lapse in coverage. A policy owner must also determine the policy’s beneficiaries at the time the contract is created. Only policyholders may change the designation of beneficiaries of a life insurance policy. A policyholder must demonstrate the existence of an insurable interest in the insured when the contract is created. Owners with obvious insurable interest in insured individuals include immediate family members such as spouses. Lending institutions, business partners and employers may also have insurable interests in an insured. Only a policyholder can access money accumulated within a permanent life insurance policy. Any amount borrowed or withdrawn from a policy’s cash value may be subtracted from the amount dispensed to beneficiaries at the time of an insured’s death.
A life insurance policy provides coverage for the life of the person identified as the insured in the insurance contract. The insured’s age, health status, lifestyle and employment at the time of the policy’s creation will factor into the amount of premium the policyholder will have to pay to keep the policy in force.
Two types of life insurance beneficiaries exist: primary and contingent. An entity identified as a primary beneficiary in a life insurance policy will receive payment when an insured expires. A contingent beneficiary will receive payment if the policy’s primary beneficiary dies before the insured. A primary or contingent beneficiary may be a friend, relative, trust, estate, charity, or business. Unlike policy owners, beneficiaries do not have to have an insured interest in the person covered by a life insurance policy. A single life insurance policy may have multiple primary and contingent beneficiaries. Determining amounts to be received by multiple beneficiaries should be done as a percentage of the amount to be dispensed at the time of expiry since the death benefit of permanent policies may change as their cash values increase or decrease over time. If a policyholder designates a minor child as a beneficiary, a guardian must be assigned or a trust established to receive funds. The amount dispensed on behalf of the minor beneficiary will be managed by the guardian or trust at least until the child attains the age of adulthood.
Policyholders must identify beneficiaries clearly to avoid confusion or disputes when insurance funds are dispersed. For instance, the National Association of Insurance Commissioners recommends using the legal name of a beneficiary instead of a reference to the person’s position (e.g., John Doe instead of husband). The National Association of Insurance Commissioners also suggests using specific language such as “per stirpes” or “per capita” when deciding to allocate policy benefits among a class or group of beneficiaries. Citing a per capita payment of benefit will increase the payment to others in the group if one of its members dies before the insured. Comparatively, using per stirpes will keep payments to the members of the designated class static regardless of whether one of its members dies; the amount that would have been paid to the deceased beneficiary will be given to the beneficiary’s family members.