What is a base policy?
A base policy is a uniliteral and adhesion contract. A unilateral and adhesion contract is written by an issuer to legally bind an exchange of mutual values between the issuer and a holder after the holder agrees to the non-negotiable (“sold as-is”) terms and conditions of the contract with their signature. If the contract is signed by the holder, then only the issuer has created a legal obligation in the exchange of mutual values. In the exchange of mutual values, the issuer must pay benefits to the holder only if the holder is current on the premium. The holder, however, has no obligation to pay the premium, but if the premium is not current, the issuer no longer has a legal obligation to pay benefits. Late premium payments incur a policy lapse, and the contract must be reinstated within the grace period set forth in the contract before benefits are subjected to surrender (termination). After the holder pays the premium, the issuer immediately invests the premium received over the duration of the contract. The long-term, stable return on the investments made by the issuer ultimately fund the benefits to the paid to the holder. The issuer can only pay benefits when the holder pays the premium. In conclusion, the holder must first pay the premium before the issuer will pay benefits, a legal obligation of the issuer.
What parties play a role in the issuance of the contract?
The applicant works directly (in-person) or indirectly (electronically) with the producer to complete the application for life insurance. The applicant does not have to be the insured or the holder. When an application for life insurance is completed on behalf of the insured, the applicant will normally have a close relationship to the insured.
An application for life insurance can be completed with a full or limited paramedical examination, or without a paramedical examination. A paramedical examination is a tool used by an underwriter to increase or decrease the base premium as calculated by an actuary. When a in-person or electronically and with a full (medical issue), limited (simplified or partial issue), or no (guaranteed issue) paramedical examination. Because the eligibility and qualifying questions asked in the application are based on the current health and prior medical diagnoses and prognoses of the insured, a simplified and guaranteed issue has a higher premium. The insurer will is also evaluated on their avocational and vocational lifestyle and financial condition normally has close relationship to the insured party. However, the applicant does not have to be the insured or the holder. The application has the moral and ethical duty to answer the questions asked in the application truthfully. When the insurer discovers misrepresentation or fraud, the issuer has the right to increase the premium, cancel the contract, or deny future claims against the face value or face amount of the policy.
The producer is also referred to as a field underwriter, solicitor, agent, or broker. The producer receives eligible and qualifiable information regarding the insured from the applicant. The producer also delivers the contract to the owner after the contract is issued by the insurer.
The actuary calculates risk of mortality, interest, and expense of the insurer by sampling a group of insureds with similar insuring characteristics to the insured named in the application to determine an appropriate base insurance rate to charge the owner. The insurance rate is included in the premium. A premium is charged to the owner by the insurer in exchange for insurance coverage to the insured, living benefits to the owner, and a death benefit to the beneficiary.
The underwriter is employed by the insurer. The underwriter performs due diligence on each assigned case based on the health condition and lifestyle information regarding the insured that was submitted in the application for life insurance by the producer. The underwriter uses the information to measure the risk of death of the insured in order to decide if the insurer should assume the risk of the insured. In the risk assumption exchange, the owner is charged a premium. The premium includes the insurance rate and hedges such as a temporary or permanent medical or non-medical table rating and flat extra.
The insurer is also referred to as the issuer, writer, insurance company, or carrier.
The insured is the person proposed to make medical claims against the face value or face amount of the base life insurance policy. The face value or face amount is also the death benefit paid to the designated beneficiary upon the death of the insured. The insured is also the person the underwriter bases the case information on to finalize the premium. Lastly, the insured is the person who must die in order for the death benefit to be paid to the designated beneficiary.
The owner is also referred to as the holder, policyholder, or policyowner. The owner is the person proposed to the insurer to receive the living benefits while the insured is living. The owner has the authority to make changes to the policy for the duration of the policy. The owner must designate a primary and/or contingent, or secondary, beneficiary to receive the death benefit paid by the insurer upon the death of the insured. The owner does not have to be the insured, but the insured can be the owner. The insured must have an insurable interest in the insured through the validation of a legal relationship by the underwriter.
The beneficiary is the person designated by the owner to receive the death benefit paid by the insurer upon the death of the insured. In order for the death benefit to be paid the insurer, the beneficiary must be living upon the death of the insured. If the beneficiary dies before the death of the insured, the death benefit will be paid by the insurer to the estate of the insured, unless a contingent, or secondary, beneficiary is named. The beneficiary is normally financially dependent on the insured.
What are the terms of the contract?
The insurer must pay a death benefit to a designated beneficiary upon the death of an insured in exchange for a premium payment from the policyowner. However, the policyowner is not legally bound to pay the premium, but must pay the premium first before the insurer will pay a death benefit. In summary, a base life insurance policy is sold on as “as-is” basis. Therefore, the conditions of the contract can only be agreed upon, but not negotiated.
The insurer immediately invests each premium paid the policyowner over the duration of the policy to fund the living benefits payable to the policyowner and death benefit payable to the designated beneficiary. When the policyowner stops paying into the policy, the policy will lapse, which means the insurer is no longer legally bound to pay a reimbursement. Additionally, if the contract is matured or endowed (expired) due to no death benefit claim made by the policyowner during the term of the contract, lapsed (cancelled) due to an outstanding premium due by the policyowner, or fully surrendered (terminated) due to the face value of the policy adjusting below a minimum limit, the insurer is not legally bound to pay a death benefit. On the upside, a death benefit is normally paid free of federal income taxation and can be chosen to be saved, loaned, or spent at the discretion of the policyowner.
What types of base policies can I purchase?
The four basic types of life insurance are:
A base life insurance policy has specific features and benefits that make each suitable to one’s financial needs.
One important principle to remember is the intended purpose of each policy. Term life insurance provides temporary insurance coverage for medical claims and financial protection to net worth. Whole, universal, and variable insurance provides permanent insurance coverage for medical claims and financial protection to net worth.
Insurance coverage exists in the form a reimbursement for a medical claim paid by the insurer to the insured. Financial protection exists when the insurer pays a living benefit to the policyowner or when the insured pays a death benefit to the designated beneficiary upon the death of the insured.
Another important principle to remember is the relationship of the death benefit to the payments made out of the policy by the insurer or the policyowner. The death benefit is also the face value or face amount of the base life insurance policy. When a reimbursement or living benefit is paid by the insurer, the amount of the death benefit will segmentally increase or decrease over the duration of the base life insurance policy. If the face value or face amount of the base life insurance policy decreases below a minimum limit, the insurer will terminate the contract. If the contract is terminated, the contract is null and void, which means the insurer is no longer legally bound to pay a reimbursement, living benefit, or death benefit. As a premium is paid by the policyowner over time, the cost basis, or the amount paid into the policy, increases.
What is the purpose of a base policy?
Net worth is a measure of one’s current financial position in life and is calculated as the value of their real and financial assets less the value of their short-term and long-term liabilities. The ongoing costs to remain or restore one’s health while living and the final costs of one’s funeral and burial expenses while dead can significantly absorb their income and savings. Net worth can be a source of security to a loved one, the next generation, or donated to a good cause. For these reasons, life insurance is a true financial need, and net worth influences the amount of insurance coverage and financial protection required to assist their dependents in the continuation of living life without their existence. A death benefit is a shield used to preserve, converse, stabilize, and sustain net worth. Therefore, it is important to hedge the risk of disability and death by applying for a life insurance policy. In return, you shall reap dividends for making this great financial decision.
Dividends or interest are returns on your cost basis, or the aggregate amount of premium paid into the base life insurance policy over the duration of the term of the contract.