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Life Insurance Overview

The primary purpose of life insurance is to provide a financial benefit to dependants upon premature death of an insured person. The policy pays a specified amount called a “death benefit” to the named beneficiary, when the insured dies.

People purchase life insurance for many reasons; to provide an income to replace lost earning potential, to fund business or partnership buy outs in the event of death of one of the business owners, to fund retirement plans, to indemnify a loan in the event of premature death, to pay for college educations, to provide dependency income for the family, and to protect future insurability, are just a few.

Most life insurance policies contain an incontestability clause. This means if the insured dies during the contestable period, the insurer has the right to review the insured’s medical history before they pay or deny a claim. This could mean a delay since the insurer must request medical records. If there is a disagreement on how the proceeds of a policy are to be paid, the insurer can file for Interpleader with the court.

In some instances, you can borrow money from a life policy that has a cash value at a reduced low rate of interest. If the policy is surrendered or the insured dies before re-paying the loan, the amount of the loan including accrued interest is deducted from the claim check. If a premium is missed, the company may pay the premium with the cash value which can cause the cash value to be depleted. If a life policy is allowed to cancel, the insurer may reinstate the policy after evidence of insurability has been provided, up to three years after the cancellation. If reinstatement is allowed, all back premiums owed from the date of cancellation to the date of reinstatement must be paid. Payment normally includes interest.

A person 15 years or more may contract for life insurance on his/her own life, or on another person in which the minor has an insurable interest. The minor may exercise all rights and powers with respect to the contract as may be exercised by a person of full legal age. While discussing insurable interest…a person wishing to purchase life insurance on another’s life must have an insurable interest at the time of purchase.

Common Terms

Accelerated Death Benefit Rider: This is found in most life insurance contracts. An Accelerated Death Benefit provision in a life insurance policy provides that the life insurance company will pay a portion of the death benefit of a policy, before the insured's death occurs. To receive this benefit, the insured must be diagnosed with a life threatening illness. Upon the death of the insured, the beneficiary will receive the remainder of the death benefits.

The insurance company may charge a small service fee for the accelerated payment. Contact the insurance company or agent to learn more about this benefit before selling a policy through a viatical settlement company.

Beneficiary: The person entitled to the proceeds of a life insurance policy upon the insured’s death.

Free Look Period: An unconditional refund for a period of at least 14 days once the life insurance contract is delivered. The free look period for a life insurance policy issued before 1/1/2009 was 10 days. The Variable Life policies do not have a free look period.

Grace Period: Entitles the insured a period of no less than 30 days to make the premium payment.

Incontestabie Clause: Allows an insurer the right to contest a death claim on a life insurance policy during the first 2 years of the policy.

Insurable Interest: An insurable interest exists for the purposes of life insurance when (at the time the policy is entered into) the policyowner has a reasonable expectation that he or she will benefit from the continued life and health of the person the policy covers. The benefit is required to be either one of love and affection due to the relationship the policyholder has to the insured or a pecuniary benefit such that the policyholder benefits financially from the continued life and health of the insured. Business entities have an insurable interest in the owners of the business and key employees. Parties to a contract for the purchase or sale of a business entity have an insurable interest in the lives of all other parties to the contract solely for the purpose of the contract. Trust and trustees have an insurable interest in the trust grantor under life insurance policies owned by the trust when trust beneficiaries meet specified criteria.

Interpleader: The policy proceeds are submitted to a court and the court determines the rightful distribution.

Non-Forfeiture Provision: A non-forfeiture provision is a State mandated requirement that life insurance policies return surplus cash values (if any) to the policy owner if the policy lapses, or is terminated by the policy owner. The options for non-forfeiture are:

  • Cash Surrender: the amount of accrued cash value in a policy that would be payable to the policy owner at surrender of the policy less any surrender fees if applicable.

  • Extended Term: a provision that would allow the face amount of the policy to remain the same and the cash value would be used by the insurance company to pay the premiums at term rates. The policy would continue until the cash value is depleted by premium payments.

  • Reduced Paid-up Insurance: the policy would continue but at a face amount less than the stated amount on the policy. The cash value would be used to purchase a reduced paid up policy based on the amount of cash value available in the policy. No additional premiums would be due for the life of the reduced policy.

Retained Asset Accounts (RAA): accounts life insurers use to hold beneficiaries’ proceeds until the beneficiaries withdraw the cash using checks (drafts), payment cards, or other means. These accounts are not insured by the Federal Deposit Insurance Corporation (FDIC), although they may be protected by state insurance guaranty funds. If a beneficiary wants to move the funds from the RAA to their own account, they should write a check provided by the insurance company and deposit it into the account of their choice. Current law does not restrict the use of a RAA by an insurer. However, a beneficiary should be able to request a lump sum check from an insurance company if they prefer.

Types of Policies

There are many types of life insurance products available in Florida. A brief description of the most common are:

Credit Life: Credit life insurance is a type of decreasing term insurance associated with loan indebtedness. If an insured dies before the loan is repaid, the credit life policy will pay the balance of the loan. Prior to October 1, 2008, the maximum amount of credit life insurance could not exceed $50,000 with any one creditor. The maximum term a credit life policy could be issued was for 10 years. After October 1, 2008, the maximum amount of credit life insurance could not exceed the amount and the duration of the indebtedness. Credit life is not available for those debtors over 70 years of age, and existing credit life policies will terminate on the loan anniversary date at age 71. The borrower is not required to purchase credit life insurance. He or she may assign any other life policy or policies they own for the purpose of covering the loan.

Endowments: Endowment policies provide for the payment of the face of the policy upon the death of the insured during a fixed term of years, but also the payment of the full face amount at the end of said term if the insured is still living. While not often thought of in this respect, a whole life policy is actually an endowment at age 100. If the insured is living at age 100, the policy will mature for its full face value. As with the whole life policy, endowment policies provide insurance protection against the economic loss of a premature death. Common endowment terms are five, ten, and twenty years, or to a stated age, such as 65. If the insured is living at the end of the endowment term, the insurance company will pay the face amount of the policy.

Whole Life: Provides financial protection the entire lifetime of the insured, or to age 100. Premiums remain the same for the life of the insured or as long as premiums are paid. During the early years of the insurance policy the premiums are greater than the amount necessary to pay policy costs. The excess accumulates cash value in the policy to offset increased insurance costs as the insured ages, or to fund the non-forfeiture provisions of the contract.

Variable Whole Life: A whole life product that incorporates investment features, designed to enhance the cash value portion of an ordinary life policy. The product was created to take advantage of investment performances that were more favorable than those of a conventional whole life policy.

Modified Life: a whole life product that incorporates investment features, designed to enhance the cash value portion of an ordinary life policy. The product was created to take advantage of investment performances that were more favorable than those of a conventional whole life policy.

Universal Life: an annual term life insurance policy with a side fund that accrues interest. As the cost of the term insurance increases each year, the side fund is used to offset the cost. Properly funded, this allows out-of-pocket premiums to remain level.

The side fund grows based on current interest rates. When rates are high, the side funds do well, when rates are low, the side fund does not grow much.

Eventually, the cost of the term insurance can grow to an amount higher than the premium and money is withdrawn from the side fund to help pay the increased cost of the term insurance. If interest remains low, the side fund may be depleted and the insured will have to increase premiums accordingly or reduce the face amount of the policy.

Variable Universal Life: made up of three interlocking parts with the following exceptions:

  • Accumulation Account: Variable life insurance companies offer a variety of available investment funds. The policy contains provisions for transferring between funds, so that the policy owner may engage in some personal investment management. Although the funds react to investment market changes more slowly than individual stocks or bonds, the fund accumulation is tied directly to the investment experience of the underlying portfolio of investments.

  • Life Insurance Amount: The insurance amount is the specified sum to be paid upon the death of the insured.

  • Policy Fees: The cost of life insurance is usually based on a company's favorable yearly renewable term premium, or monthly renewable term premiums. The premiums are deducted monthly from the policy account, or from direct customer payment, if the account balance is insufficient to support the monthly amount. Policy expense fees applied to a policy must be disclosed in a product prospectus.

Industrial Life: a form of life insurance, usually whole life, in which the premiums are payable on a monthly or weekly basis. Premiums are usually collected by an agent of the company. The policies usually have a face amount less than $5,000.

Term Life: provide financial protection for a temporary period of time and may or may not be renewable. They are normally written for individuals who need large amounts of coverage for specific periods of time. Most term life does not accrue cash value. Initial premiums are usually much less than permanent plans of insurance, but may increase each year or remain level for a specified period, depending on the type of term insurance.

Stranger Owned Life Insurance

Stranger Owned Life Insurance (STOLI), Corporate Owned Life Insurance (COLI), Charity Owned Life Insurance, Option Life Insurance, and other names are used in a new marketing arrangement involving life insurance.

This marketing arrangement generally involves an entity, usually a consortium of investors, which agrees to pay the premiums on a large life insurance policy (typically $2 million) in the name of the individual. The insured individual normally is promised a cash payment for a percentage of the face value, and the investors paying the policy premium collects the death benefit when the insured dies.

These agreements appear to be contrary to accepted practices in the insurance industry which outlawed gambling involving life insurance in the early 1700’s. They also involve questions regarding insurable interest. Arrangements such as this attempt to circumvent these problems in the following way:

  • The owner of the policy is an institutional trust.

  • The financing entity pays the premium for the first two years.

  • During the first two years of the policy, the insured can name any beneficiary he or she wants, through the trust. If the insured dies during the first two years, the policy pays the beneficiaries as directed, less the premiums (plus interest) already paid, which is returned to the entity that paid the premiums.

  • At the end of two years, the insured can keep the policy if so desired, in which case he or she has to pay back the premium the financing entity has already paid (plus interest), and continue to make the payments.

  • Instead of keeping the policy, the insured has one other, presumably more usual option. He or she can have the trust sell the policy to an institutional buyer, and walk away with a cash settlement – usually 4-5% of the face value.

The end result is to avoid the possible accusation of no insurable interest, since in life insurance (unlike property insurance) it is only required to prove insurable interest at the time the policy is purchased. At the time of purchase, the beneficiary is named by the insured, and presumably has an insurable interest.

It also avoids the issue of contestability by waiting two years from the time the policy commences before transferring the policy to the institution.

Underwriting

Underwriting is the process an insurance company uses to determine whether it is willing to write an insurance policy and the premium rate it will charge.

Some of the factors a company might consider when underwriting a life insurance contract are: age, sex, physical condition, personal history and habits, family health history, occupation, hobbies, the type of insurance requested, financial status, how often the applicant travels via aviation and the applicant’s military status.

In some situations a company may not require extensive medical history. This is normally associated with a low coverage limit. Higher coverage limits normally require more extensive information concerning the applicant’s current and past medical conditions.

Most Common Concerns

Conversion of Term Insurance: Most term insurance policies contain a provision for conversion. This feature provides the insured with the option to "convert" his term insurance policy to a "permanent" form of insurance, such as whole life or an endowment. Conversion to a permanent form of insurance is made without evidence of insurability. The premium for the permanent form of insurance is usually higher than the term insurance, and is based on the age of the insured at the time of conversion.

Interest on Death Claims: When a life insurance policy provides lump sum death benefits, the payment must include interest from the date the insurer receives written proof of death. The interest rate must be equal to or greater than the Moody's Corporate Bond Yield Average-Monthly Average Corporate as of the day the claim was received. If the method of calculating such index has substantially changed from the method in use on January 1, 1993, the rate must not be less than 8 percent.

Lost Policy Search: If you are unable to locate a life insurance policy on a deceased family member and feel certain they had life insurance, the following information may help. Look through desk drawers and filing cabinets for old bank statements, cancelled checks or other records to indicate insurance premiums were paid. Check with the insured’s bank to determine if a lock box exists that may contain old policies. Check with the insured’s home and auto insurance agent to ask if life insurance was ever sold as well. You may consider obtaining the services of a ”Life Policy Locator” such as Medical Information Bureau (MIB). MIB has a database containing over 100 million records for individually underwritten life insurance. There is a fee associated with each search. For more information, you may contact MIB at (781) 329-4500 or visit their website at www.mibsolutions.com/lost-life-insurance.

Misstatement of Age on Application: If there was an incorrect age given on a life insurance application, and a claim is filed; the company will pay an amount equal to the face amount that the stated premium collected on the policy would have purchased at the correct age.

Secondary Notice: Beginning October 1, 1997, a life insurance policy covering a person 64 years old or older, which has been in force for at least 1 year, may not be lapsed for nonpayment of premium, unless, after expiration of the grace period, and at least 21 days before the effective date of lapse, the insurer has mailed a notification of the impending lapse in coverage to the policy-owner and to a specified secondary addressee. The company is also required to notify the applicant of their right to name a secondary addressee at the time of application for coverage.

Veterans Unclaimed Life Insurance Benefits: Families can check their eligibility for funds through the Veterans Affairs website: https://insurance.va.gov/liability/ufsearch.htm. You must have the veteran's name, date of birth, date of death and, if possible, the policy number to complete a search. The website is the faster method to determine eligibility, but, there is a toll-free number (1-800-669-8477) also available.

Waiver of Premium: Waiver of premium is an optional provision of a life policy that waives the premium payments in the event the insured becomes disabled for a period of 6 months or more. The premiums are waived on the policy until the insured is no longer disabled or is deceased.

Insurance Tips

Verify before you buy!!!! Contact us to verify the license of the agent and the insurance company before you sign the application for a policy.

Life Insurance Guides! The guides are excellent tools to gain a better understanding of all the coverage and limitations of life insurance.

Contact Us or File a Complaint

Should you need additional information, you may speak with an insurance specialist between the hours of 8am–5:00pm at one of the telephone numbers listed below:

1-877-MY-FL-CFO (1-877-693-5236)

Out of State Callers: (850) 413-3089

You can also contact us for assistance anytime by email at Consumer.Services@MyFloridaCFO.com. or file a complaint through our “Consumer Help Online” website.