Fundamentals of Life Insurance

Life insurance is a contract between a policy owner and an insurer where the insurer agrees to pay a death benefit to a named beneficiary upon the death of the insured, in exchange for premium payments.

• The three parties to a life insurance contract are:
• Policy owner — the person who owns the contract, pays premiums, and controls the policy. May or may not be the insured.
• Insured — the person whose life the policy covers. The death benefit is triggered by their death.
• Beneficiary — the person or entity who receives the death benefit when the insured dies.

Insurable interest requires that the policy owner would suffer a genuine financial or emotional loss if the insured died. This prevents life insurance from being used as a gambling instrument.

• Who has insurable interest?
• A person always has insurable interest in their own life
• Spouses and common-law partners in each other
• Parents and children in each other
• Business partners in each other (key person insurance)
• Creditors in debtors (up to the amount of the debt)

Key rule: Insurable interest must exist at the time the policy is issued, not necessarily at the time of the claim.

Insurance contracts operate under the principle of uberrimae fidei (utmost good faith). Both the applicant and the insurer must deal honestly and disclose all material facts.

A material fact is any information that would influence a reasonable insurer's decision to issue a policy or set the premium — for example, health conditions, smoking status, dangerous occupations or hobbies.

Consequences of misrepresentation: During the contestability period (typically 2 years from policy issue), the insurer can investigate claims and void a policy if it finds material misrepresentation. After 2 years, the policy becomes incontestable except in cases of outright fraud.