Life Insurance: Premiums, Proceeds, and Beneficiaries

After determining insurability, companies establish a policy premium to cover costs.
Three primary factors determine premiums:
- Mortality
- Interest
- Expense

Mortality refers to the rate of death.
Mortality tables help insurance companies predict:
- Life expectancy
- Probability of death for a group

Insurance companies invest premiums to earn interest because premiums are paid before claims.
Interest earned is a primary factor in lowering premium rates.

Death benefit proceeds (settlement options) are methods to pay the death benefit to a beneficiary upon the insured's death.
The policy owner selects the settlement option:
- At the time of policy application
- Can change the option during the life of the insured
Once selected, the beneficiary cannot change the settlement option.

Lump Sum:
- Policy pays proceeds in cash upon the insured's death.
- Generally, the lump sum is not taxable as income.
Interest Only Option:
- The insurance company retains the policy proceeds.
- Pays interest on the proceeds to the beneficiary at regular intervals.
- The insurer guarantees a certain rate of interest.
- Often pays interest in excess of the guaranteed rate.
Fixed Period Option:
- Also called period certain.
- Proceeds are paid out in equal installments over a specified period of years.
Fixed Amount Option:
- Pays a fixed specific amount in installments until the proceeds are exhausted.
Life Income Option:
- Provides the recipient with an income they cannot outlive.
- Installment payments are guaranteed for as long as the recipient lives.
- The amount of each installment is based on the recipient's life expectancy.

In accordance with section $1035$ of the Internal Revenue Code, certain exchanges of life insurance policies and annuities may occur in a non-taxable exchange.
No income tax on these transactions when:
- A cash value life insurance policy is exchanged for another cash value life insurance policy.
- An annuity is exchanged for an annuity.

There are very few restrictions on who may be named a beneficiary of a life insurance policy.
The decision rests solely with the policy owner.
A beneficiary is the person to which the policy proceeds will be paid upon the death of the insured.
Beneficiaries can be:
- Individuals
- Businesses
- Trusts
- Estates
- Charities

Primary:
- Has first claim to the policy proceeds following the death of the insured.
- The policy owner may name more than one primary beneficiary.
- Can also specify how the proceeds are to be divided.
Secondary:
- Also called the contingent or tertiary beneficiary.
- Has second claim if the primary beneficiary dies before the insured.
- Contingent beneficiaries do not receive anything if the primary beneficiary is living at the time of the insured's death.

Per Stirpes:
- Means by the bloodline.
- Distributes benefits of the beneficiary who died before the insured to the beneficiary's heirs.
Per Capita:
- Means by the head.
- Evenly distributes benefits among the living named beneficiaries.

Revocable:
- The policy owner may change a revocable beneficiary at any time.
- Without the knowledge or consent of the beneficiary.
Irrevocable:
- The policy owner may not change the beneficiary without written consent of the beneficiary.
- The policy owner also cannot borrow against the policy's cash value.

Uniform Simultaneous Death Act:
- Under the Uniform Simultaneous Death Act, the law assumes the primary beneficiary died first in a common disaster.
- This ensures the contingent beneficiary receives the death benefit proceeds.
Spendthrift Trust Clause:
- Prevents the beneficiary's reckless spending of benefits.
- Requires that benefits be paid in fixed installments.