Life insurance has been a part of civilized life since ancient Rome. People started "burial clubs" to pay for burial expenses and to help survivors with money after the "insured" person was buried. Life insurance as we know it had its beginnings in 17th century England, specifically made as insurance for traders.
Life insurance is based on the fundamentals of financial logic. Cost, insurability and underwriting are the three main factors that go into life insurance policies. Cost is defined by what the policy costs the life insurance policy holder. Insurability factors like age, health and habits are most always a part of the decision making process when insurance companies are trying to assess whether or not a potential insured is worth the risk. Underwriting is what insurance companies do to decide how much coverage a person should receive, what the premium cost will be and whether or not the insured is worth insuring.
An underwriter has many functions within the insurance company. They are responsible for assessing the risks to the insurance company and how to effectively minimize those risks so that business will continue for the better benefit of the insurance company itself. Underwriters often ask health questions and questions regarding the lifestyle habits of their customers. This gives them a better idea as to the general mortality risk of each individual. This overall process is called underwriting.
Types of Life Insurance
There are a few different kinds of life insurance that are the most popular in the United States, the main ones making up 2 in total. Term, universal, whole life and endowment insurance are all popular but the two main ones are term and permanent insurance. Insurance policies are either set to expire or they are set to protect the insured person for their whole life until death occurs.
Getting to understand how these life insurance policies work will make you a more informed consumer should you ever have to take a life insurance policy out on yourself. A good understanding of life insurance is crucial for getting the best deal.
Term Life Insurance
This type of life insurance is time period specific. Meaning, an insured person pays a premium amount for a specified number of years. After the term life policy expires, a new policy will have to be drawn up in regards to the potential insured’s health risks to the insurance company. Term life insurance is usually cheaper than other forms, because it isn't a permanent form of insurance. The policy is set to expire after a certain number of years and if the insured doesn't die within this time period, the beneficiary gets nothing. This makes term life insurance one of the riskiest insurance policies for the policyholder. There is no guarantee that the insured person will die within the policy time period and if they don't then all the premiums paid will have been for nothing!
If you decide that term insurance is right for you anyway, there are three main components to consider. The face amount, premium cost and length of coverage. The face amount of a life insurance policy is the death benefit awarded to the beneficiary in the event of the insured’s death under policy coverage. The premium cost is what insured people pay in order to keep their coverage active and this premium can increase or decrease with time. The length of coverage is typically 5, 10, 15, 20, 25, 30 and possibly even 35 years long. Usually, the longer the coverage, the higher the premiums will be. This is because a longer period of time carries a greater probability of death occurring to the insured.
Permanent Life Insurance
This type of life insurance is set to pay out 100% as long as the premiums are paid in full. This type of life insurance is a bit more expensive than term life insurance, because the insurance company cradles the high probability of having to pay the insurance award when the insured person dies. This is a very popular type of life insurance because the guarantee of beneficiary payment is so attractive. Should a policyholder fail to pay the premiums and keep the policy up to date, the policy will lapse or expire. This means that coverage will no longer be active and there is no benefit award scheduled to be paid any longer.
In order to reduce the overall risk to the insurance company, a permanent life insurance policy will also build a cash value. This means that at any time during the insurance policy, a policy holder can withdraw, borrow against or surrender the policy and receive the entire surrender value of the coverage. This has proved an effective means of cost reduction for a great many insurance companies around the world in the area of permanent life insurance. People just can't help themselves from taking a chunk of the cash before the policy is set to pay out.
Pricing
The price of life insurance is based mostly upon the age and health of the individual. The price varies greatly between age groups and the price escalates as a person grows older. A 40 year old man may be able to secure a $500,000 dollar death benefit for around 350 dollars. The special thing about this insurance plan is the fact that it is a term insurance policy, designed for a non-smoker, with a fixed annual premium of $350. Whether or not the insured person dies within the term period is a matter of statistical probability. Usually, a term insurance policy is a risk that carries a low premium and some people are willing to take that risk of the policy expiring before they get a chance to collect.
This same policy for a 60 year old man would cost nearly $3,000 dollars per year to acquire the same 500,000 dollar coverage amount. This is an exponential increase and you can see how age greatly affects the premium prices.
Permanent life insurance policies are usually more expensive with their premium amounts. A permanent life insurance policy with the same coverage amount as a term insurance policy will have a much more expensive price tag. This is because, as long as the premiums are paid, the policy will pay out indefinitely.
We sincerely hope you enjoyed learning about life insurance and have an idea as to what it can do for you.