Life insurance (also referred to as life assurance) is a contract between an insured (insurance policy holder) and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person. The policy holder typically pays a premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also sometimes included in the benefits. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment.
Definite exclusions are often
written into the contract to limit the liability of the insurer; common
examples are claims relating to suicide, fraud, war, riot and civil commotion. Life
policies are legal contracts and the terms of the contract describe the
limitations of the insured events.
PLAN
OF A LIFE INSURANCE
There is a difference between the
insured and the policy owner, although the owner and the insured are often the
same person. For example, if Sam buys a policy on his own life, he is both the
owner and the insured. But if Dan, his wife, buys a policy on Sam's life, she
is the owner and he is the insured. Most companies allow the payer and owner to
be different, e. g. a grandparent paying premiums for a policy on a child,
owned by a grandchild. The policy owner is the guarantor and he will be the
person to pay for the policy. The insured is a participant in the contract, but
not necessarily a party to it.
The recipient receives policy
proceeds upon the insured person's death. The owner designates the beneficiary,
but the beneficiary is not a party to the policy.. If a policy has an
irrevocable beneficiary, any beneficiary changes, policy assignments, or cash
value borrowing would require the agreement of the original recipient. The
owner can change the beneficiary unless the policy has an irrevocable
beneficiary designation
In instances where the policy owner
is not the insured (also referred to as the celui qui vit or CQV), insurance companies have sought to limit
policy purchases to those with an insurable interest in the CQV. For life
insurance policies, close family members and business partners will usually be
found to have an insurable interest. The insurable interest requirement usually
demonstrates
that the purchaser will actually suffer some kind of loss if the CQV dies. Such
a requirement prevents people from benefiting from the purchase of purely
speculative policies on people they expect to die. With no insurable interest
requirement, the risk that a purchaser would murder the CQV for insurance
proceeds would be great.
Special exclusions may apply, such
as suicide clauses, whereby the policy becomes null and void if the insured
commits suicide within a specified time (usually two years after the purchase
date; some states provide a statutory one-year suicide clause). Any
misrepresentations by the insured on the application may also be grounds for
nullification.
The face amount of the policy is the
initial amount that the policy will pay at the death of the insured or when the
policy matures, although the actual death benefit can provide for greater or
lesser than the face amount. The policy matures when the insured dies or reaches
a specified age (like a hundred years old).
COSTS,
INSURABILITY AND UNDERWRITING
The insurer which is the life
insurance company calculates the policy prices with intent to fund claims to be
paid and administrative costs, and to make a profit. The cost of insurance is
determined using mortality tables calculated by actuaries. Actuaries are
professionals who employ actuarial science, which is based on mathematics
(primarily probability and statistics). It is possible to derive life
expectancy estimates from these mortality assumptions. Such estimates can be
important in taxation regulation. Mortality tables are statistically based tables
showing expected annual mortality rates.
The mortality tables provide a
baseline for the cost of insurance, but in practice these mortality tables are
used in conjunction with the health and family history of the individual
applying for a policy to determine premiums and insurability. Mortality tables
currently in use by life insurance companies in the United States are
individually modified by each company using pooled industry experience studies
as a starting point. In the 1980s and 1990s, the SOA 1975–80 Basic Select &
Ultimate tables were the typical reference points, while the 2001 VBT and 2001
CSO tables were published more recently. The newer tables include separate
mortality tables for smokers and non-smokers, and the CSO tables include separate
tables for preferred classes.
Current US mortality tables predict
that roughly 0.35 in 1,000 non-smoking males aged 25 will die during the first
year of coverage after underwriting. Mortality approximately doubles for every
extra ten years of age, so the mortality rate in the first year for
underwritten non-smoking men is about 2.5 in 1,000 people at age 65. Compare
this with the US population male mortality rates of 1.3 per 1,000 at age 25 and
19.3 at age 65 (regardless to health or smoking status).
The insurance company will
investigate the health of an applicant for a policy to assess the likelihood of
incurring a claim, in the same way that a bank would investigate an applicant
for a loan to assess the likelihood of a default. Group Insurance policies are
an exception to this. This investigation and resulting evaluation of the risk
is termed underwriting. Health and lifestyle questions are asked, with certain
responses or revelations possibly meriting further investigation. Life
insurance companies in the United States support the Medical Information Bureau
(MIB), which is a clearing house of information on persons who have applied for
life insurance with participating companies in the last seven years. As part of
the application, the insurer often requires the applicant's permission to
obtain information from their physicians. Most of the revenue received by
insurance companies consists of premiums paid by policy holders, with some
additional money being made through the investment of some of the cash raised
from premiums. Rates charged for life insurance increase with the insurer's age
because, statistically, people are more likely to die as they get older.
Underwriters will determine the
purpose of insurance; the most common being to protect the owner's family or
financial interests in the event of the insured's death. Other purposes include
estate planning or, in the case of cash-value contracts, investment for
retirement planning. Bank loans or buy-sell provisions of business agreements
are another acceptable purpose.
Life insurance companies are never
legally required to underwrite or to provide coverage to anyone, with the
exception of Civil Rights Act compliance requirements. Insurance companies
alone determine insurability, and some people, for their own health or
lifestyle reasons, are deemed uninsurable. The policy can be declined or rated
(increasing the premium amount to compensate for a greater probability of a
claim).[citation needed]
Many companies separate applicants
into four general categories. These categories are preferred best, preferred,
standard, and tobacco.[citation needed] Preferred best is reserved only for the
healthiest individuals in the general population. This may mean, that the
proposed insured has no adverse medical history, is not under medication for
any condition, and his family (immediate and extended) have no history of
early-onset cancer, diabetes, or other conditions. Preferred means that the
proposed insured is currently under medication for a medical condition and have
a family history of particular illnesses. Most people are in the standard
category Profession, travel history, and lifestyle factor into whether the
proposed insured will be granted a policy, and which category the insured
falls. For example, a person who would otherwise be classified as preferred
best may be denied a policy if he or she travels to a high risk country.
Underwriting practices can vary from insurer to insurer, encouraging
competition.
DEATH
PROCEEDS
Upon the insured's death, the
insurer requires acceptable proof of death before it pays the claim. The normal
minimum proof required is a death certificate, and the insurer's claim form
completed, signed (and typically notarized).[citation needed] If the insured's
death is suspicious and the policy amount is large, the insurer may investigate
the circumstances surrounding the death before deciding whether it has an
obligation to pay the claim.
Payment from the policy may be as a
lump sum or as an annuity, which is paid in regular installments for either a
specified period or for the beneficiary's lifetime.
INSURANCE
VS ASSURANCE
The specific uses of the terms
"insurance" and "assurance" are sometimes confused. In
general, in jurisdictions where both terms are used, "insurance"
refers to providing coverage for an event that might happen (fire, theft,
flood, etc.), while "assurance" is the provision of coverage for an
event that is certain to happen. In the United States both forms of coverage
are called "insurance" for reasons of simplicity in companies selling
both products. By some definitions, "insurance" is any coverage that
determines benefits based on actual losses whereas "assurance" is
coverage with predetermined benefits irrespective of the losses incurred.
TYPES
Life insurance may be divided into
two basic classes: temporary and permanent; or the following subclasses: term,
universal, whole life and endowment life insurance.
TERM
INSURANCE
Term assurance provides life
insurance coverage for a specified term. The policy does not accumulate cash
value. Term is generally considered "pure" insurance, where the
premium buys protection in the event of death and nothing else.
There are three key factors to be
considered in term insurance:
Face amount (protection or death benefit),
Premium to be paid (cost to the insured), and
Length of coverage (term).
Annual renewable term is a one-year
policy, but the insurance company guarantees it will issue a policy of an equal
or lesser amount regardless of the insurability of the applicant, and with a
premium set for the applicant's age at that time.
Another common type of term
insurance is mortgage life insurance, which usually involves a level-premium,
declining face value policy. The face amount is intended to equal the amount of
the mortgage on the policy owner's property, such that any outstanding amount
on the applicant's mortgage will be paid should the applicant die.
PERMANENT
LIFE INSURANCE
Permanent life insurance is life
insurance that remains active until the policy matures, unless the owner fails
to pay the premium when due. The policy cannot be cancelled by the insurer for
any reason except fraudulent application, and any such cancellation must occur
within a period of time (usually two years) defined by law. A permanent
insurance policy accumulates a cash value, reducing the risk to which the
insurance company is exposed, and thus the insurance expense over time. This
means that a policy with a million dollar face value can be relatively
expensive to a 70-year-old. The owner can access the money in the cash value by
withdrawing money, borrowing the cash value, or surrendering the policy and
receiving the surrender value.
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