For the Living…. And The Dead

Life insurance is a contract between the insurer and the policy owner. The insurer promises to pay a lump sum of money on the death of the insured person or persons. Or pay him the amount in case of critical or terminal illness. In return the policy owner pays a premium at regular intervals, such as monthly, quarterly, half yearly or annually. This premium is different with different insurance companies and the period of payment of the premiums may vary and this is decided at the time of buying the insurance. Some countries include even bills and funeral expenses in the agreement. In the United States, it is generally specified that the lump sum is to be paid at the demise of the insured person. Hence married people, those with children, those responsible for aged parents generally take insurance policies so that their near and dear ones are not left high and dry in the even of their deaths.

This amount is to be paid to the beneficiary or a nominee who is specified when the policy is bought. Events like serious illness are mentioned in the contract. Sometimes suicide, fraud, war, riot, civil commotion may not be included and the claimant may not get the money in such cases. The most common forms in the United States for life insurance are whole life, universal life and variable life policies.

Generally the policy owner and the insured are one and the same person but sometimes he may buy it for another person. A may buy the policy for himself in which case he is the policy owner as well as the insured but if he buys it for his wife, B, then she is the insured and he is the policy buyer. In this case A may be paying the premiums. However, there have been cases where insurance policies have been bought by a person for another, so that he benefits upon the death of the insured person which can become a temptation to murder the person for the money. Here the insurance company charges an ‘insurable interest’ from the purchaser so that there is some loss if the insurer dies.

On the death of the insured person, the beneficiary or the nominee gets the money. If the cause of death is suspicious then there may be investigations before the claims are fulfilled. This beneficiary can be changed by the insured whenever he wants. Some policies specify that if the insured person dies within a year or two by committing suicide then the contract becomes null and void. Most US states specify that the contestability period cannot be longer than two years.
The face value of the policy is the amount which will be paid to the nominee when the insured person dies and if he doesn’t, by the time the policy matures, (which can be a specific age or 100 years), then he gets the amount.

The policy price and the premiums are calculated by actuaries who are professionals well versed in the actuarial science based on mathematics. This is calculated on the mortality rate and life expectations. The three main criteria used are age, gender and the use of tobacco. Recently preferred class specific tables have been introduced in the US. They include separate mortality tables for smokers and non smokers. The insurance company collects the premiums from the policy owners and invests them to create a pool of money from which it can pay the claims. Statistics show that the insurance companies pay from the premiums collected rather than from the investments. The premium rates charged increase as the policy owner ages as people are more likely to die as they age than when they are younger.

Before selling the life insurance policies, the companies investigate, and collect information of the person to be insured. Medical information is also collected. Four general health categories are Preferred Best (where the person is in the best health), Preferred (where the person is under medication), Standard (most people are in this category) and Tobacco.