Life Insurance

An early form of life insurance dates to Ancient Rome; “burial clubs” covered the cost of members’ funeral expenses and assisted survivors financially.

The first company to offer life insurance in modern times was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen.  Each member made an annual payment per share on one to three shares with consideration to age of the members being twelve to fifty-five.  At the end of the year a portion of the “amicable contribution” was divided among the wives and children of deceased members, in proportion to the amount of shares the heirs owned.  The Amicable Society started with 2000 members.

The sale of life insurance in the U.S. began in the 1760s.  The Presbyterian Synods in Philadelphia and New York City created the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalian priests organized a similar fund in 1769.  Between 1787 and 1837 more than two dozen life insurance companies were started, but fewer than half a dozen survived.

Life insurance (or life assurance, especially in the Commonwealth of Nations), is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (often the policy holder).  Depending on the contract, other events such as terminal illness or critical illness can also trigger payment.  The policy holder typically pays a premium, either regularly or as one lump sum.  Other expenses (such as funeral expenses) can also be included in the benefits.

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events.  Specific 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-based contracts tend to fall into two major categories:

Protection policies – designed to provide a benefit, typically a lump sum payment, in the event of specified event.  A common form of a protection policy design is term insurance.
Investment policies – where the main objective is to facilitate the growth of capital by regular or single premiums.  Common forms (in the U.S.) are whole life, universal life, and variable life policies.

The insurance company calculates the policy prices (premiums) at a level sufficient to fund claims, cover administrative costs, and provide a profit.  The cost of insurance is determined using mortality tables calculated by actuaries. Mortality tables are statistically based tables showing expected annual mortality rates of people at different ages.  Put simply, people are more likely to die as they get older and the mortality tables enable the insurance companies to calculate the risk and increase premiums with age accordingly. Such estimates can be important in taxation regulation.

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.  As well as the basic parameters of age and gender, the newer tables include separate mortality tables for smokers and non-smokers, and the CSO tables include separate tables for preferred classes.

The mortality tables provide a baseline for the cost of insurance, but the health and family history of the individual applicant is also taken into account (except in the case of Group policies).  This investigation and resulting evaluation is termed underwriting. Health and lifestyle questions are asked, with certain responses possibly meriting further investigation.  Specific factors that may be considered by underwriters include:

Personal medical history
Family medical history
Driving record

Height and weight, otherwise known as BMI (Body Mass Index)
Based on the above and additional factors, applicants will be placed into one of several classes of health ratings which will determine the premium paid in exchange for insurance at that particular carrier.

Life insurance companies in the United States support the Medical Information Bureau, 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.

The mortality of underwritten persons rises much more quickly than the general population.  At the end of 10 years, the mortality of that 25-year-old, non-smoking male is 0.66/1000/year.  Consequently, in a group of one thousand 25-year-old males with a $100,000 policy, all of average health, a life insurance company would have to collect approximately $50 a year from each participant to cover the relatively few expected claims.  (0.35 to 0.66 expected deaths in each year x $100,000 payout per death = $35 per policy). Other costs, such as administrative and sales expenses, also need to be considered when setting the premiums.  A 10-year policy for a 25-year-old non-smoking male with preferred medical history may get offers as low as $90 per year for a $100,000 policy in the competitive US life insurance market.

As the picture shows below the younger and healthier you are when you purchase just about any type of insurance, but especially Life Insurance you can buy it for pennies on the dollar.  

Term Insurance is cheapest type of insurance.  You buy it in terms such as 1 year, 5,10 or even 20 years depending on the insurance company you deal with. But, after the period of time your insurance would go up because of your age and also if your health then.

 Whole Life Insurance  is more expensive but the price never changes for the life of you insurance policy.  You also build some cash value with whole life insurance.  This is normally pro rated at about four per cent.  You can also borrow against the cash value.  If you don’t pay it back then it would come out of your death benefit.  The choice is yours to make!   

Most of the revenue received by insurance companies consists of premiums, but revenue from investing the premiums forms an important source of profit for most life insurance companies.  Group Insurance policies are an exception to this.

In the USA, life insurance companies are never legally required to provide coverage to everyone, with the exception of Civil Rights Act compliance requirements. Insurance companies alone determine insurability, and some people are deemed uninsurable.  The policy can be declined or rated (increasing the premium amount to compensate for the higher risk), and the amount of the premium will be proportional to the face value of the policy.

Many companies separate applicants into four general categories.  These categories are preferred best, preferred, standard, and tobacco.  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, and has no family history of early-onset cancer, diabetes, or other conditions.  Standard means that the proposed insured is currently under medication and has a family history of particular illnesses. Most people are in the standard category.

People in the tobacco category typically have to pay higher premiums due to the higher mortality.  Recent US mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25 will die during the first year of a policy. Mortality approximately doubles for every extra ten years of age, so the mortality rate in the first year for 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 (without regard to health or smoking status).

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.  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.

If this sounds confusing to you that is because it is.  Insurance agents have training and are licensed for different types of insurance.  In addition, every few years they have continued education that they have to go through in order to keep their license in force.

If there is other information that would be valuable to you, please ask me any question in my email and if I don’t know the answer I will find out for you.

bobby@insuranceforu.net

Thank you,

Bobby