How life insurance works


It is not difficult to understand as to how life insurance works. There are two entities who are involved in every life insurance transaction. These are: the insured and the insurer. The insured agrees to pay a small amount of premium for a fixed number of years. After that, the insured is awarded the sum insured with bonuses. In case, the insured dies during the policy period then the insurer advances the sum insured to the beneficiary designated by the insured.

All policies are like legal contracts. They also include several clauses to protect the insurer. For instance, if the insured commits suicide within two years of taking the policy or if the insured furnishes facts that are found to be wrong then the insurer can declare the policy null and void. Also if the insured dies within two years of taking the policy, the insurer has a legal right to contest the claim.

The amount paid at the maturity of the policy is called the face amount. Insurance policies usually protect the financial interests of the owner of the policy when the insured passes away. Since the demise of the insured is beneficial for the policy owner, the law states that the policy owner should have a legitimate reason to insure the life of another person.

The policies are usually priced in such a way that they cover the claims to be paid, administrative expenses and make some profit. Professionals called ‘actuaries’ determine the mortality tables, considering the age, gender, health and habits of the insured .They set up the guideline premiums. The health and family history of the individual also plays a role in determining the mortality table. Premiums are the main source of income for the insurance companies. Many companies invest these in profitable activities to meet the company’s expenditure. The companies also investigate each policy thoroughly because they don’t want to pay huge amounts unnecessarily.

The investigation made by the companies is called underwriting. This includes probing into health and life style issues. The company has a right to reject a policy request if it is not satisfied with the individual’s state of health or style of living. The companies also hike premiums in those cases where the risk potential is higher.

The insurance companies categorize insurance seekers into four categories. These are: Preferred Best, Preferred, Standard and Tobacco. The Preferred Best policy holders are those who are young and in the best of health. Profession, travel and lifestyle also determine what type of policy a person can buy.

If the insured person dies, the company asks for an acceptable proof of death to settle the claims. The payment may either be made in a single transaction or as recurring payments, as opted by the policy holder.


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