Definition says that a life insurance policy is a legal contract between a policy owner and an insurer, wherein the insurer agrees to pay an accumulated sum of money to the nominees / beneficiaries nominated by the policy owner, on the insured individual’s demise or illness.
In return for this benefit, the policy owner is required to pay the insurer a certain pre-determined amount called premium, at regular intervals or in lump sums. It is important to note here that, while the insurance owner designates the beneficiaries to the contract, the beneficiaries may or may not actually be a party to the contract.
The contracts are usually long, for they contain various clauses and special provisions, including the policy purchase dates, the maturity dates, the premiums determined, etc.
How does it work?
It is essential to first know what are the informational inputs that serve as the basis for the contract.
Basis for the Premium Calculations
Professional actuaries and statisticians require you to submit all your lifestyle details to them, if you are applying for a policy. Statistics reveal that people following a certain lifestyle pattern, like those that smoke regularly or those that eat junk food a lot, are likely to die sooner than others that don’t.
So, taking all this information and fitting it into complex estimation formulas reveals premium, that a certain person will have to pay for his insurance policy. It is thus obvious that, someone who is obese or someone who already suffers from numerous health problems, will have to shell out a larger sum as a premium than someone else who’s fit as a fiddle.
Apart from this, other information is also gathered from a compulsory medical exam that is conducted in the insured individual after a person has applied for a policy.
Assuming that the medical test comes out well and the person is deemed as ‘insurable’, the individual’s exact premium is calculated based on the risk category that he falls into. As mentioned earlier, this category is based on many things like lifestyle pattern, gender, occupations (whether hazardous or not), etc.
Considerations by the Insured
The insured individual must be sure in his mind regarding the amount he wishes his beneficiaries to receive upon his death. The amount consideration can be based on things like mortgage repayment requirements, debt payoffs, etc. The idea is that the insured should at least be covered around 8 to 10 times his current annual salary.
As the beneficiaries are thoroughly investigated by the companies, it is in the insured individual’s best interest to choose them carefully. If your motives are suspicious or the beneficiaries you have chosen are dodgy and put you under scanner, there is a high probability of your application being rejected.
As an applicant, if you lie on any of the details required on the application form, the insurance company is eligible to refuse you any payout. You are also not entitled to receive anything, if you have committed suicide or have been murdered by a beneficiary.
Also, as an applicant, you will be required to supply some pretty personal details about your life and medical history, and though there are strict confidentiality codes imposed on the company, you may feel uncomfortable about revealing them. Yet, they are a necessary aspect when it comes to determining your premium amount.
Here is a simplistic breakdown of the actual process.
- First and foremost, an application is filled out by the person wanting the insurance cover. It should contain the details of a physical examination conducted to assess the health of the insured, along with other basic details.
- On receiving the application, the company hands it over to its agents who review the variables that are likely to affect your lifespan. A thorough statistical analysis takes place, they assess the risk that the insurance company will be bearing.
- Using statistical methods like the ‘cost per thousand’ tables, the agents calculate the premium that is applicable to you. If you are too much of a risk for the company to take on, your application may even be denied.
- If the company decides to bet on you, they send you a contract that specifies all the details like amount of coverage, term of contract, and amount of premium.
The trick here is that, the insurance company works on a principle, wherein it charges each insured person such an amount of premium that the collective premiums received from all (total number of) the insured individuals is enough to cover the cost of paying out on some of the policies each year.
- You will have to sign the contract and pay the first installment after naming your beneficiaries. As long as you continue your premiums, you are insured.
While choosing a policy, read all the documents very carefully and make sure you choose the right plan amongst all the different kinds of insurance.