Life Insurance 101: The Basics

How Life insurance works

Why get one

In the middle of LIFE is a big if, because we don’t know what life would bring. What is certain though, is at the end, death awaits. If we are going to talk strictly about traditional life insurance, we may think of policies with no living benefit; they would only have death benefits for your beneficiaries. Life insurance has evolved over time though, so there are more options that can suit your needs. Many even offer living benefits as well. But for most of us, life insurance is a way to ensure that our family is still provided for even when we are no longer around.

Definition of Terms

There are many things about insurance that needs some explaining. Since we are just starting out, let us define some terms essential in understanding insurance:

Policy – It is the written contract effecting insurance or simply the certificate of insurance.

Premium – It is the amount you pay to be insured. It’s the price of insurance protection for specified risks for a specified period of time.

Face amount – It is the sum paid to you by the insurance company on the policy’s maturity date.

Benefits – This is what you or your beneficiaries get in the event that certain things occur.

Claim – A demand made by the insured or the insured’s beneficiary, for payment of the benefits as provided by the policy.

Coverage – The scope of protection provided under an insurance policy.

Underwriting – The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

Beneficiary – This refers to someone who is eligible to receive distributions from a trust, will or life insurance policy.

Riders – represents a provision or modification to an existing insurance policy that provides additional coverage to an insurance policy or simply “add-ons”.

Contestability period – This is a short window of time in which insurance companies can investigate and deny claims. Usually, this is two years.

There are a lot more terms related to insurance but we just chose the most important to define

Factors that affect the cost

Life insurance is in the business of mitigating risks; however, the higher the risk, the more expensive the insurance would cost. This is determined more broadly by actuaries and more specifically by underwriters. General characteristics that are considered are age, sex, smoking habit, health condition and occupation.

For age, younger people are generally considered to be at lower risk than are older people. For sex, men tend to have higher premiums because actuaries determined that men are at a high risk; talk about sexism. By the way, when we refer to men and women, we refer to biological male and biological female. Another thing that affects the cost of insurance is smoking habit. Smokers are considered to be at higher risk for very obvious reasons.

Health condition is also a big consideration. In fact it’s not only an individual’s health that may be asked but also the health of family members because it might also manifest in the individual applying for insurance. Last major consideration is the occupation of the individual. Some jobs are just more risky than others. A person working a high risk job may be asked to pay a higher premium or be denied altogether.

Cost of Insurance

Some things to take note of:

  1. Insurance is cheaper for a younger individual.
  2. Not all who apply for insurance can be insured.
  3. There is a contestability period of two (2) years when your insurance policy may be revoked if there are certain information which were knowing withheld during the underwriting process.
  4. Do not wait until such time when you are no longer insurable to get one.

Learn more and get a quote. Fill out our request form and schedule an appointment with a financial advisor.

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