How an Insurance Policy Works

Insurance is synonymous to a lot of people sharing risks of losses expected from a supposed accident. Here, the costs of the losses will be borne by all the insurers.

For example, if Mr. Adam buys a new car and wishes to insure the vehicle against any expected accidents. He will buy an insurance policy from an insurance company through an insurance agent or insurance broker by paying a specific amount of money, called premium, to the insurance company.

The moment Mr. Adam pay the premium, the insurer (i.e. the insurance company) issue an insurance policy, or contract paper, to him. In this policy, the insurer analyses how it will pay for all or part of the damages/losses that may occur on Mr. Adam’s car.

However, just as Mr. Adam is able to buy an insurance policy and is paying to his insurer, a lot of other people in thousands are also doing the same thing. Any one of these people who are insured by the insurer is referred to as insured. Normally, most of these people will never have any form of accidents and hence there will be no need for the insurer to pay them any form of compensation.

If Mr. Adam and a very few other people has any form of accidents/losses, the insurer will pay them based on their policy.

It should be noted that the entire premiums paid by these thousands of insured is so much more than the compensations to the damages/losses incurred by some few insured. Hence, the huge left-over money (from the premiums collected after paying the compensations) is utilized by the insurer as follows:

1. Some are kept as a cash reservoir.

2. Some are used as investments for more profit.

3. Some are used as operating expenses in form of rent, supplies, salaries, staff welfare etc.

4. Some are lent out to banks as fixed deposits for more profit etc. etc.

Apart from the vehicle insurance taken by Mr. Adam on his new vehicle, he can also decide to insure himself. This one is extremely different because it involves a human life and is thus termed Life Insurance or Assurance.

Life insurance (or assurance) is the insurance against against certainty or something that is certain to happen such as death, rather than something that might happen such as loss of or damage to property.

The issue of life insurance is a paramount one because it concerns the security of human life and business. Life insurance offers real protection for your business and it also provides some sot of motivation for any skilled employees who decides to to join your organization.

Life insurance insures the life of the policy holder and pays a benefit to the beneficiary. This beneficiary can be your business in the case of a key employee, partner, or co-owner. In some cases, the beneficiary may be one’s next of kin or a near or distant relation. The beneficiary is not limited to one person; it depends on the policy holder.

Life insurance policies exist in three forms:

• Whole life insurance

• Term Insurance

• Endowment insurance

Whole Life Insurance

In Whole Life Insurance (or Whole Assurance), the insurance company pays an agreed sum of money (i.e. sum assured) upon the death of the person whose life is insured. As against the logic of term life insurance, Whole Life Insurance is valid and it continues in existence as long as the premiums of the policy holders are paid.

When a person express his wish in taking a Whole Life Insurance, the insurer will look at the person’s current age and health status and use this data to reviews longevity charts which predict the person’s life duration/life-span. The insurer then present a monthly/quarterly/bi-annual/annual level premium. This premium to be paid depends on a person’s present age: the younger the person the higher the premium and the older the person the lower the premium. However, the extreme high premium being paid by a younger person will reduce gradually relatively with age over the course of many years.

In case you are planning a life insurance, the insurer is in the best position to advise you on the type you should take. Whole life insurance exists in three varieties, as follow: variable life, universal life, and variable-universal life; and these are very good options for your employees to consider or in your personal financial plan.

Term Insurance

In Term Insurance, the life of the policy-holder is insured for a specific period of time and if the person dies within the period the insurance company pays the beneficiary. Otherwise, if the policy-holder lives longer than the period of time stated in the policy, the policy is no longer valid. In a simple word, if death does not occur within stipulated period, the policy-holder receives nothing.

For example, Mr. Adam takes a life policy for a period of not later than the age of 60. If Mr. Adam dies within the age of less than 60 years, the insurance company will pay the sum assured. If Mr. Adam’s death does not occur within the stated period in the life policy (i.e. Mr. Adam lives up to 61 years and above), the insurance company pays nothing no matter the premiums paid over the term of the policy.

Term assurance will pay the policy holder only if death occurs during the “term” of the policy, which can be up to 30 years. Beyond the “term”, the policy is null and void (i.e. worthless). Term life insurance policies are basically of two types:

o Level term: In this one, the death benefit remains constant throughout the duration of the policy.

o Decreasing term: Here, the death benefit decreases as the course of the policy’s term progresses.

It should be note that Term Life Insurance can be used in a debtor-creditor scenario. A creditor may decide to insure the life of his debtor for a period over which the debt repayment is expected to be completed, so that if the debtor dies within this period, the creditor (being the policy-holder) gets paid by the insurance company for the sum assured).

Endowment Life Insurance

In Endowment Life Insurance, the life of the policy holder is insured for a specific period of time (say, 30 years) and if the person insured is still alive after the policy has timed out, the insurance company pays the policy-holder the sum assured. However, if the person assured dies within the “time specified” the insurance company pays the beneficiary.

For example, Mr. Adam took an Endowment Life Insurance for 35 years when he was 25 years of age. If Mr. Adam is lucky to attain the age of 60 (i.e. 25 + 35), the insurance company will pay the policy-holder (i.e. whoever is paying the premium, probably Mr. Adam if he is the one paying the premium) the sum assured. However, if Mr. Adam dies at the age of 59 years before completing the assured time of 35 years, his sum assured will be paid to his beneficiary (i.e. policy-holder). In case of death, the sum assured is paid at the age which Mr. Adam dies.

Selecting a Life Insurance Plan

When shopping for life insurance, it seems that most people just look at getting the lowest possible rates for the most amount of coverage. There is nothing wrong with that. But why do some companies charge more or much more for what seems the same plan? And if rates are not the same for the same plans with all companies, why do some people want to pay more for the “same” coverage? Are they just not interested in saving money on their life insurance? Do they know something you do not know? Here are some possible reason.

Convertibility

If you are considering a term life insurance plan, then you should also consider the convertibility option. This option simply allows you to convert you term plan to a permanent life insurance without having to go through more medical underwriting. This is important as even though you may feel that term is all you need or can afford today, in 10 years or more, as your health or needs may change, convertibility may be the most important aspect of your policy. If your policy is not convertible, you may lose your coverage when you need it the most. In addition, the ability to convert your policy is not the only important part of this option. What can your policy be converted to? You need to make sure that your term life plan is convertible to a high quality permanent insurance plan. Many companies offer great whole life and universal life options to convert to. Unless, you are absolutely certain that you will only need your plan for a term period (as with some business loans) make sure to request more information on convertibility.

Term Guarantee Period

With term life insurance, you must make check that your rates are guaranteed for the full period. In other words, a ten year terms may be cheaper with company A than company B but company A may have the option to raise rates at some point before the 10 year is over while company B will guarantee rates for the full 10 years. What may have started as the cheapest rate may end up the most expensive.

Customer Service from the Insurance Company and the Agent

We feel that customer service is of prime importance. You need a company that will keep in touch with you regularly and inform you of new programs that may benefit you. They also need to inform you about your policy. Most people get a life insurance plan and file it away and if you would later ask them about the plan they have they either would say that they have no idea or worst, they think they know but are incorrect. A good company will be easily reachable and answer your questions in a simple manner and tell you about your present plan and possible options available.

Riders

You may not need them today but who knows what your needs will be tomorrow. Riders can be important from the start or at some point in the future. Make sure that you are ware of which riders are available and whether or not they can be added later. Some may include:

  • Guarantee Insurability Rider (allows you to add insurance later with no or limited underwriting)
  • Waiver of Premiums Rider (pays your premiums in case of disability – read definition carefully)
  • Inflation Rider (adjusts or allows you to adjust your policy face amount based on a percentage you pre-select)
  • Disability Income Rider (pays you a disability benefit in case of a covered disability – read definition carefully)
  • Spouse Rider (allows you to add a spouse to your policy – this may be an inexpensive way to cover a spouse)
  • Child Rider (allows you to add a child to your policy – maximum age is usually 21 to 25)
  • Return of Premiums Rider (returns some or all of the premiums you paid to the insurance company)
  • Accident Rider (pays a benefit in case of accidental death)

Value Added Benefits

Value added benefits that are often free can give your extra protection, discount on products you are already using or even such things as scholarships for children and grandchildren. If you are already paying for some of these benefits with other companies then you can save money as your new life insurance will give them to you for free. When buying certain products or using certain services, with some life insurance policies, these products or services can be greatly discounted. In the end, look at the added benefits some companies are just giving you and see if this “more” expensive insurance plan is actually cheaper for you to have.

Other things to consider

  • Cost to have a policy mailed
  • Cost to get a loan on your policy (if you have a cash value policy)
  • Interest rate charged on loan
  • Effect of loans or withdrawal on the death benefit
  • Cash value growth
  • Agent availability
  • Customer service agent availability
  • Company financial rating
  • What other plans besides life insurance do they or they agent offer? – This may be helpful later when you need other coverage and do not want to have to deal with a whole new set of people.

We hope this article has helped you understand why price really is not everything. Sometimes when you think you are saving on premiums, you are actually postponing much higher costs in time and money later. We are always happy to hear from you. Your suggestions and questions are most welcome. Be well!

How To Choose The Most Desirable And Cheapest Life Insurance Plans

Finding the cheapest life insurance policy is an important consideration in these times of economic uncertainty. If you have children or other dependents you should not think about foregoing a policy as should the worst happen your family may be left with no financial means to support themselves.

There are in fact a number of different options that you could explore when checking out the type of policies that are available. For example there are term premiums that would offer a lump sum to the beneficiaries if you were to leave this mortal coil before a certain amount of time has elapsed. Another option is the whole life plans that can guarantee financial security to your dependents no matter what age you reach.

When exploring the various options you will discover that today there are in fact a huge number of providers who you could sign up with. You will need to make certain that the option you can pick is affordable yet still offers the type of security you would expect from a life insurance plan.

The issue with locating what can be termed a cheap plan is that it should still offer a suitable payout when time dictates. If you are the type of individual that usually seeks out an insurance company that is known to you, the chance of getting a good deal may be lessened. The best option would be to find a company that gives the best policy for your budget and which offers the kind of features that you desire.

Before you put your signature on any contract you should do a background check into the insurer in question. There are many ways this can be done. One option is to contact the Better Business Bureau to find out whether any complaints have been made against the insurer. If there is a long list of unhappy customers you should take your business elsewhere.

The internet has dramatically altered the amount of effort and time that is required when searching for cheapest life insurance plans. You can log on to third party websites that can provide information relating to the best plans and deals that are currently available. When considering all the options it is vital that you provide accurate information as if you do not the policy you sign up for may not be as desirable when it comes to being cashed in and by then it will be too late to make changes.