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Life insurance is a type of insurance. As in
all insurance, the insured transfers a risk to the insurer, receiving a
policy and paying a premium in exchange. The risk assumed by the insurer is
the risk of death of the insured.
Senior Life Insurance Information
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How Life Insurance
There are three parties in a life
insurance transaction: the insurer, the insured, and the owner of the
policy (policyholder), although the owner and the insured are often the same
person. For example, if John Smith buys a policy on his own life, he is both
the owner and the insured. But if Mary Smith, his wife, buys a policy on
John's life, she is the owner and he is the insured.
Another important person involved is the beneficiary. The beneficiary is the
person or persons who will receive the policy proceeds upon the death of the
insured. The beneficiary is not a party to the policy, but is designated by
the owner, who may change the beneficiary unless the policy has an
irrevocable beneficiary designation. With an irrevocable beneficiary, that
beneficiary must agree to changes in beneficiary, policy assignment, or
borrowing of cash value.
Insurance for Seniors
Private Senior Life
like all insurance policies, is a legal contract specifying the terms and
conditions of the risk assumed. Special provisions apply, including a suicide
clause wherein the policy becomes null if the insured commits suicide within a
specified time for the policy date (usually two years). Any misrepresentation by
the owner or insured on the application is also grounds for nullification. Most
contracts have a contestability period, also usually a two-year period; if the
insured dies within this period, the insurer has a legal right to contest the
claim and request additional information before deciding to either pay or deny
the claim for proceeds.
The face amount of the life insurance policy
is normally the amount paid when the policy matures, although policies can
provide for greater or lesser amounts. The life insurance policy
matures when the insured dies or reaches a specified age. The most common reason
to buy a life insurance policy is to protect the financial interests of the
owner of the policy in the event of the insured's demise. The insurance proceeds
would pay for funeral and other death costs or be invested to provide income
replacing the deceased's wages. Other reasons include estate planning and
retirement. Because the insured's death will be to the financial betterment of
the policy owner, the owner, by law, must have an insurable interest (i.e., a
legitimate reason for insuring another personís life.)
The insurer (i.e., life insurance company) prices the policies with an intent to
recover claims to be paid and administrative costs, and to make a profit.
Claims to be paid are determined by actuaries using mortality tables. Actuaries
are professionals who use actuarial science which is based in mathematics
(primarily probability and statistics). Mortality tables are statistically based
tables showing average life expectancies. Normally, the only three
considerations in a mortality table are the insured's age, gender, and whether
or not they use tobacco. The current mortality table being used by life
insurance companies in the United States and their regulators was calculated
during the 1980s. There is currently a measure being pushed to update the
mortality tables by 2006.
mortality table assumes that roughly 2 in 1000 people aged 25 will die and rises
roughly quadratically to about 25 in 1000 people for those aged 65. So in a
group of one thousand 25 year old males with a $100,000 policy, a life
insurance company would have to, at the minimum,
collect $200 a year from each of the thousand people to cover the expected
The life nsurance company receives the
premiums from the policy owner and invests them, using the time value of money
and compound return principles to create a pool of money from which to invest,
pay claims, and finance the insurance company's operations. Despite popular
belief, the majority of the money that life insurance companies
make comes directly from premiums paid, as money gained through investment of
premiums will never, in even the most ideal market conditions, vest enough money
per year to pay out claims. Rates charged for life insurance are sensitive to
the insured's age because statistically, an insured person is more likely to
pass away and trigger a claim as they get older.
Since adverse selection can have a negative impact on the financial results of
the insurer, the insurer investigates each proposed insured (unless the policy
is below a company-established de minimis amount) beginning with the
application, which becomes part of the policy. Group Insurance policies are an
This investigation and resulting evaluation of the risk is called underwriting.
Health and life style questions are asked, answered, and dutifully recorded.
Certain responses by the insured will be given further investigation. Life
insurance companies in the United States support The Medical Information Bureau,
which is a clearinghouse of medical information on all persons who have ever
applied for life insurance. As part of the application, the insurer receives
permission to obtain information from the proposed insured's physicians.
Life insurance companies are never
required by law to underwrite or to provide coverage on anyone. They alone
determine insurability, and some people, for their own health or lifestyle
reasons, are uninsurable. The policy can be declined (turned down) or rated.
Rating means increasing the premiums to provide for additional risks relative to
that particular insured discovered in the underwriting process.
Many companies use four general health categories for those evaluated for a life
insurance policy. A proposed insured can move down the scale easily, but moving
up the scale is difficult if at all possible. These categories are Preferred
Best, Preferred, Standard, and Tobacco. Preferred Best means that the proposed
insured has no adverse medical history, are not under medication for any
condition, and his family (immediate and extended) have no history of early
cancer, diabetes, or other conditions. Preferred is like Preferred Best, but it
allows that the proposed insured is currently under medication for the condition
and may have some family history. Standard is where most people fall, allowing
for everybody who doesn't fall under the previous tiers. Profession, travel, and
lifestyle also factor into not only which category the proposed insured falls,
but also whether or not the proposed insured will be denied a policy. For
example, a person who would otherwise fall under the Preferred Best category
will be denied a policy if he or she is employed in or makes regular travel to a
high risk country.
Upon the death of the insured, the insurer will require acceptable proof of
death before paying the claim. The normal minimum proof is a death certificate
and the insurer's claim form completed, signed, and often notarized. If the
insured's death was suspicious and the policy amount warrants it, the insurer
may investigate if there is evidence of its legal obligation to pay the claim.
Proceeds from the policy may be paid in a lump sum or paid over time as regular
recurring payments for either for the life of a specified person or a specified
Senior Life Insurance | Life