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How Life Insurance Works

How Life Insurance Works

How Life Insurance Works

The word itself suggests the meaning of life insurance term. It means the beneficiary would be paid the amount of insurance on the death of the insured person within the term or insurance period. The insured period could be 5 years or 10 years.

For young and middle aged people, term life insurance is regarded as a suitable insurance policy. The premium is less as the risk for the insurance company is also low. For people who would like to opt for fixed period life insurance, term life insurance is regarded as the best. The death benefits can be availed only if the person dies within the period mentioned in the policy.

This is a pure and simple life insurance. Suppose, a person gets insured under term life insurance for a period of 5 years for $200,000 and if he survives the whole 5 years then he won’t get any insurance and the beneficiary would not be paid anything. If he dies within the 5 years period then his beneficiary would get the $200,000.

In term of life insurance, you can easily get loans with the help of the insurance policy. Which means you can use it as collateral against loans. The premium payable increases as you age. If the person survives then the policy expires and it has no value left in it. This is mainly because as a person ages the chance of risk of death increases.

The main disadvantage of term life insurance is the person is insured for a certain period of time and not throughout his life. The amount of premium is less compared to permanent insurance. This type of insurance is bought by a lot of youngsters and insurance companies and insurance agents usually target this age group. Insurance advisors tend to dissuade old people from opting for this type of insurance.

Life insurance pricing is based on many criteria related to life expectancy such as age, sex, nicotine use, medical or family health history (heart disease or cancer), dangerous hobbies practiced (scuba diving, travel planned in risk areas) and even driving record or credit history!

This information is verified by the companies by filling in a very complete questionnaire and/or by obtaining the medical files of the customers from the doctors, by carrying out medical examinations (blood, urine, electrocardiogram), by consulting the list of the current drugs ( or earlier) using prescription databases, etc ...

The most important factors influencing price are age, gender, and pre-existing medical conditions. Older people will usually pay more, just like men. Heart problems, high blood pressure, mental illness or a family history of heart disease or cancer will increase insurance premiums. Insurers also charge higher rates to people who participate in "dangerous" hobbies, and smokers can expect to pay rates that are twice as high as non-smokers.

All this information is used to determine how much the insurer must charge for a life insurance policy ... or if it must refuse it! As you will understand, the cost of life insurance is specific to each person and therefore very variable.

Warning: in the United States, the contents of life insurance are not identical throughout the country. Regulations, risks, customer profiles, etc. differ from one state to another and indirectly ... the premiums also. In addition, the US market is traditionally less regulated which gives more freedom to insurers in terms of content and especially rates.

In life insurance, the trick is to strike a balance between being overinsured and underinsured. Paying too much in premiums can be just as damaging financially as paying too little! The goal is still the financial security of your family ...

Given the complexity of life insurance, the advice of a professional is essential to find the right solution and especially to optimize the costs compared to promised benefits. It is advised to be assisted by  a specialist who can explain all the products at your disposal.