Life Insurance


Life Insurance, assumption by the an insuring organization of the risk of death of a policyholder. Unlike loss in insurance on property, loss in life insurance is certain to occur and is total. The element of uncertainty is when death will occur. Mortality is subject to the laws of probability, however, and life-insurance premiums can be calculated from mortality tables, which indicate the average number of people in each age and gender group that will die each year. A person trained to make such calculations, known as an actuary, determines the amount of premiums to be collected yearly from each group in order for the principal (the premiums) and its earned interest to equal the benefits to be paid to the policyholders’ beneficiaries. The principal payment required annually constitutes the net premium. A loading charge to cover company expenses and contingencies is added to the net premium, yielding the total, or gross premium, which the insured pays.


The earliest known type of life insurance was the burial benefits that Greek and Roman religious societies provided for their members. Neither these religious societies nor any pre-modern systems for paying death benefits employed actuarial calculations. They were frequently financed on a post-assessment basis; that is, contributions were made by all surviving members following one member’s death. As a result, funds were not always available to pay claims.

The tontine annuity system, founded in Paris by the 17th-century Italian-born banker Lorenzo Tonti, although essentially a form of gambling, has been regarded as an early attempt to use the law of averages and the principle of life expectancies in establishing annuities. Under the tontine system, associations of individuals were formed without any reference to age, and a fund was created by equal contributions from each member. The sum was invested, and at the end of each year the interest was divided among the survivors. The last remaining survivor received both the year’s interest and the entire amount of the principal. Modern life insurance has achieved global popularity. It is most popular in Ireland, Belgium, the Netherlands, the United States, Canada, Australia, New Zealand, South Korea, and Japan. In these countries the face value of current life insurance policies is usually greater than the national income.


Life insurance may be classified in a variety of ways. A classification depending primarily on the manner in which the premium is collected comprises ordinary, debit, and group life insurance. Ordinary insurance can be further classified into whole life, limited-payment life, endowment, and term. Debit life insurance can be classified into debit ordinary and industrial. Classification by type of contract yields term, whole life, and universal life. Life insurance may also be classified as participating and non-participating, depending on whether or not the policyholder shares in the savings or the profits of the insurer.


Ordinary life insurance may be used to provide a lump sum or continuing income to family beneficiaries, or it may be used by a firm to insure the life of a business executive. Premiums are paid on a periodic basis. With the exception of term life insurance, ordinary life insurance builds cash values that can be borrowed to help families meet emergencies or take advantage of business opportunities. A medical examination usually is required to buy life insurance. Almost all ordinary policies are sold on a level premium basis, which means that premiums in the early years are greater than the value of the insurance. This is not a true overcharge, but is designed to compensate for the greater costs in later years, when mortality rates increase.


Whole life insurance provides for the payment of the face amount of the policy on the death of the insured, whenever it might occur. Premium payments are made during the entire lifetime of the insured person; this differs from limited-payment and endowment policies. The cash value of the policy, which is less than its face value, is paid when the contract matures or is surrendered.

All cash-value policies like whole life, endowment, and limited payment life are required to provide values that cannot be lost should the insured terminate the policy. Such benefits provide that the insured may obtain the cash surrender value and terminate the policy; or the insured may obtain a paid-up whole life policy in a reduced amount; or he or she may obtain term insurance for the full face amount of the policy for a specified period. A loan provision in all such policies permits the insured to borrow up to the full amount of the cash surrender value at any time, subject to specified limitations.


The limited payment life policy is a subtype of whole-life policy providing for premium payments for a specified number of years (for example, 10 or 20, or until age 65) unless the insured person dies sooner. The policy remains effective once paid for, unless surrendered. A single-premium life policy is a special case of a limited-payment policy. Premium rates for limited-payment policies are higher than for ordinary life insurance policies because the paying-in period is shorter.


Endowment policies are payable at the death of the insured or on a specified maturity date if the insured is alive. Premiums generally are payable from the date of issue until the date of maturity but may be limited to fewer years or even to a single lump-sum payment. Premium payments on endowments are high because a large cash value is built up in a relatively short time. Endowments combine savings with insurance, and such policies may be used to provide for education, mortgage payments, or retirement purposes.


Term insurance provides benefits only if the insured dies within a specified period. If the insured survives up to the end of the specified period, the contract is terminated unless renewed. Because the premium for a term policy pays only for the cost of the insurance protection during the term of the policy, term insurance generally has no cash surrender value. The insured may be allowed to renew for another term without a medical examination. The premium, however, increases with each renewal because it is calculated on the age of the insured at the time of renewal.

Term insurance is often used by the head of a family to obtain additional temporary insurance when the children are young. Term insurance policies frequently provide the insured with conversion options to whole-life policies. Credit life insurance is term insurance against a loan taken out on some major purchase such as a car. It generally decreases in amount as the loan is repaid. It protects the insurer as well as the lender against the debt that remains unpaid at death.


Universal life insurance, a type first introduced in the United States in the 1970s, allows the policyholder to decide details of the premium (size and frequency) and the amount of death benefits. Policies may yield either a set benefit or a fixed sum plus any cash value accumulated in the policy. The insurer charges for general expenses and mortality costs and credits the policyholder with any interest earned, which usually gives an interest rate equivalent to mortgages and long-term bonds. If protection requirements change in the course of time, the policyholder can have the policy terms altered.


Two types of debit life insurance are available. Debit ordinary insurance was designed for wage earners with modest incomes. Premiums are collected by company agents at policyholders’ homes. Other than this mode of collection, the coverage has the same characteristics as ordinary life insurance. Industrial life insurance is also designed to meet the needs of low-income industrial workers. Premiums are payable periodically.


Group life insurance is often included as a fringe benefit in collective bargaining agreements, or as a benefit for employees. It provides a means of insuring a number of people in a business establishment, society, or other organization. This form of insurance is common in Japan, as part of the tradition of lifetime employment, and nearly all Japanese life insurance companies offer group schemes.

A master contract is issued, and each insured person receives a certificate specifying the amount of the insurance and his or her beneficiary. Employer and employee may each pay a set portion of the premium, or the employer may pay the whole; the amount of insurance is usually proportionate to seniority and salary. Because group insurance is a form of wholesale buying with low incurred costs, its economies are passed on to policyholders in the form of lower premiums. It does not usually require a medical examination. Group insurance policies are normally convertible to individual policies upon leaving the establishment.


The variety of policies available in modern life insurance allows for tailor-made combinations made to suit customers’ needs. Especially common are family income policies, where a whole-life policy is combined with term life insurance to yield an income over a set period, often the period when children are young. A similar policy, the mortgage protection policy, provides for income to pay off a mortgage on a property, usually with the term insurance decreasing as the mortgage is paid. In each case the whole-life policy is unaffected by the parallel term policy.

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