We are all aware that a life insurance policy is the best way of ensuring that those nearest and dearest to you are provided for in the case of the unforeseen happening. Often, for relatively low premiums, policies can offer astronomically high payouts, but how is this achieved? And why do certain people get better rates than others? A life insurance company works out the rate of the policy according to where the owner sits in regards to a particular mortality table. These mortality tables are worked out on a number of variables, most notably age, gender, and the use of tobacco, although often other factors are worked in, such as family medical history, alcohol, and occupational hazards (though this depends on the nature of the policy that the individual is trying to take out).
The company is then able to work out the likelihood of death within the term of the policy. The theory is that the company collects the premiums from everyone who has a policy and pools them in order to pay out any claims. If, for example, a 25 year old, non-smoker, takes out a ten year policy, the likelihood of them dying during that ten years is very low, this allows the insurance company to have relatively low premiums, drawing money from a wide range of policy holders from similar demographics in order to cover the amount of money that they will have to pay out in the event of something unexpected happening. Insurance companies obviously have to make a profit, and this drives up the premiums, but generally speaking, the larger the company, the wider the range of people they will have paying premiums, and thus, the lower the rates will be.
In general, insurance agreements work on the theory that both sides are being open and honest. This means that the company can expect that the individual will disclose any information that would change their position on a mortality table and thus affect the premium that they were expected to pay, whilst the individual can expect the company to be honest with the terms of the contract without having to be a legal expert. Of course, for the insurance company, policies can represent a large risk, particularly those with high payouts, and so they need to be as thorough as possible in order to prevent overstretching their resources and being unable to payout on other individual's policies should the terms of the policy be met.
Obviously, for an insurance company, this is a matter of livelihood, for the individuals, it is a question of whether those closest to them will be provided for, should the worst happen. Contrary to popular belief, insurance companies are not evil; they just have to be thorough and often strike hard bargains in order to guarantee the coverage of their entire portfolio. There are large differences between the rates that different companies can offer, this obviously depends on how great their assets are, which demographics they provide insurance for, and how large or small they want their profit margins to be. It is impossible to say which insurance company will provide the best deal, as life insurance policies are often finely tailored to individual needs. The best thing to do is to look at a number of different companies and try and find the best possible policy for you.
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Article Added on Friday, August 22, 2008
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