The reason life insurance can be fairly simple and straightforward is because it is pretty much the only type of insurance that can statistically be worked out to assess real levels of probability and cost.
Insurance actuaries are specialists in statistics and mathematical systems, who can model life expectancy, mortality rates, risk factors with a high degree of accuracy. This can give insurance companies a really strong understanding of the nature of risk and what to charge for it.
This then leads to specific rating structures that are reflected in policy premiums, always allowing for commercial competition between companies, which should in theory then lower premiums even further.
Types of Life Insurance
This will look at what could be termed pure life insurance itself, i.e. a life insurance policy which is bought without any type of other financial product being bought with it.
Term Insurance
This is probably the simplest type of life insurance policy, and often the cheapest. Someone takes out a term insurance policy for a fixed number of years or decades, for a fixed sum insured if the person dies during that period. The premium is normally fixed at a set rate, payable on a monthly basis, and doesn’t change during the policy period itself at all.
As an example, someone may take out a fixed term life insurance policy for a period of 30 years, pay a monthly premium fixed at £15 per month, for a sum insured of £100,000 pounds.
If the person dies during that period, then the insurance company will pay out the £100,000 to the named beneficiary under the policy, and the policy will then be cancelled.
If the person stays alive for the 30 years, then at the end of that period the policy will either be cancelled or the insurance company may offer to extend it for another fixed period of time, though most likely at an increased monthly premium.
The advantage of a term life insurance policy, is that it is very simple, very clear and normally quite cheap, depending upon the age of the person when it is taken out and their personal circumstances at the time.
Whole Life Insurance
The other type of life insurance which is also very commonly taken out is what is referred to as whole life. This again can be quite a simple type of insurance when taken out on its own, in that it will cover an individual for the whole of their life, and guarantee a payout as and when the individual dies, assuming all premiums have been paid and are up to date.
A whole life policy is often taken out when someone is still relatively young, maybe in their 30s, and are seen as long term protection for the individual and their family.
Unlike a term insurance policy, the insurance premium can change over time, depending upon the circumstances of the individual, and the insurance company should always be clear as to it’s rating structure, and when any review of the premium is likely to happen and for what reasons.
Over 50s Life Insurance Policy
The other type of life insurance policy that is commonly sold is to individuals who are over 50 but beneath the age of 80. This type of policy is normally sold as a no frills policy that doesn’t ask any medical questions, and guarantees acceptance under the policy whatever the individual’s circumstances.
This obviously can seem very attractive to individuals without any type of life cover who at this age are beginning to question their own longer term future, and see the need to provide some type of financial assistance to cover funeral arrangements and associated costs.
The premiums on this type of policy are normally quite affordable, but often the sum insured is really not that great. The intent is not to provide a generous payout during the period of the policy, but more to provide a practical amount to cover the realistic costs when someone dies, and perhaps a small gift to a beneficiary as a sort of thank you to someone for their help during this period
Factors Affecting Life Insurance
Just like any type of insurance policy, the life insurance or assurance company will take into account a number of what they consider to be risk factors, the main ones are listed below.
Age:
Unsurprisingly, the younger a person takes out a life insurance policy the cheaper it is likely to be simply because statistically they are less likely to die at a younger age. However people’s view of their own mortality tends to make them think that life assurance is something they can put off to a later age or do not need, therefore the take up rates at a young age are not normally that great.
Family medical history
If known, and that is not always the case in today’s world, a number of serious or critical conditions that can lead to death can also have an hereditary factor, and the insurance company will want to take this into account when deciding that rating structure for any individual.
Individuals own health
This type of history will also be asked for by the insurance company in addition to a family history. This relates mainly to any pre-existing conditions that the individual may have, or any serious illnesses or accidents that they have had before applying for the policy.
Insurance companies will want to have a clear idea of whether someone’s health, based on previous experience is likely to be a significant risk factor going forward.
Lifestyle
The term lifestyle can cover many areas of someone’s life. From an insurance company’s point of view they are mainly concerned with factors such as smoking, drug use recreational or otherwise, diet in relation to BMI and obesity, and any other factors that may affect someone’s health.
The insurance company will also want to know if someone indulges in what may be thought of as high risk activities, mainly hobbies, but activities that could put their life at risk.
Occupation
Certain occupations carry a much greater risk of death or injury than others, ranging from people who work in construction, scaffolders through to people who work in law enforcement or the military.
These types of occupation won’t necessarily prevent someone getting life insurance but may make them pay a higher rate.
Mental health
The concept of mental health and wellness has become increasingly important in recent years, and a life insurance company is likely to want some details about what are considered mental health conditions, either previous or current.
This can include areas such as depression, alcoholism, a history of substance abuse or any other type of illness that is considered to have a mental health component.
As with all types of insurance the onus is on the individual to declare any information that the insurance company is realistically entitled to know that could affect their judgement as to the nature and type of risk.
This determines their willingness to accept the risk, how much to pay for it and any terms and conditions the insurance company will apply to such a policy.
It is always worth flagging up that whilst the insurance company will ask questions that cover most of these areas, it is the responsibility of the individual applying for the policy to make sure that all relevant information is provided, whether asked for or not.
Failure to do so may well mean that the insurance company will void the policy if a claim is made, if they consider that the withholding of any information was effectively a material fact.
