Costs, insurability, and underwriting
The insurer (the life insurance company) calculates the policy prices with an intent to recover claims to be paid and administrative costs, and to make a profit. The cost of insurance is determined using mortality tables calculated by actuaries. 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. The three main variables in a mortality table are age, gender, and use of tobacco. The mortality tables provide a baseline for the cost of insurance. In practice, these mortality tables are used in conjunction with the health and family history of the individual applying for a policy in order to determine premiums and insurability. 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.
The current mortality table assumes that roughly 2 in 1,000 people aged 25 will die during the term of coverage. This number rises roughly quadratically to about 25 in 1,000 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 claims.
The insurance company receives the premiums from the policy owner and invests them to create a pool of money from which to pay claims, and finance the insurance company's operations. Contrary to popular belief, the majority of the money that 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 increase with the insured's age because, statistically, people are more likely to die 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 minimum amount) beginning with the application, which becomes part of the policy. Group Insurance policies are an exception.
This investigation and resulting evaluation of the risk is called underwriting. Health and lifestyle questions are asked, and the answers are 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.
Many companies use four general health categories for those evaluated for a life insurance policy. These categories are Preferred Best, Preferred, Standard, and Tobacco. Preferred Best means that the proposed insured has no adverse medical history, is 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. Most people are in the Standard category. Profession, travel, and lifestyle also factor into not only which category the proposed insured falls, but also whether the proposed insured will be denied a policy. For example, a person who would otherwise be in the Preferred Best category will be denied a policy if he or she travels to a high risk country.
The current mortality table assumes that roughly 2 in 1,000 people aged 25 will die during the term of coverage. This number rises roughly quadratically to about 25 in 1,000 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 claims.
The insurance company receives the premiums from the policy owner and invests them to create a pool of money from which to pay claims, and finance the insurance company's operations. Contrary to popular belief, the majority of the money that 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 increase with the insured's age because, statistically, people are more likely to die 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 minimum amount) beginning with the application, which becomes part of the policy. Group Insurance policies are an exception.
This investigation and resulting evaluation of the risk is called underwriting. Health and lifestyle questions are asked, and the answers are 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.
Many companies use four general health categories for those evaluated for a life insurance policy. These categories are Preferred Best, Preferred, Standard, and Tobacco. Preferred Best means that the proposed insured has no adverse medical history, is 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. Most people are in the Standard category. Profession, travel, and lifestyle also factor into not only which category the proposed insured falls, but also whether the proposed insured will be denied a policy. For example, a person who would otherwise be in the Preferred Best category will be denied a policy if he or she travels to a high risk country.
posted by Kumar Regmi @ 2:33 AM
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