Life Insurance 101

Life insurance is basically a contract between two parties: the life insurance company and the policy owner. After the demise of the policy owner, the life insurance company agrees to pay a lump sum amount based on premiums paid by the policy owner, to a designated beneficiary. The policy owner must pay the life insurance company either a lump sum or a stipulated amount at regular intervals in order to keep the policy in effect. In addition to death, a life insurance policy may also cover terminal illness or critical illness and provide the policy owner with what is known as accelerated death benefits to cover cost of treatment.

Types of Life Insurance

Life insurance purely for protection: This type of life insurance is designed to provide death benefits against premiums paid for a specified term period which can be anywhere between 1 to 30 years. Because it is temporary life insurance offered for a particular term, it is called term life insurance. This type of insurance offers high death benefits at the most affordable premiums. It is most suitable for young families on a low-budget or for individuals who want temporary life insurance protection. There is no investment component in term life insurance and should you outlive the policy, you forfeit all premiums paid.

Life insurance with an investment component: This type of life insurance is permanent. You pay premiums throughout your life. The reason why it is so attractive is because a portion of the premiums you pay goes into an investment portfolio. Your premiums begin to accrue interest. After a certain time, you can use this interest to pay premiums or you can dip into the cash value of your life insurance policy whenever you need to. Examples of life insurance with an investment component are whole life, universal, variable whole life and many others.

Who Needs Life Insurance?

Anyone who has a dependent needs life insurance.

Estimating life insurance coverage needs

Calculate all your assets against your liabilities. This will give you a fair idea of where you stand financially. Ask yourself how much money your family would need to maintain the same lifestyle they are accustomed to, pay off debts, and build up an asset for future expenses such as college tuitions or a retirement fund. You could make use of an online life insurance needs calculator to help you estimate the coverage you would need.

How premiums are calculated

Life insurance companies use mortality tables calculated by actuaries along with a host of other factors to derive the premium amount you need to pay. The process of investigating and evaluating the risk involved in insuring your life is called underwriting. The underwriting process may differ from company to company but a few common factors play a role such as age, gender, lifestyle, whether you are a smoker, pre-existing health conditions, family health profile, alcohol intake, etc. Premium rates are higher as you grow older simply because growing older is attached to a higher mortality rate.

Most companies divide the risk of insuring an applicant into four categories:

Preferred Best: This category of people is considered to be a low mortality risk. Typically, those who fall under this category have no adverse medical history, have no pre-existing health conditions, and there is no family history of cancer, diabetes or other common genetic diseases.

Preferred: This category of people is considered to be a slightly higher risk to insure. They may have a family history of illness, but lead healthy lifestyles.

Standard: This is the category which most people fall under. Typically, they may be under medication for an ailment; have a family medical history of illness; or may lead an unhealthy lifestyle and therefore prone to ill health.

Tobacco: If you smoke, you automatically fall under this category.


Because the life insurance industry is so competitive, underwriting criteria may vary. Some companies may have a competitive edge over other companies by favoring certain types of health conditions. For instance, some insurers may look into the details of your smoking, differentiating those who smoke a cigar occasionally from those who smoke a pack of cigarettes every day. In order to find such companies, however, you would need to shop around.

Make use of online life insurance quote providers certified by the Better Business Bureau. Having access to hundreds of reputable life insurance carriers, they can run your personal details through their database and instantly send you the best life insurance quotes for comparison. And because these are paperless transactions and you are able to shop around for competitive rates, you may be able to save on life insurance expenses by up to 70 percent!

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