The Difference Between Stock and Mutual Life Insurers

The Difference Between Stock and Mutual Life Insurers

Stock insurance companies are, like regular corporations, owned by stockholders who put up the required capital with the objective of earning profits on the difference between the premiums paid for policies and the various death and living benefits paid out. Mutual insurance companies are in principle owned by the policy owners rather than stockholders. “Profits,” as such, do not exist. Premiums paid in excess of the amount necessary for the company to pay benefits increase…

Read More

An Expert Explanation of Participating and Non-Participating Life Insurance Policies

An Expert Explanation of Participating and Non-Participating Life Insurance Policies

Because insurance companies must guarantee death benefits and a minimum schedule of cash values in most policies (except variable life policies), they must be conservative when estimating the values of the various premium pricing factors (interest, mortality, expenses, lapse rates, and risk loading factors) used to compute the required premiums under any particular premium payment plan of insurance.  In the case of nonparticipating policies, all elements— premiums, death benefits, and the schedule of cash values…

Read More

Life Insurer Expenses and Risk Loadings

Life Insurer Expenses and Risk Loadings

Although interest and mortality are the two principle factors in premium calculations, in reality insurance companies must include other factors. When insurers set premiums, they include various expenses as well as risk loadings. One major expense is agent sales commissions, which for a level-premium whole life insurance policy typically run about 55 percent or more of the annual premium in the first year and about equal to one to two annual premium in total over…

Read More

The Life Insurance Underwriting Process

The Life Insurance Underwriting Process

Through their underwriting process, insurance companies classify or rate insureds by their risk characteristics. Health, occupation, avocations, gender, and habits (e.g., whether or not the insured smokes or drinks) are the types of factors considered when rating insureds. Depending on the rating, premiums may be based on “standard” or “preferred” mortality charges or multiples of up to five or even more times the standard mortality charges. Many insurers specialize in substandard risks. They will ensure…

Read More

Adverse Selection and Moral Hazard in the Life Insurance Industry

Adverse Selection and Moral Hazard in the Life Insurance Industry

Adverse selection is one of two main sorts of market failure often associated with insurance. The other is moral hazard. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer. What this means is that insurance may not be profitable when buyers have better information about their risk of claiming than does the insurer. Ideally, insurance premiums should be set according to the risk of a…

Read More

Life Insurance Math Made Simple

Life Insurance Math Made Simple

The following simplified example illustrates the basic operation of life insurance as a capital accumulation vehicle with both death protection and savings components. Suppose five people form a capital accumulation lottery pool or syndicate with the objective that each of them will receive $1,000 from the pool over a five-year period. Each person will contribute the same amount to the pool in each year that he or she still participates. However, at the end of…

Read More

Life Insurance as a Savings and Investment Vehicle

Life Insurance as a Savings and Investment Vehicle

Life insurance can be a superb savings and investment vehicle. All conventional investment vehicles serve the same purpose, but the unique feature of life insurance is that it assures a desired accumulation at a specific, but uncertain time; namely at the time of the insured’s death. No other savings or investment tool makes such a guarantee.  If the time of death were certain, life insurance would be unnecessary. A person could accumulate any desired target…

Read More

The 15 Most Important Legal Aspects of Life Insurance

The 15 Most Important Legal Aspects of Life Insurance

Legally, life insurance is a contract, governed principally by state law. A life insurance contract promises to pay a specified amount of money to a designated beneficiary when the insured person dies. The contract is between the insurance company and the policy owner, who pays premiums in exchange for the promised death (and other) benefits. Frequently, the policy owner is the person insured, but someone other than the insured may own the policy.  In return…

Read More

Advantages and Disadvantages of Life Insurance

Advantages and Disadvantages of Life Insurance

ADVANTAGES  The advantages offered by life insurance vary with the type of policy and the problem to which the policy is applied. These advantages are highlighted in subsequent chapters that describe the particular types of policies and the applications to which they are most suited. However, all types of life insurance policies provide certain favorable features, which are listed below.  1. Life insurance provides a guarantee of large amounts of cash payable immediately at the…

Read More
1 2