Wednesday, March 25, 2009

Life Insurance

Life Insurance
Life Insurance, assumption by an insuring organization of the risk of death of a policyholder. Unlike loss in insurance on property, loss in life insurance is certain to occur and is total. The element of uncertainty is when death will occur. Mortality is subject to the laws of probability, however, and life-insurance premiums can be calculated from mortality tables, which indicate the average number of people in each age and gender group that will die each year. A person trained to make such calculations, known as an actuary, determines the amount of premiums to be collected yearly from each group in order for the principal (the premiums) and its earned interest to equal the benefits to be paid to the policyholders' beneficiaries. The principal payment required annually constitutes the net premium. A loading charge to cover company expenses and contingencies is added to the net premium, yielding the total, or gross premium, which the insured pays.


The earliest known type of life insurance was the burial benefits that Greek and Roman religious societies provided for their members. Neither these religious societies nor any premodern systems for paying death benefits employed actuarial calculations. They were frequently financed on a postassessment basis; that is, contributions were made by all surviving members following one member's death. As a result, funds were not always available to pay claims.

The tontine annuity system, founded in Paris by the 17th-century Italian-born banker Lorenzo Tonti, although essentially a form of gambling has been regarded as an early attempt to use the law of averages and the principle of life expectancies in establishing annuities. Under the tontine system, associations of individuals were formed without any reference to age, and a fund was created by equal contributions from each member. The sum was invested, and at the end of each year the interest was divided among the survivors. The last remaining survivor received both the year's interest and the entire amount of the principal.

The first life-insurance company in North America was founded in 1759 in Philadelphia. It was named the Corporation for the Relief of Poor and Distressed Presbyterian Ministers and of the Poor and Distressed Widows and Children of Presbyterian Ministers.


Life insurance may be classified in a variety of ways. A classification depending primarily on the manner in which the premium is collected comprises regular ordinary, debit, and group life insurance. Regular ordinary insurance can be further classified into whole life, limited-payment life, endowment, and term. Debit life insurance can be classified into debit ordinary and industrial. Life insurance may also be classified as participating and nonparticipating, depending on whether or not the policyholder shares in the savings or the profits of the insurer.

A Regular Ordinary Life Insurance

Regular ordinary life and debit ordinary life insurances are generally sold in units of $1000, and premiums are payable on an annual, semiannual, quarterly, or monthly basis. Ordinary life insurance may be used to provide a lump sum or continuing income to family beneficiaries, or it may be used by a firm to insure the life of a business executive. With the exception of term life insurance, ordinary life insurance builds cash values that can be borrowed to help families meet emergencies or take advantage of business opportunities. A medical examination usually is required to buy life insurance.

A1 Whole-Life Insurance

Whole-life insurance provides for the payment of the face amount of the policy on the death of the insured, whenever it might occur. Premium payments are made during the entire lifetime of the insured person; this differs from limited-payment and endowment policies. All cash-value policies like whole life, endowment, and limited-payment life are required to provide values that cannot be lost should the insured terminate the policy. Such benefits provide that the insured may obtain the cash surrender value and terminate the policy; or the insured may obtain a paid-up whole-life policy in a reduced amount; or he or she may obtain term insurance for the full face amount of the policy for a specified period. A loan provision in all such policies permits the insured to borrow up to the full amount of the cash surrender value at any time, subject to specified limitations.

A2 Limited-Payment Life Insurance

The limited-payment life policy provides for premium payments for a specified number of years (for example, 10 or 20, or until age 65) unless the insured person dies sooner. A single-premium life policy is a special case of a limited-payment policy. Premium rates for limited-payment policies are higher than for ordinary life insurance policies because the pay-in period is shorter.

A3 Endowment Insurance

Endowment policies are payable at the death of the insured or on a specified maturity date if the insured is alive. Premiums generally are payable from the date of issue until the date of maturity but may be limited to fewer years or even to a single lump-sum payment. Premium payments on endowments are high because a large cash value is built up in a relatively short time. Endowments combine savings with insurance, and such policies may be used to provide for college education, mortgage payments, or retirement purposes. This type of policy lost popularity when competing savings mediums began paying higher interest rates in the 1970s and early '80s. More competitive interest rates have not yet restored its standing.

A4 Term Life Insurance

Term insurance provides benefits only if the insured dies within a specified period. If the insured survives up to the end of the specified period, the contract is terminated unless renewed. Because the premium for a term policy pays only for the cost of the insurance protection during the term of the policy, term insurance generally has no cash surrender value. The insured may be allowed to renew for another term without a medical examination. The premium, however, increases with each renewal because it is calculated on the age of the insured at the time of renewal. Term insurance is often used by the head of a family to obtain additional temporary insurance when the children are young. Term insurance policies frequently provide the insured with conversion options to whole-life policies.

Credit life insurance is term insurance against a loan taken out on some major purchase such as an automobile. It generally decreases in amount as the loan is repaid. It protects the borrower's family as well as the lender against the debt that remains unpaid at death.

B Debit Life Insurance

Two types of debit life insurance are available. Debit ordinary insurance was designed for wage earners with modest incomes. Premiums are collected by company agents at policyholders' homes. Other than this mode of collection, the coverage has the same characteristics as ordinary life insurance. Industrial life insurance is also designed to meet the needs of low-income industrial workers. Premiums are payable weekly or monthly, and the face amount does not generally exceed $1000. A medical examination is not required to obtain such insurance.

C Group Life Insurance

First introduced in 1911, group life insurance has grown since World War II chiefly because it has been included as a fringe benefit in collective-bargaining agreements. It provides a means of insuring a number of people in a business establishment, society, or other organization. A master contract is issued, and each insured person receives a certificate specifying the amount of the insurance and his or her beneficiary. Group policies contain a conversion clause that permits an insured, on separation from the group, to convert to an individual type of nonterm life insurance policy without evidence of insurability. The new policy, however, is issued at the premium rate applicable at the attained age of the policyholder. Because group insurance is a form of wholesale buying, its economies are passed on to policyholders in the form of lower premiums per dollar of coverage. Group life insurance usually is issued on a 1-year renewable term basis.

D Savings Bank Life Insurance

First made available in Massachusetts in 1907, savings bank life insurance is transacted on an over-the-counter basis or by mail without the use of soliciting agents. This normally results in reduced expense and lower costs to policyholders.

The technical details of administering the business are performed by a central organization that provides actuarial, medical, and certain other services for the member banks. The central organization computes the premium rates and prepares policy forms and application blanks. Each participating bank, however, is an independent body that issues its own contracts, maintains records, and retains and invests the assets of its own insurance department. The surplus funds attributable to insurance operations of the bank are available only to its policyholders; moreover, the central organization maintains a contingency or guaranty fund to protect policyholders.

E Government Life Insurance

The U.S. government, through the Department of Veterans Affairs (formerly the Veterans Administration), administers insurance programs for active members of the armed forces and veterans of military service. Instituted under the terms of the War Risk Insurance Act of 1917, U.S. Government Life Insurance permitted those on active duty during World War I to purchase low-cost life insurance in amounts up to $10,000. About 4.5 million persons applied for this insurance during the war. National Service Life Insurance, instituted in 1940, provided insurance for members of the armed forces in World War II on the same basis as had existed in World War I. This program was later extended to include World War II veterans, who were eligible for insurance whether or not they had obtained policies while in service. No new policies were issued under either program after April 1951.

Legislation enacted in 1965 established Servicemen's Group Life Insurance (SGLI) for personnel on active duty in the uniformed services and Ready Reservists. This program is currently in effect. Under the present program up to $50,000 of group life insurance is available on a voluntary basis to each individual, including all reservists and members of the National Guard. SGLI, now supervised by the Department of Veterans Affairs, is underwritten by more than 300 life insurance companies. A program begun in 1974 provides for automatic conversion of SGLI to a 5-year nonrenewable policy known as Veteran's Group Life Insurance (VGLI). Coverage is available in units of $5000 up to the amount of SGLI in force at the time of separation. VGLI is available to service personnel separated on or after August 1, 1974, and to reservists injured while on active duty. At the termination of the 5-year policy the insurance policy can be converted to an individual commercial policy with the participating companies at standard rates regardless of the policyholder's health.

Veterans Mortgage Life Insurance is available to totally disabled veterans, primarily paraplegics, who receive a grant to purchase specially adapted housing. In 1976 the amount of insurance coverage was increased to $40,000.
written by saifullah