Another "get it right" article.
In an effort to establish a basis for discussions on this site, I present this basic article. Insurance companies' business models are often stated as:
Profit= Earned Premium+Investment Income-Underwriting Expenses-Claims Paid.
Let's look at the meaning of each term and apply them to life insurance. Profit is the surplus that an Insurer can share with its shareholders in a commercial insurer or with its policyholders in the case of a mutual company. Profit is needed or the company and all its policyholders who depend on the company's ability to pay would be left without coverage.
Earned Premium is the portion of the premium that the company collected that it "used" to provide the coverage you have had. Earned premium reflects the time period that has elapsed since the premium was collected and the actual coverage provided. Remember once a premium is collected (you paid) for a set period; you have the coverage. Life Insurance is an aleatory contract, meaning only one party must perform. The one party that must perform is the insurer. If you pay the premium in accordance with the contract, the insurance company must pay the death claim.
Investment Income is the gain the insurance company gets by investing in safe investments. They will invest immediately the premium received. Insurance companies choose investments ranging from stocks, bonds, real estate and other investments. The ratios that they choose are limited by laws and tend toward the conservative. Your state insurance commissioners don't want your future security imperiled by "risky" investments.
Underwriting Expenses are the costs associated with the determination of the cost of the risk assumed. In life insurance, we know mortality is 100%, that is we will all die. So you might think that if you know the overall life expectancy of a population, the calculation should be easy; determine your life expectancy at your age and figure the percent of those who will die and you can pay your share. Fortunately, that is not done. As we get older our life expectancy will decrease, but we can do things to lengthen or shorten or life expectancy. We all know if we smoke the effect that has on or cardio-pulmonary system will shorten our life. So if we don't smoke then we should not be lumped in the general population as we, by default, are the part of the population that increases the life expectancy. These and a myriad of other considerations are evaluated and applied to your case. This research has a cost: the underwriting costs in our profit model above.
The final factor is Claims Paid. If your beneficiaries are paid the claim because you die while covered, this is money that does not go to the profit. This is where all the money spent in researching the effects of lifestyle on mortality and your individual case can make a large amount of money for the insurer. If a claim is not paid because an obvious claim producing risk is not taken, in effect the bottom line is directly affected. The premiums you pay are calculated to allow the insurance company to meet the obligation to your beneficiary, while making a profit. So if you have a condition, such as a virulent and aggressive terminal cancer, you won't be offered competitively priced underwritten insurance. But if on the other hand, you have condition that underwriting determines will have a 50% increase in mortality you will be offered a rate at 50% more than those without the same condition.
The information in this post should serve as a guide for discussion with your insurance professional.
In an effort to establish a basis for discussions on this site, I present this basic article. Insurance companies' business models are often stated as:
Profit= Earned Premium+Investment Income-Underwriting Expenses-Claims Paid.
Let's look at the meaning of each term and apply them to life insurance. Profit is the surplus that an Insurer can share with its shareholders in a commercial insurer or with its policyholders in the case of a mutual company. Profit is needed or the company and all its policyholders who depend on the company's ability to pay would be left without coverage.
Earned Premium is the portion of the premium that the company collected that it "used" to provide the coverage you have had. Earned premium reflects the time period that has elapsed since the premium was collected and the actual coverage provided. Remember once a premium is collected (you paid) for a set period; you have the coverage. Life Insurance is an aleatory contract, meaning only one party must perform. The one party that must perform is the insurer. If you pay the premium in accordance with the contract, the insurance company must pay the death claim.
Investment Income is the gain the insurance company gets by investing in safe investments. They will invest immediately the premium received. Insurance companies choose investments ranging from stocks, bonds, real estate and other investments. The ratios that they choose are limited by laws and tend toward the conservative. Your state insurance commissioners don't want your future security imperiled by "risky" investments.
Underwriting Expenses are the costs associated with the determination of the cost of the risk assumed. In life insurance, we know mortality is 100%, that is we will all die. So you might think that if you know the overall life expectancy of a population, the calculation should be easy; determine your life expectancy at your age and figure the percent of those who will die and you can pay your share. Fortunately, that is not done. As we get older our life expectancy will decrease, but we can do things to lengthen or shorten or life expectancy. We all know if we smoke the effect that has on or cardio-pulmonary system will shorten our life. So if we don't smoke then we should not be lumped in the general population as we, by default, are the part of the population that increases the life expectancy. These and a myriad of other considerations are evaluated and applied to your case. This research has a cost: the underwriting costs in our profit model above.
The final factor is Claims Paid. If your beneficiaries are paid the claim because you die while covered, this is money that does not go to the profit. This is where all the money spent in researching the effects of lifestyle on mortality and your individual case can make a large amount of money for the insurer. If a claim is not paid because an obvious claim producing risk is not taken, in effect the bottom line is directly affected. The premiums you pay are calculated to allow the insurance company to meet the obligation to your beneficiary, while making a profit. So if you have a condition, such as a virulent and aggressive terminal cancer, you won't be offered competitively priced underwritten insurance. But if on the other hand, you have condition that underwriting determines will have a 50% increase in mortality you will be offered a rate at 50% more than those without the same condition.
The information in this post should serve as a guide for discussion with your insurance professional.
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