Life insurance - Details and history

Life insurance (or commonly life
assurance, especially in the Commonwealth)
is a contract between an insured (insurance
policy holder) and an insurer or assurer, where
the insurer promises to pay a designated
beneficiary a sum of money (the "benefits") in
exchange for a premium, upon the death of
the insured person. Depending on the contract,
other events such as terminal illness or critical
illness may also trigger payment. The policy
holder typically pays a premium, either
regularly or as a lump sum. Other expenses
(such as funeral expenses) are also sometimes
included in the benefits.
Life policies are legal contracts and the terms of
the contract describe the limitations of the
insured events. Specific exclusions are often
written into the contract to limit the liability of
the insurer; common examples are claims
relating to suicide, fraud, war, riot, and civil
commotion.
Life-based contracts tend to fall into two major
categories:
Protection policies – designed to provide a
benefit in the event of specified event, typically
a lump sum payment. A common form of this
design is term insurance.
Investment policies – where the main
objective is to facilitate the growth of capital by
regular or single premiums. Common forms
(in the US) are whole life, universal life, and
variable life policies.
History
Main article: History of insurance
Insurance began as a way of reducing the risk
to traders, as early as 2000 BC in China and
1750 BC in Babylon[citation needed]. An early
form of life insurance dates to Ancient Rome;
"burial clubs" covered the cost of members'
funeral expenses and assisted survivors
financially.
Amicable Society for a Perpetual
Assurance Office, established in 1706, was
the first life insurance company in the
world.
Modern life insurance policies were established
in the early 18th century. The first company to
offer life insurance was the Amicable Society
for a Perpetual Assurance Office, founded in
London in 1706 by William Talbot and Sir
Thomas Allen.[2][3] The first plan of life
insurance was that each member paid a fixed
annual payment per share on from one to
three shares with consideration to age of the
members being twelve to fifty-five. At the end
of the year a portion of the "amicable
contribution" was divided among the wives
and children of deceased members and it was
in proportion to the amount of shares the heirs
owned. Amicable Society started with 2000
members.[4][5]
The first life table was written by Edmund
Halley in 1693, but it was only in the 1750s that
the necessary mathematical and statistical tools
were in place for the development of modern
life insurance. James Dodson, a mathematician
and actuary, tried to establish a new company
that issued premiums aimed at correctly
offsetting the risks of long term life assurance
policies, after being refused admission to the
Amicable Life Assurance Society because of his
advanced age. He was unsuccessful in his
attempts at procuring a charter from the
government before his death in 1757.
His disciple, Edward Rowe Mores, was finally
able to establish the Society for Equitable
Assurances on Lives and Survivorship in 1762.
It was the world's first mutual insurer and it
pioneered age based premiums based on
mortality rate laying “the framework for
scientific insurance practice and
development”[6] and “the basis of modern life
assurance upon which all life assurance
schemes were subsequently based”.[7]
Mores also specified that the chief official
should be called an actuary - the earliest
known reference to the position as a business
concern. The first modern actuary was William
Morgan, who was appointed in 1775 and
served until 1830. In 1776 the Society carried
out the first actuarial valuation of liabilities and
subsequently distributed the first reversionary
bonus (1781) and interim bonus (1809) among
its members.[6] It also used regular valuations
to balance competing interests.[6] The Society
sought to treat its members equitably and the
Directors tried to ensure that the policyholders
received a fair return on their respective
investments. Premiums were regulated
according to age, and anybody could be
admitted regardless of their state of health and
other circumstances.[8]
Life insurance premiums written in 2005
The sale of life insurance in the U.S. began in
the late 1760s. The Presbyterian Synods in
Philadelphia and New York City created the
Corporation for Relief of Poor and Distressed
Widows and Children of Presbyterian Ministers
in 1759; Episcopalian priests organized a similar
fund in 1769. Between 1787 and 1837 more
than two dozen life insurance companies were
started, but fewer than half a dozen survived.
Market trends
According to a study by Swiss Re, the EU was
the largest market for life insurance premiums
in 2005, followed by the USA and Japan.
Overview
Parties to contract
There is a difference between the insured and
the policy owner, although the owner and the
insured are often the same person. For
example, if Joe buys a policy on his own life,
he is both the owner and the insured. But if
Jane, his wife, buys a policy on Joe's life, she is
the owner and he is the insured. The policy
owner is the guarantor and he will be the
person to pay for the policy. The insured is a
participant in the contract, but not necessarily a
party to it. Also, most companies allow the
payer and owner to be different, e. g. a
grandparent paying premiums for a policy on
a child, owned by a grandchild.
Chart of a life insurance
The beneficiary receives policy proceeds upon
the insured person's death. The owner
designates the beneficiary, but the beneficiary
is not a party to the policy. The owner can
change the beneficiary unless the policy has an
irrevocable beneficiary designation. If a policy
has an irrevocable beneficiary, any beneficiary
changes, policy assignments, or cash value
borrowing would require the agreement of the
original beneficiary.
In cases where the policy owner is not the
insured (also referred to as the celui qui vit or
CQV), insurance companies have sought to
limit policy purchases to those with an
insurable interest in the CQV. For life insurance
policies, close family members and business
partners will usually be found to have an
insurable interest. The insurable interest
requirement usually demonstrates that the
purchaser will actually suffer some kind of loss
if the CQV dies. Such a requirement prevents
people from benefiting from the purchase of
purely speculative policies on people they
expect to die. With no insurable interest
requirement, the risk that a purchaser would
murder the CQV for insurance proceeds would
be great. In at least one case, an insurance
company which sold a policy to a purchaser
with no insurable interest (who later murdered
the CQV for the proceeds), was found liable in
court for contributing to the wrongful death of
the victim (Liberty National Life v. Weldon, 267
Ala.171 (1957)).
Contract terms
Special exclusions may apply, such as suicide
clauses, whereby the policy becomes null and
void if the insured commits suicide within a
specified time (usually two years after the
purchase date; some states provide a statutory
one-year suicide clause). Any
misrepresentations by the insured on the
application may also be grounds for
nullification. Most US states specify a
maximum contestability period, often no more
than two years. Only if the insured dies within
this period will the insurer have a legal right to
contest the claim on the basis of
misrepresentation and request additional
information before deciding whether to pay or
deny the claim.
The face amount of the policy is the initial
amount that the policy will pay at the death of
the insured or when the policy matures,
although the actual death benefit can provide
for greater or lesser than the face amount. The
policy matures when the insured dies or
reaches a specified age (such as 100 years old).
Costs, insurability, and underwriting
The insurer (the life insurance company)
calculates the policy prices with intent to fund
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
employ actuarial science, which is based on
mathematics (primarily probability and
statistics). Mortality tables are statistically based
tables showing expected annual mortality
rates. It is possible to derive life expectancy
estimates from these mortality assumptions.
Such estimates can be important in taxation
regulation.[9][10]
The three main variables in a mortality table are
commonly age, gender, and use of tobacco,
but more recently in the US, preferred class-
specific tables have been introduced. The
mortality tables provide a baseline for the cost
of insurance, but in practice these mortality
tables are used in conjunction with the health
and family history of the individual applying for
a policy to determine premiums and
insurability. Mortality tables currently in use by
life insurance companies in the United States
are individually modified by each company
using pooled industry experience studies as a
starting point. In the 1980s and 1990s, the SOA
1975–80 Basic Select & Ultimate tables were the
typical reference points, while the 2001 VBT
and 2001 CSO tables were published more
recently. The newer tables include separate
mortality tables for smokers and non-
smokers, and the CSO tables include separate
tables for preferred classes.[11]
Recent US mortality tables predict that roughly
0.35 in 1,000 non-smoking males aged 25 will
die during the first year of coverage after
underwriting.[12] Mortality approximately
doubles for every extra ten years of age, so the
mortality rate in the first year for underwritten
non-smoking men is about 2.5 in 1,000 people
at age 65.[13] Compare this with the US
population male mortality rates of 1.3 per 1,000
at age 25 and 19.3 at age 65 (without regard to
health or smoking status).[14]
The mortality of underwritten persons rises
much more quickly than the general
population. At the end of 10 years the mortality
of that 25 year-old, non-smoking male is
0.66/1000/year. Consequently, in a group of
one thousand 25-year-old males with a
$100,000 policy, all of average health, a life
insurance company would have to collect
approximately $50 a year from each
participant to cover the relatively few expected
claims. (0.35 to 0.66 expected deaths in each
year x $100,000 payout per death = $35 per
policy). Other costs, such as administrative
and sales expenses, also need to be considered
when setting the premiums. A 10 year policy
for a 25-year-old non-smoking male with
preferred medical history may get offers as
low as $90 per year for a $100,000 policy in
the competitive US life insurance market.
Most of the revenue received by insurance
companies consists of premiums paid by
policy holders, with some additional money
being made through the investment of some
of the cash raised from premiums. Rates
charged for life insurance increase with the
insured's age because, statistically, people are
more likely to die as they get older. The
insurance company will investigate the health
of an applicant for a policy to assess the
likelihood of incurring a claim, in the same way
that a bank would investigate an applicant for a
loan to assess the likelihood of a default. Group
Insurance policies are an exception to this. This
investigation and resulting evaluation of the risk
is termed underwriting. Health and lifestyle
questions are asked, with certain responses or
revelations possibly meriting further
investigation. Life insurance companies in the
United States support the Medical Information
Bureau (MIB),[15] which is a clearing house of
information on persons who have applied for
life insurance with participating companies in
the last seven years. As part of the application,
the insurer often requires the applicant's
permission to obtain information from their
physicians.[16]
Underwriters will determine the purpose of
insurance; the most common being to protect
the owner's family or financial interests in the
event of the insured's death. Other purposes
include estate planning or, in the case of cash-
value contracts, investment for retirement
planning. Bank loans or buy-sell provisions of
business agreements are another acceptable
purpose.
In the USA, life insurance companies are never
legally required to underwrite or to provide
coverage to anyone, with the exception of Civil
Rights Act compliance requirements. Insurance
companies alone determine insurability, and
some people, for their own health or lifestyle
reasons, are deemed uninsurable. The policy
can be declined or rated (increasing the
premium amount to compensate for a greater
probability of a claim).[citation needed]
Many companies separate applicants into four
general categories. These categories are
preferred best, preferred, standard, and
tobacco.[citation needed] Preferred best is
reserved only for the healthiest individuals in
the general population. This may mean, 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-onset
cancer, diabetes, or other conditions.[17]
Preferred means that the proposed insured is
currently under medication for a medical
condition and has a family history of particular
illnesses.[citation needed] Most people are in
the standard category. People in the tobacco
category typically have to pay higher
premiums due to the inherent health problems
that smoking tobacco creates.[citation needed]
Profession, travel history, and lifestyle factor
into whether the proposed insured will be
granted a policy, and which category the
insured falls. For example, a person who
would otherwise be classified as preferred best
may be denied a policy if he or she travels to a
high risk country.[citation needed]
Underwriting practices can vary from insurer
to insurer, encouraging competition.
Death proceeds
Upon the insured's death, the insurer requires
acceptable proof of death before it pays the
claim. The normal minimum proof required is
a death certificate, and the insurer's claim form
completed, signed, and typically
notarized.[citation needed] If the insured's
death is suspicious and the policy amount is
large, the insurer may investigate the
circumstances surrounding the death before
deciding whether it has an obligation to pay the
claim.
Payment from the policy may be as a lump
sum or as an annuity, which is paid in regular
installments for either a specified period or for
the beneficiary's lifetime.[citation needed]