Life Insurance Introduction Life insurance is the contract between the policy holder and insurance company, according to which the insurer agrees to pay an amount of money upon the occurrence of the policy holder’s death. In return, the policy holder agrees to pay a specified amount of money (premium) at regular intervals. As it is claimed by the insurance companies, life insurance covers death, accidental death, or even sickness, and is evidently the best way to make sure your family survives well after your death, essentially if your family heavily depends on you and your income. Many insurance companies convince their potential customers that life insurance is the best investment, as it allows the person to retire wealthy. All insurance companies claim they will pay claims. However, the truth is that the insurance companies do not make money on paying claims; instead, they make money on not paying claims, and it is the insurance company that gets the most out of life insurance.
The Truth about Life Insurance and Insurance Companies Insurance companies belong to the category of financial services. It means that they take the money in trust from their customers, use the money to make more money, and then pay back some percentage or portion of the money at a somewhat later date (How Life Insurance Companies Make Money), under specified conditions, such as death or unexpected death in case the customer chooses life insurance policy. So, in relation to life insurance policies, the insurance companies take in relatively small amounts of money in premiums from the policy holders over many years, and give back a large amount of money at once as benefits. There are several life insurance types that can be classified under two categories – protection policy that is designed to provide a certain benefit in case of specified event occurs, and investment policy that combines both insurance and savings features. Then, life insurances are divided into two basic categories – temporary life insurance policies and permanent life insurance policies. Temporary (or term) life insurance is known as life insurance that provides for the life insurance coverage for a specified number of years for a specified premium the person is obliged to pay.
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Under this policy, cash value is not accumulated, and the premium buys protection only in the event of the policy holders death. In its turn, permanent life insurance remains in-line until it is paid out by the insurance company, and unless the policy holder fails to pay the premium. This type of policy basically cannot be cancelled by the policy holder except few reasons, such as fraud in the application, and policy cancellation must take place within a specified period (usually two years).
Many insurance companies claim that in case you purchase life insurance, you will retire rich, as life insurance is an investment. This type of investment insurance is called cash-value life insurance. What does it mean? This is a sort of insurance policy, in which the policy holder builds up a pool of capital that gains interest. Although it sounds like a temptation, it is quite far from truth. In reality, the insurance company will gain much more than the policy holder.
Lets examine this type of life insurance more thoroughly, as it is, probably, the most popular life insurance policy sold today. Approximately 70 percent of the life insurances sold today are so-called cash value policies. Many people believe that it is the best way to become rich, while living safely, but in reality it is one of the worst possible insurances available (Ramsey, 2007).
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The article written by Dave Ramsey perfectly illustrates the principle under which cash value life insurance functions. So, cash value life insurance is a type of insurance that combines insurance and savings together. Although it sounds perfect, and the insurance company will undertake all efforts to convince the customer that it is the best possible products, the returns are really terrible, as none of the projected policies perform as projected.
For example, in case a 30-year-old person wants to spend $100 per month on life insurance policy, he will find out that he can purchase an average of $125,000 in insurance for his family” (Ramsey, 2007).
At the same time, in case he wants to purchase a 20-year-level term insurance with coverage of $125,000, he will have to pay $7 per month only, instead of paying $100 at a monthly basis. In case we assume that this person purchases a cash value life insurance, it seems that $7 per month will be the insurance, while the remainder, $93, will be his savings. Again, it is not true, as the insurance companies include hidden commissions and other expenses the policy holder has to pay during the first three years. After these first three years, the return will average 2.6% per year for whole life, 4.2% for universal life, and 7.4% for the new-and-improved variable life policy that includes mutual funds (Ramsey, 2007).
However, the same mutual funds outside this life insurance policy make up approximately 12 percent.
This proves that it is an insurance company, who gets the most out of life insurance. Yet, it is not the end of the story. As it is life insurance, it means that the money and these savings will available only after the death of policy holder occurs. The only doubtful benefit of this life insurance is the face value of this policy. However, thinking logically, is would be much better to purchase a $7/month life insurance, and to put the rest ($93) somewhere in safe place, – in this case at least after three years you will have about three thousand dollars, and when (in case) you die, your family will get your saving immediately. It means that when this 20-year term is over, you will need no life insurance at all, because with no kids to feed, no house payment, and $700,000, your spouse will just have to suffer through if you die without insurance (Ramsey, 2007).
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Now, let’s go further and think logically. The truth is that insurance companies do make money, and they make large amounts of money from their policy holders.
They make money by working the averages. It is well understood that in case an average person is insured during his life, and makes an average number of claims, he will “end up paying out more money in premiums than receive back in claims. This is the explanation why insurance companies make a profit. The truth is that in case the policy holder is in any way healthier, better, or safer than average person, the claim will rarely be made, and he will waste more money than his family receives in case his death occurs. But, lets assume the policy holder dies and his family undertakes an attempt to make a claim and to ask for the money. The insurance company, in this case, fights the family every step on their way, telling hundreds of conditions and quoting exceptions you never knew existed.
In case the family will be lucky enough, the insurance company will, probably, pay out the amount of money, but only what the insurance company considers to be fair. Next, as insurance (any kind of insurance) is a risk, the insurance company makes all best to avoid risky situations whenever it is possible. For example the author of the article about the insurance companies’ tricks tells the real story about an old-age pensioner from Seven Hills, who “held a life insurance policy for 55 years, and then the insurance company cancelled it on her because she got too old. The insurance industry is founded on fear, as the insurance companies play on the peoples fears of bad things. Therefore, it seems quite natural when the insurance company offers you a life insurance, asserting that you finally will feel safe, or, as it is in case of life insurance, your family will feel safe, when you die, as they will obviously give your family a huge amount of money. However, when it comes to be fulfilled, the insurance company avoids to pay out the money at any cost. This is the business, where the insurance companies get the most out of it, while the policy holders fail.
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Another thing to consider is the policy holders lifestyle. As it was already mentioned, the insurance company tries to minimize the risk of potential payments, and thoroughly examine the potential customers health condition, as well as his lifestyle, hobbies, and habits. For example, many of us will be evidently considered to be high risk policy holders, and will either have to pay more, or will get a refusal at all. So, in case the person is a smoker, he is in a high risk group and has to pay higher rates. Moreover, some insurance companies consider scuba diving and mountain climbing to be high risk’ hobbies, thus obliging the customers either to pay through the nose for coverage, or to quit their insurance policies (Bradford, 2006).
Interesting enough, but the insurance companies are more afraid of persons with risky hobbies, than those who control their high blood pressure with medications. The risky lifestyle may cost you more than double over the life of the policy, in case you choose a term-life policy. What is the cause of it? Lets try to understand it in details. Basically, when the insurance company reviews risks, it automatically divided the potential customers into two categories smokers and non-smokers.
Then, each category is divided into three risk categories Preferred Plus, Preferred, or Standard (Bradford, 2006).
Some insurance companies have lower division into categories for those at greater risk of early death; however, even within those three categories the monthly payments significantly differ. For example, the insurance company Pacific Life offers the following rates for its $1 million insurance place for 20-year term life policy for a male in his mid-forties. In case the person is a non-smoker, he will have to pay $945 per year, in case he was classified as a Select Plus (the same as Preferred Plus category), $1,065 per year if he was classified as a Select, and $1,965 for Standard policy. At the same time, the smokers will pay significantly more, – Select Plus policy will cost $1,435 per year, a Select policy will cost $3,525 per year, and a Standard Smoker policy will cost a $4,405 per year (Bradford, 2006).
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As we can see, the cost for term life insurance is quite high, and at the end of the policy the policy holder gets nothing, in case he stays alive.
Evidently, it is better to save the money and invest them, as it will provide a safer and more guaranteed savings in case of unexpected death. Conclusion So, in conclusion it may be said that life insurance, probably, is a good thing. One can consider life insurance to be the way to protect his family and to provide them feeling of safety. However, in case you are the average or above average person, you pay more to the insurance companies than they will, probably, pay at the end, when they will have to. One can tell that, probably, in case the average and above average person loses more than gets, the ‘below average’ person will obviously get as much as he (and his family) can. Again, it is not true. The subject at issue is that insurance companies will invent thousand reasons not to approve (or even close) your life insurance, in case your health, for example, is poor, or you work in unsafe conditions, or have hereditary diseases, or any other risk factors that may accelerate’ the period, when the company will be forced to pay your family the money.
In such a way, taking into account all information above, we can easily come to conclusion that the insurance companies do not make money on paying claims, but they make money on not paying claims, and it is the insurance company that gets the most out of life insurance than the average policy holder. Works Cited Bradford, Stacey L. A Matter of Lifestyle. June 2006. 20 November 2007 . How Life Insurance Companies Make Money.
20 November 2007 . Ramsey, D. The Truth About Life Insurance. 20 November 2007 ..