Published on November 16, 2016
1. COST AND BENEFITS OF INSURANCE Submitted by- Prasoon Verma
2. A way of determining the net cost of life insurance to the insured. The total amount the insured gets back from the insurer is deducted from the total amount the insured has paid to the insurer. The premium rate for a life insurance policy is based on two underlying concepts: mortality and interest. A third variable is the expense factor which is the amount the company adds to the cost of the policy to cover operating costs of selling insurance, investing the premiums, and paying claims.
3. How The Cost Of Life Insurance Is Determined The premium rate for a life insurance policy is based on two underlying concepts: mortality and interest. A third variable is the expense factor which is the amount the company adds to the cost of the policy to cover operating costs of selling insurance, investing the premiums, and paying claims. Mortality – Life insurance is based on the sharing of the risk of death by a large group of people. The amount at risk must be known to predict the cost to each member of the group. Mortality tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a mortality table a life insurer can determine the average life expectancy for each age group. Interest – The second factor used in calculating the premium is interest earnings. Companies invest your premiums in bonds, stocks, mortgages, real estate, etc., and assume they will earn a certain rate of interest on these invested funds. Expense – The third consideration is the expenses of operating the company. The company estimates such expenses as salaries, agents’ compensation, rent, legal fees, postage, etc. The amount charged to cover each policy’s share of expenses of operation is called the expense loading. This is a cost area that can vary from company to company based on its operations and efficiency.
4. EXAMPLE: A person who is 25 years old, healthy and with no family history of genetic or terminal illness could be rated in preferred category and receive the best rate on life insurance for term or whole life. However, a 45-year old who is healthy and has the same no family history of genetic or terminal illness would pay a higher premium simply because of the age difference. This may be harsh, but the insurance company's aim is to collect more premiums in the fewer years the 45-year old has left. This is particularly true for permanent policies with a certain pay out. While someone 25 can die suddenly as well, insurance actuaries have determined the exact amount to charge for life insurance rates for each category and age group in order for the company to make money. These rates adjust all the time, so you can wait for a better premium, but remember that waiting only makes you older!
5. Mortality cost is the biggest factor in your premium rates, and will be calculated by evaluating you to determine your risk of dying during the policy. Your life insurance company will consider the following: Health: Poor health raises the rates for life insurance because it decreases the number of years you are likely to pay premiums and reduces the time before the company may have to pay a claim. Whether or not you are a smoker, drink excessively, or are overweight contribute to your health. Being unhealthy can place you in a high risk life insurance class, which will make it difficult to find an affordable plan. Age: As much as you do not like to think about it, the older you get, the greater your chance of dying. Therefore age affects the cost of life insurance. Your chances of obtaining the best life insurance rates are when you are young. Therefore, it makes sense to purchase life insurance while you are young. ‘ Gender: Males usually cost more than females. On average, females live longer. Let's remember, life insurance premium calculations are determined by actuaries (mathematicians) who look at pass history of claims and mortality statistics. This being the case, a rate is calculated for that, on average, females live longer, thus receive a lower rate. Job: A dangerous job makes it more likely that you will die before the policy is paid off. '
6. Hobbies: Likewise, dangerous hobbies will raise red flags among insurance companies and cause an increase in your cost of life insurance. Travel: Travelling outside the United States can expose you to certain risks. Depending on your destination, you could be subject to diseases, water or food borne illnesses, or war. Therefore, most life insurance applications will ask about your travel plans. Answering these questions truthfully is best. The insurance company could refuse to pay your death claim in the event you should die while in another country and it was determined that your plans to travel were in place when you applied for insurance but were not disclosed.
7. Benefits of Life Insurance Risk Cover - Life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event. Planning for life stage needs - Life Insurance not only provides for financial support in the event of untimely death but also acts as a long term investment. You can meet your goals, be it your children's education, their marriage, building your dream home or planning a relaxed retired life, according to your life stage and risk appetite. Traditional life insurance policies i.e. traditional endowment plans, offer in-built guarantees and defined maturity benefits through variety of product options such as Money Back, Guaranteed Cash Values, Guaranteed Maturity Values. Protection against rising health expenses - Life Insurers through riders or stand alone health insurance plans offer the benefits of protection against critical diseases and hospitalization expenses. This benefit has assumed critical importance given the increasing incidence of lifestyle diseases and escalating medical costs.
8. Builds the habit of thrift - Life Insurance is a long-term contract where as policyholder, you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to meet financial needs at various life stages. Safe and profitable long-term investment - Life Insurance is a highly regulated sector. IRDA of India, the regulatory body, through various rules and regulations ensures that the safety of the policyholder's money is the primary responsibility of all stakeholders. Life Insurance being a long-term savings instrument, also ensures that the life insurers focus on returns over a long-term and do not take risky investment decisions for short term gains. Assured income through annuities - Life Insurance is one of the best instruments for retirement planning. The money saved during the earning life span is utilized to provide a steady source of income during the retired phase of life. Protection plus savings over a long term - Since traditional policies are viewed both by the distributors as well as the customers as a long term commitment; these policies help the policyholders meet the dual need of protection and long term wealth creation efficiently. Growth through dividends - Traditional policies offer an opportunity to participate in the economic growth without taking the investment risk. The investment income is distributed among the policyholders through annual announcement of dividends/bonus.
9. Facility of loans without affecting the policy benefits - Policyholders have the option of taking loan against the policy. This helps you meet your unplanned life stage needs without adversely affecting the benefits of the policy they have bought. Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entry and exit under most of the plans. Mortgage Redemption- Insurance acts as an effective tool to cover mortgages and loans taken by the policyholders so that, in case of any unforeseen event, the burden of repayment does not fall on the bereaved family. Life insurance provides an infusion of cash for dealing with the adverse financial consequences of the insured's death.
10. Life insurance enjoys favorable tax treatment unlike any other financial instrument. Death benefits are generally income-tax-free to the beneficiary. Death benefits may be estate-tax free if the policy is owned properly. Cash values grow tax deferred during the insured's lifetime. Cash value withdrawals are treated on a first-in-first-out (FIFO) basis, therefore cash value withdrawals up to the total premiums paid are generally income-tax free. Policy loans are income tax free. A life insurance policy may be exchanged for another life insurance policy (or for an annuity) without incurring current taxation. Many life insurance policies are exceptionally flexible in terms of adjusting to the policyholder’s needs. The death benefit may be decreased at any time and the premiums may be easily reduced, skipped or increased. A cash value life insurance policy may be thought of as a tax- favored repository of easily accessible funds if the need arises; yet, the assets backing these funds are generally held in longer-term investments, thereby earning a higher return
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