Insurance Basics - MIB Group, Inc.

The first life insurance started when people within a community would contribute toward a fund when a person within the community died, and the survivor's family needed help.

Life insurance is based upon the law of probability. If you roll a dice literally thousands of times, the number one will come up on the dice on the average of one out of every six times. So will a two, and a three, etc. In other words, according to the law of large numbers and probability, the chances of a single event occurring, when there are six equal chances of it occurring, are one out of six.

A mortality table, on which all life insurance is based, is nothing more than this law of probability carried over to human life expectancies. If a mortality table starts with 10 million people and assumes that everyone born at age 0 will die by age 100, the table can very accurately predict how many of the people alive at any given age will die that year and how many will survive. Obviously they don't know who will die, but they can tell from the pool of survivors each year how many will make it.

Although some people in the group will die in the first year, and the money which is set aside for them won't have much of a chance to earn interest, the majority of the people will live a long time. The monies that aren't needed to pay that year's claims can be invested and earn interest, which over time holds the actual cost of insurance down for everyone.

The other element of life insurance is expenses; expenses for underwriting the insurance, commissions to the agent, etc.

Once you realize that all life insurance with any company is based upon these three elements: 1) mortality, 2) interest (investment earnings), 3) expenses; some of the mystery should go away.

Life insurance underwriting starts with the premise that an applicant makes true "representations" when he or she answers application questions...to the best of their knowledge...regardless of what may actually be the case in reality. If you stated on an application that you had never had heart problems and 6 months later died of a heart attack, the burden of proof would be on the insurance company to show that you had actually known about your condition or, that you had inadvertently omitted information that was material to the underwriting decision.

Say that you had gone to a doctor and had been told that you had elevated cholesterol levels, and because you had a history of heart disease in your family, he had prescribed some cholesterol-lowering drugs. Pretend you had forgotten about this when you filled out the application, and because you had never specifically been told that you had heart disease, you answered the question about "heart disease" as "no".

If the person dies within the first two years that the policy was in force, statements made on the application can be challenged, and although it's uncertain if the insurance company would challenge paying the death claim, they certainly would have the right to do so. After two years, things are different.

After the policy has been in force for two years, in the absence of fraud, the policy becomes "incontestable". In other words, after the policy had been in force for two years, the company would have to not only prove that there had been a misrepresentation on the application, but they would have to show that you had intentionally omitted material information, or that you had knowingly misstated information in order to get the insurance.

This is to protect the insured and his or her family, since many of the facts are only known by the insured who answered the question. At the time of claim, he or she is not around.

This is one of the real values of a life insurance contract. It is a "unilateral" contract - meaning that the insured has all the rights and the company has all the obligations. The only "obligation" on the part of the insured (or owner who is usually the same) is to pay the premium if continuing coverage is desired.