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How Insurance Policy Works

Insurance is synonymous to a lot of people sharing risks of losses expected from a supposed accident. Here, the costs of the losses will be borne by all the insurers.

For example, if Mr. Adam buys a new car and wishes to insure the vehicle against any expected accidents. He will buy an insurance policy from an insurance company through an insurance agent or insurance broker by paying a specific amount of money, called premium, to the insurance company.

The moment Mr. Adam pay the premium, the insurer (i.e. the insurance company) issue an insurance policy, or contract paper, to him. In this policy, the insurer analyses how it will pay for all or part of the damages/losses that may occur on Mr. Adam’s car.

However, just as Mr. Adam is able to buy an insurance policy and is paying to his insurer, a lot of other people in thousands are also doing the same thing. Any one of these people who are insured by the insurer is referred to as insured. Normally, most of these people will never have any form of accident and hence there will be no need for the insurer to pay them any form of compensation.

If Mr. Adam and a very few other people has any form of accidents/losses, the insurer will pay them based on their policy.

It should be noted that the entire premiums paid by these thousands of insured is so much more than the compensations to the damages/losses incurred by some few insured. Hence, the huge left-over money (from the premiums collected after paying the compensations) is utilized by the insurer as follows:

1. Some are kept as a cash reservoir.
2. Some are used as investments for more profit.
3. Some are used as operating expenses in form of rent, supplies, salaries, staff welfare etc.
4. Some are lend out to banks as fixed deposits for more profit.

Life Insurance

Life insurance (or assurance) is the insurance against against certainty or something that is certain to happen such as death, rather than something that might happen such as loss of or damage to property.

 

The issue of life insurance is a paramount one because it concerns the security of human life and business. Life insurance offers real protection for your business and it also provides some sot of motivation for any skilled employees who decides to to join your organization.

Life insurance insures the life of the policy holder and pays a benefit to the beneficiary. This beneficiary can be your business in the case of a key employee, partner, or co-owner. In some cases, the beneficiary may be one’s next of kin or a near or distant relation. The beneficiary is not limited to one person; it depends on the policy holder.

Life insurance policies exist in three forms:

• Whole life insurance
• Term Insurance
• Endowment insurance 

• Whole Life Insurance

In Whole Life Insurance (or Whole Assurance), the insurance company pays an agreed sum of money (i.e. sum assured) upon the death of the person whose life is insured. As against the logic of term life insurance, Whole Life Insurance is valid and it continues in existence as long as the premiums of the policy holders are paid.

When a person express his wish in taking a Whole Life Insurance, the insurer will look at the person’s current age and health status and use this data to reviews longevity charts which predict the person’s life duration/life-span. The insurer then present a monthly/quarterly/bi-annual/annual level premium. This premium to be paid depends on a person’s present age: the younger the person the higher the premium and the older the person the lower the premium. However, the extreme high premium being paid by a younger person will reduce gradually relatively with age over the course of many years.

In case you are planning a life insurance, the insurer is in the best position to advise you on the type you should take. Whole life insurance exists in three varieties, as follow: variable life, universal life, and variable-universal life; and these are very good options for your employees to consider or in your personal financial plan.

Need a Whole Life Insurance policy, contact an insurer now!

• Term Insurance

In Term Insurance, the life of the policy-holder is insured for a specific period of time and if the person dies within the period the insurance company pays the beneficiary. Otherwise, if the policy-holder lives longer than the period of time stated in the policy, the policy is no longer valid. In a simple word, if death does not occur within stipulated period, the policy-holder receives nothing.

For example, Mr. Adam takes a life policy for a period of not later than the age of 60. If Mr. Adam dies within the age of less than 60 years, the insurance company will pay the sum assured. If Mr. Adam’s death does not occur within the stated period in the life policy (i.e. Mr. Adam lives up to 61 years and above), the insurance company pays nothing no matter the premiums paid over the term of the policy.  

Term assurance will pay the policy holder only if death occurs during the “term” of the policy, which can be up to 30 years. Beyond the “term”, the policy is null and void (i.e. worthless).

Term life insurance policies are basically of two types:

• Level term: In this one, the death benefit remains constant throughout the duration of the policy.
• Decreasing term:  Here, the death benefit decreases as the course of the policy’s term progresses .

Note that Term Life Insurance is being used in a debtor-creditor scenario. A creditor may decide to insure the life of his debtor for a period over which the debt repayment is expected to be completed, so that if the debtor dies within this period, the creditor (being the policy-holder) gets paid by the insurance company for the sum assured).

• Endowment Life Insurance

In Endowment Life Insurance, the life of the policy holder is insured for a specific period of time (say, 30 years) and if the person insured is still alive after the policy has timed out, the insurance company pays the policy-holder the sum assured. However, if the person assured dies within the “time specified” the insurance company pays the beneficiary.

For example, Mr. Adam took an Endowment Life Insurance for 35 years when he was 25 years of age. If Mr. Adam is lucky to attain the age of 60 (i.e. 25 + 35), the insurance company will pay the policy-holder (i.e. whoever is paying the premium, probably Mr. Adam if he is the one paying the premium) the sum assured. However, if Mr. Adam dies at the age of 59 years before completing the assured time of 35 years, his sum assured will be paid to his beneficiary (i.e. policy-holder). In case of death, the sum assured is paid at the age which Mr. Adam dies.

Insurance Terms/Terminology

Insurance terms/terminologies are the language, expressions, vocabularies, jargons, lingo (informal), lexicons, lexis and/or words, or a set of expressions, vocabularies, jargons etc. relating to the day-to-day operation of insurance, used by people involved in the activities or fields of work of insurance.

Term	Definition

Actual cash value	The traditional measure of property insurance loss. Usually defined as the cost of replacing the destroyed property with new property, minus an allowance for depreciation.
Actuary	This is a person involved in life assurance, assessing the risks and calculating the premium and handling the matters connected with pension funds.
All-risk insurance	A generic term for insurance that covers all risks that are not explicitly excluded.
Annuity	A contract that provides an income for a stated period or for a person's lifetime.
Assurance	Life insurance; or assurance against certainty; or insurance against something that is certain to happen such as death, rather than something that might happen such as loss of or damage to property
Auto collision coverage	The portion of an auto insurance policy that pays for collision damage to the insured auto.
Auto comprehensive coverage	The portion of an auto insurance policy that pays for loss or damage to the insured auto other than the loss or damage caused by collision.
Auto liability coverage	The portion of an auto insurance policy that protects against claims for legal liability arising out of auto accidents. Provides legal defense and pays sums necessary to settle claims against the insured person.
Automatic premium loan	A life insurance policy provision authorizing the insurer to use the policy's loan value to pay any premium not paid by the end of the grace period.
Beneficiary	The person who receives the proceeds of a life insurance policy upon the death of the insured person.
Binder	A temporary insurance contract (written or oral) that remains in effect until replaced by a regular policy.
Cash surrender value	The amount of money payable to a policyholder who discontinues a life insurance policy.
Casualty Insurance	Insurance that covers losses caused by injury to others or damage to property of others. Casualty insurance policies may or may not require that policy-owners determine legal liability (fault) in order to collect payments.
Coverage	The protection provided by insurance.
Cover note	Temporary insurance cover which enables the insured to enjoy the benefits of a policy while it is being processed.
Credit life insurance	Term life insurance issued to cover repayment of a loan if the borrower dies.
Deductible clause	A policy provision defining the specific amount of loss that, if exceeded, will trigger insurance coverage.
Dividend	A partial return of premium, reflecting the difference between the premium charged and the amount needed to cover the company's operations and payments on claims.
Endowment insurance	Life insurance payable to the insured if he or she is living on the maturity date stated in the policy, or to a beneficiary if the insured dies before that date.
Exclusions	Provisions that explicitly limit the coverage provided by an insurance policy.
Expiration date	The date when an insurance policy ends.
Grace period	A period of time following the date the premium is due, during which a policy remains in force even though the premium has not been paid.
Group insurance	Any insurance plan that covers a number of individuals under a single contract. It is typically issued to an employer for the benefit of employees.
Guaranteed insurability	A life insurance policy provision permitting the purchase of additional insurance at stated times regardless of the condition of the insured person's health.
Incontestable clause	A policy provision that prevents the insurer from challenging or contesting claims after a stated period of coverage, regardless of any misstatements made by the applicant.
Insurance rate	The price of insurance per unit of coverage, usually expressed as a cost per dollar amount of coverage per year.
Insurance policy	Document which sets out the exact terms of the insurance contract.
Insured	A person or organization that is protected by insurance.
Insurer	An insurance company or other organization that provides insurance.
Liability insurance	An insurance policy that protects against claims for legal liability. Provides legal defense and pays sums necessary to settle claims against the insured.
Limit of liability	The maximum amount an insurer will pay in the event of a covered loss.
Limited payment whole life	Whole life insurance on which premiums are payable for a specified number of years.
Loss	An event or circumstance for which insurance may pay.
Major medical expense insurance	Insurance that pays for a broad range of medical services up to a very high maximum amount. It is usually subject to a deductible amount and percentage participation. Also called major medical.
Medical payments coverage	A form of insurance that pays for medical and funeral expenses without regard to liability. It is available in auto policies and other policies that provide liability coverage.
Mutual insurance company	An insuring organization that is owned by its policyholders.
Named peril insurance	Any insurance that specifies the perils (risks) it covers.
No-fault system	A system in which reimbursement for injuries on the basis of fault (tort liability) is not legally available.
Nonforfeiture options	Alternatives available to a policy-owner who discontinues premium payments on a policy of insurance.
Nonparticipating insurance	Insurance provided by policies on which no policy dividends are payable. Also called nonpar.
Participating insurance	Insurance provided by policies on which dividends are payable.
Permanent life insurance	Loosely, any form of individual life insurance that develops a cash value.
Policy	A contract that exists between an insurance company and a person or organization buying insurance services, or the document that lists the contract terms
Policy loan	A loan made by a life insurance company to a policy-owner on the security of a policy's cash surrender value.
Policyholder	The person or entity who pays for, and therefore owns, an insurance policy. This is usually the insured, but it may also be a relative of the insured, a partnership, or a corporation. Also called a policy-owner.
Premium	The price of an insurance policy. Payment made to an insurance policy for an insurance policy, it can be paid annually, quarterly or monthly.
Proposal form	This is a form that must be completed by a person wishing to enter into an insurance contract. He must disclose all relevant information truthfully in the form.
Replacement cost	The cost of replacing damaged or destroyed property with new property, without deducting for depreciation.
Risk	The cause of a possible loss. Also referred to as peril.
Settlement options	The alternatives, other than immediate payment in cash, in which a life insurance beneficiary may choose to have policy benefits paid.
Stock insurance company	A corporate insuring organization owned by stockholders.
Straight life insurance	Whole life insurance on which premiums are payable for life.
Subrogation	A legal principle which provides that, to the extent an insurer has paid for a loss, the insurer receives the policyholder's right to recover from any third party who caused the loss.
Surrender value	The amount in cash an insurance company will repay to an endowment policy holder if he wishes to discontinue prior to the date of the maturity. This depends on the premium paid.
Term life insurance	Life insurance payable to a beneficiary when the insured dies within a specified period. If the insured is living at the end of the period, the policy expires without value.
Underwriting	The process by which insurers decide which losses to insure and how to insure them.
Uninsured motorists coverage	A form of auto insurance that pays the damages that insured persons are legally entitled to collect from uninsured motorists.
Waiting period	In disability income insurance, the period of time between the beginning of a disability and the date that the policy's income payments begin. In group insurance, the period an employee must work for a firm in order to qualify for coverage.
Waiver of premium	A life or health insurance policy provision stating that premiums will not be charged if the insured person becomes totally and permanently disabled.
Whole life insurance	Life insurance payable to a beneficiary at the death of the policyholder, whenever that occurs. Premiums may be payable for a specified number of years (limited payment life insurance) or for life (straight life insurance).